Does Urban Agglomeration Discourage Entrepreneurship in China? Micro-Empirical Evidence from China

Abstract

As the net effect of agglomeration on entrepreneurship depends on the trade-off between positive and negative effects, urban agglomeration can either promote or discourage entrepreneurial activity in theory. However, there is an unexpected shortage of empirical confirmations on this potential cause-and-effect relationship. Our study strives to fill this empirical gap by providing credible evidence whether agglomeration, measured by the urban density or population, increases the probability of individuals being self-employed. Based on the China Labor-Force Dynamic Survey of 2012, 2014, and 2016, we find that big cities fail to facilitate individuals to start or run their own businesses. Further analyses illustrate that the entrepreneurs in large cities can be easily tempted by a wider range of salaried opportunities and are generally exposed to high fixed costs and intense competition. In contrast, entrepreneurship in large cities is of high reward. These results serve as direct evidence of the co-existence of agglomeration diseconomies and economies. This also suggests the direction of government policy in large cities, which is to alleviate, as much as possible, the negative impact on entrepreneurs.