Determinants of Self-employment in China: Evidence from Cross-regional Data

49China & World Economy / 49 – 67, Vol. 19, No. 3, 2011

©2011 The AuthorsChina & World Economy ©2011 Institute of World Economics and Politics, Chinese Academy of Social Sciences

Determinants of Self-employment in China:Evidence from Cross-regional Data

Kun Li, Changwen Zhao*

Abstract

This paper presents and tests a series of sources of regional variations in self-employmentrate in China in the 2000s, and illustrates that the stage of economic development is a majorexplanation for the variations of self-employment rate across regions over the past decade.The negative relationship between the stage of economic development and self-employmentrate identified in the paper indicates that China has entered the process of fast industrialization,and self-employment is playing a diminishing role in economic growth and employment. Wealso find a substitution effect between self-employment and private enterprises. While bothare important components of China’s private sector, private enterprises are becoming anincreasingly important source of China’s economic growth and employment. Furthermore,our findings also imply that when job opportunities are limited, self-employment in China islikely a forced choice of disadvantaged people who are not qualified for wage jobs.

Key words: economic development, regional variation, self-employmentJEL codes: E26, O10, R11

I. Introduction

In recent decades, many industrialized countries have been shifting the focus of economicpolicy away from large firms to small- and medium-sized enterprises, and self-employmenthas been the focus of growing attention from both academics and policy makers (Cowlingand Mitchell, 1997). However, most existing literature focuses on self-employment either indeveloped economies or developing countries, and the experiences from emerging marketshave not been examined adequately. The rise of self-employment (“getihu” in Chinese) in

* Kun Li, Associate Professor, School of Business Administration, Sichuan University, Chengdu, China.Email: [email protected]; Changwen Zhao, Professor, School of Business Administration, SichuanUniversity, Chengdu, China. Email: [email protected]. The authors are grateful to SichuanUniversity for providing research funding (No. SKX201030 and SKG201008).

mailto:[email protected]

mailto:[email protected]

50 Kun Li, Changwen Zhao / 49 – 67, Vol. 19, No. 3, 2011


the 1980s heralded China’s market transition, and it is now still an important part of thedynamic private sector that drives China’s spectacular economic growth. Our paper attemptsto fill the gap by looking at self-employment in China, using regional level data to analyzethe macroeconomic and social factors that contribute to variations in the self-employmentrate across provinces, and to gain insight into the determinants of self-employment dynamismin the process of market transition and economic development.

The economic growth in China since its reform in the early 1980s has been marked byentrenched interregional disparity, and variations in the self-employment rate are an importantpart of this disparity. The analysis of self-employment in China at the regional level isimportant for at least two reasons. First, it gives us the opportunity to observe the role ofself-employment at different stages of economic development; and second, given thisregional disparity, a necessary step in effectively formulating, monitoring, and evaluatingnational policies in self-employment is to appreciate the significant variations across regionsand understand how self-employment is affected by regional economic and social factors.

The empirical test used in this paper is based on a panel estimation of annual data atthe provincial level from 1999 to 2008. We find that the regional self-employment rate,defined as the proportion of self-employment in total non-agricultural employment, isnegatively correlated with the stage of economic development; that is, the more developedregions tend to have a lower rate of self-employment. The negative relationship betweenthe stage of economic development and the self-employment rate conforms to the experienceof many developed economies during the process of industrialization. Thus, the decliningself-employment rate in developed regions can be viewed as a positive sign of economicdevelopment. We also find a substitution effect between self-employment and privateenterprises. While both are important components of China’s private sector, privateenterprises are becoming an increasingly more important source of China’s economic growthand employment.

The rest of the paper is organized as follows. Section II provides stylized facts on self-employment in China and its regional variations, Section III explores the theoreticalframework and discusses factors that might contribute to regional variations, Section IVpresents the empirical results, and section V concludes.

