Culture and the Economy : Clan, Entrepreneurship, and Development of the Private Sector in China

Abstract This paper examines the relationship between culture and the economy, investigating the role of clan in China's unprecedented development of the private sector. Although with no well-developed financial and legal systems, China witnesses a boom of private sector, which contributes to most of its economic growth during the past three decades. Using inter-census population survey and economic census data, I find that China's clan culture is positively associated with the likelihood of entrepreneurship and the share of economy in the private sector. Exploring possible mechanisms, I find that clan culture helps privately-owned enterprises overcome financing constraints and escape from local government's “grabbing hand”. In addition, the clan culture is significantly related to a set of individual values, which are arguably relevant for private business. Finally, I find that the support of clan culture for private business is limited as it deters private businesses from growing into large firms. The results also suggest that the role of clan reduces as formal institutions develop