In most developed economies, small businesses play an essential role in overall economic growth. In the United States, for example, small business contributes about 50 percent of the private, nonfarm gross domestic product (GDP), according to research conducted by the US Small Business Administration (SBA).

Small businesses make a huge contribution to the Chinese economy as well. My research on Small and Medium Enterprises (SME) in Shandong Province during 2001-2006, showed that SMEs play a major role in the growth of GDP, fiscal revenue, job creation and exports. But the study also shows that SMEs make only limited contributions to technical innovation, signaling what is an important gap in SME performance in developing, as compared to developed nations.

If China is to maintain its leading role as a world economic power, the government must promote vigorous entrepreneurship by making it easy for people to start businesses with maximum administrative simplicity and minimum administrative cost. Employment has become a particularly critical issue in China since the outbreak of the world recession. There has been a huge increase in the number of unemployed college graduates, as well as other workers. Small businesses can help new graduates, laid-off workers, retired employees and others start new careers. The government should design policies to help small businesses and provide timely financial and technical assistance.

For entrepreneurship to flourish, government must provide efficient public services so as to build individual confidence and boost start-ups. China has amended its company law, reducing the minimum capital requirement by 70 percent and eliminating many of the reviews and checks previously required to register a company. But it still takes 35 days to start up a business in China compared to less than 10 days in many developed countries.

Some provinces in China have abolished the registered capital requirement or cut it to RMB￥1, but this has not boosted business start-ups as much as hoped. The major bottleneck is not registration, but unpredictable operating expenses, which are the biggest concern of most small business owners. Local governments need to take into account financial and other factors to effectively assist small businesses through all stages of development rather than just cutting registration costs.

Small business is increasingly going to drive the Chinese economy. China has a huge potential market, and its highly diversified rural market, in particular, has a critical role to play in the economy. Faced with the world financial crisis, domestic demand will inevitably become the key to economic growth. But this will require a capable small business sector able to meet the demand. The lack of a supportive policy regime could stifle business incentives and hamper economic stimulus plans.