More but not better: Career incentives of local leaders and entrepreneurial entry in China

This study explores how local leaders’ career incentives influence entrepreneurial activity in China. We identify a positive relationship between high-incentive leaders and the entry rate of new manufacturing firms, facilitated by access to capital and land and the implementation of place-based policies. However, firms that enter the market under high-incentive leaders tend to experience lower productivity growth and lower survivability, highlighting a quantity–quality trade-off. This quality deficit is linked to a mismatch between the types of new entrants and local economic fundamentals. Additionally, the responsiveness of manufacturing exit rates, productivity growth of existing manufacturers, and service firm dynamics to leader incentives appears minimal. Overall, by illuminating both the advantages and limitations of second-best institutions through the lens of firm entry, our study provides new insights into the institutions–growth nexus and offers a cohesive framework for understanding the growth and slowdown of the Chinese economy.