Eesley Stanford University Department of Management Science & Engineering Stanford, CA 94305 Tel: (740) 236 4653 Abstract: Our understanding of institutional change and strategy is limited. Institutions will influence the types of strategies that result in higher performance in entrepreneurial firms. This paper shows that different strategies and firm characteristics will explain variation in performance as institutional change occurs. Exploiting variation in the institutional environment over time and across regions in China, this paper examines the impact of institutional change on the effectiveness of entrepreneurial strategies. Unique data were collected through survey responses from alumni who graduated from a Chinese university. The results show that different factors determine venture performance during different stages of institutional reform. These factors differ from those identified in the literature using data from well-developed economy contexts. The results indicate a significantly strong role for entrepreneur-government connections in the less developed institutional environment and a shift towards factors associated with competition in the market.

Delin Yang Tsinghua University School of Economics and Management Beijing, China

Understanding the success of entrepreneurial firms is important because it is these firms that drive economic growth and job creation (Haltiwanger, Jarmin, & Miranda, 2010). This paper analyzes shifts in entrepreneurship among technology-based university alumni in China since the 1940s by asking two related research questions: (1) How do the characteristics of high performing ventures change over time? and (2) How do these changes relate to specific shifts in the institutional environment in China? We look into these questions in the context of alumni and entrepreneur records from Tsinghua University, a prestigious and highly selective university in Beijing. Tsinghua University is consistently ranked first or second among the top universities in


China.1 Therefore, the alumni of Tsinghua are a special and important population, which the university keeps detailed historical records on, and a carefully built dataset of their entrepreneurial activities, allows us a window on how the changes in specific institutions in China have influenced venture formation in this population of elite individuals. Alumni from top research universities are an important source of new venture activity. For example, the Stanford website lists Cisco, Google, Hewlett Packard, Netflix, Silicon Graphics, Sun Microsystems and Yahoo! as several of the companies the university has helped to spawn. A study of MIT alumni concludes that its alumni have created over 25,800 companies, generating over 3 million new jobs and $2T in worldwide sales (Roberts & Eesley, 2010). Similar to that of alumni of MIT or Stanford (Hsu, Roberts, & Eesley, 2007; Barnett & Dobrev, 2005), Tsinghua alumni are responsible for many important technology-based and high growth companies, including the first Chinese search engine, Using data primarily from well-developed economies, prior work on entrepreneurship has proliferated around the question of who becomes an entrepreneur, but relatively fewer scholars have examined who becomes successful (Sørensen, 2007a; Sørensen, 2007b; Nicolaou and Shane, 2010). Prior literature on entrepreneurship finds that characteristics of the team (size, diversity experience) and environment (rate of growth) influence performance (Eisenhardt & Schoonhoven, 1990). However, this research is largely done in a particular institutional environment (i.e., mature, capitalist economies). Most entrepreneurs are not located in such a mature, developed economy and yet few scholars have looked at drivers of entrepreneurial performance in a developing country context (Gollin, 2002, p. 466). Yet, it seems likely that the factors that influence entrepreneurial performance differ in different institutional environments. Many developing countries are currently transitioning away from more centralized economic

The current President of China, Hu Jintao is one of the alumni of Tsinghua University.


structures and implementing institutional changes to encourage successful entrepreneurship (Hoskisson, 2000). Indeed, prior literature on institutions finds that the institutional context affects the founding rate of entrepreneurial firms (Aldrich and Fiol, 1994; Sine, Haveman and Tolbert, 2005). Eesley (2010) shows that with institutional changes there can be shifts in the type of person becoming an entrepreneur. But do the paths and strategies leading to success in entrepreneurship change as well? Although institutional research has not examined the implications of institutional change for entrepreneurial performance, this related work is encouraging. While there is growing consensus that institutions are important (Scott, 2008) and affect entrepreneurship (Aldrich and Fiol, 1994; Sine, Haveman and Tolbert, 2005), the relationship between institutional change and entrepreneurial firm performance is still unclear (Tolbert, David, & Sine, 2010). The purpose of this paper is to bring together the entrepreneurship and institutional literatures to examine entrepreneurial firm performance. Specifically we ask, how does the institutional environment shape the factors that influence entrepreneurial performance? We conduct this research in the context of China between 1988 and 2007. This is a particularly attractive setting for two reasons. It enables us to examine the influence of a changing institutional context at the national level as china moved from a planned towards a market economy and to corroborate the influence of institutional changes at regional levels, which changed at different rates from the nation as whole. As more and more policy makers attempt to foster an institutional change to support entrepreneurship, it is important for scholars and entrepreneurs to better understand the implications for entrepreneurial firms. As prior scholars emphasize (Powell, Koput and SmithDoerr, 1996), p. 297), to make theoretical progress, we must examine the, “more interesting


issues of how [institutions] matter, under what circumstances . . . and in what ways.” A key question for researchers interested in entrepreneurship and strategy is how the institutional environment influences the types of ventures that generate larger and more highly performing firms. This paper explores specific shifts in the institutional environment that allow new paths to successful entrepreneurship to open up in society. Literature and Hypotheses Introduction. The literature on entrepreneurship explains performance by examining the characteristics of founders and their firm strategies (Eisenhardt & Schoonhoven, 1990). The work focusing on the question of what drives performance has focused on explanations involving human and social capital. The human capital of the founding team, including educational and management achievements have reliably been shown to predict the new organization‟s performance (Eisenhardt and Schoonhoven, 1990; Beckman and Burton, 2008; Roberts, 1991). More functionally diverse and larger founding teams tend to be more highly performing (Beckman, Burton & O‟Reilly, 2007). Social networks that are higher in trust and more cohesive can improve the resource mobilization and accumulation process necessary for success (Shane and Cable, 2002; Burton, Sørensen and Beckman, 2002). Stuart, Gulati & Higgins, Baum et al, Ozcan & Eisenhardt. The literature in strategy and entrepreneurship has also explained performance as being driven by the firm‟s environment. Stinchcombe (1965) highlights the importance of the imprinting provided by the environment at the time when the firm is founded for subsequent firm performance. Eisenhardt and Schoonhoven (1990) find that founding a firm in a growth market led to greater firm performance. Firms founded during periods of high demand (Carroll and


Delacroix, 1982), during increasing industry sales (Romanelli, 1989), or in industries with high barriers to entry (Sandberg & Hofer, 1987) had improved survival or success. To examine the impact of the firm‟s environment, the literature on entrepreneurship also draws on institutional theory (Sine, Haveman and Tolbert, 2005; Tucker, Singh & Meinhard, 1990). Institutions are defined as the laws, norms, or beliefs, which form the „rules of the game‟ (North, 1990; Williamson, 2000; Scott, 2008). Institutions act as the political, social, legal (both formal and informal) constraints on individuals and organizations (North, 1990; Scott, 2008). By altering the constraints and structure of opportunities, institutions direct behavior towards certain activities (Baumol, 1990; Nee, 1996). Institutional theory tends to highlight the effects of institutions on organizational founding rates (Tucker, Singh & Meinhard, 1990), but until recently, has neglected the ways that institutions may influence firm strategy. Existing work does not present a complete picture since the strategy and institutional streams of work have proceeded independently. The ability of institutional theory to offer guidance on which institutional shifts might result in changes in firm strategy has not reached its potential. Work in organizational theory and sociology has long been
interested in how the prevailing institutional and opportunity structure relates to founding rates (Aldrich, 1999; Romanelli, 1989; Stinchcombe, 1965), which tends to increase competition (Dobbin and Dowd, 1997). While we now understand that institutions shape founding rates (Russo, 2001),

the level of productivity of organizations (Baumol, 1990) and the type of technology commercialized (Sine, Haveman and Tolbert, 2005), we have not yet developed a robust understanding of the role of institutions in shaping firm strategy and performance. In particular, the existing literature does not help us understand entrepreneurial performance as a function of the firm‟s institutional environment. Little work has shed light on the related question of which shifts in institutional arrangements might lead to changes in what strategies entrepreneurs should 5

use to grow their firms. This study asks how institutional change affects which entrepreneurial firms have higher firm performance across time. The traditional emphasis in the institutional theory literature has been on how institutions lead to organizational conformity. Yet, firm strategy is often about moving to areas away from similar firms and competitors (Porter, 1985). The mechanisms that differentiate firms from one another have received less attention than mimetic mechanisms (Mizruchi and Fein, 1999). This study responds to calls in the literature for greater development of theory that explains how institutional change affects the overall heterogeneity of entrepreneurial firms (Hoskisson, 2000; Sine, Haveman, & Tolbert, 2005). There is a need to examine the institutional contexts that are more conducive to producing new types of entrepreneurship (Thornton, 1999; Stuart and Sorenson, 2003). An emerging view suggests that the strategies leading to competitive advantage are best seen as differing over time or across contexts. Founder characteristics may be important, but they do not allow us to understand the broader social conditions under which entrepreneurial firms with these characteristics are more likely to grow larger and have better performance. Studies of firm strategy typically do not look at differences across institutional contexts or over time. The institutional changes that may shift which strategies and what entrepreneurs form larger, more successful firms are relatively unexamined. This study focuses on the neglected link between the institutional level and how it helps to shape what strategies lead to higher entrepreneurial performance. The idea that to prosper, organizations must have congruence or fit with their institutional environment is fundamental to institutional theory (Meyer and Rowan, 1977; Meyer and Scott, 1983). The organization‟s services and form must be matched to the regulatory, normative and


cognitive structures in the society (Baum and Rao, 2004; Scott, 2008). Congruence with the institutional environment allows organizations to gain necessary resources by increasing the commitment of internal and external constituents to the organization (Stinchcombe, 1965; Meyer and Rowan, 1977). One stream focuses on the established patterns of industry evolution, showing with a focus on a single industry, that effective strategies appear to change across the industry life cycle (Abernathy, 1978; Clayton M. Christensen, Suárez and Utterback, 1998) and across expanding or declining markets (Romanelli, 1989; Gulati and Higgins, 2003). Entrepreneurial experience can switch from a positive to a negative impact with a technological disruption in an industry (Eesley and Roberts, 2010) and the strategies associated with innovative firm performance differ across industry context (Eesley, Hsu, & Roberts, 2010). While prior work has examined entrepreneurial strategies for rapidly changing industries, these studies have typically been in a relatively stable institutional context. In the U.S., firms in the independent power sector changed towards riskier technologies with risk-reducing shifts in the institutional environment (Sine, Haveman, & Tolbert, 2005). However, this focus has left an incomplete picture of how the broader social environment, particularly how shifting institutions in a society may have implications for entrepreneurial firm strategy. Industry specific changes pale in comparison to the scale of institutional changes in most developing countries during economic transition (Peng, 2003). Connections to the government. Previous work suggests that building certain types of ties is more valuable in certain environments. Gulati and Higgins (2003) find that during hot equity markets, firms benefit more from ties to investment banks, whereas during cold markets ties to prominent venture capitalists are more important. Others have found that legal institutions moderate the performance effects of ties to venture capitalists or business angels (Bruton, et al,


