Urban Employment in Small Businesses and the Level of Economic Development: Evidence from Chinese Cities

Based on a panel of Chinese cities over the period 2004–2009, we analyze the relationship between the level of economic development and the share of urban employment in small businesses. We find that this relationship can be described by an inverted U‐shape. In cities with lower levels of economic development, the restructure of the state sector along with a booming service industry is associated with a higher share of employment in small businesses. On the other hand, in cities with higher levels of economic development, a more vibrant manufacturing sector is related to a lower share of employment in small businesses.