The literature on transaction costs concentrates on established firms in established markets, while the literature on industrial ecology concentrates on new firms in given markets. It is contested in the following that the picture looks differently if the analysis concentrates on establishing new firms in new markets, such as e-commerce or the new private sector in the formerly socialist economies. A new market is defined by high uncertainty. First, the general knowledge of expertise in a society is low, so that young entrepreneurs find it hard, and costly, to acquire the necessary know-how. Second, institutions, might these be the law, business practices, or intermediaries, are poor and underdeveloped. It will be argued that in China therefore entrepreneurship depends crucially on the ability to establish firms, i.e. to find organisational forms for business ventures that facilitate long-term business relations within and around a firm, that is to say, individual entrepreneurship depends on mechanisms for co-ordinating individual or organisational behaviour of firms. These mechanisms were lacking under socialist planning. The legacy of the planned economy was an environment of weak economic institutions in which state-socialist institutions uneasily coexisted with market institutions, and newness of private exchange added to uncertainty. In this environment, economic actors depended on collective action to create their own institutions, driven by the need to agree on rules of conduct in business relations and on sanctions against violation of these rules. The study will concentrate on two essential components of (private) entrepreneurship. One is the search for organisational forms conforming to the situational constraints; the other is the formation of business practices that enable individual entrepreneurship to become a viable and sustainable course of action. In other words, we will attempt to show how the transaction cost advantage of organisational forms and co-ordination mechanisms can compensate entrepreneurs for the disadvantage they face with respect to the lack of clearly defined property rights. Based on extensive fieldwork in two provinces where 100 firms were interviewed the study can show that 1. as predicted by approaches in industrial ecology both experimentation and selection were crucial in shaping the new private business sector; 2. on the individual level the performance-orientation of Chinese culture allowed entrepreneurs to combine rational decision making with tradition. Both factors can explain why for example the family in China but not in Chinese overseas communities is no longer the natural base for private firms, why networks are assessed by their expected performance, or why Chinese firm do not care about building up a core business. 1
