Prior Experience and Social Class as Moderators of the Planning‐Performance Relationship in China's Emerging Economy

• Author: Jintong Tang,Yuli Zhang,Jun Yang,Hongzhi Xue,Kevin Au
• Published date: 01 September 2013
• DOI: http://doi.org/10.1002/sej.1155
• Date: 01 September 2013

PRIOR EXPERIENCE AND SOCIAL CLASS AS

MODERATORS OF THE PLANNING-PERFORMANCE

RELATIONSHIP IN CHINA’S EMERGING ECONOMY

YULI ZHANG,1JUN YANG,1* JINTONG TANG,2KEVIN AU,3and

HONGZHI XUE1

1Research Center of Entrepreneurial Management, Business School, Nankai

University, Tianjin, China

2John Cook School of Business, Saint Louis University, St. Louis, Missouri,

U.S.A.

3Center for Entrepreneurship and Department of Management, Chinese

University of Hong Kong, Hong Kong, China

This study advances research on business planning by integrating and reconciling the institu-

tional and strategic planning perspectives to explore the performance implications of both

formal and informal business planning. We also examine how an entrepreneur’s prior expe-

rience and social class shape the planning-performance relationship. Using a dataset of two

waves of interviews with 313 founders in China, we found that both formal and informal

business planning can benefit new ventures. Interestingly,as a unique contingency factor in the

Chinese context, social class moderates only the link between formal planning and perfor-

mance, whereas prior work experience moderates the effects of both formal and informal

planning on performance. Copyright © 2013 Strategic Management Society.

INTRODUCTION

Much recent research has focused on the effects of

business plans on new venture performance (for a

recent meta-analysis, see Brinckmann, Grichnik, and

Kapsa, 2010). Proponents claim that preparing a

business plan can provide a new venture with legiti-

macy, resource acquisition, and goal implementation

to promote new venture performance (e.g., Delmar

and Shane, 2003). However, many others present

unfavorable evidence (e.g., Bhide, 2000). Such a

theoretical puzzle has generated rich empirical find-

ings, and the divergent nature of these findings has

led researchers to advocate contingency models to

explain the relationship between business planning

and performance (Gruber, 2007). Nonetheless, these

theoretical and empirical advances have been con-

fined largely to the situation in developed nations.As

a case in point, a recent meta-analysis (Brinckmann

et al., 2010) does not cover a single study from

China, which is an important emerging economy

with an environment quite different from that of

more developed nations (Bruton and Ahlstrom,

2003; Tan, Yang, and Veliyath, 2009).

The question whether business planning inhibits

or enhances entrepreneurial performance and under

what conditions such an effect occurs is especially

acute in emerging economies such as China. The

traditional personalized transaction structure in

China was relationship based and network centered.

Recently, China has been shifting from this tradi-

tional structure to an impersonal exchange regime

which is rule based and market centered (Peng,

2003). Under such circumstances, ‘a unique environ-

ment has emerged since the 1990s that is neither

Keywords: business plans; new venture performance; prior

experience; social class; emerging economy

*Correspondence to: Jun Yang, Research Center of Entrepre-

neurial Management, Business School, Nankai University, No.

94, Weijin Road, Tianjin, China. E-mail: nkyangjun@163.com

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Strategic Entrepreneurship Journal

Strat. Entrepreneurship J., 7: 214–229 (2013)

Published online in Wiley Online Library (wileyonlinelibrary.com). DOI: 10.1002/sej.1155

Copyright © 2013 Strategic Management Society

socialist nor capitalist . . . The Chinese reform-

minded policy makers have attempted to preserve

the socialist system in order to maintain its legiti-

macy and power base. Meanwhile, knowing this

system has failed to advance economic growth, the

capitalist market-based system was introduced, even

though it is an opposing force to the socialist ideol-

ogy’ (Tan and Tan, 2005: 144).

