Rural Entrepreneurship in an Emerging Economy:Reading Institutional Perspectives fromEntrepreneur Storiesby Jun Yu, Joyce X. Zhou, Yagang Wang, and Youmin Xi

Rural entrepreneurs are of extreme importance in China’s progress toward a more market-oriented economy as the vast majority of Chinese live in rural areas. From an institutionalperspective and based on content analysis of 91 publicly published stories about rural Chineseentrepreneurs broadcast by China Central Television, this paper addresses several key aspects ofrural entrepreneurship in China and specifically probes into how different institutional elements(i.e., regulative, normative, and cognitive components) affect the strategic behaviors of ruralChinese entrepreneurs. We found that due to weak regulatory protection of intellectual rights,rural entrepreneurs in China tend to work on innovations on their own or with close familymembers instead of collaborating with external sources; these entrepreneurs use guanxi strategi-cally to deal with constraints from the institutional environment; it is important to build legiti-macy by either building alliances with large, established firms, or acquiring approval from peopleof authority.

IntroductionChina, one of the most important emerging

economies, has experienced dramatic eco-nomic growth. Due to the vast rural populationin China, private enterprises in China’s ruralareas in the past three decades served as theengine that has been pushing China’s continu-ous economic growth and reform (Pooh, Zhou,and Chan 2009). Today, it has been widelyrecognized that rural Chinese entrepreneurialfirms represent the most dynamic force in theChinese economy, and exemplify the funda-mental nature of China’s socialist market

economy (Pooh, Zhou, and Chan 2009). Under-standing entrepreneurial activities in ruralChina is, therefore, an important research area.

In this transitional economy, private enter-prises face a complicated institutional environ-ment. Krug and Hendrischke (2002) describedthe Chinese institutional environment as pos-sessing a high share of nontradable inputs andresources, complemented by a lack of contrac-tual security and relational risk, ill-functioninginformation markets, and relatively weak prop-erty rights. Peng (2000) depicted the unique-ness of China’s institutional environment as acombination of socialist legacy, high context

Jun Yu is an associate professor of business administration at School of Business, Emporia State University.Joyce X. Zhou is an assistant professor at School of Business, Emporia State University.Yagang Wang is a policy researcher with the Municipal Government of Tianjian City at Management

Department, School of Management, Xi’an Jiaotong University.Youmin Xi is a professor at Management Department, School of Management, Xi’an Jiaotong University.Address correspondence to: Jun Yu, School of Business, Emporia State University, Emporia, KS 66801,

USA. E-mail: jyu@emporia.edu.

Journal of Small Business Management 2013 51(2), pp. 183–195

doi: 10.1111/jsbm.12012

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culture, and transition economy. In the samevein, Li and Matlay (2006) concluded thatfactors responsible for the institutional environ-ment under economic transition were thelegacy of the centrally planned system, includ-ing political interference in market activitiesand economic experimentation. Similarly, Tan(1996) conceptualized the institutional environ-ment in terms of a multidimensional construct,characterized by elevated levels of dynamism,complexity, and hostility. In short, it appearsthat the performance of Chinese businesses isnot determined only by environmental factorsin the market economy, but also by other indig-enous features such as institutional determi-nants (Li 1998; Li and Matlay 2006). Therefore,a distinctive feature of entrepreneurship intransition economies is that it is largely shapedby socially and institutionally regulated envi-ronment (Kodithuwakku and Rosa 2002; Peng2001; Pooh, Zhou, and Chan 2009). This paperseeks to expand our understanding of howChinese rural entrepreneurs navigate their insti-tutional environment.

Rural Entrepreneurshipin China and theInstitutional Perspective

Research on rural entrepreneurship in Chinais fairly limited. In a recent literature review of11 leading English-language academic journalsof management and entrepreneurship rangingfrom 1980 to 2006, Yang and Li (2008) identi-fied 68 articles related to entrepreneurship inChina, among which there were only 31 articlesfocusing on entrepreneurship and small busi-ness in China. None of these articles specificallystudied rural entrepreneurship. However,several recent papers did have Chinese ruralentrepreneurship as the main area of discus-sion. Research indicates that there are moreentrepreneurial businesses in rural areas wherethe central government’s influence is smaller,the community government’s power is weaker,and the level of market development is higher(Jin and Qian 1998). Pooh, Zhou, and Chan(2009) explored a conceptual framework forsocial entrepreneurship of rural enterprises inChina. Mohapatra, Rozelle, and Goodhue(2007) used an econometric model to show thatself-employment in China promotes entrepre-neurship and is a sign of development, not astopover for disadvantaged workers and a signof distress. It appears that most of the research

related to rural entrepreneurship in China isbased on the perspectives of economics ratherthan those of management and business strat-egy. Furthermore, when discussing rural entre-preneurship in China, most of these studiesincluded not only private enterprises, but alsotown and village-based enterprises (TVEs),which have quite different characteristicsbecause they are supported by local govern-ments (Li and Matlay 2006). This is not surpris-ing, as TVEs were the dominant players in mostrural areas in the 1980s (Li and Matlay 2006).

