Entrepreneurial opportunities,capacities and entrepreneurial

environmentsEvidence from Chinese GEM data

Yiyuan Mai and Zhilong GanSchool of Management, Huazhong University of Science and Technology,

Wuhan, Peoples’ Republic of China

Abstract

Purpose – To study how entrepreneurial environments influence entrepreneurial opportunities andcapacities in China.

Design/methodology/approach – This paper constructs statistical models to test the relationshipbetween environmental factors and entrepreneurial opportunities or capacities in 13 cities in Chinaaccording to the conceptual model of GEM. Based on the data derived from GEM reports, the authorsuse principal component of factor analysis and lest square regression to study the impacts ofentrepreneurial environments on entrepreneurial opportunities and capacities empirically.

Findings – This paper indicates that among 13 Chinese cities, if one city has more favorableconditions in terms of nine factors of entrepreneurial environments, it will have more entrepreneurialopportunities, and its entrepreneur will have higher capacities. Moreover, the authors find the extent ofthe impacts of the economic and cultural environments on entrepreneurial opportunities and capacitiesis higher than that of political and market environments.

Research limitations/implications – The quantity of sample statistics is relatively small, becauseit is difficult to develop the GEM project roundly in China.

Originality/value – This paper provides Chinese government with theoretical support so that thegovernment can utilize limited resources to develop entrepreneurial activities. Meanwhile, it furthersforeign researchers and investors to understand the specific conditions in terms of Chineseentrepreneurial environments, opportunities, and capacities more clearly.

Keywords Entrepreneurialism, Entrepreneurs, China

Paper type Research paper

1. IntroductionThe impacts of entrepreneurship on economic growth have been confirmed by more andmore researchers. In addition to increase employment opportunities, export and capitalstocks, entrepreneurship has significant effects on entrepreneurs’ spirit and technicalinnovation. The emergence of entrepreneurship derives from formation ofentrepreneurial opportunities and realization of entrepreneurial capacities, whichcause new business creation. Number of entrepreneurial opportunities and level ofentrepreneurial capacities determine rate of entrepreneurial activities and influence therole of entrepreneurship on economic growth. Thus, many researchers put moreemphasis upon studies on entrepreneurial opportunities and capacities. At present,most researches are theoretically based on qualitative analysis. There is dearth ofevidence based on empirical data. The reason causing the above condition is thedifficulty in the measure for entrepreneurial environments, opportunities and capacities.

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Chinese Management StudiesVol. 1 No. 4, 2007pp. 216-224q Emerald Group Publishing Limited1750-614XDOI 10.1108/17506140710828505

Therefore, it is theoretically important to advance the research. Moreover, while Chinesegovernment propose a momentous strategy of “independent innovation,” it ispractically significant to study how entrepreneurial environments influenceentrepreneurial opportunities and capacities in China. From this perspective, thispaper attempts to establish theoretical foundation for government policies.

Section 2 of the paper describes the literature linking entrepreneurial environments,opportunities and capacities so as to finds out the deficiency, and indicates thedirections of next step of researches. In Section 3, we develop the hypotheses, andthereafter describe the source of data and the model. Meanwhile, we explain how toempirically test these hypotheses. The results of the analysis are presented in Section 4,while the discussions of the findings are presented in Section 5.

2. Literature reviewA great many literatures show that lots of researchers study entrepreneurialenvironments, opportunities and capacities from different perspectives. Firstly, wereview the associated documents.

2.1 Literature linking entrepreneurial environmentsThe term “entrepreneurial environments” refers to a combination of factors that play arole in the development of entrepreneurship. Many works have indicates the effect ofdifferent factors of entrepreneurial environments on entrepreneurship. Governmentscan influence market mechanisms, making them function efficiently by removingconditions that create market imperfections or administrative rigidities (Fogel, 1994).Socioeconomic factors may be as important as availability of loans, technical assistance,physical facilities, and information (Gartner, 1985). The presence of experienced andsuccessful entrepreneurial role models in a community conveys a message to the otherpotential entrepreneurs that business is an attractive career option (Zapalska andZapalska, 1999). Successful entrepreneurs can be developed through educational andshort-term training programs, especially when market imperfections exist, largeindustries dominate the industrial sector, government policies do not support smallbusinesses and several bureaucratic hurdles have to be overcome to get permission tostart a business (Davidsson, 1991). Countries that keep rules and regulations at aminimum, offer tax and other incentive, and provide training and counseling services tostart-up entrepreneur increase the likelihood of new venture development (Dana, 1987,1990). Furthermore, factors such as the availability of financial resources, being in largeurban areas, and the presence of universities for training and research are also found tobe very important in increasing the rate of new venture creations (Pennings, 1982).