II. Self-employment in China

The rise of self-employment in the 1980s heralded China’s market transition. Self-employmentplayed two important roles during the process of economic transition. First, it createdabundant job opportunities that facilitated reform both in rural areas and state-owned

51Self-employment in China


enterprises; and second, it made self-employed people forerunners of privateentrepreneurship in a transitional economy. In Mao’s era, self-employment, viewed as soilof capitalism, was severely suppressed and was nearly eradicated. It was the economicreforms of the early 1980s that revived self-employment. In the early 1980s, the suppressionof self-employment was repealed to solve the problem of increasing unemployment of twogroups of people: sent-down youth1 returning to cities after the end of the Cultural Revolution,and farmers coming to towns and cities to seek job opportunities after the disbanding ofthe commune system in rural areas. Although proliferating quickly, self-employment wasviewed as a marginal way for socially unprivileged people in 1980s to make a living, justifiedeconomically, but not ideologically (Wehrfritz and Seno, 2003). The 1990s witnessed thelegitimization of market economy and private entrepreneurship, and the government enactedfavorable policies to promote self-employment to absorb workers displaced from shut-down state-owned enterprises. The self-employment rate continued to rise in the 1980s and1990s, and, in 1999, both the number of people in self-employment and the self-employmentrate reached their highest points, historically: 62.4 million for the former and 17 percent forthe latter (see Figure 1).

After reaching their peak in 1999, both the number of people in self-employment and

1 Many new high-school graduates were forced out of the cities, and effectively sent to the villages and upto the mountains in remote areas to work as farmers during the late 1960s and early 1970s under China's‘down to the countryside’ movement during the Cultural Revolution.

Figure 1. Self-employment in China (1981–2008)

Source: China Statistical Yearbook (1981–2008).

0

10

20

30

40

50

60

70

1981 1984 1987 1990 1993 1996 1999 2002 2005 20080

2

4

6

8

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18

20Number of self-employed people(million)

Self-employment rate (%)

Year

Num

ber o

f se

lf-em

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eopl

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illio

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empl

oym

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(%)



the self-employment rate experienced a significant drop at the start of the 21st century.There might be several reasons for this change. First, after decades of reform, China evolvedfrom a shortage economy into a market economy, and the sectors where self-employmentwas concentrated were those with low-entry barriers and intensive competition, decreasingthe return to self-employed people. Second, with the increased protection of propertyrights, the private sectors were expanding rapidly. Many entrepreneurs with managerialability tended to register their businesses as private enterprises instead of self-employment,leaving more room for business growth. The substitution effect by the fast-developingprivate enterprises is clearly reflected in the macro-level economic data. In 1999, the numberof people in self-employment was 62.4 million, and 20.2 million in private enterprises, while,in 2008, the numbers were 57.8 million and 79 million, respectively.2 Self-employment remainsan important part of private sectors, but its dominating role has been replaced by privateenterprises. Finally, the fast-growing exporting industry is labor intensive and createsmany job opportunities, drawing people away from self-employment.

Table 1 presents the self-employment rate, that is, self-employment as a percentage ofthe non-agricultural employment, in each province in the year of 1999 and 2008.3 Severalfeatures of the data can be identified. The first observation is the significant discrepancy inself-employment rates across regions. In 1999, the self-employment rate in Hebei provincewas 0.31, which was almost eight times that of Shanghai (0.04); and, in 2008, the self-employment rate in Tibet was 0.34, which was more than 10 times that of Shanghai (0.03). Ifwe look at the measures of discrepancy, the standard deviation is 0.06 for the year of 1999,and 0.05 for the year of 2008, indicating considerable interregional disparity, given theaverage provincial level of 0.18 for 1999, and 0.14 for 2008.

The second observation is the general declining trend in the self-employment rate. Thenational level decreased from 0.17 in 1999 to 0.11 in 2008, and the average provincial leveldecreased from 0.18 to 0.14. However, not all the provinces experienced a decline duringthis period. Table 1 shows that, while most of the provinces saw a decline in the self-employment rate, there was still an increase in several provinces. Because the self-employment rates of the provinces in 1999 are ranked in increasing order in Table 1, it iseasy to see that most provinces that experienced an increase in the self-employment rateare the ones with a low self-employment rate in 1999, while most of the provinces thatexperienced a decrease are the ones with a relatively high self-employment rate in 1999.

The last observation is that, in both 1999 and 2008, the provinces with the lowest self-employment rate tended to be relatively developed areas, such as Shanghai, Beijing, and

2 Source: China Statistical Yearbook (1999, 2008).3 “Provinces” refers to the 27 Chinese provinces and 4 municipalities.



Tianjin, while the provinces with the highest self-employment rate tended to be lessdeveloped areas, such as Tibet, Anhui, and Heilongjiang.

