Institutional Environment, Public-private Hybrid Strategy, and Entrepreneurial Investment:evidence from China’s Transition Economy

Wubiao Zhou (NTU, Singapore)

Abstract: Public-private hybrid strategy is one of the key strategies that many private entrepreneurs during gradual market transition have adopted. Under this strategy, a private entrepreneur either rents a public firm and operates it as though it is his own (a way of informal privatization of public firms) or registers his private firm as a public firm to cover up de facto private ownership (wearing a “red cap”). This study examines the effect of this strategy on entrepreneurial reinvestment – the primary source of entrepreneurial financing in transition economies –as institutional environment changes based on the case of the rapidly emerging private sector in China. Conventional wisdom in economics expects that such a strategy would discourage entrepreneurial investment because it results in ambiguous property rights structure. Based on the new institutional perspective, this study argues that this strategy could facilitate entrepreneurial investment because the legitimacy benefits of this strategy outweigh its costs during gradual reform when the government still favors the public sector over the private one and thus the playing field between the two sectors is not level. Yet, as the market economy expands, the positive effect of this strategy may decrease and even turn negative. The hypotheses are supported by large scale national survey data on private entrepreneurs from China.

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