zhangyuli 200801 19 edited

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New venture creation: evidencefrom an investigation into Chinese

entrepreneurshipYuli Zhang and Jun Yang

International Business School, Nankai University, Tianjin, China

Abstract

Purpose – This study aims to use the Timmons model to identify the pattern of entrepreneurialactivity at micro-level in China.

Design/methodology/approach – The paper employs a self-administered questionnaire survey

approach, involving a sample of MBA students and general public in China.Findings – The analysis suggests that personality characteristics, cultural environment andeconomic environment are external factors influencing new venture creation.

Practical implications – The findings of this study suggest that supportive cultural environmentand economic environment is more important for MBA entrepreneurs than for general public toencourage the former to start new businesses as they bear higher entrepreneurial opportunity cost.

Originality/value – The paper extends the macro approach of the GEM China Report to examineentrepreneurial activity in China at micro-level.

Keywords Entrepreneurialism, Business formation, Questionnaires, China

Paper type Research paper

IntroductionThis is an entrepreneurial age. As many as 460 million people worldwide wereestimated to be either actively involved in trying to start a new venture or to beowner-managers of a new business in 2002 (Bygrave, 2002). Surprisingly, China led theworldwide entrepreneurial trends. The GEM China Report (Jiang et al., 2003) suggestedthat the total entrepreneurship activity (TEA) of China reached 12.3, in comparison toAmerica’s 11.66, placing China in the ninth position out of 37 countries and regionsunder investigation in 2002. Given that current entrepreneurship research in China isstill at its early stage, even the well-received GEM China Report could only examineentrepreneurial activity in China at macro-level, whilst failing to offer any revealingaccount at micro-level. This article aims to examine entrepreneurial activity atmicro-level and to find out the common rules of entrepreneurial activity in China using

the method of random sample and questionnaire survey on MBA students and thegeneral public in China.

Literature reviewThe Timmons model Generally speaking, entrepreneurship means the creation of new organisations(Gartner, 1985). A broader meaning of entrepreneurship, however, now refers to the

This study was supported by the National Natural Science Foundation of China (project no.70472049).

New venturecreation

161

Journal of Small Business and

Enterprise Development

Vol. 13 No. 2, 2006

pp. 161-173

q Emerald Group Publishing Limited

1462-6004

DOI 10.1108/14626000610665872

转载

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propensity of the entrepreneur must influence his/her entrepreneurial decisions.Meanwhile, successful entrepreneurs often have enough work and managerialexperiences, especially work experience in large enterprises (e.g. Bruno and Tyebjee,1982; Van de Ven and Garud, 1989), and through their prior work experiences,entrepreneurs would obtain good business insight, important business skills andrelevant managerial knowledge. For these reasons, this article focused on analysing theinfluence of entrepreneur’s risk-taking propensity, abilities and experiences onentrepreneurial decisions instead of trying to understand entrepreneur’s psychologicalcharacteristics.

Cultural environment . The GEM Report 2003 (Reynolds et al., 2003) measuredcultural environment with three yes/no options:

(1) in your country, most people consider starting a new business as a desirablecareer choice;

(2) in your country, those who succeed in starting a new business have a high

social status and being respected; and(3) in your country, you will often read stories about successful new business in the

public media, and find that those who perceive the cultural context as verysupportive are four times more likely to be engaged in starting up a business.

The findings suggested that, in a sense, cultural environment had an influence onperson’s entrepreneurial career propensity. We measure cultural environment withthree options: attitudes toward entrepreneurs, acceptance of earning distance, andknowledge of some entrepreneurs.

Economic environment . The economic environment is always the focus of studies onthe entrepreneurial environment. It was found that many economic factors affected thelevel of regional entrepreneurial activity, such as accessibility of suppliers,accessibility of customers or new markets, and high degree of competition amongfirms, and etc. (Bruno and Tyebjee, 1982; El-Namaki, 1988; Gartner, 1985; Staley andMorse, 1971). More importantly, studies (e.g. Hal, 1990) suggest that, to some extent, aperson’s rational decisions are the results of his expectations of economic conditions infuture. Following Varian’s argument, we measure economic environment fromrespondent’s expectations of regional economic conditions in future, in order toevaluate the influence of economic environment on entrepreneurial decisions.