2010). In a society undergoing institutional change the importance of government ties may change. Initial work highlighted the role of government ties for established firms in developed economies (Roy, 1981; Carroll, Delacroix and Goodstein, 1988). A greater likelihood of survival and higher performance has been found for firms with government networks (Pfeffer and Salanick, 1978; Hillman, 2005). This is particularly true with state contracts, state provision of finance or with beneficial export policies (Roy, 1981; Getz, 1997). Government funding can provide certification, benefiting young firms (Lerner, 1999). Recent work examines government ties in emerging economies (Fisman, 2001; Leuz and Oberholzer-Gee, 2006). Established firms with government connections have higher market share and profitability (Peng and Luo, 2000). Some profit from privatization auctions that are not fully competitive (Schamis, 2002) or closer relationships with state-owned companies (Backman, 2001). Others receive better access to credit (Khwaja and Mian, 2005; Leuz and Oberholzer-Gee, 2006; Li, et al, in press). Due to their instability, political ties can be more treacherous in developing countries. For instance, ties to sociopolitical elites increase the propensity to form cross-border alliances, however when the regime changed, these ties became a liability (Siegel, 2007). In addition to acting as a helping hand, in less developed countries, government ties can also act as a grabbing hand, appropriating resources (Frye and Shleifer, 1997). Debate continues on whether political elites are able to leverage their power into a post-transition era when corporate leaders and market information may be more important (Nee, 1996; Walder, 2002; 2003). Few studies have examined the impact of government ties for entrepreneurs and their firms.


While established firms may benefit from government ties, entrepreneurs must balance time spent courting government officials with the priorities of finding an opportunity in the market, gathering resources, and establishing more market-based ties to exploit that opportunity. Peng and Luo (2000) examine Chinese ventures and show that personal ties between entrepreneurs and managers at other firms have a stronger positive performance impact in lowgrowth industries while smaller firms in the service sector benefit more from ties to government officials. It could be that government officials choose to create ties with larger firms. Yet, there are reasons to expect a strategy of building government connections to aid entrepreneurial firm performance in the early phases of institutional transition. In a less developed economy, government ties may be more important in gathering scarce resources. Second, in a more developed institutional setting, established laws and practices protect contracts and investments. If the main purpose of government ties is a form of protection and recourse, then developed legal institutions may reduce the benefits associated with forming political connections. As legal institutions develop the entrepreneur is also increasingly protected from expropriation by the state as well. Furthermore, for an economy transitioning from state-control to building free market institutions, government officials may have more information on emerging market opportunities that can be passed through ties to entrepreneurs. The existing evidence and theory suggests that the overall benefits of ties to government officials will differ across institutional environments and may be relatively more important in the early stages of institutional change. H1: In institutional environments characterized by an emphasis on government central planning and control, entrepreneurs with government ties will create larger firms compared to entrepreneurs without such ties.


There is a useful analogy between institutional evolution and the established patterns of technology and industry evolution. There is growing agreement that technology evolves by long stretches of incremental changes, punctuated by breakthroughs or technological discontinuities (Romanelli and Tushman, 1986; Tushman and Anderson, 1986). There are patterns of industry evolution that persist across numerous industries (Abernathy, 1978; Abernathy and Clark, 1985). The firm strategies leading to survival, such as targeting new market segments or introducing architectural innovations depend on the stage of industry evolution (Christensen, Suarez and Utterback, 1999). This model has four main stages: a period of ferment and variation, a dominant design (selection), a period of incremental change (retention), and a technological discontinuity, creating a new period of ferment (Utterback and Abernathy, 1975; Anderson and Tushman, 1990; Kaplan and Tripsas, 2008). Technological discontinuities increase levels of competitive uncertainty and munificence in the environment (Anderson and Tushman, 1990). Yet we have few models of how institutional environments evolve across time. Peng (2003) suggests that there are slow, continuous institutional changes, but that there are also transitions and points of inflection that may result in more rapid shifts in the strategic choices of firms. Most institutional change may be of the longer run, slow and incremental type that is experienced in developed economies. Developing societies often make more rapid changes during the process of transition to market-based economies. Sometimes these institutional changes occur all at once as with the privatization reforms in the former Soviet Union (Hitt, et al, 2004). In contrast to the slower, more stable institutional changes, we propose the term cocoon institutions to describe deliberate efforts to create a more discontinuous change and to usher in a new set of societal relationships and behaviors. Cocoon institutions can be thought of as tools that may generate high incentives, change written policies, or that may attempt to overcome


informal constraints by starting a different set of norms or rules within a location. In some developing economies, free enterprise zones, science parks, or incubators are examples of cocoon institutions where a protected “island” of a market-based economy is set up within the broader society in an attempt to seed or experiment with new institutions. Coase (1937) referred to firms as islands of planned economies within the sea of the free market. In societies transitioning to more capitalistic economies, cocoon institutions such as science parks can act as protected islands of free enterprise that aid the creation of markets. All of the prior studies of science parks and incubators (that we are aware of) use data from developed economies {{2143 Rothaermel,Frank T. 2007;}}. Many of the studies have been located in the UK. The few existing studies typically show that incubator firms do not differ significantly in their outcomes from non-incubator firms {{118 Colombo, Massimo G. 2002;}}. However, most of the existing work has either not included a control group of firms, has only looked at innovation outcomes or survival as a performance variable (a couple examine sales growth), focus on incubators connected with a university {{442 Rothaermel, Frank T. 2005;}}, use qualitative self-assessments of incubator value and simple univariate statistics rather than multi-variate regression analysis {{1392 Cooper, A. 1985;}}. Worldwide, science parks and incubators have been proliferating and moving away from universities and appear to be shifting into models that focus less on spillovers from university research and more on support services offered to entrepreneurs. For example, to encourage innovation and the entry of high-tech firms, local and national governments in China have developed a number of science and industrial parks. China has six thousand industrial parks and 58 national-level science parks (Cai, Todo and Zhou, 2007). Established in Beijing, the Zhongguancun Science Park (the Z-Park) was the first of many


science parks in China. The Z-Park was established in 1988 and by 2003 contained over 12,000 firms. Construction was finished on the Tsinghua Science Park (affiliated with Tsinghua University) by 1999 and it was one of the first national university science parks in China. Several science parks are now affiliated with Tsinghua and carrying the Tsinghua name in different locations. In addition to assembling a cluster of private, entrepreneurial firms pursuing technological opportunities, the government offers firms located in science parks several advantages. Corporate income is not taxed for the first three years and afterwards is taxed at 15 percent instead of 33 percent. Traditionally in China a system of household registration (hu kou) has been enforced to regulate people‟s geographic mobility. However, to attract talent from other parts of China and back from overseas, the government allows employees in the Z-Park to obtain Beijing residence. Even more preferential policies were granted in 1999 by the government. These included reduction of sales taxes on technology transfer, R&D expenditures, services, and consulting activities. Thus these parks create a protected environment for entrepreneurial firms competing in the market and ease the process of resource accumulation and mobilization, facilitating firm performance. H2: As institutional environments transition from government central planning and control to market-based incentives, entrepreneurs who use transitional “cocoon institutions” will create larger firms. Exposure to the entrepreneurial process. Just as science parks as an example of a cocoon institution create an area where the institutional environment is different from the surrounding areas, some individuals have a set of social contacts that create an institutional (normative or cognitive) environment that is more supportive of entrepreneurship.


One set of factors that may influence entrepreneurial performance is exposure to entrepreneurship through one‟s own prior experience, or that of friends or family. An individual‟s personal and social exposure to entrepreneurship may influence her own entrepreneurial performance in three ways. First, it may shape the perception of the institutional environment and what types of actions or strategies are appropriate. Second, it may provide knowledge about how to gather resources to create an organization and how to compete effectively. Such knowledge may be especially limited in its diffusion in a formerly planned economy. Third, it may provide resources beyond knowledge of the entrepreneurial process that are helpful in growing the firm. These may include connections to new employees, financing, initial customers or suppliers. Social exposure provides legitimacy and the knowledge of socially condoned strategies for starting a firm and competing in the market. Williamson (1994) incorporates network embeddedness into the concept of the institutional environment. The normative and cognitive institutional environment is at least partly determined by the social groups surrounding the individual (Nee and Ingram, 1997). An individual‟s social network ties act as a filter, conditioning how the individual understands and interprets what behaviors are appropriate. As a society transitions, it is through one‟s social network that one becomes aware of the formal and informal changes in how to effectively compete. Having a friend or former colleague who has started a business provides legitimacy and certain taken-for-granted assumptions about how to go about winning customers and generating profits in a market-based economic system. Even compliance with regulatory institutional changes is interpreted through the lens of social and organizational processes (Dobbin, Sutton, Meyer and Rowan, 1993). An individual embedded in a network that includes entrepreneurs may see the extent of regulatory institutions supporting


market-based entrepreneurial competition differently than someone without any entrepreneurs in their network.2 One especially important social tie that has been shown to expose many potential founders to entrepreneurial competition is the home environment. In developed economies, children of entrepreneurs are twice as likely to become entrepreneurs (Dunn and Holtz-Eakin, 2000). This finding mirrors findings of inter-generational transfer of careers in many fields. Sørensen (2007) finds this effect is primarily due to exposure to entrepreneurship and parents modeling entrepreneurial careers. He finds little evidence that inter-generational transfer of entrepreneurial ability, financial or social capital explains this result. In addition to parents, there is some evidence that entrepreneurial peers may also influence an individual‟s likelihood of entrepreneurship (Nanda and Sørensen, 2007). Other work suggests after being exposed to entrepreneurship indirectly through peers, individuals may decide that their ideas were not so good after all and decline starting a firm if their performance would have been low (Malmendier and Lerner, 2009). While exposure to entrepreneurship appears to influence the likelihood of becoming an entrepreneur, it is unclear whether it influences success rates unless the individual has previously founded a company herself. Prior work suggests that individuals who have been exposed to entrepreneurship directly start higher performing firms.3 Analyses of the impact on performance of founding experience have varied, with some showing no effect (Westhead and Birley, 1993; Alsos, 1998; Westhead and Wright, 1998) while others show performance advantages for multiple entrepreneurs (Stuart and Abetti, 1990). Entrepreneurs with prior start-up founding experience have higher valuation and shorter timing to venture capital investment (Hsu, 2007). Eesley and Roberts (2010) find that

