Abstract

Traditional economic theory used to explain economic development or recession from the perspective of attenuation or blooming of entrepreneurship. If economic growth has slowed, this recession should partly be attributed to the attenuation of entrepreneurship by traditional economists. At another time and place, it is said, the flowering of entrepreneurship accounts for unprecedented expansion.

However, William Jack Baumol had challenged this interpretation in 1990. He claimed that entrepreneurs are always with us and always play some substantial roles. But there are a variety of roles among which the entrepreneur's efforts can be reallocated, and some of those roles do not follow the constructive and innovative script that is conventionally attributed to that person. Indeed, at times the entrepreneur may even lead a parasitical existence that is actually damaging to the economy. How the entrepreneur acts at a given time and place depends heavily on the rules of the game-the reward structure in the economy-that happen to prevail. In another word, entrepreneurship is neutral, andthe allocation of entrepreneurship between productive activities and unproductive activities depends on one country's institutional quality and its endogenous rules of the game. In some countries or areas, good institutions-such as a high degree of rule of law, good protection of property rights, less government regulation, a good financing system and a reasonable tax policy-promote entrepreneurship into productive activities, which enhances economic performance. But in other countries or areas, bad institutions lead entrepreneurship to unproductive activities, which reduce the economic performance.

This paper inherits and extends the analytical framework of Baumol, attempts to use transnational data and Chinese provincial data to testBaumol's theory. The results of empirical researches support the Baumol's thesis. In the first transnational empirical research, patents per million population is regarded as the proxy for productive entrepreneurial activities, meanwhile, the proportion of corporate bribery is used as the proxy for unproductive entrepreneurial activities, Corruption Perceptions Index and Index of Economic Freedom are respectively regarded as the proxy for institutional quality. After controlling for demographic factors such asage structure, labor force participation rate, population density and enrollment rate of tertiary education, OLS regression analysis shows that institutional variables have a significant positive impact on productive entrepreneurial activities and a significant negative impact on unproductive entrepreneurial activities, but demographic variables have no significant impact on both productive activities and unproductive activities. In this way, the results support Baumol's thesis. Baumol contends that“it is the set of rules and not the supply of entrepreneurs or the nature of their objectives that undergoes significant changes from one country to another”.

The second trans-provincial empirical research has tested the relationship between the allocation of entrepreneurial talents and economic growth. Based on provincial panel data of China, we have found thatthe productive allocation of entrepreneurial talents has a significant positive effect on economic growth of China, while the unproductive allocation of entrepreneurial talents has a significant negative effect on economic growth of China. After we consider demographic variables and socioeconomic variables that may affect economic growth, the results are still robust and significant. Specifically, as self-employment increases by one percentage point, per capita GDP in this province will increase 1.511% every year, while as state-owned employment increases by one percentage point, per capita GDP in this province will decrease 0.418% every year. The conclusion indicates that it is essential to formulate rules and policies which are conducive to the productive allocation of entrepreneurial talents for the long-term sustainable economic growth in China.

More importantly, thisbook canexplain many social phenomena deeply from this perspective. This paper explains and analyses the phenomena that many private entrepreneurs in China are unmindful of their proper works, but they are keen on rent-seeking, speculation, investment immigration, even taking part in mafia. In my opinion, Institutional arrangement and its endogenous game rules determine the allocation of entrepreneurship. Under the current institutional environment in China, rent-seeking, speculation, investment immigration and mafia behavior are kinds of helpless and rational choice. In addition, using the economic theory of the mafia, I deeply explain the reason that Chinese entrepreneurs are keen on taking part in mafia. During the period of economic transformation in China, the mafia behaviors are largely due to the lack of protection of property rights. When the state can't provide public goods such as the protection of property rights that should be provided by the state, entrepreneurs and ordinary people need to seek alternative protection products. The mafia can provide private protection of property rights which can meet the needs of entrepreneurs. That is why entrepreneurs are keen on taking part in mafia.

Next, I pay attention to the motives that entrepreneurs are keen to join the entrepreneurial circles. In my view, the essence of entrepreneurial circles is an alliance of politics, capital and relations. The members of this circle can share information, network and resources to run business. In a word, entrepreneurial circle is an alternative and complementary mechanism during the period of China's transformation when financial system, rules of law and protection of property right are unsound and imperfect. In this case, entrepreneurial circle can reduce the transaction costs and business risks, and promote the development of enterprises.

Broadly speaking, The Needham Puzzle, the Heat of Being a Civil Servant and the Popular Choice in Economics, Management and Law Majors are the negative consequences of entrepreneurial talents flowing into unproductive area and improper allocation of talents. My explanation ofThe Needham Puzzle is that scientific research is a productive activity, while the official promotion is an unproductive activity. The political system in ancient China lacks incentives to engage in commercial activities and technological inventions. As a result, a large number of entrepreneurial resources flowed into rent-seeking activities. In this way, the wisdom of the social elites wasused in unproductive fields rather than in creating social wealth and innovating technology, the consequent results are the backwardness of China's modern science and technology and economic stagnation. We can evaluate the incentive structure and institutional quality in a society by observing the flow of the entrepreneurial resources or potential entrepreneurial resources. As a higher intelligence group, college students can be seen as potential entrepreneurs or entrepreneurial resources, while the Heat of Being a Civil Servant and the Popular Choice in Economics, Management and Law Majors in China may be a signal of wrong allocation of entrepreneurial resources. The two phenomenaseemirrelevant, but in fact, they are both closely linked with the rent-seeking. The biggest consequence of rent-seeking activities is the negative impact on human capital investment. The Popular Choice in Economics, Management and Law Majors can be seen as the rent-seeking tendency and expectationfor college students in accumulating knowledge, therefore it is an ex ante rent-seeking phenomenon. The Heat of Being a Civil Servant can be seen as the rent-seeking tendency and expectationfor college students in choosing an occupation, therefore it is an ex post rent-seeking phenomenon. If a social system is beneficial to rent-seeking, it will encourage college students to choose the majors which are good for rent-seeking in investing human capital, and choose the job sectors which are good for rent-seeking in choosing an occupation. In my opinion, the two phenomena reflect the wrong allocation of talents.

In all, the key point in this book is that the supply of entrepreneurs among countries in period of time is relatively fixed, significant change in different periods are the game rules, but not the supply of entrepreneurs. The game rules determine the allocation of entrepreneurial resource and determine economic performance at last. The purpose of this study is to reduce entrepreneurial resource to flow into unproductive area such as rent-seeking from the perspective of institutions, to encourage entrepreneurial resource to engage in starting a business and innovations. At last, this book gives some advice on improving the allocation of entrepreneurial resource and talents from the perspective of improving the formal institutions and informal institutions.

At present, China's economy has entered“new normal”（Xi Jinping, 2015）. Its most basic feature is that China's economic growth rate will be transferred from high to medium-to-high. The book will be conducive to change the direction of economic policy which is designed to promote entrepreneurship and economic growth. Traditionally, the focus of scholars is how to revive and promote entrepreneurship, and increase the number of entrepreneurs. In the future, in order to get the largest productive output, scholars will pay more attention to how to improve the quality of the system rather than to increase the supply of entrepreneurs. In order to encourage innovation and reduce rent-seeking, the key of government policy is to optimize the institutional environment. These conclusions and suggestions have profound implications for the implementation of the policy which encourage people to do business creatively and drive innovation.

Key words: Institutions; Rent-seeking; Profit-seeking; Entrepreneurial Activity; Economic Performance