III. Theoretical Framework: RegionalDeterminants of Self-employment Rate

In this section, we explore the possible sources of interregional variations in the self-employment rate in China. Because we are discussing the variations in one country, theinstitutional framework can be largely assumed to be homogenous across the regions, thusour explanations focus on macroeconomic factors.

1. Self-employment Rate and Stage of Economic DevelopmentOne of the most important facts about the Chinese economy is the entrenched regionaldisparity. While the gross regional product (GRP) per capita in the richest areas, such as

Table 1. Regional Self-employment Rate

1999 2008 Change 1999 2008 Change

Shanghai 0.04 0.03 –0.01 Yunnan 0.19 0.17 –0.02

Beijing 0.06 0.09 0.03 Gansu 0.20 0.14 –0.06

Tianjing 0.09 0.07 –0.02 Shaanxi 0.20 0.15 –0.05

Fujian 0.11 0.08 –0.03 Chongqing 0.21 0.14 –0.07

Ningxia 0.11 0.16 0.05 Hubei 0.21 0.16 –0.05

Shanxi 0.12 0.13 0.01 Jiangxi 0.21 0.17 –0.04

Guangdong 0.13 0.17 0.04 Hunan 0.22 0.11 –0.11

Qinghai 0.14 0.19 0.05 Jilin 0.22 0.16 –0.06

Xinjiang 0.14 0.16 0.02 Shandong 0.23 0.12 –0.11

Guizhou 0.16 0.12 –0.04 Tibet 0.23 0.34 0.11

Hainan 0.16 0.16 0.00 Anhui 0.26 0.18 –0.08

Jiangsu 0.16 0.08 –0.08 Heilongjiang 0.27 0.18 –0.09

Sichuan 0.16 0.16 0.00 Hebei 0.31 0.12 –0.19

Liaoning 0.17 0.17 0.00 Average 0.18 0.14

Inner Mongolia 0.17 0.15 –0.02 National level 0.17 0.11

Zhejiang 0.17 0.12 –0.05 Standard deviation 0.06 0.05

Guangxi 0.19 0.18 –0.01 Minimum 0.04 0.03

Henan 0.19 0.13 –0.06 Maximum 0.31 0.34

Source: China Statistical Yearbook (1999, 2008).Note: Change is the difference between self-employment rates in 1999 and 2008.



Shanghai and Beijing, has reached US$10 000, the GRP per capita of the poorest provinces,such as Guizhou and Gansu, is still under US$2000 (see Table 2). Because the stage ofeconomic development is a comprehensive indicator of the regional economic situation, weexpect that disparity in economic development could be a vital explanatory factor of theself-employment rate.

According to Porter et al. (2002), economic growth can be viewed as a process from thefactor-driven stage to the investment-driven stage, and then to an innovation-driveneconomy. For developing economies at the early stage, growth is primarily the result ofmobilization of primary production factors, such as natural resources and unskilled labor.Due to limited opportunities in a formal economy, many people have to resort to informalsectors, including self-employment, for their livelihood. As a result, the self-employmentrate tends to be high in developing countries. When an economy grows from the factor-driven stage into the investment-driven stage in the process of industrialization, economicgrowth is largely seen as the result of harnessing technologies for production. The self-employment rate tends to decline during this process for several reasons. First, the increaseduse of capital leads companies to grow in size and provides more job opportunities informal sectors (Noorderhaven et al., 2003). Second, as economies of scales set in andbecome the major source of efficiency, small businesses are disadvantaged in competition.Finally, as a country becomes richer and real wages rise, the opportunity cost of runningone’s own business rises, because the amount of money one could have earned as wageearner increases. The increased opportunity cost leads more people to become wage/salary employees (Carree et al., 2002).

Table 2. Gross Regional Product (GRP) Per Capita in 2008 (RMB)

Province GRP per capita Province GRP per capita Province GRP per capita

Guizhou 8824 Ningxia 17 892 Liaoning 31 259

Gansu 12 110 Sichuan 18 025 Inner Mongolia 32 214

Yunnan 12 587 Shaanxi 18 246 Shandong 33 083

Tibet 13 861 Henan 19 593 Guangdong 37 589

Anhui 14 485 Hubei 19 860 Jiangsu 39 622

Jiangxi 14 781 Xinjiang 19 893 Zhejiang 42 214

Guangxi 14 966 Shanxi 20 398 Tianjin 55 473

Chongqing 15 378 Heilongjiang 21 727 Beijing 63 029

Hainan 17 175 Hebei 23 239 Shanghai 73 124

Qinghai 17 389 Jilin 23 514

Hunan 17 521 Fujian 30 123 Source: China Statistical Yearbook (2008).Note: US$1 = 6.8 RMB.