A Chinese entrepreneur could have many western entrepreneurs in her network, but these could not provide the necessary information about the relevant business environment. 3 Politis (2005) has an extensive review and synthesis of the research on entrepreneurial learning.


particularly when the previous founding experience was in the same industry, serial entrepreneurs start significantly more successful subsequent firms. Literature on the transition from planned to market economies argues that as institutional transitions occur, the activities that form the basis for gaining or maintaining elite status in society shift also (Li & Walder, 2001; Walder, 1995; Walder, Li & Treiman, 2000). Eesley (2010) finds that for the most advantaged elites in China, as institutional change occurred, these individuals shifted the career paths they pursued from government positions to entrepreneurship. Reaching the elite levels in society more broadly or in terms of firm performance in particular, may require different strategies and activities as institutional change occurs. The impact of exposure to entrepreneurship is likely to become more significant with institutional change. H3a: In institutional environments that have transitioned from government central planning and control to market-based institutions, entrepreneurs with exposure to the firm creation process will create larger firms. In the past, innovation was seen as something done in well-developed economies and then exported in the form of final products to less developed countries (Vernon, 1966; Puga and Trefler, August 2005). Increasingly firms are choosing to do R&D and to innovate within emerging economies such as India and China despite their still developing institutional environments and weak property rights protection (Zhao, 2006). Yet, we know relatively little about the impact of institutional change on the link between firm innovation and performance. In developed economy settings, innovation and firm R&D are typically seen as driving firm growth (Geroski and Machin, 1992; Geroski, Machin and Reenen, 1993). The literature on resources and capabilities, has suggested both that R&D can result in novelty, which is a strategic resource (Dierickx and Cool, 1989). The firms that initiate technological discontinuities tend to grow faster than other firms (Anderson and Tushman, 1990).


Several empirical articles find evidence of a positive relationship between certain institutional changes such as public R&D expenditures and firm innovation (Balasubramanian and Sivadasan, 2008; Branstetter and Ogura, 2005; Lentz and Mortensen, 2008; Rothaermel and Hess, 2007). Notably, Furman and coauthors (2002) are one of the few papers to examine aggregate country-level patenting and institutional changes such as public R&D expenditures and access to venture capital funding. Furman and Hayes (2004) find that public investment in R&D and in science and technology personnel are associated with substantial increases in country level patenting. Other work has also found evidence that increased government funding or subsidies lead to more private R&D (Mansfield and Switzer, 1984; Lach, 2002; Cassiman and Veugelers, 2006). In contrast to the literature above, our emphasis is on institutional change and how it affects the link between strategy and performance, rather than on country-wide levels of innovation. The impact of undertaking R&D and innovation on firm growth and performance is likely to depend on the institutional environment (Zhao, 2006), such that with institutional change towards a more market-based economy, there is a stronger positive relationship between innovation and firm performance. For instance, China has been undertaking a series of institutional reforms related to innovation with the hope that firms will increasingly find it profitable to conduct R&D (Motohashi and Yun, 2007; Organization for Economic Co-operation and Development, 2007). In earlier periods of development, firms may have relied less on differentiation and competition in the market through innovation and more on political lobbying. Institutional change has been shown to increase entrepreneurship and levels of competition (Dobbin and Dowd, 1997). Increases in competition, especially from very low levels have been shown to increase firm innovation (Aghion, et al, 2005).


H3b: In institutional environments that have transitioned from government central planning and control to market-based institutions, entrepreneurs who are innovating will create larger firms. The coastal provinces in China are known to have experienced faster development of market-oriented institutions. Scholars have produced a large literature on the economic geography of China, particularly the coast-inland regional disparities (Young, 2000). The special economic zones were developed in several coastal provinces as experiments in a more marketbased system. Guangdong and Fujian have enjoyed special treatment since 1979 when they were permitted to open up and reform ahead of other regions within China (Qian, 2000). Similar differences to those we propose over time, are likely to appear across regions according to the extent or timing of institutional change. Supporting this idea, Nee and Opper (2010) find that political ties were most helpful in markets where the government intervenes to restrict economic activity. Essentially, these zones were allowed to become market economies while the rest of China maintained central planning. The special economic zones had a special policy (teshu zhengce) and institutional environment more conducive to free markets, such as the authority to approve foreign investment projects up to $30 million, lower tax rates, and the encouragement of private entrepreneurship. In 1992, special privileges were extended to most cities along the Yangtze River. Even inland cities that did not have special economic zones created

“development zones” and granted them tax benefits. These policies create geographic variation in the development of market-based institutions and allow a further test of our model. H4: Entrepreneurs in locations where marketization occurred earlier who use strategies consistent with market-based institutions will create larger firms. Recent work in strategy has suggested that timing is an important consideration for managers searching for new products or implementing strategies (Pacheco-de-Almeida and


Zemsky, 2007). Katila and Chen (2009) find that the most innovative firms avoid searching for new product innovations in-sync with their competitors, that is, they avoid searching simultaneously. Prior work had argued that old knowledge becomes obsolete (Eisenhardt, 1989) and that older technical breakthroughs and approaches eventually leak to competitors without their having to invest in costly search activities (Huber, 1991). A firm was traditionally seen as unlikely to differentiate from rivals by imitating what is already known (Kogut and Zander, 1992). However, more recent work has shown that older knowledge can be helpful due to its reliability and legitimacy (Katila, 2002). In addition, it can be costly to pursue strategies and develop resources very quickly (Pacheco-de-Almeida and Zemsky, 2007). However, timing or speed in the context of firm strategy in changing institutional contexts has been underexplored due to a focus on technology search and data from welldeveloped institutional contexts. Firms in rapidly changing markets appear to do better by being nimble and adopting a more flexible structuring (Eisenhardt, 1989) Similarly, Rindova and Kotha (2001) argue that in rapidly changing environments, firms must continuously morph, or transform themselves to maintain competitive advantage over time. Bingham, Eisenhardt and Davis (2009) find that the amount of structure a firm needs depends on its environment. Studies of the diffusion process argue that initial adopters may choose a practice due to its technical benefits vs. costs. Over time, others rationalize adoption on the grounds that the practice has become institutionalized and helps in gaining legitimacy and resources (Meyer and Rowan, 1977; Rogers, 2003). There may be an institutionalization process applicable to the strategies associated with higher firm performance. Through searching for effective strategies, some firms may be early to find new strategies and enjoy superior performance as they differentiate themselves. Over time, this knowledge may diffuse to other new firms who then


imitate these previously successful strategies. Prestige generated by the success of early adopters can also increase the rate of knowledge transfer to other organizations (Sine, Shane and Gregorio, 2003). Investors and other resource providers may start to see these characteristics and strategies as signals associated with higher performing firms, creating a decoupling from rational reasons for adoption and generating a self-fulfilling prophecy. However, with enough time, if the use of the strategy becomes widely known it may lessen the performance-enhancing benefits as competition builds. The use of the strategy comes to be taken for granted, even if it no longer provides advantages. If there is a new round of institutional change, then this may start the cycle again as a new set of firms search for more effective strategies to fit the environment. The early firms to find strategies that are now effective should experience higher performance relative to later adopters mimicking the strategy. While later firms avoid the costly search process (Huber, 1991; Pacheco-de-Almeida and Zemsky, 2007), they also face increased competition from rival firms and risk the chance that the institutional environment has continued to change. This process may be accelerated in the case of cocoon institutions, however, since they are established to generate more of an immediate effect and transfer of resources or credibility in an effort to stimulate new institutions and behavior. The earlier firms to take advantage of the cocoon institutions may benefit more, especially if the institution offers immediate benefits. If the rest of the outside institutional environment continues to change and become more conducive to entrepreneurship and market-based competition, this may reduce the benefits to those making use of the cocoon institution in later time periods. These arguments lead us to predict: H5: Entrepreneurs who are early adopters of the strategies that match the institutional environment will start larger firms. RESEARCH CONTEXT


We test these hypotheses within the setting of institutional changes in China. The Chinese context is particularly appropriate because there is sufficient variation in the institutional environment through on-going reforms to transition and develop the private sector. Evidence from less-developed countries (LDCs), undergoing transition, is useful for three reasons. First, relative to more stable, developed countries, transition economies are still in the process of changing fundamental institutions. Transition governments creating policy shifts generate variation in the institutional environment and allow for opportunities for identification of the link between institutional change and firm strategy. Second, studying LDCs reduces concerns of reverse causation since they tend to have fewer well-organized industry associations to lobby for reforms. Finally, the vast majority of literature on entrepreneurship focuses on well-developed economies where the minority of entrepreneurs live (Gollin, 2002). The literature on economic transition towards capitalism shows that while each society has its own story, there are common elements. The first is the role occupied by entrepreneurs as the initial capitalists during transition (McMillan and Woodruff, 2002). Second, is the role of institutional changes that legitimate entrepreneurial activity (Rona-Tas, 1994). The following paragraphs describe the evolution of the institutional changes as they relate to entrepreneurship in China. Although change is on-going, we will seek to examine differences between the earlier period (from the late 1980s to the late 1990s) when institutions for markets and entrepreneurship were nascent and the later period when such institutions were better developed, leading to relatively easier growth of entrepreneurial firms. We also examine a middle time period in the late 1990s and early 2000s when institutional change was particularly intense. Our data, described below, lead us to believe that changes in firm strategies and performance occurred


across these time periods. In addition, interviews reinforced this idea. A successful entrepreneur turned venture capitalist told us: “There have been three waves or forms of entrepreneurship in China as the country transformed from a planned economy to a market economy, making more space for private entrepreneurship. In the 1980s, there were two types of people becoming entrepreneurs, those from the countryside and those with a connection to government. After 1992, … there was a second generation of entrepreneurs doing low cost, small margin businesses. The third wave came after 2000 when a wide range of people of all ages became entrepreneurs and increasingly started technology-based businesses doing some innovation.” Overall, the earlier time period can be characterized as an institutional environment that began to transition from a planned economy to support the formation of entrepreneurial firms via the creation of a market economy. In 1988, The First Plenary of the Seventh People‟s Congress approved an amendment to the Chinese Constitution, which “permits the private sector of the economy to exist and develop within the limits prescribed by law.” Also in 1988, the state officially recognized private businesses (known in Mandarin as „siying qiye‟) with eight or more employees (Xu and Zhao, 2008) by issuing the Tentative Stipulations on Private Enterprise (TSPE). In the aggregate, reforms in this earlier period mainly provided initial legitimacy to entrepreneurship, making it easier and less risky to create a firm. Motivated by the economic slowdown in the late 1980s, Deng Xiaopeng went on a tour of southern China, promoting entrepreneurship. Economic reforms re-started with the Fourteenth Party Congress in 1992 indicating that the goal of economic reforms in China was a socialist market economy. In 1997, the Fifteenth Party Congress further conveyed legitimacy and affirmed the legality of entrepreneurs, by making a large rhetorical shift, referring to private ownership as an important component of China‟s “socialist market economy”. They were essentially condoning private ownership of corporations and indicating that entrepreneurial firms would continue to be allowed