We found two studies that are related toentrepreneurial strategies in rural China.Droege, Lane, and Spiller (2009) exploredfactors that led to Chinese rural entrepreneurschoosing private rather than collective businessownership. Fan, Chen, and Kirby (1996) notedthat entrepreneurs of peasant background hadoriginated from one of the following types:leaders of former local governments, either atthe township or village level; craftsmen, whopossessed specialized skills; a “specializedhousehold” business, which evolved into asmall family enterprise; ex-servicemen, whogained valuable or desirable training and/orbuilt up key connections within the armedforces; and “home returning” youths, with sec-ondary school education.

Based on this review, it seems that we arestill left with little understanding about howrural entrepreneurs interact with their institu-tional environment to build entrepreneurialbusiness ventures. Institutional theory is tradi-tionally concerned with how organizationsbetter secure their positions and legitimacy byconforming to the rules and norms of the insti-tutional environment (Meyer and Rowan 1991;Scott 2007). The term “institution” broadlyrefers to the formal rule sets (North 1990), exante agreements (Bonchek and Shepsle 1996),and taken-for-granted assumptions (Meyer andRowan 1991) that organizations and individualsare expected to follow (Bruton, Ahlstrom, andLi 2010). These institutions are derived fromrules such as regulatory structures, governmen-tal agencies, laws, courts, professions, andscripts and other societal and cultural practicesthat exert conformance pressures (Bruton, Ahl-strom, and Li 2010; DiMaggio & Powell 1983,1991). These institutions create expectationsthat determine appropriate actions for organi-zations (Meyer and Rowan 1991), and also formthe logic by which laws, rules, and taken-for-granted behavioral expectations appear natural

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and abiding (Zucker 1977). Institutions definetherefore what is appropriate in an objectivesense, and thus render other actions unaccept-able or even beyond consideration (Bruton,Ahlstrom, and Li 2010; DiMaggio and Powell1991).

The examination of entrepreneurial venturescommonly focuses on the actions of either indi-vidual or teams of entrepreneurs. Institutionaltheory, however, has traditionally argued for acircumscribed theory of action, focusinginstead on how shared interactions becometaken-for-granted, constraining action in orga-nizations, professions, or even across entirenations (Bruton and Ahlstrom 2003; DiMaggioand Powell 1983, 1991). Recent research oninstitutional theory has emphasized threepillars of institutional factors—regulative, nor-mative, and cognitive institutions (Scott 2000).Regulative institutions include laws, regula-tions, and codified governmental policies.These institutions guide behavior by means ofthe rules of the game, monitoring, and enforce-ment. These rules provide guidelines for newentrepreneurial organizations and can lead toorganizations complying with laws and alsoindividual compliance with laws or may requirea reaction if there is a lack of law or regulationin the entrepreneurial firm’s region (Bruton,Ahlstrom, and Li 2010).

The normative pillar represents models oforganizational and individual behavior basedon obligatory dimensions of social, profes-sional, and organizational interaction. Theseinstitutions guide behavior by defining what isappropriate or expected in various social andcommercial situations. Normative systems aretypically composed of values (what is preferredor considered proper) and norms (how thingsare to be done, consistent with those values)that further establish consciously followedground rules to which people conform (Bruton,Ahlstrom, and Li 2010; Scott 2007). Normativeinstitutions reflect what is expected of organi-zations and individuals, thus refer to role-basedrules (written or unwritten).

The cognitive dimension of institutionsemphasizes the schema, frames, and scriptsthat people rely on in making choices, some-times without even realizing them. They ofteninclude informal constraints embodied in tradi-tions, taken-for-granted rules and conventions,as well as preconscious and widely acceptedcustoms (DiMaggio and Powell 1991). The cog-nitive pillar represents models of individual

behavior based on subjectively and (oftengradually) constructed rules and meanings thatlimit appropriate beliefs and actions. Cognitiveinstitutions may operate more at the individuallevel in terms of culture and language, andother taken-for-grantedness and preconsciousbehavior that people barely think about(DiMaggio and Powell 1991; Meyer and Rowan1991). Overall, one can regard socialinstitutions—these laws, norms, and beliefs—aswritten and unwritten rules of game (North1990).

