Legal Development, Financial Repression, and Entrepreneurship in a Marketizing Economy

The nature of entrepreneurship in a marketizing economy will be affected not only by personal and socioeconomic characteristics, but also by the extent of legal development and financial repression. Many developing countries have underdeveloped legal and credit systems that can impede self-employment. Since China is an economy characterized by legal and institutional imperfections as well as underdeveloped financial markets, its growing and important nonstate sector poses a puzzle. This article tests whether such institutional constraints have affected the development of entrepreneurship in China, with implications for other countries in the process of liberalization. After examining the impact of legal and financial development, improvements in the legal system are found to lead to greater entrepreneurship, while financial repression is not a significant factor. Legal protection increases protection of property rights that can promote self-employment, while start-up money is often obtained from informal avenues such that financial repression is not a deterrent for starting a business, though it may be more important in the later stages of business expansion.