Hometown Networks, Private Entrepreneurship and Exporting in China

We document the following dissimilarity between patterns of selection into entrepreneurship and into exporting among Chinese entrepreneurs. Birth counties with higher population density (PD) exhibited higher levels and growth of entrepreneurship, but a lower fraction of active entrepreneurs were engaged in direct exports. This is robust to inclusion of controls for education and occupational patterns, and checks for possible measurement error in PD or reverse causality. Hence it is unlikely that PD is a proxy for unobserved ability, wealth or other attributes stimulating entrepreneurship. We develop a theoretical model explaining the observed patterns on the basis of stronger birth county-network-based spillovers among domestic producers than among exporters, and present evidence corroborating this explanation. This explanation suggests that while industrial development maybe stimulated by informal community networks, it can also generate a misallocation whereby the increased profitability of low value (production for the home market) activities discourages choice of higher value (exporting) activities.