When an industrialized economy develops into the innovation-driven stage, it becomesmore friendly and conducive to small businesses, and self-employment might be reactivated.New technology might reduce the cost of running small businesses and makes economiesof scale less of a disadvantage for small businesses; more individualized demand in affluentsociety might create more niche markets for small businesses (Jackson, 1984). Whensubsistence is no longer a problem, more people tend to enjoy the autonomy and sense ofself-realization from working for themselves. The expansion of service industries in aninnovation-driven economy also provides more opportunities for small businesses.

The relationship between the self-employment rate and economic development isbasically negatively correlated during the process of industrialization, as indicated in Figure2. While self-employment might be reactivated in the post-industrialization era, self-employedpeople in the post-industrialization era tend to be more entrepreneurial in the sense definedby Schumpeter (1934), unlike people who are forced into self-employment for subsistencein developing countries.

Most empirical studies confirm the negative correlation between the self-employmentrate and stage of economic development. It is more likely to find a higher rate of self-employment in developing countries than in developed countries, and the first two-thirdsof the 20th century witnessed the continuous declining rate of self-employment inindustrialized countries when they moved towards industrial concentration fuelled by thepervasiveness of economies of scale (Chandler, 1990; Teece, 1993). After examining a sampleof self-employment of 64 less-developed countries and 19 developed countries from the1960s to the 1990s, Pietrobelli et al. (2004) find that the rate of self-employment declines ascountries become richer, which is consistent with the conclusion in Blanchflower’s (2000)study that uses a sample of 30 OECD countries. However, Yamada (1996) argues that evenin developing countries, self-employment can be entrepreneurial in the sense defined by

Figure 2. Economic Development and Self-employment

Factor driven Investment driven Innovation driven

Self-employment rate

Economic development



Schumpeter (1934). In fact, in the study of Pietrobelli et al. (2004), when they separate theemerging countries as a subgroup, they find a positive relationship between the stage ofeconomic development and the self-employment rate.

2. Private EnterprisesIn China, self-employment and private enterprises4 are two major types of domestic privately-owned businesses. Private enterprises were legally instituted in the early 1990s, and, sincethen, have been growing steadily. China’s accession to the World Trade Organizationfurther improved the institutional environment of private enterprises when the governmentpromised to “level the playing field” for all enterprises, regardless of size, origin, andownership class. Now, private enterprises are becoming an increasingly important sourceof China’s economic growth. In 2008, there were 6.57 million private enterprises, employingmore than 79 million people. The number of private enterprises and people employed bythem grew annually at 25 percent and 23 percent, respectively, over 1992–2008 (see Table3).

The development of private enterprises might impact self-employment in several ways.First, private enterprises are registered in formal forms of business entity, with more roomfor growth than self-employment. Many ambitious entrepreneurs registered their start-upsas private enterprises instead of self-employment, and some successful self-employedpeople transformed their businesses into private enterprises. Second, expanding private

4 Firms owned by Chinese residents that employ eight or more persons are termed “private enterprise”(“siying qiye”), and they can be registered in several formal forms of business entities, such as soleproprietorship and corporation.

Table 3. Development of Private Enterprises in China (1992–2008)


Year Number of employees

(million)

Number of enterprises

(thousand) Year

Number of employees

(million)

Number of enterprises

(thousand)

1992 2.32 140 2001 27.14 2030

1993 3.73 240 2002 34.09 2440

1994 6.48 430 2003 42.99 3010

1995 9.56 660 2004 50.17 3650

1996 11.71 820 2005 58.24 4300

1997 13.50 960 2006 65.86 4980

1998 17.10 1200 2007 72.53 5510

1999 20.22 1510 2008 79.04 6570

2000 24.06 1760



enterprises create more and more job opportunities that provide alternative choices forpeople in self-employment or those intending to be self-employed. Finally, private enterprisesstill remain relatively small, and the average employment by private enterprises was fewerthan 12 workers per firm in 2008.5 While some private enterprises are very large in size, thevast majority are very small. Most of them cluster in the same sectors where self-employmentconcentrates, and compete with self-employment directly. Self-employed people are disad-vantaged in competition with private enterprises, because the latter have better management,more financial resources, and higher efficiency of economies of scale. Thus, we expect asubstitution effect between the regional self-employment rate and the regional activity ofprivate enterprises.

