Entrepreneurship, Business Density, and the Future of China

            I was invited to serve as a discussant for a luncheon seminar hosted by the Hudson Institute and the Dingman Center for Entrepreneurship on Dec. 9, 2008.  Antony Ni, a Visiting Professor at Shanghai Jiao Tong University, and an entrepreneur both in China and in United States presented an update of data on doing business in China (the CIA Factbook contains a wealth of this information).  I was impressed by Dr. Ni’s statistics about China’s economic growth: 50 million people have incomes between $40,000 and $140,000 and the top 5 million wealthiest have an income over $140,000.


            I made two points during my discussion: (1) China’s astonishing economic history is a history of unleashing entrepreneurship; (2) China can learn from American experience in fostering entrepreneurship and business ownership so that China can maintain sustainable development and growth.


            China’s economic growth has been astounding: total GDP in 1978 was 364 billion Chinese Yuan, which increased to 25 trillion in 2007, a net average annual growth rate above 8 percent for 30 years.  Yet, while China’s GDP surged about 50 fold between 1978 and 2007, GDP per capita increased only 12 times, according to China’s Bureau of Statistics.  China’s GDP per capita was less than $3,000 in 2007.


            Research shows that in America, widespread entrepreneurship and business ownership has proven to be an important too for improving people’s economic wellbeing.  In 2002, the business density (number of businesses owned per 1000 persons) for Asian-Americans was 95, for Whites 86, for Hispanics 40, and for African-American 33.  The corresponding average household income for these groups was $57,129, $50,911, $35,934, and $31,509.  Further, women business ownership had a very powerful explanatory relationship with average household income.


            Even though business density for various groups has a clear correlation with household income and economic wellbeing, that is not to say that all entrepreneurship can be positive for society.  As William Baumol’s research points out, entrepreneurship can be directed toward unproductive or destructive ends such as rent-seeking, or organized crime.  The challenge for China is to steer its citizens’ entrepreneurial energies toward owning businesses and improving economic wellbeing rather than unproductive ends.


            In 2002, the business density for America as a whole was 83, but only 25 for China.  If China could learn American know-how (both experience and lessons) in fostering entrepreneurship and business ownership and double its business density, China would enjoy further economic achievements and social progress.


— Ying Lowrey, Senior Economist