Strategic choices that firms or individualsmake are inevitably affected by formal andinformal constraints within an institutionalframework (North 1990; Oliver 1997). Hoskis-son, Eden, and Lau (2000), in particular,argued that institutional theory best explainsstrategies of enterprises in emerging econo-mies. In the case of China, recent research hasexplored the relationship between firm strate-gies and institutions (Lau 1998; Li, Sun, andLiu 2006; O’Connor, Chow, and Wu 2004).This line of research provides strong evidencethat enterprises in China have to carefullydevise strategies to deal with a number ofinstitutional constraints (Bruton and Ahlstrom2003).

Research ApproachStudying entrepreneurial activities often

requires studying entrepreneurs’ past experi-ence. Labov (1972) defines narrative as amethod of recapitulating past experience bymatching a verbal sequence of clauses to thesequence of events which (it is inferred) actu-ally occurred. In recent years, research hasleaned toward narrative knowing in socialscience in general. Narrative studies are nowemerging in the domain of entrepreneurshipresearch (e.g., O’Connor 2002; Pitt 1998). Theemergence of explicit use of stories in socialsciences stems from the fact that storytelling isoften the most natural way to describe pastexperience (Johansson 2004). Johansson dis-cussed three areas of narrative research inentrepreneurship, one of which is the role ofstories as a means of articulating experienceand learning. This paper utilizes this role ofstories in exploring the interaction of entrepre-neurs in rural China and their institutionalenvironment.

Published news stories are often appropriatefor research that attempts to identify importantunique behavioral patterns of organizations or

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individuals, as these stories generally focus onnonroutine decisions (Siu 2005), thus highlight-ing key factors the researchers need to identify.Another important advantage of this approachis that, as these cases are written for public use(e.g., magazines, newspapers, and books), thelikelihood of falsification and misrepresenta-tion of facts is low. The facts are subject toscrutiny by employees, competitors, and otherstakeholders such as the general public. Hence,they are more likely to be reliable (Miller andFriesen 1984).

Using published stories for academicresearch has a long history (e.g., Yin and Heald1975). For instance, by analyzing publicly avail-able stories on entrepreneurs or small andmedium enterprises (SMEs), Manimala (1992)compared high and low pioneering-innovativeventures in India regarding heuristics. Lin(1998) studied successful factors of SMEs inTaiwan. Siu (2002) explored the differencesbetween marketing practices of Internet firmsand traditional firms. More recently, Siu (2005)researched and compared marketing practicesof SMEs in mainland China, Hong Kong, andTaiwan.

For this research, we conduct an analysisof publicly published stories. These storieswere broadcast by one of the most popularpublic media—China Central Television(CCTV)—on a show in the second half of2008 that told stories about rural entrepre-neurs. The manner in which these storieswere told was relatively uniform. There weretwo to three stories per week. In this study,all available cases (91 in total) during theseven-month period between May 30th, 2008and December 31st, 2008 were analyzed. Theauthors watched all available videos on thesestories and analyzed the transcripts providedby CCTV. Data analysis proceeded in severalsteps. First, every decision made or actiontaken by the entrepreneurs was coded as anevent. To ensure data reliability, all storieswere coded independently by two nativeChinese speakers (not authors of this paper).The inter-rater reliability is 0.84, which repre-sents a high reliability. Then, the differencesbetween coders were discussed and consen-sus was eventually reached. Finally, eachevent, in the context of its occurrence, wasfurther studied to aid in generating researchpropositions. The industries represented bythe 91 cases are presented in Table 1. In all,1,741 decisions or actions were coded.

FindingsCoping with Regulative InstitutionOn Product Innovation. China has not fullydeveloped its legal and regulatory policies toregulate the emerging market economy.Fearing having their new product ideas stolenby others, quite a few business owners in oursample told the story about himself/herselfdeveloping a new product without getting helpfrom anyone else. In some cases, familymembers were entrusted to participate indeveloping new products and technologies. Forinstance, a young man seeking to get into therestaurant business started by figuring out howhis late father cooked a particular type of fishso well when the young man was a little boy.He spent numerous days and nights experi-menting and doing research on cooking fish,and eventually found a recipe for a sauce thatcould be used to make cooked fish more deli-cious. In his research and experimentationprocess, he did not seek advice from anyoneelse but his brother. His restaurant businesssoon spread to several provinces, which meanshe had to redevelop the recipe to match localtastes in these new markets. Again, fearing thatseeking help from local chefs would disclosethe secret recipe, he did research on his owneach time he entered a new market and tried tofind out the best cooking style for that market.

