IDEAS home Printed from https://ideas.repec.org/a/bla/econom/v85y2018i337p41-74.html
   My bibliography  Save this article

Friends with Benefits: How Political Connections Help to Sustain Private Enterprise Growth in China

Author

Listed:
  • James Kai‐sing Kung
  • Chicheng Ma

Abstract

By analysing data from a survey of 511 Chinese private enterprises, we find that their owners respond to government discrimination by developing political connections with government officials. A one‐standard‐deviation increase in the insecurity of property rights has the effect of increasing the number of ‘friends’ in the government by a substantial 22%. These ‘friends’ significantly help to mitigate by half the negative effect arising from the difficulties of obtaining land and excessive regulations on enterprise growth. This explains why an institutional environment of weak property rights has not stopped private enterprises in China from developing rapidly.

Suggested Citation

  • James Kai‐sing Kung & Chicheng Ma, 2018. "Friends with Benefits: How Political Connections Help to Sustain Private Enterprise Growth in China," Economica, London School of Economics and Political Science, vol. 85(337), pages 41-74, January.
    • Handle: RePEc:bla:econom:v:85:y:2018:i:337:p:41-74
    DOI: 10.1111/ecca.12212
    as

    Download full text from publisher

    File URL: https://doi.org/10.1111/ecca.12212
    Download Restriction: no
    File URL: https://libkey.io/10.1111/ecca.12212?utm_source=ideas
    LibKey link: if access is restricted and if your library uses this service, LibKey will redirect you to where you can use your library subscription to access this item
    ---><---