2.2 Literature linking entrepreneurial opportunitiesEntrepreneurial opportunities are a series of market imperfections (Kirzner, 1973).The imperfections and individual heterogeneity in market cause the formation ofentrepreneurial opportunities. Current studies on the factors which affect entrepreneurialopportunities mainly focus on the opportunity identification. Some researchers havelucubrated on the environmental factors which influence entrepreneurial opportunityidentification. Carroll and Delacroix (1982) maintain that environments have great effectson the formation of entrepreneurial opportunities. Stevenson and Gumpert (1985) classifyfour environmental dimensions which affect entrepreneurial opportunity identification.

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The dimensions include technology, market, social value and policies. Singh (2000) arguesthat situational factors of external environments have a certain role on entrepreneurialopportunity identification. Timmons (1999) indicates that if environments had changed,many opportunities would come into being, and the gap of knowledge and informationwill cause the formation of other space.

2.3 Literature linking entrepreneurial capacitiesEntrepreneurial capacities can be divided into entrepreneurial intentions and skills, whichtogether with entrepreneurial opportunities are three key elements of entrepreneurship(Gnyawali and Fogel, 1994). Entrepreneurial intention is individual motivation that spurspotential entrepreneur to create new business (Reynolds and Miller, 1992). Existingresearches have analyzed deeply the impacts of external environments on entrepreneurialintention. Kirchoff (1991) identified social and economic factors, such as blockedpromotion, recession, unemployment, and the need to earn a reasonable living, as having aprofound influencing effect on shaping the attitudes and creating intentions of anentrepreneur. Robertson et al. (2003) found that the factors inhibiting start-ups included anexpressed fear of debt, a fear of failure, difficulties in obtaining finance, regulation, andtaxation. With respect to the factors affecting entrepreneurial skills, researchers argue thatthe intention derives from many factors, such as former working experience (De Koning,1999), managerial skills (Koeller and Lechler, 2006), and social networks (Hill et al., 1997).

Basing on the above review, we found that empirical studies on the impacts ofentrepreneurial environments on the opportunities and capacities were relativelyscarce. The researches on this respect were based on foreign countries, and theirconclusion did not always accorded with Chinese economic system. Since, China hasdistinct economic, cultural, political and social environments, the study on the impactsof entrepreneurial environments on the opportunities and capacities has practicalsignificance in promoting regional entrepreneurial activities. Therefore, this paperattempts to find the specific impacts in China.

3. Estimation model3.1 Premise of model and hypothesisThe conceptual model employed by GEM indicates opportunity recognition andentrepreneurial potential are influenced by factors of entrepreneurial environments:availability of finance, government policies, government programs, education andtraining, research and development transfer, commercial and legal infrastructure,internal market openness, access to physical infrastructure (Reynolds et al., 1999). Themodel shows in Figure 1. It reveals that in social, cultural and political condition,entrepreneurial environments influence entrepreneurial opportunities and capacitieswhich both mate each other to engender entrepreneurial activities.

Since, the model was propounded by Reynolds in 1999, it has attracted the attention ofover 40 GEM countries. These countries adopt the model as the framework ofentrepreneurial investigation in order to find out their specific entrepreneurialenvironments. According to these countries’ GEM reports, the nine environmentalfactors propounded by the model can roundly reflect regional conditions inentrepreneurial environments. Meanwhile, the model rationally explains the mechanismof the impacts of environments on entrepreneurial opportunities and capacities. Thereby,based on the model, this paper posits that:

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H1. Regions with higher level of availability of finance will have moreentrepreneurial opportunities and higher entrepreneurial rate.

