Written by Xin Mu

Posted on March 25

Much economic research suggests that the talent of entrepreneurs has consequences both for the productivity of individual firms at the micro-level and for macro-economic growth. However, according to Prof. Ruixue Jia, School of Policy and Strategy, University of California, San Diego, academic talents are less likely to create firms in China.

Jia, who conducts research on political and developmental economics in China, presented her studies on the link between China’s national college entrance exam scores and firm creation at the Center for Asian Legal Studies on Friday, Mar 6, 2020.

Talent can be measured in different ways, including education, confidence, personality etc. Jia’s study focuses on the Chinese College Entrance Exam (“CCEE”) score as a measurement of academic talent. CCEE is a national standardized test that determines the tier and specific university a student is eligible for. According to Jia, the scores capture both the ability of a student and the investment of his or her family.

Jia’s study is based on college admission records in 1993-2003, as well as the data for the universe of Chinese firms and their owners by 2015. From the college admission records, Jian ad her co-authors identified a group of individuals in their 30s in 2015. The study compares students born in the same year in the same province that are later enrolled in the same college. Controlling for these variables, the comparison shows that within colleges, individuals with higher college entrance exam scores are less likely to create firms. Also, women, individuals from rural areas and those from lower-quality high schools are less likely to create firms.

There can be several interpretations for this strong negative score-firm creation link:

• Students with higher scores generally have the lower entrepreneurial ability;
• High-score students also have higher wage ability, and the relative return from entrepreneurship is lower than the labour market;
• Personal traits affect occupational choices.

The first interpretation is not consistent with the data which shows that larger firms (with higher registered capital) are mostly owned by people who have higher CCEE Scores.

The data presents a negative correlation between the CCEE scores and firm creation in firms of all sizes. The negative score-firm creation link is stronger when one’s home province experienced better growth in his or her graduation year, and for male, urban students and those from better high schools. These latter variables are strong predictors of higher first job wages of the students. These findings suggest that high-score students are attracted away by non-entrepreneur sectors.

The above findings are robust when taking into account missing ID numbers in the data, different college tiers, students’ majors and repeated exam takers.

The correlation between CCEE score and firm creation becomes positive when comparisons are made across colleges. This could reflect many other factors, including network within provinces and access to finance. However, because the base-line comparison is made within colleges, these factors should not play a significant role in the analysis.

Finally, it is intuitive that personal traits matter and may explain the differences in the probability of firm creation across genders and hukou status. For example, women have both lower wages and lower chances of creating a firm. There must be something else that affects their decision to create a firm. However, a survey conducted in 2011 demonstrates that there is no clear pattern between scores and risk attitudes, although females are more risk-averse.

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