The stories of most other entrepreneursseem to confirm this pattern. Among the 78

Table 1Industries Represented by

Entrepreneurs in the Sample

Industry Cases Percentageof TotalCases

Fruits and vegetables 25 27Food and beverages 21 23Meat and meat

processing16 18

Services (e.g., cleaning,decoration, pets)

10 11

Clothing and fashiondesign

7 8

Restaurants 7 8Household goods 5 5

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entrepreneurs that engaged in product innova-tion for the purpose of offering a new productor improving an existing product, 23 (30percent) worked alone in the product develop-ment process, and 22 (28 percent) worked withtheir family members. By contrast, only 11 (14percent) collaborated with their friends or col-leagues and 22 (28 percent) with other externalsources (e.g., outside organizations or govern-ment support agencies).

On the Role of Guanxi. In China, the essenceof a mutually beneficial relationship is capturedby the concept of guanxi. Guanxi consists ofconnections that are defined by reciprocity andmutual obligation. Ideally, the connections arealso supported by goodwill and personal affec-tion. Our case study indicates that buildingguanxi is a significant part of starting a busi-ness. The story of Ms. Zhang illustrates thispoint. Ms. Zhang sensed there was a businessopportunity on one of the sightseeing trips to asmall village two hours from the city where shelived. She observed that the local restaurantstargeting tourists, operated by former farmersin the village, were not able to serve food fastenough, and the service quality was not good.Therefore, she opened a restaurant that didthese two things well. However, because shewas a newcomer and was not treated as amember of the village, she was getting second-class treatment from the local farmers that didnot supply her restaurant with the best veg-etables and meat. Here is what she said she did:

Since they did not think I was one ofthem, I thought I should try to becomeone. After some research, I found thatMr. Liu was the person most respectedhere. He was in his late 70s and peoplelooked up to him. I started talking to himoften, and gradually we became friends.He started to think I was a solid personand apparently he started telling peopleabout that. Before long I got the samequality supplies as the other restaurants.

In this case, Ms. Zhang was able to overcomethe unfair treatment of her business and herselfby building guanxi with someone with power-ful influence. Sixty-three new guanxi buildingevents were recorded in our data. Amongthese, only 17 (27 percent) are about usingguanxi to help solve technical problems, andthe vast majority (73 percent) of new guanxi

was built to secure long-term relations withsuppliers, manufacturers, distributors, or cus-tomers that would not have been possiblewithout the help of guanxi, as in Ms. Zhang’scase.

On Handling Dishonesty in BusinessRelationships. Faced with an inadequate legalsystem to protect business interests from dis-honest parties and unfair business practice, therural entrepreneurs sometimes have to deviseingenious ways of protecting their business andtheir personal interests. A simple case illus-trates potential problems in such a situation. Ayoung woman, Ms. Qiu, started her business ofproducing car seat covers by first getting rawmaterials from her former employer, then dis-tributing them to women in her village to makethe products, and finally selling them to herformer employer. Soon she found out thatsome of those women did not make full use ofthe raw materials because they stole some.However, as people in the same villages knewone another as friends or relatives (distant orclose), she initially had no other choice buttake the loss herself, because directly askingthe women about the issue would cause themto lose face. Gradually she figured out a way tostandardize the amount of materials given toeach village worker so that cheating couldbecome more difficult. In the 17 cases thatinvolve employees not cooperating or violatingwork standards, the problems were solved byfiring employees or setting up work standards,sometimes by enacting punishment policies.Stories like these imply that these entrepre-neurs relied on treating those that they knewwell as someone in a business relationship withthem, as opposed to treating them as familyand friends, in order to avoid having their busi-ness harmed.

Treating family members and friends as theother party in a business relationship is alsoreflected in borrowing money from them.Thirty-seven entrepreneurs in our sample bor-rowed money from family and friends.Although the terms of such financing were notexplicitly explained in these published stories,words such as “borrow,” “lend,” and “pay back”were sometimes used, suggesting that suchfinancing deals were treated as regular businesstransactions from which both parties benefited.Although it is not explicitly mentioned in any ofthe stories, it seems that there typically is not awritten contract in such dealings. Therefore,

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both parties put much trust in the other partyand believe the other party will perform his orher duties in good faith.