to form. While these statements and reforms conveyed assurances that China would have a market-based economy that allowed for entrepreneurship, there were continued policies easing the flow of resources towards state-owned firms and foreign-invested firms and away from entrepreneurs. From 1978 to 1988, an emphasis on foreign investment resulted in discrimination against domestic entrepreneurs in favor of foreign-invested and state-owned firms (Huang, 2003, 2008). In contrast to the earlier period, in the later period of institutional change, beginning in the late 1990s, reforms provided more resources, financing for expansion, and talent. These reforms made it easier for entrepreneurial firms to expand and achieve larger sizes. For example, in 1998, the government passed reforms promoting venture capital and private equity investment. The constraints to growth began to be reduced after 1999 when the government altered the historical discrimination against private firms (Huang, 2003). In the spring of 1999, building on the statements issued in 1997, the People‟s Congress approved an amendment officially putting the private sector on the same legal footing as the public sector (Xu and Zhao, 2008). Eesley (2010) discusses the impact of these reforms on individual-level choices to become entrepreneurs. Also in 1999, the Innovation Fund for Technology Small and Medium Enterprises (SMEs) was passed to provide a new mechanism of funding to encourage technology-based entrepreneurship. Another significant landmark occurred when China joined the World Trade Organization (WTO) in 2001. In 2004, the Constitution was amended again, strengthening the protection of private property. Institutional effects are complex and it is likely the cumulative effect of these changes was interdependent and reinforcing (Batjargal, 2010). A virtuous cycle began where the positive


impact that the private sector growth had further encouraged officials to pass more reforms that in turn spurred further entrepreneurship (Li, Meng and Zhang, 2006; Li and Zhang, 2007). Other reforms in this period accelerated the support for entrepreneurial firms through the proliferation of science parks and incubators as well as tax incentives for R&D and licensing activity. METHODOLOGY The setting of institutional transitions in emerging economies offers an opportune context to integrate the strategy perspective with institutional theories. For instance, Peng (2003) offers a two-stage institutional framework arguing that in the early phase, firms compete based on networks while in a later phase, arms-length, rule-based transactions become more prevalent and competition moves to building competitive resources and capabilities. The transition literature has moved from a focus on state-centered policy analysis to examine a broader set of actors over time (Nee, 1996). By focusing previous work on entrepreneurial performance in well-developed economies, we may have developed theory that is robust in stable, wealthy societies but lacks explanatory power in the majority of economies that are still developing. Just as the factors that lead individuals to entrepreneurship differ across contexts (Eesley, 2010), the drivers of entrepreneurial performance may change with institutional shifts. We are just beginning to understand how a country‟s development and institutional environment influences strategy and firm performance. This paper aims to contribute by exploring this gap, using China‟s transition to provide empirical evidence. We respond to suggestions in the literature (Tsui, et al, 2004), “to think deeply about China as an empirical setting where the boundaries of existing knowledge on organizations can be extended.”


To gather firm-level data in the Chinese context, a unique survey was sent to all alumni of Tsinghua University in Beijing. An alumni survey is particularly appropriate because it enables gathering data from a well-defined population of comparable entrepreneurs. An alumni survey has the additional advantages in China that it is not biased by government collection towards classification of private firms as state-owned and not selected based on success in entrepreneurship. Past studies of institutional transitions (Rona-Tas, 1994) and of entrepreneurship (Dobrev and Barnett, 2005) have focused on elites as a particularly important segment of society to understand intuitional change (Hsu, Roberts and Eesley, 2007). The study of elite mobility dates back to early work examining “sponsored” mobility in England (Turner, 1960; Treiman and Terrell, 1975). Specifically, I examine the entire population of alumni across all schools and departments in one of the oldest and most prestigious engineering-focused universities in China, Tsinghua University. This is an advantageous sample because it provides data on elite individuals in society with high education levels. This focus creates some desirable homogeneity in the social and human capital in the sample compared to more representative samples where concerns that unobserved differences in these factors may be driving the results. Tsinghua is one of the few Chinese universities currently that has a history of maintaining a high quality, up-to-date database of alumni contact information, enabling us to reach older alumni as well as recent graduates. The advantages of this survey over existing datasets include a panel of detailed work history and education data, coverage over many years of graduates, and less bias on funding and performance measures than government surveys where Chinese entrepreneurs are known to misreport their earnings and firm status as state-owned (wearing the red hat) to avoid discriminatory practices.


We developed the survey instrument in collaboration with partners at Tsinghua University, based on an earlier alumni entrepreneurship survey of the Massachusetts Institute of Technology (Hsu, Roberts, and Eesley, 2007). We took steps to be sure of measurement equivalence and the questionnaire was independently back-translated to ensure validity (Brislin, 1970). The survey was sent to all alumni including graduates from 1947 to 2007, with an address on record (a total of 26,700) and could be returned online or via regular mail. Alumni were asked if they participated in founding a new company or privatized a state-owned enterprise. A total of 2,966 surveys have been received online, via paper and email. Of the 26,700 mailings, the response rate is 11 percent, including entrepreneurs and non-entrepreneurs. For this analysis, the final number of observations is the 297 firms founded by the entrepreneurs who responded to all variables used. While in line with other surveys of top executives in China, our response rate is on the low side. To test whether the respondents to the survey were representative of the broader population of Tsinghua graduates, we compared the survey responses to data on the average graduates from Tsinghua University. The school claims 62.5 percent of the students major in engineering disciplines, 11.9 percent in sciences and 12.9 percent in humanities (architecture, medicine and law comprise the remainder). The Tsinghua survey sample contains 62.2 percent engineering, 10.6 percent sciences, and 13.7 percent humanities. Traditionally, Tsinghua has been a male dominated university and the Tsinghua sample reflects this with only 12.2 percent of the responses from women. However, in recent years, Tsinghua reports that 25-30% of the students are female. In the survey sample, the percentage of women in recent graduating cohorts ranges from 11 percent in 2000 to 28 percent in 2007. Tsinghua has 19.2 percent of its alumni graduating from doctorate degree programs and in the survey sample we have 19.3 percent.


Tsinghua claims 53.4 percent of its students are enrolled in graduate (Master‟s or Doctorate programs) and the survey sample shows 53.9 percent. The results show that there were not statistically significant biases in the respondents. To further assess non-response bias, we performed a test using the extrapolation procedure (Armstrong & Overton, 1977). Extrapolation has been shown to perform well in assessing the extent and direction of bias (Donald, 1960; Filion, 1975). Numerous scholars have used extrapolation techniques to assess non-response bias, making it an accepted and commonly used method (Lehman, 1963; Rogelberg & Luong, 1998). In this method, the survey is split on the basis of survey return dates. The test examines mean characteristics of respondents who were among the first 90 percent to respond and compares them with the last 10 percent of respondents who answered after multiple reminders. This method rests on the assumption that nonrespondents share characteristics with late responders. Extrapolation has the advantage that tests for differences can be carried out across all variables whereas non-respondent surveys only enable comparisons across a select few variables.4 The appendix shows t-tests of the null hypothesis that the average (observed) characteristics of the responders and non-responders are roughly the same statistically. Older founders appear to have been equally likely as younger founders to respond. The 10th, 25th, 50th, 75th, and 90th percentiles of graduation years were also checked and are similar; offering reassurance that there were not large differences over time in response rates. There are not significant differences between the groups in Bachelor‟s graduation year. These results offer reassurance that there were not systematic biases in respondents to the survey.


However, extrapolation shares the drawback of using non-respondent surveys that those who never respond may differ from late respondents or from those who respond to a non-respondent survey.


We supplemented these quantitative data with semi-structured field interviews in June of 2007 set up by Tsinghua Alumni Association with 42 informants who were entrepreneurs, investors, and government officials. In June of 2010, one of the authors traveled to China to conduct an additional 20 interviews. We used these interviews to better understand the context of the study, the changing firm strategies and startup process, to develop the hypotheses, as well as to improve the appropriateness and accuracy of the measurements. In addition, after the surveys were collected, we used follow-up phone calls with some of the respondents to probe more deeply. Interviewees helped in understand the changing institutional environment. The interviews first suggested that the strategies entrepreneurs are using have been changing. In order to get a deeper understanding, before doing statistical analysis, we first isolated the firms with the top ten highest revenue numbers. We used the survey responses to trace the story of the educational and career history, family background, and strategies that each of these entrepreneurs used in creating their firms. This analysis showed that there were multiple paths to successful entrepreneurship in China. The results were consistent with what the interviewees had said about changing strategies over time. We use an alumni survey of Tsinghua University for several reasons. First, this sample has the benefit of giving us a long time span of data on firm creation and outcomes, enabling us to examine changes over time. Second, the sample includes a wide range of different industries, increasing the likelihood of robust and generalizable results. The Tsinghua sample provides us with desired homogeneity in skills and status in society compared to more general samples, reducing concerns that results may be driven by differences in these factors. Measures


Dependent variables. To test hypotheses 1 to 4, that the factors driving the creation of larger firms shifts with institutional change, we measured firm size by the number of employees in the most recent fiscal year the firm was in operation. We take the natural log of this variable (log emp) to account for skew. The number of employees is frequently used as a measure of firm size, (Dess, Lumpkin and Covin, 1997) and in the case of entrepreneurial firms is a good indicator of firm growth and performance (Beckman, 2006; Khaire, 2010). We find that the number of employees is significantly correlated with the firm‟s revenues and profits. In China, the number of employees is a particularly good measure since revenues and profits are more sensitive to report. We check for (and find) robustness using firm revenues and profits. We choose not to use survival since survival exists among underperforming firms (Gimeno, Folta, Cooper & Woo, 1997). Independent variables. Government ties. We measured the construct of government ties by coding a dichotomous variable equal to zero if there were no government ties and equal to one if one of the individual‟s parents held a government job or if the respondent indicated that the government regulators in charge of their industry were school friends, fellow alumni, former co-workers, a friend, or a family member.5 The traditional name-generator approach used in the network literature (Burt, 1997) is not possible in a setting where respondents are reluctant to disclose this type of contact. We followed Peng and Luo (2000), Peng (1997), and Xin and Pearch (1996) in posing more general questions about how extensive are the ties to government officials. Siegel (2007) codes political ties according to whether the firm had senior managers with prior ministerial level government work experience or in the leading business association. Our measures are


