Social Network, Household Entrepreneurship And Financial Decisions

Since the reform and opening policies, the private sector, which acts as one of the main economic entities, provides most of China's miraculous economic growth. In recent years, the Chinese economy gradually steps into the "new normal" and it has embarked on a new track featuring a shift from factor-driven and investment-driven growth to innovation-driven growth model. Entrepreneurs should become the leader and dominant force of China's future economic development. As an important aspect of entrepreneurship, entrepreneurial activities are of great significance for implementing innovation-driven development strategy, promoting economic restructuring, solving employment problem and shaping culture norms. Simultaneously, with the rapid growth of China's national economy and the development of financial markets, high savings rate and low risky financial assets holding appear as two features of households' financial assets allocation in China. That is the propotion of risk-free assets (e.g. saving deposits, etc) in total financial assets is declining gradually but still accounts for dominant position, meanwhile the fraction of risky assets (e.g. stocks, funds, bonds, etc) in total financial assets is-increasing, but remains at a low level and a few types overall. Moreover with the explosive development of widespread informal financial activities, the coexistence of formal finance and informal finance, which refers to dual financial system, is the remarkable feature of China. The informal financial market is becoming one of the important ways to allocate financial assets for households in China.From the perspective of entrepreneurship and financial development practice in economic trasition China, our business environment and financial development exhibit distinctive characteristics compared with the developed countries. Also China is a typical relationship-based society and the traditional culture, which is based on Confucianism and clan institution, stresses the importance of personalized networks of influence (guanxi) and moral obligation to maintain a connection (renqing). As a central content of social capital, social network has an unnegligible impact on households' economic and financial behaviors. More importantly, the urban-rual dual economic and financial structure as well as the associated cultural and institutional differences may make the social network composition of urban and rural households and also its potential impacts as well as the mechanism on economic behavior, such as entrepreneurship and financial assets allocation, to be different. Therefore under the background of urban and rural economic dual structure in transition China and based on the 2011 China Household Finance Survey (CHFS) data, this paper explores the effects of widespread social network on household entrepreneurship, financial market participation and asset allocations and the exact mechanism as well as its urban-rural differences.Our analysis indicates that social network has a significant positive effect on both entrepreneurial choice and entrepreneurial income of urban and rural households. With regard to entrepreneurial choice, social network plays a more important role in rural areas where financial constraints are more severe. The main reason is that resource constraints, which are caused by the underdeveloped economy and financial markets, are one of the main obstacles to hinder households' entrepreneurship in rural areas. And the social network of rural households that emphasizes the concept of blood lineage, clans and local customs mainly consists of relatives and ethnic groups who are based on kinship and geographic connections. The strong ties, which can mitigate information asymmetry problems in the informal financial market and also serve as implicit collateral, are beneficial to obtain informal financing for rural households. This will alleviate the resource constraints effectively and provide financial support for entrepreneurial activities, which exerts a positive effect on households'entrepreneurship. However, the negative effects of financial constraints on urban households'entrepreneurship are relatively smaller than that on rural households because of the higher level of economic and financial development. Thus the mechanism of social network influences household entrepreneurship through informal financing may not be hold in urban areas.In terms of households' entrepreneurial income, the positive effects of social network are greater for urban households who have more extensive social interactions and diversified social contacts. Because the social network of urban households is primarily composed of non-kinship connections such as friends and colleagues. The basic function of this kind of weak ties with a high degree of heterogeneity is broadening the channels of accessing to information sources and facilitating information exchange and sharing. Consequently this will help urban households obtain more important information and understand the market dynamics accurately, which in turn increasing their entrepreneurial income. This shows that there are significant urban-rural differences between the effects of social network on entrepreneurial choice and its operating performance. The fundamental reason of existence of the differences lies in the different composition of households' social network in urban and rural areas, which is caused by urban-rural economic dual structure and the corresponding cultural differences, as well as its particular influence mechanism on entrepreneurial activities.Additionally social network plays a vital role in the process of household financial market participation and asset allocation decisions. Social network can significantly increase the possibility of both formal and informal financial market participation and the fraction of risky asset holding. But the positive effects are greater in rural areas where information is relatively insufficient and the social security system is imperfect. Specifically, the positive impacts for informal financial market are mainly attributed to raising the possibility of making interest-free or no-interest informal lending, but there is no significant influence on household participation in high interest informal lending market. The positive effect of social network on household financial asset allocation occurs through two possible channels. The first channel is that social network directly helps households to obtain relevant information through communication and discussion as well as information exchange, which can reduce the cost of participating financial markets. Simultaneously social network that functions as a risk-sharing and informal security institution indirectly alleviates the negative impacts of risk aversion on household financial decisions, while the possible financing mechanism of social network plays a very limited role.This paper not only reveals the internal mechanisms of how social network influence household entrepreneurship and financial asset allocation and the main reasons that lead to urban-rural differences formation, as well as provides a fresh perspective of informal institutions, e.g. social network, to understand macro-economic growth and limited financial market participation, but also further enriches the relevant study of entrepreneurship and household finance. Simultaneously it also has policy implications for entrepreneurial practice and financial market reform in economic transition China.