    References listed on IDEAS

    as
    1. Thomas Ferguson & Hans-Joachim Voth, 2008. "Betting on Hitler—The Value of Political Connections in Nazi Germany," The Quarterly Journal of Economics, President and Fellows of Harvard College, vol. 123(1), pages 101-137.
    2. Simeon Djankov & Rafael La Porta & Florencio Lopez-de-Silanes & Andrei Shleifer, 2002. "The Regulation of Entry," The Quarterly Journal of Economics, Oxford University Press, vol. 117(1), pages 1-37.
    3. Lixin Colin Xu, 2011. "The Effects of Business Environments on Development: Surveying New Firm-level Evidence," The World Bank Research Observer, World Bank, vol. 26(2), pages 310-340, August.
    4. Simon Johnson & John McMillan & Christopher Woodruff, 2002. "Property Rights and Finance," American Economic Review, American Economic Association, vol. 92(5), pages 1335-1356, December.
    5. Agrawal, Anup & Knoeber, Charles R, 2001. "Do Some Outside Directors Play a Political Role?," Journal of Law and Economics, University of Chicago Press, vol. 44(1), pages 179-198, April.
    6. Cull, Robert & Xu, Lixin Colin, 2005. "Institutions, ownership, and finance: the determinants of profit reinvestment among Chinese firms," Journal of Financial Economics, Elsevier, vol. 77(1), pages 117-146, July.
    7. Allen, Franklin & Qian, Jun & Qian, Meijun, 2005. "Law, finance, and economic growth in China," Journal of Financial Economics, Elsevier, vol. 77(1), pages 57-116, July.
    8. Luc Laeven & Christopher Woodruff, 2007. "The Quality of the Legal System, Firm Ownership, and Firm Size," The Review of Economics and Statistics, MIT Press, vol. 89(4), pages 601-614, November.
    9. Stephen Knack & Philip Keefer, 1995. "Institutions And Economic Performance: Cross‐Country Tests Using Alternative Institutional Measures," Economics and Politics, Wiley Blackwell, vol. 7(3), pages 207-227, November.
    10. Cull, Robert & Li, Wei & Sun, Bo & Xu, Lixin Colin, 2015. "Government connections and financial constraints: Evidence from a large representative sample of Chinese firms," Journal of Corporate Finance, Elsevier, vol. 32(C), pages 271-294.
    11. Chenggang Xu, 2011. "The Fundamental Institutions of China's Reforms and Development," Journal of Economic Literature, American Economic Association, vol. 49(4), pages 1076-1151, December.
    12. Eric Maskin & Yingyi Qian & Chenggang Xu, 2000. "Incentives, Information, and Organizational Form," The Review of Economic Studies, Review of Economic Studies Ltd, vol. 67(2), pages 359-378.
    13. Michael J. Cooper & Huseyin Gulen & Alexei V. Ovtchinnikov, 2010. "Corporate Political Contributions and Stock Returns," Journal of Finance, American Finance Association, vol. 65(2), pages 687-724, April.
    14. Jun Du & Sourafel Girma, 2010. "Red Capitalists: Political Connections and Firm Performance in China," Kyklos, Wiley Blackwell, vol. 63(4), pages 530-545, November.
    15. Shleifer, Andrei, 1997. "Government in transition," European Economic Review, Elsevier, vol. 41(3-5), pages 385-410, April.
    16. Brandt, Loren & Li, Hongbin, 2003. "Bank discrimination in transition economies: ideology, information, or incentives?," Journal of Comparative Economics, Elsevier, vol. 31(3), pages 387-413, September.
    17. Hongbin Cai & Hanming Fang & Lixin Colin Xu, 2011. "Eat, Drink, Firms, Government: An Investigation of Corruption from the Entertainment and Travel Costs of Chinese Firms," Journal of Law and Economics, University of Chicago Press, vol. 54(1), pages 55-78.
    18. Knack, Stephen & Keefer, Philip, 1995. "Institutions and Economic Performance: Cross-Country Tests Using Alternative Institutional Indicators," MPRA Paper 23118, University Library of Munich, Germany.
    19. Che, Jiahua, 2002. "Rent Seeking and Government Ownership of Firms: An Application to China's Township-Village Enterprises," Journal of Comparative Economics, Elsevier, vol. 30(4), pages 787-811, December.
    20. Hongbin Li & Lingsheng Meng & Junsen Zhang, 2006. "Why Do Entrepreneurs Enter Politics? Evidence from China," Economic Inquiry, Western Economic Association International, vol. 44(3), pages 559-578, July.
    21. Li, Hongbin & Zhou, Li-An, 2005. "Political turnover and economic performance: the incentive role of personnel control in China," Journal of Public Economics, Elsevier, vol. 89(9-10), pages 1743-1762, September.
    22. Daron Acemoglu & Simon Johnson, 2005. "Unbundling Institutions," Journal of Political Economy, University of Chicago Press, vol. 113(5), pages 949-995, October.
    23. Li, Hongbin & Meng, Lingsheng & Wang, Qian & Zhou, Li-An, 2008. "Political connections, financing and firm performance: Evidence from Chinese private firms," Journal of Development Economics, Elsevier, vol. 87(2), pages 283-299, October.
    24. Hellman, Joel S. & Jones, Geraint & Kaufmann, Daniel, 2003. "Seize the state, seize the day: state capture and influence in transition economies," Journal of Comparative Economics, Elsevier, vol. 31(4), pages 751-773, December.
    25. Mara Faccio, 2006. "Politically Connected Firms," American Economic Review, American Economic Association, vol. 96(1), pages 369-386, March.
    26. Guo, Di & Jiang, Kun & Kim, Byung-Yeon & Xu, Chenggang, 2014. "Political economy of private firms in China," Journal of Comparative Economics, Elsevier, vol. 42(2), pages 286-303.
    27. Bulte, Erwin H. & Damania, Richard & Deacon, Robert T., 2005. "Resource intensity, institutions, and development," World Development, Elsevier, vol. 33(7), pages 1029-1044, July.
    28. John McMillan & Christopher Woodruff, 2002. "The Central Role of Entrepreneurs in Transition Economies," Journal of Economic Perspectives, American Economic Association, vol. 16(3), pages 153-170, Summer.
    29. Jiahua Che & Yingyi Qian, 1998. "Insecure Property Rights and Government Ownership of Firms," The Quarterly Journal of Economics, President and Fellows of Harvard College, vol. 113(2), pages 467-496.
    30. Asim Ijaz Khwaja & Atif Mian, 2005. "Do Lenders Favor Politically Connected Firms? Rent Provision in an Emerging Financial Market," The Quarterly Journal of Economics, President and Fellows of Harvard College, vol. 120(4), pages 1371-1411.
    31. Raymond Fisman, 2001. "Estimating the Value of Political Connections," American Economic Review, American Economic Association, vol. 91(4), pages 1095-1102, September.
    32. Sachs, Jeffrey D. & Warner, Andrew M., 2001. "The curse of natural resources," European Economic Review, Elsevier, vol. 45(4-6), pages 827-838, May.
    Full references (including those not matched with items on IDEAS)

    Citations

    Citations are extracted by the CitEc Project, subscribe to its RSS feed for this item.
    as


    Cited by:

    1. Fu, Tong & He, Feng & Lucey, Brian, 2023. "Justice as efficiency: Courts and the allocation of electricity in China," Journal of International Financial Markets, Institutions and Money, Elsevier, vol. 84(C).
    2. Zhou, Hui & Nagayasu, Jun, 2023. "Is corporate environmental responsibility more valuable in the transitory period? The moderating effect of ownership type," Finance Research Letters, Elsevier, vol. 53(C).
    3. Shuangyan Li & Anum Shahzadi & Mingbo Zheng & Chun-Ping Chang, 2022. "The impacts of executives’ political connections on interactions between firm’s mergers, acquisitions, and performance," Economic Change and Restructuring, Springer, vol. 55(2), pages 653-679, May.
    4. Barraza, Santiago & Rossi, Martín A & Ruzzier, Christian A, 2022. "Sleeping with the enemy: The perils of having the government on(the)board," Journal of Comparative Economics, Elsevier, vol. 50(3), pages 641-651.
    5. Ling Huang & Haiyue Liu & Jack Hou & Fulong Xiao, 2022. "Long‐term financing effects of Chinese non‐SOEs Belt and Road OFDI," Accounting and Finance, Accounting and Finance Association of Australia and New Zealand, vol. 62(S1), pages 1819-1850, April.
    6. Chengrui Xiao, 2020. "Intergovernmental revenue relations, tax enforcement and tax shifting: evidence from China," International Tax and Public Finance, Springer;International Institute of Public Finance, vol. 27(1), pages 128-152, February.
    7. Danting Cao & Yike Yu, 2023. "Top management team stability and enterprise innovation: A chairman's implicit human capital perspective," Managerial and Decision Economics, John Wiley & Sons, Ltd., vol. 44(4), pages 2346-2365, June.
    8. Will Bartlett, 2023. "The performance of politically connected firms in South East Europe: state capture or business capture?," Post-Communist Economies, Taylor & Francis Journals, vol. 35(4), pages 351-367, May.
    9. Zhang, Yi & Liu, Chun, 2021. "Religion and unproductive entrepreneurship: The role of risk aversion," European Journal of Political Economy, Elsevier, vol. 70(C).
    10. Yang, Chih-Hai, 2023. "Competition in the Chinese market: Foreign firms and markups," Journal of the Japanese and International Economies, Elsevier, vol. 67(C).
    11. Chen, Shuai & Ge, Erqi, 2022. "The Anti-Corruption Campaign and the Inter-Generational Transmission of Working in Bureaucracy: Evidence from China," GLO Discussion Paper Series 1159, Global Labor Organization (GLO).
    12. Wang, Zongrun & Fu, Haiqin & Ren, Xiaohang, 2023. "Political connections and corporate carbon emission: New evidence from Chinese industrial firms," Technological Forecasting and Social Change, Elsevier, vol. 188(C).
    13. Li Yang & Filip Novokmet & Branko Milanovic, 2019. "From workers to capitalists in less than two generations: A study of Chinese urban elite transformation between 1988 and 2013," Working Papers hal-02876990, HAL.
    14. Cai, Guowei & Zhang, Xuejiao & Yang, Hao, 2023. "Capacity utilization shifting or resource-seeking? Benefits for Chinese enterprises participating in the belt and road initiative," Emerging Markets Review, Elsevier, vol. 54(C).
    15. Liu, Yajie & Cui, Lijuan & Xiong, Yanyan & Yao, Xianguo, 2023. "Does the development of the Internet improve the allocative efficiency of production factors? Evidence from surveys of Chinese manufacturing firms," Structural Change and Economic Dynamics, Elsevier, vol. 66(C), pages 161-174.
    16. Dong, Zhiqiang & Wang, Xiaobing & Zhang, Tianhua & Zhong, Yuejun, 2022. "The effects of local government leadership turnover on entrepreneurial behavior," China Economic Review, Elsevier, vol. 71(C).
    17. Zhang, Yi & Liu, Chun & Wang, Ting, 2020. "Direct or indirect? The impact of political connections on export mode of Chinese private enterprises," China Economic Review, Elsevier, vol. 61(C).
    18. Lan, Xiaohuan & Li, Wei, 2018. "Swiss watch cycles: Evidence of corruption during leadership transition in China," Journal of Comparative Economics, Elsevier, vol. 46(4), pages 1234-1252.
    19. Balakumar, Suganya & Maitra, Debasish, 2023. "Do political connections or elite capture matter in access to financial services? Evidence from Indian households," Journal of Behavioral and Experimental Finance, Elsevier, vol. 39(C).
    20. Zhao Wang & Xiaobing Liu & Qinhua Liu, 2019. "Study of the Relationship between Political Connections and Corporate Re-Entrepreneurial Performance," Sustainability, MDPI, vol. 11(15), pages 1-28, July.
    21. Chen, Shuai & Ge, Erqi, 2022. "The Anti-Corruption Campaign and the Inter-Generational Transmission of Working in Bureaucracy: Evidence from China," IZA Discussion Papers 15569, Institute of Labor Economics (IZA).
    22. Peng Xu & Guiyu Bai, 2019. "Board Governance, Sustainable Innovation Capability and Corporate Expansion: Empirical Data from Private Listed Companies in China," Sustainability, MDPI, vol. 11(13), pages 1-17, June.