3. Labor Market SituationA critical issue in understanding the nature of self-employment is whether people enterself-employment by choice or only as an involuntary action when other job opportunitiesare unavailable (Yamada, 1996). If people enter self-employment for the opportunities itoffers, the proliferation of self-employment can be viewed as a sign of economic growth.However, there is a large body of literature arguing that people are mostly forced into self-employment when they have little access to wage jobs (Steinmetz and Wright, 1989). Storeyand Johnson (1987), and Evans and Leighton (1989), provide empirical support for thishypothesis. Using US and European data between 1950 and 1987, Bogenhold and Staber(1991) find a strong and positive relationship between the unemployment rate and the self-employment rate for most countries. Especially in developing countries, self-employmentis more likely a result of economic necessity, instead of a desire for autonomy. Thus, wageemployment opportunities should be an important factor affecting the self-employmentrate.

In China, the registered urban unemployment rate is the only available official indicatorof unemployment. However, most people believe that it fails to reveal the true situation ofthe labor market because it reports only the unemployment of urban residents, excluding alarge population of rural laborers who have migrated to the cities in search of work or thosewho are left unemployed in the countryside. To make things worse, it is widely believedthat, even among unemployed urban residents, many do not register themselves officiallyfor various reasons. In order to better represent the labor market situation, instead of usingthe registered urban unemployment rate, we use a ratio of the number of people excludedfrom the formal economy (including both unemployed people and people working in informal

5 Source: China Statistical Yearbook (2008) and the authors’ calculation.



economy) to total employment to indicate the lack of wage job opportunities in regionallabor markets. We expect that the higher the ratio, the higher the self-employment rate.

4. Other Control Variables(1) Population DensityThe disparity in population density might have contradictory effects on the self-employmentrate. A higher population density will provide more niches for small business, thus it couldbe positively correlated with the self-employment rate. However, in thinly populated areas,larger firms find it more difficult to exploit economies of scale than smaller firms due tolimited number of customers, higher transportation, and telecommunication costs (Acs etal., 1994), thus leaving more room for small businesses run by self-employed people.

(2) EducationEducation is a factor often examined by existing literature that discusses the determinantsof self-employment, but there seems to be no consensus on its impact. Several studies(Blau, 1987; De Wit, 1993) find that management skills are important in self-employment, butsome argue that formal education does not reward investment in the case of self-employment(House et al., 1993). We expect that the regions with higher educational levels tend to havelower self-employment rates, because better education enables people to have more optionswhen seeking formal jobs, and disadvantaged people lacking qualifications for wage jobsare often compelled to enter self-employment.

(3) Economic StructureThe expansion of the manufacturing sector is thought to have different impacts on self-employment in developing and industrialized countries (Acs et al., 1994; Pietrobelli etal., 2004). In industrialized countries, the expansion of the manufacturing sector is doneby large firms, while in developing countries, the manufacturing sector is mainly dominatedby small businesses. Therefore, the self-employment rate is expected to be negativelycorrelated with the share of manufacturing in GDP in developed countries, and positivelycorrelated in developing countries. The service industry is usually viewed as being morefriendly than manufacturing to small businesses, and the share of the service industry isexpected to be positively correlated with self-employment. In our study, we use fourindicators to represent industry structure, that is, the share of the manufacturing/serviceindustry in regional GDP and the share of manufacturing/service industry employment inregional total employment.



(4) Competition of the Regional MarketSelf-employed people are usually disadvantaged in an economy. Increasing competitionfrom larger firms tends to reduce the profitability of businesses by self-employed peopleand reduce the self-employment rate. We use two indicators to test this impact, that is,business density in the manufacturing sector, and business density in the service sector.The former is calculated as the number of above-scale firms6 in the manufacturing sectorowned by every 10 000 people, and the latter is calculated as the number of above-scalefirms in wholesale, retail, and catering owned by every 10 000 people.

IV. Empirical Results

1. Data and MethodologyThe data are annual data at the provincial level for 1999–2008 from the China StatisticalYearbook. Table 4 defines the variables used in our empirical test, and their values are logtransformed in the regression.

