Political uncertainty and firm entry: Evidence from Chinese manufacturing industries

Firm entry promotes the overall vitality and potential of an economy. We examine how political uncertainty, proxied by local government official turnover, affects firm entry in China. We find that political turnover significantly reduces firm entry, particularly when the newly appointed leader is from a different city and when the turnover is not around the National Party Congress. Moreover, our evidence suggests that the effect of political turnover on firm entry is stronger for non-state-owned entrepreneurs and high-technology industries. Our results are robust to assessing selection on unobservable, instrumental variable estimation, HLM analysis, sub-sample without firms in 15 vice-province–level cities and sub-sample without predictable turnovers. Our findings provide solid evidence that political turnover influences firm entry, and shed light upon how the government official exchange system and tenure system in China could be improved to achieve stable economic growth.