Access to external financing is a major obstacle for starting a new business across various country contexts. Ethnic minorities, in particular, tend to face more extreme financial constraints, although the linkages between ethnicity, finance, and entrepreneurship have never been previously studied in China. Relying on a new proprietary dataset, this paper compares ethnic-based differences in external financing from both formal and informal sources used to start a new micro-enterprise or a small-and-medium-sized enterprise (SME) and the implications on post-entry business performance in China. The main results show that Han households tend to rely more on initial formal financing, but not initial informal financing, to start a new business. Furthermore, Han-operated businesses tend to perform better than their minority-operated counterparts, although this performance gap disappears given similar access to initial external financing.
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Other potential explanations is that ethnic minorities lack access to information, lack sufficient human and physical capital, or maintain stronger cultural or religious preferences that prevent them seeking out formal loans.
Note that ethnic minorities in China are concentrated in lesser developed regions with fewer growth opportunities, so the survey areas are not representative of China as a whole.
Spatial deflators developed by Brandt and Holz (2006) were updated and used take into account regional price differences among the seven provinces.
The following items are included as durable goods: car, motorcycle, washing machine, refrigerator, color TV, home computer, air conditioner, and mobile phone.
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The author would like to thank Björn Gustafsson, Ding Sai, Rachel Connelly, Sylvie Démurger, and other participants at the CHES conference for helpful comments.
This project received funding support from the School of Economics at Peking University and the Natural Science Foundation of China No. 71603009.
Appendix: Summary statistics
Appendix: Summary statistics
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Howell, A. Ethnic entrepreneurship, initial financing, and business performance in China. Small Bus Econ 52, 697–712 (2019). https://doi.org/10.1007/s11187-017-9980-5