Ethnic entrepreneurship, initial financing, and business performance in China

Access to external financing is a major obstacle for starting a new business across various country contexts. Ethnic minorities, in particular, tend to face more extreme financial constraints, although the linkages between ethnicity, finance, and entrepreneurship have never been previously studied in China. Relying on a new proprietary dataset, this paper compares ethnic-based differences in external financing from both formal and informal sources used to start a new micro-enterprise or a small-and-medium-sized enterprise (SME) and the implications on post-entry business performance in China. The main results show that Han households tend to rely more on initial formal financing, but not initial informal financing, to start a new business. Furthermore, Han-operated businesses tend to perform better than their minority-operated counterparts, although this performance gap disappears given similar access to initial external financing.