In the U.S., regulation can protect incumbents while discouraging entrepreneurs. China gives startups room to grow before cracking down on founders.
IN CHINA, property rights are conditional, contracts can be torn up by the Communist Party, founders can suddenly disappear from public life or be ousted from their own firms and there is no meaningful recourse against the state.
By every textbook of institutional economics, this should make China a graveyard for enterprise. Instead, the country has produced ByteDance, Shein, BYD and, last year, DeepSeek, a Hangzhou startup whose AI model helped trigger a record $593 billion one-day loss in Nvidia’s market value. In July, Beijing-based startup Moonshot AI announced the release of a fully open-source AI, startling Silicon Valley with its ability to rival U.S. models.
How does a country with such casual regard for the rule of law produce so much dynamism?
The answer is that the rule of law, in China and elsewhere, is not one thing. It has a liberal side—secure property rights, courts that constrain the state—that shields entrepreneurs from arbitrary state power, ranging from selective prosecution to outright expropriation. It also has a regulatory side that can wall off competition, brick by brick, protecting incumbents from challengers who lack a compliance department. America used to be alive to this distinction. It is no longer.
…Many similar regulations were a response to real harms. But the cumulative effect created a wall. By RegData’s count, restrictive terms in the Code of Federal Regulations rose from around 400,000 in 1970 to more than one million by 2020. Each layer thickened the regulatory side of the law, but without strengthening the liberal one.
The result has been a shield for incumbents. Bringing a new drug to market in the U.S. (not to mention Europe) takes roughly a decade and can cost north of a billion dollars.
For Pfizer, that entry fee has already been funded. For two founders with a prototype, it is almost disqualifying. Legal infrastructure is a fixed cost, and fixed costs favour scale. No start-up can afford to build the compliance department that protects Pfizer. The threat to enterprise in a mature democracy is no longer the whim of governments; it is the weight of procedure.
…CHINA’S DYNAMISM does not come from the absence of law. It comes from the sequence in which laws are enacted. The Communist Party allows firms to scale in regulatory gray zones, when a sector serves growth, employment or strategic competition. Safety is an afterthought; the rules arrive later, sometimes all at once.
…The pattern recurs: firms scale first; law and politics arrive later, often together.
Dynamism occurs when newcomers can innovate before lawyers—or regulators—arrive. But in China the bill arrives in a different form. In place of compliance departments, Chinese firms invest in political insurance: …The investment is not optional; it’s the price of doing business without legal recourse.
…But every rule proposed today should be tested against a simple counterfactual: had it been on the books a decade ago, would the firm we are now regulating have ever been built?