In the high-rolling lives of China’s billionaires, one problem you wouldn’t expect them to have to grapple with is a shortage of money.
Yet in a recent research study with colleagues at two Chinese universities, we found access to sources of finance to be among the top factors determining the success or failure of billionaire entrepreneurs.
China’s economic boom since the reforms of the late 1970s has given birth to a rapidly expanding cohort of billionaires – almost all of them self-made entrepreneurs. In 2015 China overtook the U.S. as home to the highest number of billionaires in the world.
Two of the main trackers of this explosion of China’s super-rich are the annual Hurun Report rich list and a similar list compiled by Forbes.
A peculiar feature of these lists is the extremely high degree of volatility they reveal, with a much larger proportion of names rising and falling off the list every year than in similar rankings for other economies.
Indeed, while the number of billionaires in China has steadily increased, our examination of the Forbes and Hurun lists between 2000 and 2013 showed only slightly more than a third (35.4%) of the billionaires on the list managed to remain on it. Likewise very few managed to re-enter the lists once they had dropped off.
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This matters because self-made, entrepreneur billionaires often make significant contributions to the economic growth of their home countries.
Entrepreneurs bring innovations to markets as they grow their business, and a large failure rate creates ripples in the form of economic uncertainty and turbulence. This can cause significant damage, not just to those immediately close to the entrepreneurs concerned, but also to employees, suppliers, local communities and economies in general.
So what accounts for the high turnover of China’s billionaire entrepreneurs, and specifically why do so many of them seem to fail?
In our study, we looked at several factors that account for billionaire longevity, among them institutions governing property rights and access to finance, political connections and access to social networks, and personal characteristics including gender and educational background.
We focused solely on first generation entrepreneurs, excluding the relatively few Chinese billionaires who had inherited money from billionaire parents or who had earned their wealth from the privatization of state-owned firms.
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Among the findings, we uncovered that social networks played no significant role in the longevity of billionaires. This may come as a surprise to those familiar with China’s “guanxi” business culture which traditionally places a strong emphasis on the importance of personal relationships and connections.
At an individual level, we found that billionaires with an MBA were less likely to fail, as were older, male billionaires. But there was no evidence that undergraduate educational levels played a role in determining longevity, nor did having an Executive MBA education.
Above all, we found that two of the most influential factors determining longevity were access to finance and access to political connections.
Access to finance is typically seen as an issue challenging small-scale entrepreneurs, so it is surprising to see it also being an important factor for billionaires who – it would typically be assumed – would have little shortage of funds.
As for political connections, they can often act as a double-edged sword, with strong influence both positively and negatively on billionaire’s fortunes. We found that having ties to influential officials played a strong role in billionaire longevity, perhaps helping business owners win government contracts or helping to shield their business from expropriation by the government.
Losing these connections – which in China is often inevitable – can also be a key cause of billionaire failure. For example, the downfall of important government officials may implicate business owners with whom they had connections.
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Many previous studies on entrepreneurship have tended to emphasize the importance of strong institutions governing property rights and contracting as being important determinants of long-term success. Property rights cover such issues such as regulatory transparency and fairness, government corruption and interference in business, while contracting measures factors such judicial fairness and the protection of business rights, as well protection of intellectual property among others.
However, whilst these issues may affect small entrepreneurs, we found no evidence that either strong property rights or contracting institutions mattered in affecting the longevity of Chinese billionaires.
Our study showed that despite their super-rich status, one critical factor determining the longevity of China’s billionaires can be a crippling lack of access to finance. This reflects an increasingly tough funding climate for private firms, with China’s overwhelmingly state-owned banks tightening their access to credit and placing greater restrictions on what it can be used for.
For policymakers seeking to promote the sustained growth of billionaire entrepreneurship, policies that reduce discrimination against private entrepreneurs in access to finance will likely be more effective than those that enhance property rights and contracting institutions.