In summary, our research selects opportunity recognition, entrepreneurial team andresources as the crux of new venture creation, and treats personality characteristics,cultural environment, and economic environment as external factors that influencenew venture creation (see Figure 1).

Data and methods DataThe research design was intended to meet two needs of our investigation: the first wasto find a method to divide the whole samples into different groups for comparisons of entrepreneurship when testing the conceptual model; the second was to find a methodto select target cities for investigation in order to generalise the characteristics of entrepreneurship in China through comparisons between different cities.

From this perspective, we considered knowledge of business or management thecatalyst for entrepreneurship, and perceived MBA students as one extreme group in

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the society who have formal business education toward business practice and morethorough knowledge about business operations. So we selected and divided the targetsamples or respondents into two groups, e.g. MBA students in business schools andgeneral public.

Regarding the selection of cities for investigation, two factors were considered. Oneis the extreme unbalanced development between eastern and western China, and theother is the marked cultural difference between northern and southern China.Undoubtedly, entrepreneurship in eastern and southern China was more active andmore diversified, even though culture in these two areas is quite different. The generalguideline was to select provincial capitals in certain areas, because a provincial capital,without any questions, is the economic and cultural centre of the province. Eventually,11 cities were selected which cover about ten provinces or areas in eastern andsouthern China, e.g. Shenyang (SY), Dalian (DL), Beijing (BJ), Tianjin (TJ),Shijiazhuang (SJZ), Shanghai (SH), Nanjing (NJ), Changsha (CS), Chengdu (CD),Chongqing (CQ), and Shenzhen (SZ)

Referring to the general public survey of GEM (2002), we designed a questionnairein accordance with the conceptual model, which makes up of seven aspects of contents(see details in Table I). The survey was implemented from October 2003 to April 2004.For the MBA samples, data was collected in two ways: whenever teachers at theNankai University went to lecture MBA students in other cities, they asked their MBAstudents to answer the questionnaires, using the method of random sampling; wemailed the questionnaires to local teachers for their MBA class to complete the survey.As for the survey on general public, the method of road survey by postgraduates atNankai University was used, and, to develop respondent’s interests, little gifts weregiven to each respondent. It is necessary to note that for the difficulty in data collection,

Figure 1.The conceptual model

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intended to start a new business in future, while the proportion of female respondentswas 10.8 per cent. A total of 15.5 per cent of MBA respondents have started and run anew business, which was 4.4 per cent lower than that of general public, while 47.1 per

cent of MBA respondents intended to start a new business in future, 3.0 per cent higherthan that of general public.

MethodsWe used SPSS 11.5 statistical software to analyse the data. The article’s purpose is torecognise basic characteristics of entrepreneurial process and summarise the commonrules of entrepreneurial activity in China to explain the interactions between variableswith the method of frequency analysis and correlation analysis, which will direct thecontinued study.

Analysis and results

Descriptions of the crux of entrepreneurshipOpportunity recognition. Although many empirical studies proved that the recognitionof opportunity would initiate would-be entrepreneur’s entrepreneurial intention andlead to his entrepreneurial behaviour in the end. Unfortunately, these studies have notadequately explained entrepreneur’s decision-making process from recognition of opportunity to entrepreneurial behaviour.

Recognition of opportunity may not always lead to entrepreneurial intentionbecause many factors can still affect would-be entrepreneur’s entrepreneurial intention.It has been shown that the relationship between opportunity cost and entrepreneurialintention, suggesting that entrepreneurial opportunity cost is mainly determined byentrepreneur’s status before starting a company, expressed as entrepreneur’s presentinterests, such as his current incomes and education. Their research indicated that thelower the opportunity cost of individuals, the more likely they were to undertakeentrepreneurial activities.

