Entrepreneurs' socioeconomic status and government expropriation in an emerging economy

• Published date: 01 September 2020
• Author: Jieyu Zhou,Subramanya Prasad Chandrashekar,Lipeng Gary Ge,Jiatao Li
• Date: 01 September 2020
• DOI: http://doi.org/10.1002/sej.1361

SPECIAL ISSUE ARTICLE

Entrepreneurs' socioeconomic status and

government expropriation in an emerging

economy

Jieyu Zhou

1

| Lipeng Gary Ge

2

| Jiatao Li

3

|

Subramanya Prasad Chandrashekar

4

1

School of Management, Xiamen University, Xiamen, Fujian, China

2

Department of Global Economics and Management, University of Groningen, Groningen, The Netherlands

3

Department of Management, Hong Kong University of Science and Technology, Kowloon, Hong Kong

4

Institute of International Business and Governance, The Open University of Hong Kong, Kowloon, Hong Kong

Correspondence

Jieyu Zhou, School of Management, Xiamen

University, No. 422, Siming South Road,

Xiamen, 361005 Fujian, China.

Email: jyzhouaa@connect.ust.hk

Funding information

Hong Kong's Research Grants Council,

Grant/Award Numbers: 16505817, 16507219

Abstract

Research Summary: This study focuses on a salient chal-

lenge for entrepreneurs in emerging economies: govern-

ment expropriation. Drawing on signaling arguments, we

propose that an owner's high socioeconomic status (SES)

attracts government attention to her start-up by conveying

information about its resource endowments. The empirical

tests based on start-ups in China support that an owner's

high SES increases government expropriation. The effect is

stronger for start-ups in regions with greater income

inequality or in those where the legal system is less devel-

oped. High-SES entrepreneurs can mitigate the risk of gov-

ernment expropriation by building political connections.

Managerial Summary: Institutional voids in emerging econ-

omies pose a major threat to start-ups in the form of gov-

ernment expropriation. This research finds that the threat is

more severe for start-ups with high-SES entrepreneurs

because they have strong resource-mobilization capabilities

and easily become expropriation targets. Further, this

research suggests that two measures help protect high-SES

Received: 15 February 2019 Revised: 3 May 2020 Accepted: 19 May 2020 Published on: 10 August 2020

DOI: 10.1002/sej.1361

© 2020 Strategic Management Society

396 Strategic Entrepreneurship Journal. 2020;14:396–418.wileyonlinelibrary.com/journal/sej

entrepreneurs from government expropriation: locating

their start-ups in regions with low income inequality or a

well-developed legal system, and building connections with

the government in order to exchange favors with govern-

ment officials.

KEYWORDS

entrepreneurs, government expropriation, income inequality, legal

system, political connections, socioeconomic status

1|INTRODUCTION

Institutions are important for entrepreneurship (Estrin, Korosteleva, & Mickiewicz, 2013; J. Li, 2013). Well-

functioning institutions promote entrepreneurship by providing incentives and critical resources for entrepreneurs

throughout the entrepreneurship process (Bruton, Ahlstrom, & Li, 2010; Estrin et al., 2013). However, in contrast to

developed economies with sufficient formal institutions, emerging economies are fraught with institutional voids,

typically deficient market intermediaries, and a weak legal system (Khanna & Palepu, 1997; Puffer, McCarthy, &

Boisot, 2010; Xie & Li, 2018; Yang & Li, 2008). Entrepreneurial challenges in emerging economies include corruption

(Bowen & De Clercq, 2008; Tian, Yang, & Li, 2020), insecure property rights (Puffer et al., 2010), weak enforceability

of contracts (De Soto, 2000), and other problems.

One salient but less mentioned challenge for entrepreneurs in emerging economies is the risk of government

expropriation because government power is often relatively unconstrained in emerging economies, accompanying a

lack of legal protection for property rights (Eunni & Manolova, 2012; Frye & Shleifer, 1997; Jia & Mayer, 2017;

Shleifer & Vishny, 2002). Government expropriation refers to rent extraction by the government from business sec-

tors without a legal basis to increase government revenues or provide public goods (Hou, 2015; Jia & Mayer, 2017;

Tsai, 2004). Start-ups tend to experience the most severe threat of government expropriation (Du, Lu, & Tao, 2015)

because they are typically at the bottom of the political hierarchy (Guo, 2013; Lu, 2002).

But start-ups differ in the extent of government expropriation they experience. Previous studies of expropria-

tion tended to take the government's perspective in explaining such differences. Government is considered to be

quite prudent in selecting its expropriation targets in order to balance current expropriation revenue against longer

term value that might be harvested as the firm grows and the economy develops (Jia & Mayer, 2017; Tomz &

Wright, 2010). For instance, Jia and Mayer (2017) showed that firms operating in only one region suffer less from

government expropriation than those operating in many regions, because the local government is willing to protect

the firm as a local business when the firm locates in only one region. However, prior expropriation studies failed to

draw a complete picture of the differences among start-ups in experiencing government expropriation. Researchers

have paid insufficient attention to the influence of entrepreneurs who are start-up founders and decision-makers

and should be able to convey valuable information about their start-ups to the government when considered for

expropriation (Elitzur & Gavious, 2003).

To fill this gap, this study explored the idea that entrepreneurs' socioeconomic status (SES) has an important

bearing on government expropriation by serving as a signal about their start-ups to the government. Due to the

information asymmetry between a government and a start-up that it might target to expropriate, it is costly for the

government to obtain detailed information about which start-up might have resources and potential for expropria-

tion. Government needs some observable signals, and an entrepreneur's SES is one such signal.

ZHOU ET AL.397