Cognitive legitimacy and ownership heterogeneity: impact of local incumbent firms on new private firm formation in China’s manufacturing sector

This study investigates the impact of local incumbent firms on new private firm formation in China by focusing on the cognitive legitimacy lent by different ownership types. We argue that new firm formation requires legitimacy spillover from local society. Based on the panel data of China’s manufacturing enterprises, we find that local ownership structure plays a vital role in new private firm formation. Incumbent privately owned enterprises enhance the legitimacy of private ownership naturally, and the effect from foreign-owned enterprises to new private firms is positive but weaker than that of privately owned enterprises, whereas state-owned enterprises discourage entrepreneurship due to their entirely different identities.