Our results of frequency analysis show that entrepreneur’s entrepreneurialopportunity cost was not very high. A total of 42.4 per cent of entrepreneurs in thewhole samples had an income of less than 50,000 per year before starting a business(27.0 per cent with an income below 30,000; 15.4 per cent between 30,000 and 50,000). Atotal of 7.9 per cent had an income of more than 50,000 per year before starting abusiness (0.9 per cent were more than 100,000; 7.0 per cent between 50,000 and100,000). Meanwhile, the average entrepreneurial opportunity cost of the MBA groupwas much higher than that of the general public. Among those whose entrepreneurialopportunity cost was more than 50,000, the frequency of the MBA group was 3.4 per

cent higher than that of the general public.

City BJ CS CD DL NJ SH SZ SY SJZ TJ CQ SUM

Value 79 51 77 54 128 181 100 74 113 239 89 1185Rate 6.6 4.3 6.4 4.5 10.7 15.1 8.3 6.2 9.4 19.9 7.4 100Group MBA Common people (CP) SUMValue 550 635 1185Rate 46.4 53.6 100

Table II.Samples from differentcities and groups

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The correlation analysis found a significant positive relationship between opportunityrecognition and entrepreneurial intention (correlation coefficient 0.316, p , 0:05) and a

significant positive relationship between entrepreneurial intention and entrepreneurialbehaviour (correlation coefficient 0.317, p , 0:05). But opportunity cost had a negativeeffect on entrepreneurial intention (correlation coefficient 20:341, p , 0:05). Theseresults suggest that people would not have entrepreneurial intention before theyrecognised entrepreneurial opportunity, and that opportunity cost prevented would-beentrepreneurs from starting a company by affecting their entrepreneurial intention. Inother words, the higher the entrepreneurial opportunity cost, the less likely thewould-be entrepreneurs would give up current work and start entrepreneurialbehaviour. This suggests that recognition of opportunity would not necessarily lead towould-be entrepreneur’s entrepreneurial behaviour, which was a complexdecision-making process involving a trade-off between potential benefit of opportunity and entrepreneurial opportunity cost. Therefore, the evaluation of

opportunity on the basis of opportunity cost is the main task of entrepreneurs’decision-making in opportunity recognition stage (Zhang et al., 2003).

Entrepreneurial team. The entrepreneurial team is at the heart of any new venture(Cooper and Daily, 1997, p. 144), and entrepreneurial teams’ decision-making has asignificant impact on new venture’s performance (Hambrick, 1994). In our research, wefocused on the key issues of decision-making before and after creation of neworganisations, and the principles and methods of entrepreneur’s decision-making.

Starting a company alone or with others and which industry to serve for are the keyproblems that entrepreneurs have to deal with before new venture creation. Our resultsindicated that 60.5 per cent of new ventures were started by teams of two or moremembers, which showed that entrepreneurs preferred to start new businesses in teams.More specifically, in the MBA group, the ratio of start-up by teams and individuals wasabout 3:1, against 1:1 in the general public group (see details in Table III). This suggeststhat whilst entrepreneurs preferred to start a new business by teams, the MBA group wasmore likely to start a company by teams. The reason may be that team entrepreneurshipcan spread risk and combine skills among entrepreneurial teams to improve the newventure’s capacity in dealing with uncertainties, as a result, reducing the risk of failure.Meanwhile, our survey found that new ventures starting in teams were easier to obtainresources in that they mainly obtained financial capital from multiple channels, whilstindividual entrepreneurs mainly relied financial capital on single channels.

New ventures mainly served in service and emerging industries, with the rate of new ventures in service industry 23.3 per cent higher than that in emerging industry.This was due to the lower entry and exit barriers. Moreover, these industries are high

growing industries in China, which means that there is a higher potential benefit in thelong run. More importantly, the competitive risk in these industries was even lowerthan that in others, which may be the reason why more new ventures were found inthese industries.

Group Individual (%) Team (%) Missing (%) Team/individual (%)

MBA 12.6 39.2 48.2 3.1Adults 37.8 42.0 20.2 1.1

Table III.Decision of individual or

team entrepreneurshipbetween two groups

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After the creation of a new venture, the key problem is survival. Hence, attitudestowards social capital, innovativeness of new venture and the new venture’s growthaspirations are important. We found that a large proportion of entrepreneurs in thesamples recognised the importance of their social capital for new ventures, and thatthere was a difference of attitude towards social capital between the two groups. Atotal of 8.2 per cent more general public than MBA entrepreneurs did not perceive anyinfluence of social capital on entrepreneurial process. Moreover, there were still manyrespondents who said social capital was not important to their new ventures (Table IV).