The coexistence of socialist and capitalist systems

in China poses unique paradoxical situations of

potential interest in studying business plans. Due to

liability of smallness and newness (Stinchcombe,

1965), new ventures desperately need resources to

grow their businesses. However, entrepreneurial

firms in China suffer from a significant shortage of

slack resources and legitimacy compared to more

established firms (Delmar and Shane, 2004). This is

particularly true for entrepreneurial firms in China

who operate under the socialist system where ‘the

government still controls significant portions of stra-

tegic factor resources and has considerable power to

approve projects and allocate resources’ (Li and

Zhang, 2007: 793). Further, in the venture capitalist

industry, funds are typically associated with state-

owned banks or corporations (Ahlstrom, Bruton, and

Yeh, 2007). As a result, venture capitalists in China

tend to adopt procedures very different from those in

the West. That is, they rely on the evaluation of

formal business plans to make investment decisions

(Bruton and Ahlstrom, 2003; Bajargal and Liu,

2005). Under such conditions, new ventures are

prompted to engage in preparing a formal business

plan in order to acquire resources and legitimacy

through market mechanisms.

The paradox comes because China is distin-

guished by its imperfect markets for production, ill-

defined property rights, and underdeveloped legal

system (Peng and Heath, 1996). Further, the inher-

ently chaotic and unpredictable nature of institu-

tional transition (Nee, 1992) requires new ventures

to be ‘flexible’in dealing with uncertainty (Child and

Tse, 2001; Tan, 2005, 2007). Under such situations,

entrepreneurial firms may feel ‘under the radar’ as

they are less visible to the public than are established

firms and, thus, choose not to spare their limited

resources on preparing business plans. Indeed,

research has found entrepreneurial firms act oppor-

tunistically or unethically to take advantage of the

leeway and gray areas due to scant legal protections

of consumer interests and unfair competition (Azmat

and Samaratunge, 2009). Given this paradox, new

theoretical perspectives and empirical evidence are

needed to reveal the process through which business

planning impacts entrepreneurial firms in China.

Thus, the current study was motivated by two

fundamental research questions. First, what is the

impact, if any, of business planning on new venture

performance in China? Integrating the institutional

and strategic planning views, we propose that both

formal and informal business planning are beneficial

for new venture performance. Further, given the

idiosyncratic circumstances in China, we predict that

informal planning will have a more potent influence

on firm performance than will formal planning.

Second, as adopting a strong business plan is

increasingly considered necessary but insufficient

for wealth creation by new firms (Gruber, 2007), a

better understanding of the conditions under which a

business plan enhances new venture performance

may require a contingency perspective that empha-

sizes the importance of fit between a business plan

and other constructs of interest. Building on the

premise that business planning has contingent value,

our second research question is: under what condi-

tions does business planning enhance or constrain

new venture performance in China? In order to iden-

tify the optimal value of business planning, we inves-

tigate two individual characteristics as moderators:

entrepreneurs’ prior experience and social class.

THEORY AND HYPOTHESES

DEVELOPMENT

Central to understanding the role of business plan-

ning for new ventures, particularly new ventures in

China, is the heterogeneity of business planning. A

key premise in the literature is that entrepreneurs

prepare both formal plans and informal plans that

follow different logics and serve different purposes

(Gruber, 2007). Formal business plans refer to plans

developed to communicate with external stakehold-

ers and to acquire resources, while informal business

plans are utilized as an operational guide to facilitate

a new venture’s development.

The inherent logics to explicate the role of formal

and informal business plans are also different. The

institutional view regards the preparation of a formal

business plan as the entrepreneur’s reaction to exter-

nal forces, that is, entrepreneurs write formal busi-

ness plans to conform to institutionalized rules and

to mimic the behavior of others (Delmar and Shane,

2004; Honig and Karlsson, 2004). The strategic

planning view suggests informal business planning

Prior Experience and Social Class as Moderators 215

Copyright © 2013 Strategic Management Society Strat. Entrepreneurship J.,7: 214–229 (2013)

DOI: 10.1002/sej