Table 5 presents the matrix of correlation coefficients for the log values of all the

6 These include all state-owned enterprises and those non-state-owned firms with annual revenue above5 million RMB.

Table 4. List of Variables

Variable Description

SELF Self-employment rate: self-employment as a proportion of the non-agricultural employment

GRPC Gross regional product (GRP) per capita, deflated to the price level (RMB) of the year of 1999

PRA Private enterprise activity: measured by the number of private enterprises owned by every 10 000 people

JOB The number of people excluded from the formal economy (including both unemployed people and people working in

informal economy) as a ratio of total non-agricultural employment

POP Population density: measured by population per unit area

EDU Education: measured by the number of people with college education as a proportion of the population over 6 years of age

SEM The share of secondary industry in total employment

TEM The share of tertiary industry in total employment

SGRP The share of secondary industry in GRP

TGRP The share of tertiary industry in GRP

MAN Competition in the manufacturing sector: measured by the number of above-scale firms owned by every 10 000 people

SER Competition in the service sector: measured by the number of above-scale firms in wholesale, retail, and catering owned

by every 10 000 people



variables. For the independent variable, GRP per capita, we find it highly correlated withseveral other independent variables: 0.92 for private enterprise activity, 0.85 for competitionin manufacturing, and 0.89 for competition in service. This is not surprising, because mostof the explanatory variables included here are macroeconomic indicators, and GRP percapita is a comprehensive indicator of regional economic development. In fact, it is quitejustifiable in economic theory to take GRP per capita as a function of all other explanatoryvariables in our correlation matrix. Because GRP per capita is the major explanatory variablein our model, we conduct our empirical test in two steps. In step 1, we run a univariateregression to test the relationship between the self-employment rate and stage of economicdevelopment (measured by GRP per capita), and, in step 2, we run a multivariate regressionto study how the self-employment rate is determined when adding other macroeconomicand social factors.

2. Self-employment Rate and Stage of Economic DevelopmentFigure 3 plots all the observations in our sample, according to the respective self-employmentrate and GRP per capita. The overall pattern of negative correlation between the two variablesis not difficult to identify in the graph, which conforms to the correlation coefficient of –0.59in Table 5.

Table 5. Correlation Coefficient Matrix

Source: China Statistical Yearbook and authors’ estimates.Notes: SELF, self-employment rate; GRPC, gross regional product per capita; PRA, private enterprise

activity; JOB, the number of people excluded from the formal economy; POP, population density;EDU, education; SEM, the share of secondary industry in total employment; TEM, the share oftertiary industry in total employment; SGRP, the share of secondary industry in GRP; TGRP, theshare of tertiary industry in GRP; MAN, competition in the manufacturing sector; and SER, competitionin the service sector.

SELF GRPC PRA JOB POP EDU SEM TEM SGRP TGRP MAN SER

SELF 1.00

GRPC –0.59 1.00

PRA –0.60 0.92 1.00

JOB 0.22 0.34 0.41 1.00

POP –0.56 0.45 0.47 –0.07 1.00

EDU –0.61 0.74 0.78 0.14 0.44 1.00

SEM –0.56 0.77 0.70 0.10 0.64 0.62 1.00

TEM –0.49 0.74 0.79 0.26 0.33 0.76 0.50 1.00

SGRP –0.23 0.30 0.22 0.01 0.30 0.32 0.65 0.02 1.00

TGRP –0.33 0.42 0.45 0.11 0.06 0.29 0.07 0.63 –0.52 1.00

MAN –0.64 0.85 0.77 0.17 0.56 0.55 0.82 0.58 0.33 0.35 1.00

SER –0.58 0.89 0.87 0.29 0.38 0.71 0.63 0.71 0.19 0.44 0.75 1.00



To test the relationship between the self-employment rate and the stage of economicgrowth with regressions, we follow two formulas, of which Equation 1 assumes a linearrelationship, and Equation 2, an L-shaped relationship:

ititit GRPCSELF εβα ++= ln*ln (1)

itititit GRPCGRPCSELF εβα ++= ])/[ln(ln*ln , (2)

where SELF is the self-employment rate, and GRPC is GRP per capita.Table 6 presents the results of Equations 1 and 2 estimated from the panel data. While