Coding the total number of government ties was also done, and yields similar results, but only five percent of the sample had more than 2 types of government ties.


advantageous in being more specific than the ones used previously in asking separately about the origin of the tie (family, school, work, and so on) and asking specifically about government officials with oversight of the firm and its industry. We also separately code communist party as a one if the respondent was a member of the party. We use the responses to code ever job government as a one if the respondent held a government job. Cocoon (transitional) institutions. We measure cocoon institutions by whether the firm is located in a science park. The Chinese government has pursued a policy of building science parks as a way to encourage the growth of the private sector and the transition to a science and innovation driven economy. In this context, science parks are the main cocoon (transitional) institution. I code science park as an dichotomous variable equal to one if the firm was in a science park. Exposure to entrepreneurship. We measure exposure to entrepreneurship by whether the individual herself or whether their close contacts have founded a firm. We create a scale measure equal to zero if the individual has not founded a firm previously and has no contacts that have founded firms. Entrepreneur index is set equal to the number of siblings, close relatives, friends, neighbors, colleagues and classmates who have founded firms. Prior literature has separately considered the effects of exposure to entrepreneurship through parents (Sorensen, 2007), classmates (Malmendier and Lerner, 2009) or work colleagues (Nanda and Sorensen, 2010). However, we choose to look at them as different ways that an individual can be exposed to and gain knowledge of the process of starting a firm and competing in the market, particularly in a transition society where entrepreneurship had not been common. The variable serial entrepreneur is equal to a 0 if this is the entrepreneur‟s first firm, and a 1 if the individual had prior founding experience.


Marketization. To test hypothesis 4, that in the regions where market reforms and institutional changes happened earlier, we see certain strategies associated with firm performance, we use the National Economic Research Institute (NERI) data, that includes subindicators rating progress in marketization across time (1997-2005) and the extent of marketization across provinces (Fan and Wang, 2003; Nee and Sopper, 2010). We also use the item on the scale that asked about the protection of intellectual property rights. The NERI index has frequently been used as a measure of the institutional environment (Fan & Wang, 2006; Li, Meng, & Zhang, 2006). Initial adoption of strategies. Testing hypothesis 6, (that entrepreneurs who are initial adopters of the strategies that match the institutional environment will start larger firms) requires that we define early adopters. First, we examine the timing within each of the institutional time periods to see when the first fifty percent of firms were founded who had government ties, cocoon institution location, or exposure to entrepreneurship equal to 1. We define the variable initial as equal to 1 if the firm was among the first half of firms using that strategy during the institutional time period when it was effective. Then, we interact initial with each of the variables government ties, entrepreneur index, science park, and serial entrepreneur. This allows us to explore whether those who are quicker to match the institutional changes are more likely to create larger firms. Controls. Since older firms have had more time to reach a larger scale, we take the natural log of the number of years in operation and control for log firm age (we add one to avoid taking the natural log of zero). We control for whether the individual has gone abroad for education or work experience with the variable overseas as an indicator for an individual who left China for education or work and then returned. China has a large number of return migrants


who may have been exposed to entrepreneurship, been able to save at higher rates, or may have international networks from studying or working abroad (Huang, 2008). In China, it is also considered entrepreneurship to privatize a state-owned enterprise (SOE). Yet, privatized SOEs have some employees and resources already and so we include a control with the variable privatized and also include a control for the initial firm size when the privatization occurred. Prior work shows that larger founding teams are more successful, so we include a control for founding team size (Eisenhardt and Schoonhoven, 1990; Roberts, 1991). Another dimension that opportunities may vary over is the industry sector, which may determine the typical firm size. We include controls for industry sectors such as software and electronics. Prior work finds that macroeconomic conditions, such as higher GDP increase the entrepreneurship rate (Hsu, Roberts & Eesley, 2007), so we control for log(GDP per capita) by year in China. Interviewees mentioned the advantages of firms who had the government as their customer, so we include gov. as customer to capture those firms who were selling to the government. Prior literature also uses this variable (Nee and Opper, 2010). Finally, prior work shows party members had advantages (Walder, 1995; Walder, 2003) and since the Communist party began admitting entrepreneurs after 2001, we include a control for Communist party member. Statistical Methods We use ordinary least squares regression to test the impact of the independent variables on firm size. We use a data-driven approach to examine the time periods when change occurs in the factors driving greater firm size. We begin the time period after 1988 since that is when the foundings begin and when firms with more than eight employees were permitted. The results are robust to using this year as the starting point as well. I find the greatest shifts in the data occurring across three time periods. The first period is 1989 to 2002, there is an overlapping


middle time period of 1999 to 2002 and then a third time period from roughly 2003 to 2007. We do not make strong claims that these specific years are significant since change and reforms were on going. The mid to late-1990s were an active time for reforms encouraging the private sector. These three time periods serve as useful indicators of the three time periods where institutions have been evolving. Results --------------------------------Insert Figure 1 here --------------------------------Table 1 reports pair-wise correlations. Table 2 reports the results the OLS regressions predicting log(emp), the number of employees. Model 1 in Table 2 tests period 1 (1989 to 2000) and includes control variables along with the other independent variables. In hypothesis 1, we argued that in institutional environments characterized by an emphasis on government central planning and control, entrepreneurs with government ties would create larger firms compared to entrepreneurs without such ties. Model 2 tests period 1 and shows that the coefficient for government ties is positive and significant, supporting the first hypothesis. Adding the government ties variable explains an additional 3.3 percent of the variance. The coefficients for science park is marginally significant, and the coefficients for serial entrepreneur, innovation and entrepreneur index are not statistically significant. In hypothesis 2, we argued that in a period of institutional transition, entrepreneurs utilizing “cocoon institutions” would create larger firms. Models 3 and 4 examine the 2000 to 2002 time period and offer evidence in support for this hypothesis. The results show a positive, significant coefficient on science park, which explains an additional 5.2 percent of the variance. We argued in hypotheses 3a, that as marketbased institutions develop, entrepreneurs with exposure to entrepreneurship will create larger firms. To test this hypothesis, we introduce two measures of exposure to entrepreneurship, serial


entrepreneur and entrepreneur index. Models 5 and 6 examine the 2003 to 2006 time period. We find some support for this hypothesis and find that the coefficient on serial entrepreneur, but not on entrepreneur index is positive and significant. In addition, we argued in hypothesis 3b, that as an economy transitions towards market-based institutions, entrepreneurs who are innovating would create larger firms. Model 6 shows a positive and significant coefficient on innovation, offering support for the hypothesis. Adding these three variables explains an additional 7.4 percent of the variation in this time period. Finally, in Model 7, we see that in period 3, the variables serial entrepreneur, entrepreneur index and innovation explain over five times more of the variation in period 3 than they do in period 1. Similarly, the variable government ties explains much more of the variance in firm performance in period 1 and almost none in period 3. Since the impact of everjob govt. and communist party were not significant and did not vary in their impact significantly over time, for these models we include it as a control.6 In Table 5 we include interaction terms to show that the differences in the coefficients across the time periods that we found in Table 2 are statistically significant. --------------------------------Insert Tables 1-6 about here --------------------------------In hypothesis 4, we argued that the regions within China where marketization occurred earlier would see similar strategies to the third time period driving firm performance. The results in Table 3 support this hypothesis. Model 1 shows results for just the controls and main effects. Model 2 uses the NERI index item that asks about the protection of intellectual property. The results show that in regions where intellectual property is perceived as being better protected, innovation is associated with higher performance. Model 3 interacts the aggregate NERI index at the province level with government ties. The coefficient on the interaction term with government

It appears that other ties to the government officials who are have oversight over the firm‟s industry are more important factors than more general government work experience or Communist party membership.


ties is negative and significant, indicating that government ties provide less of a benefit in regions higher in institutional changes and marketization. Model 4 adds interaction terms with science park, serial entrepreneur, and entrepreneur ties. The coefficient on the interaction term with government ties remains negative and significant. The coefficient on the interaction term with science park is negative and significant, indicating that in a region with more developed market-based institutions, science park wwere less of an advantage. The coefficient on the interaction term with entrepreneur index is positive and significant, providing evidence that individuals with ties and exposure to entrepreneurs do better where market-based institutions are more developed. The coefficient on the serial entrepreneur interaction is not significant. In Model 5, we include an interaction between innovation and the aggregate marketization index, however this coefficient is not significant. The results continue to show that government ties and science parks provide fewer benefits and being exposed to entrepreneurship provides a greater benefit in regions with higher marketization. In hypothesis 5, we argued that entrepreneurs who are early adopters of the strategies that match the institutional environment will start larger firms. Table 6 shows results from adding the variable early as an indicator for being among the initial fifty percent of firms founded during each time period. We then interact this with each of the key independent variables to test whether being among the first firms (in each time period) to adopt the strategies that match that environment results in higher performance. Model 1 shows a negative and significant coefficient on the interaction with government index indicating that firms who entered later with government ties actually did better, counter to the hypothesis. In model 2, we focus on the second time period, and find that the coefficient on the interaction term with science park is positive and significant, indicating that those who were early to take advantage of science parks


did better, all else equal. In model 3, focusing on the most recent time period, we find a negative and significant coefficient on the interaction term with serial entrepreneurs providing evidence that it was the experienced entrepreneurs who entered later rather than earlier who saw the greatest performance benefit. The evidence does not support the hypothesis, but suggests a more nuanced interpretation, that there is an important difference between cocoon institutions and broader institutional changes. Entrepreneurs who are quicker to take advantage of cocoon institutions see the greatest benefit, whereas with longer-term institutional changes, following the trend may be a better strategy. The results are robust to a number of different specifications and alternate measures of the dependent and independent variables. If we recode the NERI index into a dichotomous variable with the regions with scores above or below the mean, the results are consistent. The extreme performance outcome results were mostly robust to choices of the top twenty-five percent. While the coefficients were of the predicted directions, they often lost statistical significance when ten percent was chosen. Appendix Table A shows the results are robust to using simple univariate tests. Appendix Table B shows that the results are mostly robust to profits as a dependent variable. As an additional analysis and to test robustness to an alternative dependent variable, we tested whether entrepreneurs pursuing strategies consistent with the institutional environment will be more likely to experience extreme positive outcomes and less likely to experience extreme negative outcomes. To test whether extreme performance outcomes become more likely with a strategy that matches the institutional environment, we use measures of extreme positive or negative outcomes. We created dichotomous dependent variables equal to one if the firm was in the top one third of the employee (high emp) and separately, the revenue (high rev) distribution. We created measures for extreme negative outcomes for if the firm was in