Regarding innovativeness of new ventures, 17.9 per cent of new ventures providedinnovative imitation products/services to the existing ones in market, which was 9.1per cent higher than those provided completely innovative ones. When comparing thetwo groups, the ratio of innovative imitation and complete innovation was 4:1 in theMBA group, against 1.7:1 in the general public group. These indicated thatentrepreneurs did not prefer to provide complete innovation in general, and that MBA

entrepreneurs had a higher proclivity for innovative imitation than general public. Thereason may be due to the higher market risk and substitution risk associated withcomplete innovation behaviour than with innovative imitation.

With reference to the research method of GEM (Jiang et al., 2003), growth aspirationwas measured by three aspects: normal growth aspiration (planning to increase 1-74employees in five years), high growth aspirations (planning to increase 74-124employees in five years), and super-high growth aspirations (planning to increase 125or more employees in five years). The result found that 8.0 per cent more MBAentrepreneurs than the general public group planned to increase employees up to 74,and that normal growth aspirations was 18.4 per cent higher than the other two(super-high growth aspirations was 2.9 per cent, high growth aspirations 2.8 per cent).Only few new ventures has high growth aspirations, because, as the new business

grows, the gap between existing managerial competency in new business andincreasing complexity of operation will increase the risk of failure. So a largeproportions of new ventures pay attention to their growth speed for not seeking highgrowth speed, which implies that new venture creation is the behaviour avoiding risk.

Resources assembling . Financial resources are most important resources for newventure in the early stage of start-up (Timmons, 1985). We categorised new venturefinancing into two kinds: financing from single and multiple channels. The frequencyanalysis shows that new venture financing from single channel (26.0 per cent) is 6.2 percent lower than that of financing from multiple channels (32.2 per cent), becausefinancing from multiple channels may ensure the obtainment of entrepreneurial capitaland decrease new venture’s financial risk. Of all new ventures financing from singlechannel, the frequency of new ventures financing from entrepreneur’s social network

(19.0 per cent) was highest, 1.0 per cent higher than the combination of financing fromventure capital and financial institutions, because financing from entrepreneur’s

Attitude CD (%) DL (%) NJ (%) SH (%) SZ (%) SY (%) SJZ (%) CQ (%)

Very important 63.6 46.3 28.2 27.6 17.3 55.6 37.3 65.2Not important 11.7 9.3 0 1.7 3.7 2.8 6.8 18.0No influence 2.6 1.9 0 0 0 0 0 2.2Missing 22.0 42.5 71.8 70.7 79.0 41.6 55.9 14.6

Table IV.Attitude to social capitalin different cites

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personal relationships will simplify the financing procedure, shorten financing timeand cut down financing cost.

External factors and entrepreneurshipGeneral understanding . Table V shows the correlation between external factors andkey variables. First, cultural environmental factors (respecting entrepreneurs,accepting income difference from entrepreneurship, and knowing someentrepreneurs) were found to have significant relationship with entrepreneurship, interms of opportunity recognition, entrepreneurial intention production, andentrepreneurial behaviour, but it showed no direct relationships between “acceptingincome difference from entrepreneurship” and entrepreneurial intention, nor between“knowing some entrepreneurs” and entrepreneurial behaviour. Second, the two itemsof personality characteristics (abilities and experience, risk-taking propensity) had a

significant positive relationship with entrepreneurial intention and entrepreneurialbehaviour, which indicated that those with higher risk-taking propensity and moreabilities and experience necessary for entrepreneurship will be more likely to haveentrepreneurial intention and execute entrepreneurial activity. Third, economicenvironment has an significant positive relationships with opportunity recognition,entrepreneurial intention and entrepreneurial behaviour, that is to say, the morepositive the expectation on economic environment, the more entrepreneurialopportunities, and the higher levels of regional entrepreneurial activity.