Coping with Normative InstitutionOn Seeking Assistance in Funding andLabor. The role of family and friends isalways important to the Chinese. Major assis-tance from family and friends we found in thedata includes money and labor. Out of the 91entrepreneurs we studied, 40 borrowed moneyto start their business. Twenty-four of them (60percent) borrowed from family members, 8 (20percent) from friends, and another 8 (20percent) from other sources (those that do nothave regular close relationship with the entre-preneur, including the government). There are44 records of entrepreneurs seeking unpaidhelp, primarily through labor. Among these, 32(73 percent) were from family members, andonly 12 (27 percent) were from friends. Itappears that it is very natural for the entrepre-neur to go to parents, siblings, or other familymembers for money if he or she does not haveenough personal funds. In the meantime, thesefamily members almost think that it is theirobligation to help. In no case did we find thatan entrepreneur could not get financial helpfrom family members if he or she asked and theperson being asked had the money. These arereflected in the fact that the verbal descriptionof the money-borrowing experience is alwaysas simple as “I borrowed 200,000 yuan fromfamily members.”

However, when the case is about seekingbusiness advice or information from others, in64 out of 125 incidents (51 percent) the entre-preneurs received information from friends, 32(26 percent) from their families, and only 29(23 percent) from strangers, various organiza-tions, or government agencies. As in the case ofborrowing money from family and friends,getting advice or information from friends andfamily comes naturally in the venture-buildingprocess. The stories are replete with suchsimple descriptions as a business owner’sformer classmate informing the business ownerabout new product ideas, or an entrepreneurtalking with her friends about her business ideabefore making the plunge.

On Strategic Adaptation. Strategic adaptationis imperative for a new venture to be success-ful. In the sample we have, we noticed numer-ous cases where the business owner had to

adapt by changing his or her initial plans inareas such as product design, pricing, advertis-ing, production plans, employee compensation,etc. However, one category of adaptation, as aconsequence of having to deal with constraintsimposed by normative institutions in the busi-ness environment, involves sometimes dramati-cally changing the entrepreneur’s initial visionfor the business. The case of Mr. Gao illustratesthis point. Gao initially wanted to work as anindependent fruit trader, buying specialty fruitsfrom other provinces and selling them in localsupermarkets, where customers are generallymore upscale and can afford to pay higherprices. However, for fruit business, the localnorm of the supermarket industry is to contractonly with those who have substantial produc-tion facilities. That means Gao had to changehis business focus from trading to plantingfruits. Realizing that his business had to rely onsupermarkets to prosper, Gao quickly investedall his life savings to build a plantation, takingon huge risks. Gao’s case is not an exception.Thirty-seven entrepreneurs (41 percent) had toadapt to the constraints imposed by the indus-try norms, and almost half of them had to takeon new businesses that they had not planned.

Coping with Cognitive InstitutionOn Legitimacy Building. How to establishlegitimacy in the eyes of the stakeholders isobviously a critical issue for the entrepreneur.In order to build legitimacy, 23 stories in oursample involve learning from established firmsin the areas of marketing and public relations;and 26 other cases involve forming alliancewith large firms. An example is Mr. Shen, whoraised otter rabbits and exported hair and otherproducts taken from these animals. He initiallybuilt his industry-wide reputation by participat-ing in an otter rabbit contest and wining thepraises from industry experts at these contests.Only after this did customers start to come tohim. Another example is about Ms. Dong.Dong, a university researcher, successfullycloned cows for the first time in China usingsomatic cell cloning technology. When shewanted to introduce this technology to farmersto help them raise high-quality cattle, they ini-tially did not believe her and refused herproposition. After unsuccessfully talkingdirectly with many farmers, Dong sought helpfrom elder Communist Party members of thevillage who, although not officially in leader-ship positions, enjoyed great respect from the

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farmers in the local village. Dong’s persever-ance deeply moved these elders. They agreedto participate in her business, and this wasviewed as a seal of approval from the localfarmers. This brought other farmers on board.Like Mr. Shen, another 17 entrepreneurs in oursample used approving comments of industryexperts or people in influential positions as amarketing tool.

DiscussionCoping Strategies RegardingRegulatory Institutions

In the past two decades, China undertookcomprehensive reforms in its legal system. TheGeneral Principles of Civil Law (1986) and thesubsequent Civil Procedure Law (1991) formallyrecognized the civil rights of Chinese citizensand legal domestic and foreign entities in China.In addition, laws on patent (1984 and 1992) andcopyright (1990) were enacted to protect intel-lectual property. However, these laws are gen-erally blurry and the enforcement system is farfrom adequate. The legislative, judicial, andexecutive systems are not independent. Collu-sive arrangements between local power holdersand local economic elites make the spread oflaw uneven at best (Fewsmith 2001). These havecaused many cases of counterfeit products(Guvenli and Sanyal 2003). On the other hand, itis also possible that rural Chinese entrepreneurs,most of whom are former peasants, are not evenaware of intellectual property rights they aresupposed to possess. Reflecting these realities,most rural entrepreneurs in our sample chose toengage in product innovation on their own orwith their close family members only, out of thefear that others may obtain the informationabout their products.

