By leveraging insights from new institutional economics, agency theory, and entrepreneurial cognition theory, we propose that the quality of market institutions moderates the relationship between privatization and entrepreneurs’ sales performance. We combine the World Bank’s Enterprise Survey data for Chinese entrepreneurs with data from the Provincial Capital Freedom (PCF) Index developed by the China Institute of Public Affairs (CIPA) (Feng & Shoulong, 2011) to show that the effectiveness of privatization on entrepreneurs’ sales performance depends critically on the underlying quality of market institutions. Specifically, we find that POEs underperform SOEs in environments with low-quality market institutions but outperform SOEs in environments with high-quality market institutions. These findings suggest that the success of privatization depends ultimately on the quality of the underlying institutional environment.
These findings have important implications for both theoretical and practical reasons. First, our results are important for entrepreneurs. Although privatization can alter organizational cultures, promote risk taking, and spur innovation and entrepreneurship (Tan, 2001; Zahra &
Hansen, 2000), our results suggest that private enterprise activity will be more successful in environments with market-enhancing institutions. In the absence of these formal institutions, political and social connections become relatively more important. Our study thus highlights the importance of placing the evidence in the appropriate context (Zahra, 2007; Zahra et al., 2014).
Entrepreneurs can benefit from this study by learning about the importance of the institutional context. This is especially true for those who are considering foreign direct investment in emerging markets and who might be unfamiliar with these environments.
Second, our findings are important for policy makers. Because low-quality institutional environments encourage unproductive entrepreneurship and discourage productive entrepreneurship (Baumol, 1990; Sobel, 2008), policy makers can advocate for market reforms which might improve the quality of market institutions and ultimately lead to greater productivity and growth (Baumol, 1986, 2002; Baumol & Strom, 2007). Caution is needed, however, because research identifies that gradual changes are more successful than rapid privatization efforts (Spicer, McDermott, & Kogut, 2000). Nevertheless, if the desire of policy is to promote entrepreneurship (Acs et al., 2016; Acs & Szerb, 2007; Shane, 2008), privatization can be a viable strategy to achieve these goals—if the underlying environment is supportive of entrepreneurship and private enterprise activity.
Third, our results have important implications for educators. The primary contribution of our study shows that the relative success of privatization depends critically on the underlying quality of market institutions. These findings shed new light on entrepreneurship in transition economies (McMillan & Woodruff, 2002; Park, Li, & Tse, 2006; Svejnar, 2002; Zhou, 2013). More importantly, however, we add to the literature that argues for a more nuanced understanding of the relationship between institutions and entrepreneurship (Audretsch, Belitski, & Desai, 2018;
Boudreaux, Nikolaev, & Klein, 2018; Estrin et al., 2013; Stenholm et al., 2013). The interaction between institutions and entrepreneurship is complex (Bjørnskov & Foss, 2016; Kim et al., 2016;
Terjesen et al., 2016), and our findings, thus, are consistent with recent advances in entrepreneurship that offered nuanced approaches in transition economies and emerging markets (Ge et al., 2017; Tran, 2018).
5.1.Limitations and future research
As any empirical study, we face a number of limitations. We chose to examine a sample of Chinese entrepreneurs in an attempt to increase our understanding of the complex interaction between institutional environments, entrepreneurship, and privatization in a transition economies setting. While consistent with prior research in transition and emerging markets (Ge et al., 2017;
Puffer, McCarthy, & Boisot, 2010), our findings apply only to entrepreneurs in China and caution should be given to the generalizability of our results. Future research, thus, should examine these relationships in alternative transition economies and emerging markets to determine the external validity of our findings. With that said, recent advances highlight that institutions have profound effects in other transition economies like Vietnam (Tran, 2018), and although this study examines the relative institutional dynamics on entrepreneurship for both new entrants and incumbents, we find these results encouraging for the applicability of institutions and entrepreneurship in alternative settings.
Relatedly, while our sample takes advantage of important regional and industrial heterogeneities in entrepreneurship, it only includes a single-year of observation. To alleviate some of the associated empirical problems with cross-sectional data, we employed a multi-level hierarchical linear model that incorporates city-level and province-level random effects. This methodology allows us to compare the performances of entrepreneurs to similar entrepreneurs
within the same industry and geographic context (Audretsch et al., 2018). We therefore feel reasonably assured that our results are not driven by the omission of key confounders or otherwise important sources of regional heterogeneity. Future research, however, could improve upon our study by incorporating longitudinal designs that not only include important measures of regional and industrial classification but also incorporate multiple observations for the same organization over time. This research design would offer researchers an opportunity to enhance our understanding of the intricacies involved in the privatization process. For instance, research indicates that the speed of institutional reform (Banalieva et al., 2015) and the speed of privatization is an important consideration for the success of entrepreneurs in transitioning settings (Spicer et al., 2000). Future research could extend this logic to address whether slow and gradual improvements in the privatization process offer more benefits than a rapidly changing privatization that creates uncertainty during reform.
In sum, we find that POEs underperform SOEs in environments with low-quality market institutions but outperform SOEs in environments with high-quality market institutions. Our results thus suggest that the quality of market institutions moderates the relationship between privatization and entrepreneurs’ sales performance. These findings highlight the importance of context to entrepreneurial performance, especially in transition economies and emerging markets.
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