H2. Regions with more favorable policies will have more entrepreneurialopportunities and higher entrepreneurial rate.

H3. Regions with more government programs will have more entrepreneurialopportunities and higher entrepreneurial rate.

H4. Regions with more perfect system of education and training will have moreentrepreneurial opportunities, and entrepreneur will have higher capacities.

H5. Regions with more successful research and development transfer will havemore entrepreneurial opportunities and higher entrepreneurial rate.

H6. Regions with more perfect commercial and legal infrastructure will have moreentrepreneurial opportunities and higher entrepreneurial rate.

H7. Regions with lower barriers to entry will have more entrepreneurialopportunities and entrepreneurs will be more intense to create new business.

H8. Regions with more perfect physical infrastructure will have moreentrepreneurial opportunities and higher entrepreneurial rate.

H9. Regions with more favorable culture and social norms will have moreentrepreneurial opportunities and higher entrepreneurial rate.

In addition to the relationship among these objects, it is the different effects of ninefactors on entrepreneurial opportunities and capacities that are the focus of this paper.Which factors have more significant role on the opportunities and capacities than otherfactors? This is an important question to discuss, considering how to utilize limitedresources to boost entrepreneurial activities furthest in China. Thereby, the tenthhypothesis posits as follow:

H10. Under Chinese entrepreneurial environments, there must be a part of factorswhich effects on entrepreneurial opportunities and capacities are moresignificant than others.

Figure 1.GEM conceptual model

Entrepreneurial framework

conditions

Financial

Government policies

Government programs

Education & training

R&D transfer

Commercial, legal infrastructure

Internal market openness

Access to physical infrastructure

Culture, social norms

Entrepreneurial opportunities

Entrepreneurial capacity

Skills

Motivation

Business churning

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3.2 Data sourcesThe empirical data in this paper derive from the Chinese reports of the GEM researchprogram carried out from November 2005 to December 2006. The program implementsadult population surveys and unstructured interviews with the experts inentrepreneurial environments, opportunities and capacities. These experts comefrom government, universities and organization of venture investment in 30 cities inChina. They grade entrepreneurial conditions of these cities according to GEM module.These grades lie from 1 to 5. Higher grade shows finer condition. After collecting theseresults, we gain the empirical data this paper needs.

3.3 Models3.3.1 Initial models. Based on the conceptual model propounded in GEM researchprogram, this paper utilizes statistical models of multiple linear regressions forhypothesis testing. Initial models present as follows:

yj ¼ a0j þX9

i¼1

aijxi þ 1 ð j ¼ 1; 2; 3Þ ð1Þ

In the models, the independent variables xi are nine environmental factors which includethe availability of finance, government policies, government programs, education andtraining, research and development transfer, commercial and legal infrastructure,internal market openness, access to physical infrastructure, culture and social norms.Entrepreneurial opportunity, motivation and skills are dependent variable y1, y2, y3.

3.3.2 Test for collinearity. Some of nine factors overlap each other at a certain extent,for example, subsidiary and financial bills belong to policies as well as availability offinancial resources for new business; government program is embodiment of policies;meanwhile, commercial and legal infrastructure also include financial services whichbelong to availability of finance. Thereby, before analysis of multiple linearregressions, we need to test collinearity among these independent variables.

Through calculating correlation coefficients of nine independent variables shown inTable I, we find that there exists collinearity between these nine variables. Thus, thepaper utilizes factor analysis of principal components to eliminate the collinearity. Byusing SPSS 13.0 to deal with the data, we gets the value of KMO which is 0.737 more

X1 X2 X3 X4 rX5 X6 X7 X8 X9

X1 1.000X2 0.786 1.000X3 0.881 0.977 1.000X4 0.923 0.651 0.763 1.000X5 0.970 0.776 0.855 0.906 1.000X6 0.917 0.778 0.837 0.846 0.941 1.000X7 0.869 0.888 0.912 0.790 0.822 0.859 1.000X8 0.841 0.916 0.918 0.759 0.827 0.781 0.824 1.000X9 0.898 0.627 0.736 0.862 0.838 0.827 0.839 0.657 1.000

