This paper identifies and quantifies the role played by community networks organized around the birth county in the growth of private enterprise in China. The model that we develop generates predictions for the dynamics of firm entry, sectoral and spatial concentration, and firm size, across birth counties with different levels of social connectedness (measured by population density) when networks are active. We validate each of these predictions over a twenty year period (1990-2009) with unique administrative data that covers the universe of registered firms and provides information on entrepreneurs' birth counties. The rich set of results that we obtain, taken together, allow us to rule out alternative non-network-based explanations. Additional results provide direct support for the network channel, indicating that spillovers occur within the birth county (and, going down even further, within clans within the county). Having validated the model, we estimate its structural parameters and conduct counter-factual simulations, which indicate that entry over the 1995-2004 period would have been 64% lower in the absence of community networks. Additional counter-factual simulations shed light on the design of optimal industrial policy in economies where networks are active or have the potential to be activated.
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