β is highly significant in both equations, Equation 1 has a higher adjusted R2, suggestingthat the linear function is a better fit than the L-shaped function. In the linear equation, theadjusted R2 (0.35) indicates that more than one-third of the cross-regional variations of theself-employment rate can be explained by the stage of economic growth during the sampleperiod. The negative coefficient (–0.42) means that, if GRP per capita rises by 1 percent, theself-employment rate will decrease by 0.42 percent of the previous level. To test therobustness of the results, we further run the linear model of Equation 1 with a fixed-effectspecification of cross-section (regions). Table 7 presents the results. With a fixed effect forregions, the fitness of the model is much improved, and the coefficient of GRP per capitastill remains negative and highly significant.

Figure 3. Self-employment Rate and Gross Regional Product(GRP) Per Capita across Regions (1999–2008)


0

5

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15

20

25

30

35

40

10 000 20 000 30 000 40 000 50 000 60 000

Self-

empl

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GRP per capita (RMB)



3. Multivariate RegressionIn this part, we use multivariate analysis to identify the impact of regional macroeconomicand social factors on the self-employment rate. We hoped that our independent variablescould explain much of what is different about the self-employment rate at the provinciallevel, but we cannot, since it is likely that there are some unmodeled factors. We ran aHausman test to examine whether a fixed- or random-effect model is appropriate here; thetest statistic is for the fixed-effect model. Therefore, the regional fixed effects would capturethe differences across provinces arising from these omitted variables. Furthermore, sinceGRP per capita has a very high correlation coefficient with private enterprise activity (0.92),we drop this variable to avoid a serious problem of multicollinearity. Equation 3 specifiesthe multivariate regression:

itititititit

itititititit

SERMANTEMSEMTGRPSGRPEDUPOPJOBGRPCSELF

εββββββββββα

+++++++++++=

lnlnlnlnlnlnlnlnlnln*ln

109876

54321, (3)

where GRPC is gross regional product per capita, JOB is the number of people excludedfrom the formal economy, POP is population density, EDU is education, SGRP is the share

Table 6. Empirical Results Based on Equations 1 and 2

Source: China Statistical Yearbook and authors’ estimates.Notes: t-values are given in parentheses. *** indicates significance at the 1 percent level.

Equation 1 Equation 2

C 1.87*** (6.26) 36.53*** (11.43)

β –0.42*** (–12.93) –42.72*** (–12.06)

Adjusted R2 0.35 0.32

F-statistic 167.36 145.44

Table 7. Equation 1 with Fixed Effect (Regions)

Source: China Statistical Yearbook and authors’ estimates.Notes: t-values are given in parentheses. ** indicates significance at the 5 percent level; *** indicates

significance at the 1 percent level.

Equation 1 (fixed effect)

C –0.58** (–2.09)

β –0.15*** (–5.03)

Adjusted R2 0.87

F-statistic 65.50



of secondary industry in GRP, TGRP is the share of tertiary industry in GRP, SEM is theshare of secondary industry in total employment, TEM is the share of tertiary industry intotal employment, MAN is competition in the manufacturing sector, and SER is competitionin the service sector.

Table 8 presents the results of the multivariate regression for the panel data with a fixedcross-section effect. All coefficients are significant, except for competition in the servicesector.

(1) Stage of Economic Development (GRP Per Capita)After adding other economic and social factors to the multivariate regression, the coefficientof GRP per capita remains negative and highly significant. This further confirms theconclusion of a previous univariate regression that the self-employment rate was negativelycorrelated with the stage of economic development in the past decade.

(2) Lack of Wage Job OpportunityThe coefficient is positive and highly significant as expected, meaning that the fewer jobopportunities the formal sector provides, the more people go into self-employment. Theimplication is that self-employment in China is still basically subsistence driven.

(3) Population DensityThe coefficient of population density is positive and significant. This supports thehypothesis that a higher population density might provide more niches for small business,including businesses in the form of self-employment.

(4) EducationThe result related to education indicates that better-educated people are less likely to gointo self-employment. It further confirms the conclusion that self-employment in China ismore likely for subsistence, and a forced choice for people unqualified for wage jobs.