Notes: X1: availability of finance, X2: government policies, X3: government programs, X4: educationand training, X5: R&D transfer, X6: commercial and legal infrastructure, X7: internal market openness,X8: access to physical infrastructure, X9: culture and social norms

Table I.Correlation coefficientbetween variables

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than 0.7, and significance of Bartlett’s test that is less than 0.0001. The results showthat the data are fit for factor analysis of principal components. The communality liesfrom 0.889 to 0.990 that indicates the accountability of common factors to the variable.According to matrix eigenvalues and cumulative percents, this paper adopts the firsttwo factors as common factors. Their eigenvalues is more than 1. Meanwhile, theaccumulative contribution of the two factors is 93.11 percent. And then, applyingvarimax rotation and four-time iterative methods, we gain a rotated component matrixand a component score coefficient matrix as Table II.

The data of component matrix show that culture and social norms, educationand training, availability of finance, research and development transfer, commercialand legal infrastructure is higher loaded on factor F1 than other variables. On the otherhand, government policies, government program, physical infrastructure and internalmarket openness are higher loaded on factor F2 than others. The former five variablesmainly represent economic and cultural environments in the region, and the latter fourones denote political and market environments. According to component scorecoefficient matrix, this paper reduces nine variables to two factors and uses the factorsto modify original models.

3.3.3 Modification of the models. Based on factor analysis of principal components,nine variables are reduced to two factors. Thus, the modified models are as follows:

yj ¼ b0j þ b1jF1 þ b2jF2 þ 1j ð j ¼ 1; 2; 3Þ ð2Þ

New independent variables F1 denotes the information of culture and social norms,education and training, availability of finance, research and development transfer,commercial and legal infrastructure, and F2 represents other four variables in theoriginal models. The dependent variables remain identical. With component scoresas values of independent variables, the model is estimated using least squareregression, alternating three dependent variables as the measure for entrepreneurship.According to the regression coefficients and the significant level, this paper attempts tofind the difference of the impacts of nine variables on entrepreneurial opportunities,skills and intentions.

4. Estimation resultsThe results of statistic analysis are showed as Table III. Multiple correlation coefficients Ris more than 0.9 that indicates the regression effect is significant. Standardized coefficients

Rotated componentmatrix

Component scorecoefficient matrix

Variables F1 F2 F1 F2

Culture and social norms 0.89 0.33 0.450 20.314Education and training 0.874 0.385 0.402 20.258Availability of finance 0.821 0.546 0.254 20.087R&D transfer 0.804 0.538 0.246 20.082Commercial and legal infrastructure 0.772 0.546 0.217 20.054Government policies 0.344 0.934 20.362 0.556Government programs 0.498 0.854 20.194 0.387Access to physical infrastructure 0.453 0.839 20.218 0.405Internal market openness 0.618 0.712 20.009 0.188

Table II.Component matrix and

component scorecoefficient matrix

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b1 are positive, and significance level is less than 0.05. The results indicate entrepreneurialopportunities, skills and intention is positively related to variables F1 which mainlyrepresents the information of culture and social norms, education and training, availabilityof finance, research and development transfer, commercial and legal infrastructure. In thesame way, the value of coefficient b2 and significance level show that entrepreneurialopportunities, skills and intention is positively related to variables F2, which mainlydenotes the information of government policies, government program, physicalinfrastructure and internal market openness. These results accord with the first ninehypotheses in Section 3. Therefore, the positive impacts of nine environmental factors onentrepreneurial opportunities and capacities are supported effectively in 13 Chinese cities.