Furthermore, there were significant positive relationships among external factors:entrepreneur’s risk-taking propensity in cultural environment and economicenvironment conducive to entrepreneurship was higher than in other environmentalconditions. Meanwhile, in good cultural and economic environment, entrepreneurs will

be more likely to feel that they had enough abilities or experiences necessary to start abusiness (Table VI).

Opportunityrecognition

Entrepreneurialintention

Entrepreneurialbehaviour

Respecting entrepreneurs 0.462 * 0.439 * 0.431 *

Accepting income difference 0.084 * None 0.158 *

Knowing entrepreneurs 0.008 * 0.051 * NoneRisk-taking propensity 0.135 * 0.064 * 0.135 *

Abilities/experiences 0.294 * 0.108 * 0.294 *

Economic environment 0.155 * 0.074 * 0.008 *

Note: * p , 0:

05

Table V.Correlation coefficient of external factors and key

variables

Respectingentrepreneurs

Accepting incomedistance

Knowingentrepreneurs

Economicenvironment

Risk-taking propensity 0.276 * 0.324 * 0.379 * 0.325 *

Abilities/experiences 0.378* 0.300 * 0.455 * 0.284 *

Note: * p , 0:05

Table VI.Correlation coefficient of

external factors

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The mechanism of external factors: role of entrepreneurial opportunity costrecognition[1].

Table VII showed the relationships between cultural environment andentrepreneurial opportunity cost. With the increase in entrepreneurial opportunitycost, the relative frequency of negative aspect of cultural environment (such as jealousto entrepreneurs, not knowing entrepreneurs, and not accepting income distances)became smaller. Especially, when entrepreneurial opportunity cost was higher than50,000, the frequencies of respecting entrepreneurs (6.7 per cent), accepting incomedistance (6.7 per cent) and knowing some entrepreneurs (6.1 per cent) were muchhigher than those of negative aspect of cultural environment. Cultural environmentthus had an impact on entrepreneur’s entrepreneurial opportunity cost recognition.

Table VIII also shows the relationships between economic environment andentrepreneurial opportunity cost. When entrepreneurial opportunity cost was higherthan 50,000, 10.3 per cent of entrepreneurs expected better economic environment in

future, which was higher than the other two items; when entrepreneurial opportunitycost was lower than 50,000, 43.9 per cent of entrepreneurs believed that the economicenvironment would turn bad in future, which was higher than the other two items.Economic environment has an impact on entrepreneur’s entrepreneurial opportunitycost recognition.

As for personality characteristics, there are significant positive relationshipsbetween entrepreneur’s risk-taking propensity and entrepreneurial opportunity cost

Income per year before starting a companyBelow 30,000 30,000-50,000 50,000-100,000 Up 100,000

Attitude to entrepreneursRespect 18.2 11.5 5.9 0.8Neutral 21.6 10.1 3.4 0.7

Jealous/distrust 22.2 22.2 0 0Missing 38.0 56.2 90.7 98.5

Accepting income difference or not Yes 17.4 11.0 5.7 1.0No 24.1 12.7 3.8 0Missing 58.5 76.3 90.5 99.0

Knowing entrepreneurs or not Yes 19.5 11.8 5.6 0.5No 12.5 7.1 1.8 1.8Missing 68.0 81.1 92.6 97.7

Table VII.Relationships betweencultural environment andentrepreneurialopportunity cost

Income per year before starting a companyBelow 30,000 30,000-50,000 50,000-100,000 Up 100,000

Improving 18.6 10.5 9.8 0.5No change 16.8 14.4 3.6 0.6Declining 34.1 9.8 3.5 0.3Missing 30.5 65.3 83.1 98.6

Table VIII.Relationships betweeneconomic environmentand entrepreneurialopportunity cost

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Note

1. The article defined entrepreneurial opportunity cost recognition as entrepreneur’s attitude to

opportunity cost of entrepreneurial behaviour; in other words, it’s entrepreneur’s preferencefor entrepreneurial opportunity cost.

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About the authorsYuli Zhang is Professor of Management at the School of International Business, NankaiUniversity, China. Yuli Zhang is the corresponding author and can be contacted at:[email protected]

Jun Yang is a PhD candidate at the School of International Business, Nankai University,China.

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