Though it has been widely recognized thatthe presence and availability of external helpcan enhance entrepreneurs’ propensity andability to start a new business (Bruton, Fried,and Marnigart 2005), seeking external helpconcerning new product development efforts isconspicuously absent among the majority ofthe cases examined. Because China has theone-child policy, which leads to decreasingfamily size (Ding and Hesketh 2006), it remainsto be seen whether the pattern observed herewould inhibit innovation in private enterprisesin rural China.

P1: As a result of lack of legal protection andenforcement, rural entrepreneurs in China

tend to engage in product innovation ontheir own or with close family members.

McMillan and Woodruff (2002) suggested thatwhere courts and laws are unreliable for set-tling disputes, firms trust their customers to paytheir bills and their suppliers to deliver quali-fied goods out of the prospect of future busi-ness. Their interviews with Vietnameseentrepreneurs indicated that these entrepre-neurs think quite consciously in terms of build-ing relationships with specific customers orsuppliers. In China, the essence of a mutuallybeneficial relationship is captured by theconcept of guanxi. As indicated earlier, guanxiconsists of connections that are defined by reci-procity and mutual obligation. Ideally, the con-nections are also supported by goodwill andpersonal affection. Chen (2003) refuted the per-ception by many outsiders that guanxi is acorrupt system of paybacks. Instead, it is anhonest system based on mutual trust and obli-gation developed in relationships. Guanxi doesinclude the concept of reciprocity, but not inthe way that the Western culture typically seesit. Chen (2003) also introduced the concept ofrenqing (ren’ching), which is the accumulationof unpaid debts that are a result of guanxirelationships. These debts can be as simple as asmall gift given to a visitor, or as complex as aconcession made at a negotiation. In eithercase, reciprocity is not immediate as in westernstandards, but instead can be distributed overtime. Graham and Lam (2003) professed thatfavors and gifts are seldom forgotten, andalmost always returned. As long as one main-tains a balance in the concept of renqing, it willhelp to cultivate guanxi relationships.

Our case study indicates that buildingguanxi is a significant part of starting a busi-ness. Through solid guanxi between entrepre-neurs and their stakeholders, contracts can beenforced better, risk of payment delinquencycan be decreased, and business disputes occurless often. Therefore, guanxi becomes anessential tool for entrepreneurs to protectthemselves, as in the case of Ms. Zhang.

P2: Rural Chinese entrepreneurs take advan-tage of the institutional opportunities anddeal with the lack of supportive institutionsby building guanxi.

The lack of adequate legal protection andenforcement in China, especially in rural

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regions, has created chances for some toengage in dishonest business activities. Suchdeceptive behaviors can occur to the entrepre-neurial business both internally and externally.Internally, rural entrepreneurs face the situa-tion that the only labor source is local farmers,typically residing in the same village. Thefarmers generally do not have much education,and have never been trained to work in any-thing else besides farming. Being an employeeof a business venture and working toward acommon goal of the firm are not solidly rootedin their psyche. These employees or their fami-lies and an entrepreneur’s family often havelived in the same village for generations, andpeople in the village know one another well.

Externally, as the legal infrastructure isunderdeveloped, some business people inChina tend to take advantage of the situationto pursue self-interests at the expense ofothers. For instance, suppliers might cheat byproviding materials that are not up to stan-dards, or distributors might not devote enoughresources promised to sell certain products.Fifteen stories in our data mentioned thesetypes of problems. Our data show that suc-cessful entrepreneurs typically win out in thelong run by standing up to the cheatingparties and relying on some form of threat, asin the case of Ms. Qiu. Such cases have impor-tant implications on the extent to whichguanxi is used. That is, as powerful as guanxiis (being in the same family usually representsthe strongest guanxi between two people), itcan have negative consequences for the ruralentrepreneur in cases where unethical con-ducts occur. This suggests that, to deal withunethical conducts, the best way is to treatrelationships with other parties strictly onbusiness principles.