the bottom one third of the employee (low emp) or revenue (low rev) distribution. We group firm outcomes into the high end, middle and low performers based on firm employees and revenues. Both IPOs and acquisitions are a choice of the founders, whereas revenues are a common goal of all companies. Many studies use IPO as a measure of success (Shane and Stuart, 2002), but more startups successfully exit via acquisition. Other limitations of using IPO or acquisition are that both of these are sensitive to the industry, the economic environment, and the founders‟ desire to retain control. In the Chinese context at this time, the ability to exit via IPO or acquisition was very limited as well as being seen as an undesirable choice. On the other hand, some studies examine going out of business as an extreme negative outcome. We choose not to use this measure since survival for long periods can often be observed for underperforming firms (Gimeno, Folta, Cooper & Woo, 1997). Chatterjee and Hambrick (2007) use the distance of ROA from the industry average (in either direction) as a measure of performance “extremeness”. Taylor and Greve (2006) use market value and create standardized scores to examine the characteristics of teams leading to extreme, outlier performance (positive or negative). Both of these measures have important limitations in our context that cause us to prefer employee and revenue-based measures. Model 1 shows the coefficient for the interaction of government ties and the early time period is positive and significant, suggesting it increases the likelihood of an extreme positive performance outcome. Model 2 finds a negative coefficient on this same interaction term, but fails to reach statistical significance. Model 3 shows that as hypothesized, the coefficient on the interaction between entrepreneur index and the recent time period is positive and significant. The main effect for entrepreneur index is negative and significant, suggesting that in other time periods having contacts who were entrepreneurs may have reduced the likelihood of extreme positive outcomes (perhaps because they substituted for more


beneficial government contacts). Correspondingly, model 4 finds that the interaction term with entrepreneur index is negative and significant in predicting extreme low employee outcomes. However, models 3 and 4 fail to find significant coefficients on the interaction term with serial entrepreneur and the recent time period. Model 5 is the full model and continues to show a positive and significant coefficient for the interaction with government ties and entrepreneur index (but not with serial entrepreneur). Models 6-9 test the robustness of these results to using extreme outcomes in the revenue distribution. We find robust results and here also find a positive and significant coefficient on the interaction with serial entrepreneur and the recent time period, adding further support to the hypothesis. Overall, it appears that a strategy that matches the institutional environment increases extreme positive outcomes and in some cases decreases the extreme negative outcomes. The sample used in this analysis is limited in several ways. First, it is not, and is not intended to be, a representative sample of entrepreneurship across China. We have focused on a highly selected and advantaged population of entrepreneurs and how institutional changes have affected this population over time. It could be argued that the fact that they are alumni of Tsinghua University gives our respondents a baseline level of connections with the government. We have no way to know whether more successful founders were more likely to respond to our survey. It is also difficult to know the extent of hindsight bias. While founding a firm is a significant event in one‟s life, our respondents may not have as clear of a memory of foundings that occurred many years in the past. Our data are self-reported and come from a single developing economy. Some aspects of China‟s case are unique. It is a country where economic liberalization has occurred at a deliberate pace while political changes have been slower. In Chinese culture, the concept of guanxi refers to the importance of reciprocity, trust and social


obligations in Chinese society. It has been defined to refer to “instrumental-personal ties that range from strong personal loyalty to ceremonial bribery” (Walder, 1986: 19). Thus, we might expect that connections have a special significance in Chinese culture. Other factors associated with development could be influencing the results. Nonetheless, the results of this paper may be expected to generalize to other developing countries. Discussion and Conclusion This study focuses on the neglected link between the institutional level and how it helps to shape what firm strategies lead to entrepreneurial performance. Research focusing on new ventures explains performance in terms of the founders and their strategic choices. Such factors are important, but the broader social conditions and institutional changes that shift which strategies and what entrepreneurs form larger, more successful firms are relatively unexamined. The literature in strategy and entrepreneurship has also explained performance as being driven by the firm‟s environment (Stinchcombe, 1965; Eisenhardt and Schoonhoven, 1990). Institutional theorists and sociologists have been interested in how the prevailing institutional structure relates to founding rates (Romanelli, 1989; Dobbin and Dowd, 1997; Aldrich, 1999), but until recently, have neglected the ways that institutions may influence firm strategy (Peng, 2003). We have not yet developed a robust understanding of the role of institutions in shaping the link between firm strategy and performance. In this paper, we link macro-level institutional changes together with firm-level effects to extend and build theory of how certain firm strategies lead to the creation of larger, more successful firms. In contrast to prior work, we explore whether a fit with the institutional environment affects extreme performance outcomes as well as mean performance. We also contribute by theorizing about differences between broad, slow institutional changes as distinct from more immediate types of institutional changes intended to


produce a certain shift in behavior. An emerging view suggests that the strategies leading to competitive advantage are best seen as differing over time or across contexts. The changes in performance-enhancing strategies during periods of institutional change have rarely been explored (Hoskisson, et al, 2000). This study aims to contribute to an emerging stream of literature on strategy and institutions in emerging economies (Hoskisson, et al, 2000; Peng, 2003). A key contribution of this paper is to show that the factors associated with entrepreneurial performance differ as development of institutions for capitalism and entrepreneurship proceeds. It introduces the idea that there are certain transitional “cocoon” institutions that are useful for a brief period of time as a country transitions. Overall, the evidence supports the idea that alongside the institutional changes, there have been shifts in the strategies and firm characteristics associated with the creation of larger firms. The single most important factor for the successful creation of larger firms in the earlier time period when government control was more dominant appears to be government connections.
Having government ties was a greater advantage than one‟s own career history in government.

Amsden (2007) and others argue that in developing institutional environments, government support of a few large firms is critical to economic development. Alternatively, another interpretation is that less developed institutional environments allow for crony capitalism and that in more developed settings, there is a more level playing field where success depends on competition in the market (Walder, 2003). Future work further exploring these competing explanations would be fruitful. Those firms pursuing entrepreneurial opportunities in science parks were more likely to be high performers in the middle time period. Finally, in the most recent time period as market-based institutions developed, those who had prior direct


entrepreneurship experience and knew how to build a firm along with entrepreneurs who were innovating were more likely to be high performers. One entrepreneur that we interviewed in Shanghai told us: Strong connections with the government mean more opportunities to receive projects from SOEs and can make you grow really fast. However, it could plant the seed in letting non-market factors creep into the business and that can decrease your competitiveness. This becomes a hazard when the market is opened up and the government has less influence. The Chinese government is improving … and can be good to build connections but cannot become an obstacle to market competition for the firm. Another entrepreneur who started earlier, put it this way, “China is more state-led than a market economy still. The government controls many resources. For firms the quickest way to make a lot of money is through the government.” A venture capital investor in China mentioned: In the US you don’t see the government, but in China the role of the government is seen from the very beginning. They could be a major funding source, help in penetrating the markets, and in protecting the competitive advantage. There is some over-emphasis of the role of the government however. Another serial entrepreneur, on his sixth start-up emphasized that over time, young entrepreneurs were now relying more on their connections with older, experienced entrepreneurs to learn the process, saying, “Tsinghua alumni, entrepreneurship among alumni has a metaeffect where some learn the process and mentor each other so in the future there will be more and more entrepreneurs from Tsinghua as has already happened with MIT alumni.” A large and growing literature has looked at who becomes an entrepreneur, but fewer scholars have examined who becomes successful. This study yields important insights for those studying strategy and entrepreneurial firm performance in emerging markets. For entrepreneurship scholars, this study offers the main contribution that the optimal firm strategies depend on the institutional environment and the development of market-based institutions. It puts forward the idea that there are certain transitional “cocoon” institutions that are useful for a brief


period of time. This paper builds on prior work and responds to calls in the literature for research on the impact of institutional environments on firm strategy (Peng, 2003; Meyer and Peng, 2005; Peng, Wang and Jiang, 2008). Studies only in well-developed economies cannot help to answer the questions of whether private firms in other countries may need to develop different strategies or follow a different firm development process. In addition to showing that strategies are not constant over time, we also find that there are regional differences across China. In the regions where market-based institutions developed fastest, we see greater changes in the effective firm strategies. Also, we look beyond average performance to show that firms with strategies that fit the environment have a greater likelihood of performance at the extreme positive end of the spectrum. We also show that the timing of strategies is important. Here the results differ for the “cocoon” institutions, where being early to take advantage of their offerings yields higher performance. In contrast, with broader, slowing moving institutional changes, the later adopters have an advantage and can wait to see the implications of the changes happening. The findings of this study also have implications at a more practical level for entrepreneurs and policymakers. Entrepreneurial opportunities are only beginning to be explored in the context of developed economies (Shane, 2001). The vast majority of the world‟s entrepreneurs are located in developing economies (Gollin, 2002). However, less is known about the drivers of performance for entrepreneurial firms in less-developed contexts. The results of this study suggest that in an emerging economy, as institutions to protect intellectual property develop, innovation appears to result in a greater likelihood of creating a firm that is among the largest private firms. The results suggest that in an early-stage developing economy, seeking out connections in government may be advantageous, but that pursuing a career experience in


government may not be the optimal way. For policymakers, the results have implications for spurring high growth entrepreneurship. Surviving new firms tend to have higher productivity than mature businesses (Foster, Haltiwanger and Syverson, 2008). If impediments arise in the process of new firm growth then resources do not flow towards the more productive firms. If the most productive entrants do not grow to displace mature firms then generating more new entrants adds little to aggregate economic growth. Thus, understanding the factors shaping post-entry outcomes for entrepreneurial firms is important, particularly if factors facilitate or inhibit this process. If connections to government or transitional “cocoon” institutions moderate the resource reallocation process towards young entrepreneurial firms then understanding this process is vital since it would slow job creation and economic growth. In the same way that formal institutions can provide barriers to growth (Eesley, 2010), access to government connections can enable or impede entrepreneurial growth as well. To conclude, it appears that the factors associated with entrepreneur performance change with institutional development. Early in the development of market-oriented institutions, different types of networks, specifically ties to government appear to benefit entrepreneurs. In a middle stage, new cocoon institutions such as science parks offer advantages. The benefit of government connections declines. Later in institutional development towards markets, having the skills to found a firm and to compete in the market via commercializing innovation becomes relatively more important. We hope that this study represents a step towards a better understanding of institutions



