Does dialect diversity affect entrepreneurial activities? Evidence from China

Entrepreneurial activities are considered as the crucial driver of economic growth. While extant literature has documented the relationship between formal institutions and entrepreneurship, the role of informal institutions, such as languages, has largely been unexplored. We examine the impact of dialect diversity on entrepreneurship using a sample of new entry firms in 255 prefecture-level cities in China from 2007 to 2018. Our findings suggest that dialect diversity negatively affects entrepreneurial activities. Moreover, we find that this effect is more salient in regions belonging to non-Mandarin supergroups, regions with lower inclusiveness and lower social trust, and cities with more industries that require interpersonal communications. Additional analyses suggest that FDI, innovation input, labor attractiveness, and industrial agglomeration are the channels through which dialect diversity affects entrepreneurship. Overall, this paper enriches the literature on the importance of informal institutions in real economy and sheds light on how to enhance entrepreneurship.