This is clearly reflected in how some entre-preneurs financed their business activities. Thebanking system remains institutionally biasedtoward state lending; persistent interest rateceilings in China restrain the ability of commer-cial banks to structure loans in a commerciallyviable manner for private borrowers. As such,entrepreneurs have created a wide array ofnongovernmental financing mechanisms andinstitutions (Tsai 2002). One of the solutions, asin other cultures, is to be funded by family andfriends. Such financial relationships have to bedealt with on business principles if they bringbenefits to both parties, as suggested by thestories in our data.

P3: When dealing with cheating or dishonestbehavior, an effective approach for ruralChinese entrepreneurs is to treat the rela-tionship with cheating parties purely asbusiness relationships, which can meantreating others (e.g., relatives, friends, etc.)based on business principles.

Coping Strategies RegardingNormative Institutions

In a society that is deeply influenced byConfucian values, the family is the center of allrelationships (Wah 2001). It has long been rec-ognized that relationships among familymembers are the dominant relationships for theChinese (Cheng 1944). Thus, such a relationshiptakes precedence over any other types of socialrelationships such as friendship. Of course,friendship is also highly valued by the Chineseand it forms the foundation of most guanxi.Generally, the closeness among individuals in afamily is based on this order: family member,clan member, close relatives, and distant rela-tives (Chen and Chen 2004). Therefore, family isthe center of one’s social network, followed byrelatives, and then by friends outside the family.

As such, based on our data, it seems thatwhen rural entrepreneurs seek help in buildingtheir business, they will first appeal to the mostreliable source—the family. Friends may alsoassist in the business but they will not be asimportant as the family. Only when thesesources are not available do entrepreneurs seekassistance from other sources. Thus, the patternsseem clear. When rural Chinese entrepreneursneed money or time-consuming assistance, theyprimarily seek help from family members first,and then friends, before appealing to othersources. However, family and friends do notnecessarily possess useful information orknowledge about the business. When it comesto getting advices or new ideas, friends becomethe most important source, whereas family andother outside sources do not differ much in thisregard.

P4a: When seeking financial or labor help inbuilding new ventures, rural Chinese entre-preneurs seek help from their familymembers or close relatives first, then friends,and finally outside organizations or govern-ment agencies.

P4b: When seeking advice, information, orexpertise in building new ventures, rural

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Chinese entrepreneurs seek help fromfriends first, and then from other sources.

Coping Strategies RegardingCognitive Institutions

Legitimacy represents a legal and societaljudgment of the norms, appropriateness,image, and legal standing of an organization(Aldrich and Fiol 1994). Past research depictedthe hostile attitude toward entrepreneurs inChina (Peng 2000; Tsang 1996). Such a situa-tion has been forcing Chinese entrepreneurs toseek ways to build legitimacy for themselves.Research on institutional theory has empha-sized the notion of isomorphism, which holdsthat organizations have to conform to the pre-vailing rules and belief systems in order tosurvive (DiMaggio and Powell 1983; Meyer andRowan 1977). When the founders of new ven-tures seek legitimacy for their activities (andthose of their industry), the social context inwhich they operate encourages different strat-egies to establish or build legitimacy in both asociopolitical and cognitive sense (Aldrich andFiol 1994). Thus, an interesting question is thatfrom what sources Chinese rural entrepreneurscan gain legitimacy (D’Aunno, Sutton, andPrice 1991).

Effective approaches to establishing legiti-macy, as concluded by Ahlstrom and Bruton(2001), include conforming to acceptedmodels of practices in the local culture andconstructing linkages with organizations thatare widely perceived to be legitimate. Ourstories about entrepreneurs seeking alliancesor imitating marketing activities of large,established firms, confirm this pattern.However, our data also show that otherapproaches exist for rural Chinese entrepre-neurs, likely due to the distinct characteristicsof the Chinese culture.

The Chinese society has long held highrespects for people with authority due to thefact that this is a culture with high powerdistance, which is defined as the extent towhich less powerful members of a societyaccept and expect that power is distributedunequally (Hofstede 1980). In larger power dis-tance cultures such as China, everyone hashis/her rightful place in a social hierarchy, andas a result acceptance and giving of authoritycome naturally. Authority can derive from one’sposition in the government, industry, or anyother fields. Sociopolitical legitimation refers tothe process by which key stakeholders, the

general public, key opinion leaders, or govern-ment officials accept a venture as appropriateand right, given existing norms and laws(Aldrich and Fiol 1994). Those with expertise intheir fields are often opinion leaders thatpossess such authority because they haveknowledge that is not available to ordinarypeople. Therefore, an approval from these indi-viduals would be an effective tool for ruralChinese entrepreneurs to build legitimacy, asindicated by the stories of Mr. Shen and Ms.Dong.