Figure 1

Shifting Performance Drivers by Time Period (employees)
1.4 1.2 1 0.8 Difference 0.6 0.4 0.2 0 -0.2 -0.4 -0.6 Period 1 Period 2 Period 3

* *



* *

* * *

Gov index


Science Park Serial entrep. Innovation


1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 Gov ties Innovation serial Entrep index Science park Ever job govt Ever job acad Comm. party gender Master‟s Doctorate Overseas Log(rev) Log(emp) Found year Team size Gov. customer Log(firm age) Initial size Log(GDP) 1 1.00 0.19 0.22 0.15 0.08 0.03 -0.01 -0.03 -0.06 0.09 0.03 0.04 0.03 0.10 -0.03 0.25 0.09 0.07 -0.06 -0.03 13 1.00 0.74 -0.43 0.06 0.10 0.38 0.31 -0.44 2 1.00 0.28 0.07 0.14 -0.03 -0.03 -0.01 0.03 0.07 0.02 0.04 -0.23 -0.04 0.06 0.31 -0.04 -0.03 0.01 0.06 14 1.00 -0.49 0.09 0.22 0.43 0.47 -0.51 3 4 5 6 7 8 9 10 11 12

1.00 0.11 0.15 -0.06 -0.01 -0.05 0.03 0.03 0.00 0.03 0.02 0.03 0.19 0.33 -0.10 -0.14 -0.01 0.19 15

1.00 0.02 0.02 0.06 -0.10 0.01 0.26 0.10 0.14 0.03 0.00 -0.05 0.09 0.07 -0.01 -0.14 -0.05 16

1.00 0.01 -0.02 0.00 0.03 0.06 0.01 0.01 -0.16 0.00 0.04 0.20 0.11 -0.04 -0.05 0.05 17

1.00 -0.03 0.11 -0.01 -0.06 -0.04 -0.06 -0.10 -0.06 0.00 -0.05 0.11 0.05 -0.07 0.00 18

1.00 -0.01 -0.01 0.08 0.23 0.00 -0.08 -0.05 -0.02 -0.03 0.02 0.03 -0.07 -0.02 19

1.00 0.04 -0.10 -0.03 -0.09 -0.03 -0.02 0.02 -0.03 -0.01 -0.04 0.06 0.02 20

1.00 0.00 0.03 0.04 0.05 0.09 -0.03 0.04 0.07 -0.01 -0.03 -0.03

1.00 0.21 0.13 0.05 -0.03 0.07 0.08 0.00 -0.06 0.04 0.07

1.00 0.08 0.01 0.04 0.04 0.00 0.08 0.00 -0.05 0.04

1.00 -0.07 -0.11 0.08 0.02 0.00 -0.09 0.01 0.08

13 14 15 16 17 18 19 20

Log(rev) Log(emp) Found year Team size Gov. customer Log(firm age) Initial size Log(GDP)

1.00 -0.05 -0.12 -0.74 -0.12 1.00

1.00 0.06 0.04 -0.07 -0.06 1.00 0.11 0.07 -0.12

1.00 0.11 -0.76

1.00 -0.12



Table 2
VARIABLES Time period Gov ties Science park Serial entrepreneur Innovation Entrep. index Controls Gov. as customer Everjob govt Comm. party Overseas exper. Log(firm age) Founding team size Log(GDP per capita) Initial firm size Electronics Software Privatized Constant Observations R-squared Adjusted R-sq. Log(emp) (3-1) 1989-2000 Log(emp) (3-2) 1989-2000 0.798** (0.383) 1.273* (0.649) 0.202 (0.385) -0.141 (0.454) -0.068 (0.099) 0.530 (0.371) -0.454 (0.554) -0.046 (0.421) -0.287 (0.512) 1.355*** (0.423) 0.089 (0.073) -0.552 (0.917 (0.133) -0.378 (0.159) (0.482) 0.858 (0.575) 0.002*** (0.001) 4.848 (8.052) 62 0.657 0.535 Log(emp) (3-3) 2000-2002 0.416 (0.353) Log(emp) (3-4) 2000-2002 0.521 (0.345) 1.526** (0.702) -0.131 (0.367) -0.233 (0.389) -0.056 (0.101) 0.588 (0.440) -0.041 (0.412) -0.196 (0.318) -0.281 (0.401) 0.141 (0.267) 0.009 (0.075) 0.367 (2.952) (0.058) -0.482 0.285 (0.414) -1.259* (0.658) 0.004*** (0.001) (0.085) (24.763) 70 0.415 0.238 0.613** (0.255) -0.303 (0.246) 0.090 (0.177) 0.185 (0.221) 0.656** (0.297) 0.132*** (0.049) 0.427 (1.593) (0.274) -0.239 0.066 (0.205) 1.224** (0.517) 0.005*** (0.001) (2.174) (14.006) 129 0.414 0.348 Log(emp) (3-5) 2003-2006 0.075 (0.178) (0.290) (0.354) Log(emp) (3-6) 2003-2006 -0.018 (0.174) (0.292) (0.340) 0.447** (0.174) 0.510** (0.198) 0.062 (0.054) 0.752*** (0.251) -0.212 (0.237) 0.098 (0.168) 0.052 (0.214) 0.409 (0.288) 0.143*** (0.047) -0.258 (1.526) (0.259) -0.227 -0.098 (0.200) 1.370*** (0.494) 0.005*** (0.001) 3.520 (13.405) 129 0.488 0.414 0.480 (0.377) 0.349 (0.539) -0.046 (0.400) -0.329 (0.507) 1.407*** (0.403) 0.116 (0.070) 0.299 (1.034) 0.003*** (0.001) -0.032 (0.369) -0.038 (0.472) 0.950* (0.560) -2.547 (8.911) 59 0.643 0.540 Log(emp) (3-7) 1992-2000 0.788** (0.365) 1.262** (0.621) Log(emp) (3-8) 2003-2006

1.251* (0.672) 0.376 (0.389) -0.018 (0.466) -0.044 (0.102) 0.680* (0.377) 0.009 (0.530) -0.528 (0.364) -0.270 (0.531) 1.164*** (0.428) 0.134* (0.072) -0.709 (0.946) 0.002*** (0.001) -0.130 (0.391) -0.101 (0.498) 0.862 (0.595) 6.868 (8.279) 62 0.624 0.502

(0.289) (0.338) 0.448** (0.173) 0.506** (0.194) 0.061 (0.053) 0.749*** (0.249) -0.215 (0.234) 0.097 (0.167) 0.048 (0.209) 0.406 (0.285) 0.144*** (0.046) -0.281 (1.503) (0.259) -0.226 -0.099 (0.199) 1.372*** (0.491) 0.005*** (0.001) 3.713 (13.212) 129 0.488 0.419

0.032 (0.371) -0.232 (0.402) -0.062 (0.104) 0.764* (0.447) 0.095 (0.421) -0.172 (0.329) -0.424 (0.409) 0.199 (0.274) 0.015 (0.078) -0.660 (3.012) (0.190) -0.494 0.138 (0.422) -0.953 (0.665) 0.004*** (0.001) 8.500 (25.275) 70 0.363 0.186

The time periods were chosen by looking at the data and grouping years according to when changes appeared to occur in the factors driving firm size. ***, **, and * indicate statistical significance at the 1%, 5%, and 10% levels, respectively.


VARIABLES Gov x NERI index Science Park x NERI index Serial x NERI index Entrep. index x NERI index Innovation x NERI index Innovation x NERI patent index NERI patent index NERI index Log(emp) (3-1) Log(emp) (3-2) Log(emp) (3-3) Log(emp) (3-4) Log(emp) (3-5)

-0.260** (0.115)

-0.336*** (0.121) -0.531*** (0.182) -0.120 (0.128) 0.076* (0.041)

-0.347*** (0.116) -0.544** (0.228) -0.132 (0.122) 0.077* (0.041) 0.120 (0.145)

0.208* (0.113) -0.068 (0.057)

0.052 0.157 0.029 0.011 (0.091) (0.103) (0.219) (0.166) Gov ties 0.311 2.266** 2.771*** 2.841*** (0.194) (0.869) (0.943) (0.874) Innovation 0.186 -1.037 0.312 -0.588 (0.236) (0.846) (0.220) (1.111) Serial 0.128 0.929 1.005 (0.197) (0.980) (0.921) Entrepreneur index 0.004 -0.571 -0.576* (0.057) (0.372) (0.315) Science Park 0.603 4.369*** 4.424*** (0.402) (1.404) (1.624) Everjob govt -0.161 -0.318 -0.131 -0.117 (0.269) (0.227) (0.218) (0.260) Comm. party 0.009 0.244 0.127 0.077 0.098 (0.195) (0.187) (0.192) (0.194) (0.191) Log(firm age) 0.368* 0.758** 0.376* 0.281 0.275 (0.216) (0.317) (0.208) (0.279) (0.208) Founding team size 0.083* -0.005 0.072 0.043 0.040 (0.044) (0.046) (0.044) (0.048) (0.044) Log(GDP per capita) -2.304** 0.235 -1.978** -1.884* -1.831* (0.973) (1.222) (0.940) (1.013) (0.935) Industry fixed effects YES YES YES YES YES Constant 21.014** 2.514 17.631** 17.637** 17.237** -8.123 (10.573) -7.874 -8.497 -7.838 Observations 159 106 159 159 159 R-squared 0.504 0.647 0.509 0.567 0.569 Industry, government customer and initial firm size controls were included but not shown to save space. ***, **, and * indicate statistical significance at the 1%, 5%, and 10% levels, respectively.