(5) Economic StructureThe coefficients of the share of the secondary and tertiary industries in GRP are bothnegative. This implies that during the process of industrialization, economies of scales setin and become the major source of efficiency, and small businesses are disadvantaged incompetition. The coefficients of the share of the secondary and tertiary industries in totalemployment are both positive. Given the share of the secondary and tertiary industries inGRP, the higher the share of the secondary and tertiary industries in total employment, the



lower efficiency the two industries have. Lower efficiency is conducive to the existence ofself-employment; thus we have the positive correlation.

(6) Competition in the Manufacturing and Service SectorsThe coefficient of competition in the manufacturing sector is negative, confirming theconjecture that higher competition of larger enterprises in the manufacturing sector reducesthe room for businesses of self-employed people. The coefficient of competition in theservice sector is not significant.

4. Role of Private EnterprisesIn the previous multivariate regression, we exclude private enterprise activities fromexplanatory variables because of its high correlation with the level of economic development.The high correlation between private enterprises activities and the stage of economicgrowth is consistent with the fact that private enterprise activities are the major drive of theeconomic boom in the past decade. Figure 4 shows the increasing share of private enterprisesin the private sector. Indeed, in the past decade, private enterprises have become veryimportant players. The growth of private enterprises contributes to a higher level of

Table 8. Empirical Results of Multivariate Regression(Fixed Effect for Regions)

Source: China Statistical Yearbook and authors’ estimates.Notes: GRPC, gross regional product per capita; JOB, the number of people excluded from the formal

economy; POP, population density; EDU, education; SEM, the share of secondary industry in totalemployment; TEM, the share of tertiary industry in total employment; SGRP, the share of secondaryindustry in GRP; TGRP, the share of tertiary industry in GRP; MAN, competition in the manufacturingsector; SER, competition in the service sector.

Variable Coefficient t-statistic Probability

C –0.14 –0.07 0.95

GRPC –0.31 –3.62 0.00

JOB 0.17 2.78 0.01

POP 1.02 3.54 0.00

EDU –0.14 –3.78 0.00

SEM 0.22 2.21 0.03

TEM 0.44 2.53 0.01

SGRP –0.4 –1.72 0.09

TGRP –0.42 –1.82 0.07

MAN –0.08 –1.8 0.07

SER 0.01 0.3 0.77

R2 0.9 F–statistic 64.68

Adjusted R2 0.89



economic development, but the growth of private enterprises reduces the role of self-employment; thus we see a substitution effect between self-employment and privateenterprise activities represented by a significantly negative correlation coefficient of –0.60(see Table 5).

V. Conclusions and Policy Implications

While businesses run by self-employed people might be a positive driving force of economicgrowth in developing countries, economic theory and empirical evidence suggest that theself-employment rate tends to decline in the process of industrialization. Our findingssupport the conclusion that China is now following the path of other industrialized countriesin terms of a declining self-employment rate.

In the present study, we find that self-employment is negatively correlated with thestage of economic development; that is, more developed provinces tend to have a lowerself-employment rate. While businesses run by self-employed people used to be a veryimportant driving force of economic growth in the early stage of China’s economic reform,the negative relationship found in data of the past decade indicates that China has startedthe process of fast industrialization, and self-employed people are facing competition frommore efficient economic agents, which is consistent with the experience of other industrialized

Figure 4. Proportion of Self-employment and Private Enterprisesin Total Non-agricultural Employment (1999–2008)

0

5

10

15

20

25

30

1999 2000 2001 2002 2003 2004 2005 2006 2007 2008

Private enterprises

Self-employment

Perc

ent

Year

Source: China Statistical Yearbook (1999–2008) and authors’ estimates.



countries related to a declining self-employment rate.There is a substitution effect between individual businesses run by self-employed

people and private enterprises. While both are important components of China’s privatesector, private enterprises, with better management, more financial resources, and higherefficiency of economies of scale, are becoming an increasingly important force in China’seconomic growth and employment.

Self-employment rate is positively correlated with the lack of wage job opportunitiesand is negatively correlated with education, indicating that self-employment in China tendsto be a forced choice for disadvantaged people unqualified for wage jobs in the circumstanceof limited job opportunities.

Government policies on self-employment should take into account the interregionaldisparity of economic growth. While self-employment plays a diminishing role in developedareas, it might be still a very important force in economic growth and employment in someother less-developed areas. Detailed and specific policy on self-employment should alwaysbe formulated at the regional level.

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(Edited by Jing Qiu)

Determinants of Self-employment in China: Evidence from Cross-regional Data

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