The Community Origins of Private Enterprise in China

This paper identifies and quantifies the role played by birth-county-based community networks in the growth of private enterprise in China. The starting point for the analysis is the observation that population density is positively associated with local social interactions, social homogeneity, and enforceable trust in counties (but not cities). This motivates a model of network-based spillovers that predicts how the dynamics of firm entry, concentration, and firm size vary with birth county population density. The predictions of the model are validated over the 1990-2009 period with administrative data covering the universe of registered firms. Competing non-network-based explanations can explain some, but not all of the results. We subsequently estimate the structural parameters of the model and conduct counter-factual simulations, which indicate that entry and capital stock over the 1995-2004 period would have been 40% lower without community networks. Additional counter-factual simulations shed light on misallocation and industrial policy.