With exception to the above conclusion, we find another important one. Because b11

is more than b12, b21 is more than b22, and b31 is more than b32, the extent of theimpacts of F1 on entrepreneurial opportunities and capacities is higher than that of F2.According to the component matrix, culture and social norms, education and training,availability of finance, research and development transfer, commercial and legalinfrastructures are higher loaded on factor F1 than other variables. On the other hand,government policies, government program, physical infrastructure and internalmarket openness are higher loaded on factor F2 than others. The former five variablesmainly represent economic and cultural environments in the region, and the latter fourones denote political and market environments. Thus, it can be seen, in 13 cities, theextent of the impacts of the economic and cultural environments on entrepreneurialopportunities and capacities is higher than that of political and market environments.Thereby, the tenth hypothesis is supported.

5. ConclusionsThis paper constructs statistical models to test the relationship between environmentalfactors and entrepreneurial opportunities or capacities in 13 cities in China according tothe conceptual model of GEM. Based on the data derived from GEM reports, we useprincipal component of factor analysis and lest square regression to study the impactsof entrepreneurial environments on entrepreneurial opportunities and capacitiesempirically. After calculating the correlation matrix, we find that the data ofenvironmental factors have relatively high correlation. If adopting the nine factors asindependent variables in multiple regression equation, the problem of collinearity mustappear. Thus, by utilizing factor analysis of principal components, nine environmentalfactors are reduced to two common factors. And the component scores are adopted asthe value of independent variables to implement multiple regression analysis.

The statistical results show that among 13 Chinese cities, if one city has morefavorable conditions in terms of availability of finance, government policies,

F1 F2

Dependentvariable yi

Multiplecorrelation

coefficient R

Standardizedcoefficients

b1j tSignificant

level

Standardizedcoefficients

b2j tSignificant

level

y1 0.944 0.734 7.009 0.000 0.634 6.045 0.000y2 0.911 0.813 6.238 0.000 0.457 3.508 0.006y1 0.955 0.884 9.424 0.000 0.413 4.399 0.001

Table III.The results of multipleregression

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government programs, education and training, research and development transfer,commercial and legal infrastructure, internal market openness, access to physicalinfrastructure, it will have more entrepreneurial opportunities, and its entrepreneurwill have higher capacities.

With respect to the difference of the impacts of nine environmental factors onentrepreneurial opportunities and capacities, we find the extent of the impacts of theeconomic and cultural environments on entrepreneurial opportunities and capacities ishigher than that of political and market environments. Economic and culturalenvironments are mainly composed of culture and social norms, education andtraining, availability of finance, research and development transfer, commercial andlegal infrastructure. Political and market environments consist mostly of governmentpolicies, program, access to physical infrastructure and internal market openness).

The study is based on regional data derived from Chinese entrepreneurship monitorresearch program. The samples include developed areas in entrepreneurialenvironments as well as underdeveloped ones. So the diversity and timeliness causethe conclusions to really reflect the entrepreneurial conditions in China. Theenvironmental factors comprise economic, cultural, political and social aspects thatadvance the integrality and typification of the study. To some extent, the analysesbased on empirical data are also beneficial supplements to current researches.

With respect to the statistical results, this paper reveals the relationship betweenChinese entrepreneurial environments and entrepreneurial opportunities or capacities,and indicates the difference of the impacts of environmental factors onentrepreneurship. These conclusions will provide Chinese government withtheoretical support so that the government can utilize limited resources to developentrepreneurial activities. Meanwhile, the paper furthers foreign researchers andinvestors to understand the specific conditions in terms of Chinese entrepreneurialenvironments, opportunities, and capacities more clearly.

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Further reading

Li, C., Qiguo, C. and Lin, S. (2007), “A framework for the study of entrepreneurship environment”,Jilin University Journal Social Sciences Edition, Vol. 1, pp. 50-6.

Qiang, L. and Yanfu, J. (2001), “The theory of entrepreneurship and an analysis of its conceptualframework”, Economic Research Journal, Vol. l9, pp. 85-94.

Xuemin, W. (2004), Applied Multivariate Statistical Analysis, Press of Shanghai University ofFinance and Economics, Shanghai.

Zhenhong, C. and Junwu, D. (2004), “Foreign research on entrepreneurship: past trend and futuredirection”, Foreign Economies and Management, Vol. 2, pp. 7-11.

Corresponding authorZhilong Gan can be contacted at: ganzhilong@gmail.com

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