This paper explores the processes and mechanisms of business failure in emerging economies. Drawing from the experiences of 50 failed entrepreneurs in China, we developed the concept of dynamic capabilities malfunction (DCM) to explain how business failure can stem from maladaptive, misallocation of attention and internal deficiencies. Our phase model explicates how exogenous and endogenous factors can interplay to contribute to DCM that ultimately led to the business closures. Another unexpected finding was that the failure occurred during the process of business transition. The implications for business failure research in emerging markets are discussed.

Introduction

Over the past few years, a bourgeoning stream of research has demonstrated that learning from business failure can have positive effects on business performance and survival (Madsen & Desai, 2010; Shepherd & Haynie, 2011). Following Whetten (1980) that an examination of the determinants and effects of business failure is an imperative in seeking to reduce risk of business operation, business failure has become an area of growing interests to scholars in mainstream management (e.g. Madsen & Desai, 2010; Shepherd & Haynie, 2011; Singh, Corner, & Pavlovich, 2015). To date, some efforts have been made in examining the determinants of business failure (e.g. Carter & Van Auken, 2006), but these are somewhat too general. Recent empirical and theoretical works in the areas of strategic management, international business and organisational ecology have demonstrated a lack of clear consensus about the causes of business failure, polarising along the exogenous and endogenous views. The exogenous view suggests the causes of business failure should be attributed to exogenous factors such as market competition and recession (Henderson, 1999).