Community Networks and the Growth 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. We develop a network-based model that generates predictions for the dynamics of firm entry, concentration, and firm size across birth counties with varying social connectedness (measured by population density). These predictions are verified 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. Moreover, supplementary evidence indicates that network spillovers occur within the birth county and, going down even further, within clans within the county. Having validated the model, we estimate its structural parameters and conduct counter-factual simulations, which estimate that entry over the 1995-2004 period would have been 40% lower (with a comparable decline in the stock of capital) in the absence of community networks. Additional counter-factual simulations shed light on misallocation and industrial policy in economies where networks are active.