P5: Rural entrepreneurs in China attempt tobuild legitimacy by imitating establishedlarge firms, building alliances with suchfirms, or seeking approvals from people ororganizations in influential positions.

Conclusions and FutureResearch

This study points to several critical chal-lenges to entrepreneurs in the institutionalenvironment in rural China and the associatedapproaches that successful rural entrepreneurshave adopted to cope with these challenges. Inthe meantime, it also raises issues that need tobe explored in future research. We brieflydiscuss them next.

Paths to Product InnovationIt seems that under the current system, rural

entrepreneurs in China are precautious aboutprotecting their product ideas and innovations.Working on his or her own or with familymembers can prevent others from taking awaythe product idea or innovation, but it is notclear if this also inhibits business growthbecause it is entirely possible that peopleoutside the family can contribute more in thatprocess. Could better product concepts becreated if different ways of dealing with theconstraints of regulative institutions are used? Itseems that, even if the regulative institutionalenvironment evolves, family and friends willalways be an important part of the entrepre-neurial process. In addition, because familysize has become smaller due to the one-childpolicy, will these entrepreneurs continue todevelop innovation ideas within their family, orwill they realize that it is becoming more diffi-cult to do so? These issues have broad eco-nomic implications.

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Long-Term Role of Guanxi inBusiness Relationships

This study found that the majority of newguanxi was built to secure relations with sup-pliers, manufactures, distributors, or custom-ers that would not have been possible withoutthe help of guanxi. Whether these guanxirelationships can be maintained and bringabout long-term benefits to the new venture isnot clear. Is guanxi that was built for thesake of moving one’s business along, sustain-able over time as the business and its ownerevolve? How does the guanxi itself evolve inthe venture-building process? These questionshave implications for the long-term prospectof the new business.

Guanxi with Government AgenciesBuilding guanxi is such an important part of

the venture creation process that we found itplays a role in coping with various types ofinstitutions. An interesting finding is that nomatter what kind of help (e.g., money, labor, orinformation) the entrepreneurs seek, they firstappeal to either family or friends, not govern-ment agencies. Considering the resources andother important roles (e.g., the ability to issuelicenses) of the government, the question arisesas to why rural Chinese entrepreneurs do notactively build guanxi with members of the gov-ernment. Will this change when rural entrepre-neurs seek help in the future as theirbusinesses grow? That is, will venture–government relations become more importantthan family relations or friendship for ruralentrepreneurs when their ventures havealready passed the surviving period andexpand further? Not cultivating guanxi withgovernment officials is inconsistent with theprevailing view that businesses in China haveto rely on personal connections, often throughbribery to government officials, to survive(Tsang 1996). Whether this is due to the spe-cific circumstances of rural entrepreneurs orthe public nature of the data source, this issueshould be examined further in future research.

Negative or Limiting Effects of guanxiAnother important issue in need of further

study is the limitation of guanxi. Guanxi isusually a powerful resource for an entrepre-neur but can be a drawback when the otherparty engages in unethical conducts. In thestories we studied, business owners resorted to

business principles in dealing with such partiesonly after these conducts had occurred. Thisundoubtedly is not the ideal approach as thebusiness owner has to swallow the loss to his/her business first. How to strategically buildone’s guanxi with business partners and otherstakeholders to prevent destructive actions ofunethical parties is, therefore, an importantissue to explore.

Legitimacy BuildingIn the initial stage of business creation by

rural Chinese entrepreneurs, building legiti-macy by imitating or establishing alliances withlarge, well-known businesses, or gettingapproval from persons of authority, is indeedunderstandable. However, as the entrepreneurbuilds and grows his/her new venture, it wouldbe imperative to build its own legitimacy inde-pendently if he/she wants to have a viablebusiness in the long term. How should this beachieved, given the institutional challengesfacing these entrepreneurs, needs to beaddressed in future research.

Other Possible Patterns of Coping withInstitutional Challenges

The institutional environment is a complexone in transitional economies. This study is oneof the first few efforts that rely on actual datafrom entrepreneurs to address the interactionbetween business owners and institutionalenvironment in such economies. Much moreabout how business owners can effectively dealwith the challenges from various institutionalelements needs to be explored. Even in ruralChina, it is entirely possible that many morebehavioral patterns exist beyond what wecould identify in our research here. Futureresearch would help enrich our understandingabout this important area by providing addi-tional knowledge and insights. Future researchshould also improve our understanding byadopting representative samples of the entre-preneur population. Whether the behavioralpatterns uncovered in our study are the optimalones in China’s rural institutional environmentshould also be explored.

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