Social Media, Entrepreneurship and Institutional Environment

Xiaoning (Gavin) Wang, PhD Candidate, The Wharton School

Abstract: Institutional environments play an important role in entrepreneurial activities. In this study we examine whether startups’ social media activities could improve the institutional environments that they face. Using comprehensive firm information and social media data from WeChat for about 2,000 Chinese startups from 2011 to 2020, we find that social media activities can help companies with few political connections to obtain institutional resources. They are more likely to receive administrative approvals from the government to conduct their primary businesses activities. They are also more likely to receive positive media coverages. We find that social media can help these companies broadcast quality signals and direct public opinions in their favor, all of which are essential to establish legitimacy in the public. These effects are especially strong for firms that face greater institutional barriers and have scarce resources. Social media content also plays a critical role. We find that posts relating to corporate social responsibility (CSR) play a bigger role than other topics in helping firms receive favorable treatment and establish public legitimacy. Consistent with our proposed mechanism, we find social media’s effect is significantly reduced when institutional barriers to entrepreneurship are reduced such as after the Mass Entrepreneurship and Innovation Policy was implemented in 2014.