VARIABLES Early x gov ties Gov ties Serial x Recent Serial entrep. Entrep index x Recent Entrep index Recent (Post-2003) Early (Pre-2002) Everjob govt Comm. party Overseas exper. Log(firm age) Founding team size Log(GDP per capita) Constant Obs. 0.687 (0.645) -0.808* (0.456) -0.948*** (0.280) 0.094 (0.356) -0.539** (0.221) 0.102 (0.069) 1.386 (8.698) 471.754 1,303.488) 297 -0.196 (0.707) 0.427 (0.401) 0.428 (0.272) 0.064 (0.352) 0.032 (0.235) -0.263*** (0.093) 4.157 (9.525) 506.229 1,485.599) 297
Pr(high emp) Pr(low emp) Pr(high emp) Pr(low emp) Pr(high emp) Pr(high rev) Pr(low rev) Pr(high rev) Pr(low rev)

(4-1) 1.268** (0.586) 0.101 (0.336)

(4-2) -0.480 (0.759) -0.273 (0.323)



-0.010 (0.624) 0.014 (0.379) 0.354** (0.163) -0.290*** (0.108) -1.184 (0.816)

-0.255 (0.627) -0.278 (0.426) -0.366** (0.183) 0.149 (0.125) 1.899** (0.845)

(4-5) 1.402** (0.598) 0.107 (0.342) 0.232 (0.643) -0.172 (0.440) 0.423** (0.168) -0.294*** (0.113) -1.683** (0.782) 0.780 (0.611) -0.811* (0.470) -0.998*** (0.290) 0.151 (0.365) -0.557** (0.232) 0.110 (0.072) 5.480 (11.387) 1012.964 (1,633.828) 297

(4-6) 1.233** (0.585) -0.214 (0.319)

(4-7) 0.692 (0.944) 0.240 (0.359)



2.071** (0.959) 0.108 (0.406) 0.415* (0.231) -0.015 (0.117) -2.687** (1.263) -0.510 (0.624) -0.582 (0.368) 0.305 (0.271) 0.555* (0.328) -1.244*** (0.416) 0.067 (0.068) -12.374 (11.813) -1042.924 (1,715.131) 297 -0.105 (1.145) 0.377 (0.445) -0.401 (0.333) -0.521 (0.456) 1.313*** (0.402) 0.006 (0.108) 21.132 (16.052) 1968.144 (2,609.869) 297

-0.713 (0.733) 0.637 (0.492) -0.462** (0.225) 0.157 (0.144) 1.684* (1.018)

-0.610 (0.495) -1.034*** (0.288) 0.237 (0.347) -0.746*** (0.251) 0.088 (0.068) 1.925 (12.105) 975.646 (1,748.698) 297

0.283 (0.398) 0.453 (0.284) 0.018 (0.355) -0.042 (0.230) -0.297*** (0.093) -8.811 (13.112) -1446.248 (1,955.092) 270

-0.497 (0.489) -0.102 (0.337) 0.366 (0.381) 1.107** (0.498) 0.011 (0.090) 18.648 (12.286) 2764.286 (1,807.942) 297

0.418 (0.474) -0.433 (0.342) -0.557 (0.503) 1.193*** (0.411) 0.025 (0.117) 17.774 (18.725) 1677.496 (2,741.453) 297

These models control for industry sector (electronics and software) although the coefficients are not shown to save space. Robust st. errors. ***, **, and * indicate statistical significance at the 1%, 5%, and 10% levels, respectively.


VARIABLES Early x gov ties Gov ties Park x Middle period Middle (1999-2002) Science Park x post 2004 Log(emp) (5-1) Log(emp) (5-2) Log(emp) (5-3) Log(emp) (5-4) Log(emp) (5-5) Log(rev) (5-6) Log(emp) (5-7)

0.709** (0.303) -0.012 (0.175) 1.379** (0.686) -0.120 (0.167) -1.549** -0.133 (0.367) (0.639) 1.248** (0.515)

0.876*** (0.304) -0.048 (0.175) 1.032 (0.779) -0.171 (0.184) -0.850

(0.728) 0.542 Science Park (0.684) 0.616** 0.679** Serial x Recent (0.307) (0.304) 0.232 0.460*** 0.800** 0.164 Serial entrep. (0.188) (0.151) (0.337) (0.187) 0.203** 0.075 0.211** Entrep index x Recent (0.089) (0.097) (0.089) 0.021 -0.056 -0.075 Entrep index (0.044) (0.055) (0.056) 1.958** -0.237 Innov. X Recent (0.838) (0.396) 0.425 0.043 Innovation (0.588) (0.254) -0.199 -0.355 Early (Pre-2002) (0.309) (0.325) 0.108 -0.156 -0.437 -1.934** -0.607 Recent (Post-2003) -0.231 (0.264) (0.331) (0.821) (0.497) 0.156 0.156 0.194 0.121 0.132 0.352 0.035 Overseas (0.175) (0.175) (0.175) (0.174) (0.173) (0.396) (0.172) 0.265** 0.248** 0.289** 0.258** 0.262** -0.228 0.234** Log(firm age) (0.113) (0.112) (0.118) (0.116) (0.116) (0.286) -0.116 0.100*** 0.111*** 0.102*** 0.109*** 0.109*** 0.093 0.090*** Founding team size (0.035) (0.035) (0.035) (0.034) (0.034) (0.071) -0.034 -0.088 -0.173 -0.167 -0.131 -0.145 0.215 -0.033 Comm. party (0.146) (0.146) (0.146) (0.143) (0.143) (0.318) -0.143 -0.981* -1.336*** -1.241*** -1.459*** -1.566*** -4.985*** -1.243** Log(GDP per capita) (0.576) (0.412) (0.452) (0.450) (0.447) (1.092) -0.627 10.654** 13.756*** 12.858*** 14.614*** 15.632*** 47.319*** 13.116** Constant (5.049) -3.626 -3.903 (3.882) (3.863) (9.531) -5.428 252 252 252 252 252 181 247 Observations 0.481 0.473 0.477 0.492 0.495 0.469 0.549 R-squared Industry and initial firm size controls were included but not shown to save space. ***, **, and * indicate statistical significance at the 1%, 5%, and 10% levels, respectively.


TABLE 6 VARIABLES Early Early x gov ties Early x science park Early x serial entrep
Log(emp) (6-1) Period 1 Log(emp) (6-2) Period 2 Log(emp) (6-3) Period 3

2.056* (1.033) -2.004** (0.927)

0.570 (0.717)

-0.354 (0.448)

1.928*** (0.594)

-0.777* (0.457) Early x entrep. index 0.128 (0.119) Early x innovation 0.224 (0.442) Gov ties 0.974*** 0.554 -0.019 (0.341) (0.372) (0.174) Science Park 1.664*** -0.045 -0.324 (0.420) (0.520) (0.266) Serial 0.099 0.077 0.860** (0.424) (0.368) (0.402) Innovation 0.033 -0.149 0.281 (0.558) (0.330) (0.385) Entrepreneur index -0.149 -0.089 -0.001 (0.107) (0.116) (0.099) Everjob govt -0.303 -0.051 -0.188 (0.655) (0.417) (0.239) Comm. party -0.323 -0.187 0.073 (0.472) (0.329) (0.174) Overseas exper. 0.096 -0.083 0.025 (0.496) (0.355) (0.196) Log(firm age) 1.369*** 0.250 0.590*** (0.369) (0.321) (0.172) Founding team size 0.031 0.039 0.118** (0.079) (0.058) (0.047) Log(GDP per capita) 0.593 2.245 0.026 (1.799) (5.914) (1.297) Constant -4.107 -16.404 1.326 (14.982) (49.961) (11.352) Observations 64 72 132 R-squared 0.621 0.388 0.445 Adjusted R-squared 0.492 0.210 0.356 Industry and Initial firm size controls were included but not shown to save space. ***, **, and * indicate statistical significance at the 1%, 5%, and 10% levels, respectively.



Log_emp Period 1 Period 2 Period 3 innov=0 innov=1 Gov ties=0 3.622 2.982 2.904 3.172 2.888 Gov ties=1 4.638 4.142 2.787 3.502 3.360 t-statistic -1.862** -2.855*** 0.433 -1.391* -1.516* Science park=0 3.669 3.320 2.818 3.308 3.148 Science park=1 4.755 4.613 2.428 3.385 3.075 t-statistic -1.633* -1.830 ** 0.834 -0.126 0.149 Serial =0 3.644 3.264 2.539 3.257 3.059 Serial= 1 3.919 3.640 3.196 3.420 3.264 t-statistic -0.863 -1.104 -3.172 *** -0.674 -0.683 innov=0 3.804 3.459 2.710 innov=1 3.359 3.122 3.077 t-stat 1.207 0.856 -1.508*


VARIABLES Gov Ties (parent or work exp) Comm. party Govt. customer Science Park Serial Innovation Post-2002

Period 1 1.066* (0.50) -2.103*** (0.57) 0.152 (0.59) 0.679 (1.24) 1.072 (0.74) 0.778 (1.77)

TABLE B - OLS Log(profit in 2006) Period 2 Period 3 All periods 0.318 (0.57) 0.196 (0.68) 0.557 (0.72) -1.884 (1.84) 0.227 (0.69) 0.101 (1.13) -0.135 (0.48) 0.0413 (0.54) 1.620* (0.84) -0.338 (1.18) 1.408** (0.55) -0.865 (1.14) 0.719 (0.56) 0.174 (0.37) 0.456 (0.47)

All periods 0.656 (0.42) 0.069 (0.28) 0.469 (0.35)

-0.0634 (0.40) Gov dad x post-2002 -0.900* (0.52) Master’s degree -0.342 0.134 0.0335 0.244 (0.45) (0.70) (0.54) (0.26) Doctorate degree 0.385 -1.609 -0.494 -0.337 (1.08) (1.11) (1.39) (0.53) Overseas -1.35 -0.595 0.371 0.271 (0.95) (0.75) (0.70) (0.37) Founding Team size 0.0334 0.0561 0.408** 0.0119 (0.11) (0.14) (0.17) (0.06) Software -1.566** -0.108 -0.454 -2.767* (0.69) (0.79) (0.65) (1.46) Electronics 1.049* -1.435* -0.395 -2.361 (0.57) (0.81) (0.75) (1.91) Log(firm age) -0.453 0.669 -0.121 (0.44) (0.83) (0.16) Log(employees) 1.089*** (0.13) Industry F.E. YES YES YES YES YES Constant 10.84*** 11.81*** 6.516*** 13.10*** 7.678*** (1.13) (1.34) (1.38) (1.91) (1.57) Observations 33 35 64 122 122 R-squared 0.782 0.399 0.396 0.48 0.71 Adjusted R-squared 0.463 -0.0763 0.191 0.324 0.619 Robust st. errors. ***, **, and * indicate statistical significance at the 1%, 5%, and 10% levels, respectively.

-1.332*** (0.49) -1.035 (0.69) 0.284 (0.34) -0.596 (0.71) 0.261 (0.49) 0.112 (0.08) -4.729** (1.92) -4.606* (2.53) 0.198 (0.20)


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