    Most related items

    These are the items that most often cite the same works as this one and are cited by the same works as this one.
    1. Long,Cheryl Xiaoning & Xu,L. Colin & Yang,Jin, 2020. "Business Environment and Dual-Track Private Sector Development : China's Experience in Two Crucial Decades," Policy Research Working Paper Series 9161, The World Bank.
    2. Cull, Robert & Xu, Lixin Colin & Yang, Xi & Zhou, Li-An & Zhu, Tian, 2017. "Market facilitation by local government and firm efficiency: Evidence from China," Journal of Corporate Finance, Elsevier, vol. 42(C), pages 460-480.
    3. Cull, Robert & Li, Wei & Sun, Bo & Xu, Lixin Colin, 2015. "Government connections and financial constraints: Evidence from a large representative sample of Chinese firms," Journal of Corporate Finance, Elsevier, vol. 32(C), pages 271-294.
    4. Li, Hongbin & Meng, Lingsheng & Wang, Qian & Zhou, Li-An, 2008. "Political connections, financing and firm performance: Evidence from Chinese private firms," Journal of Development Economics, Elsevier, vol. 87(2), pages 283-299, October.
    5. Zhong-qin Su & Hung-Gay Fung, 2013. "Political Connections and Firm Performance in Chinese Companies," Pacific Economic Review, Wiley Blackwell, vol. 18(3), pages 283-317, August.
    6. Lin, Chen & Lin, Ping & Song, Frank, 2010. "Property rights protection and corporate R&D: Evidence from China," Journal of Development Economics, Elsevier, vol. 93(1), pages 49-62, September.
    7. Rodolphe Durand & Robert M. Grant & Tammy L. Madsen & Sinziana Dorobantu & Aseem Kaul & Bennet Zelner, 2017. "Nonmarket strategy research through the lens of new institutional economics: An integrative review and future directions," Strategic Management Journal, Wiley Blackwell, vol. 38(1), pages 114-140, January.
    8. Lin, Karen Jingrong & Tan, Jinsong & Zhao, Liming & Karim, Khondkar, 2015. "In the name of charity: Political connections and strategic corporate social responsibility in a transition economy," Journal of Corporate Finance, Elsevier, vol. 32(C), pages 327-346.
    9. Hongbin Li & Lingsheng Meng & Junsen Zhang, 2005. "Why Do Entrepreneurs Enter Politics?," Discussion Papers 00009, Chinese University of Hong Kong, Department of Economics.
    10. Bodnaruk, Andriy & Massa, Massimo & Yadav, Vijay, 2017. "Family ownership, country governance, and foreign portfolio investment," Journal of Empirical Finance, Elsevier, vol. 41(C), pages 96-115.
    11. Firth, Michael & Gong, Stephen X. & Shan, Liwei, 2013. "Cost of government and firm value," Journal of Corporate Finance, Elsevier, vol. 21(C), pages 136-152.
    12. Jia, Ning & Mao, Xinshu & Yuan, Rongli, 2019. "Political connections and directors' and officers' liability insurance – Evidence from China," Journal of Corporate Finance, Elsevier, vol. 58(C), pages 353-372.
    13. Lu, Yi & Png, Ivan P.L. & Tao, Zhigang, 2013. "Do institutions not matter in China? Evidence from manufacturing enterprises," Journal of Comparative Economics, Elsevier, vol. 41(1), pages 74-90.
    14. Zhou, Wubiao, 2013. "Political connections and entrepreneurial investment: Evidence from China's transition economy," Journal of Business Venturing, Elsevier, vol. 28(2), pages 299-315.
    15. Yang, Jin & Huang, Jian & Deng, Yanhua & Bordignon, Massimo, 2020. "The rise of red private entrepreneurs in China: Policy shift, institutional settings and political connection," China Economic Review, Elsevier, vol. 61(C).
    16. Wu, Huiying & Li, Sihai & Ying, Sammy Xiaoyan & Chen, Xuan, 2018. "Politically connected CEOs, firm performance, and CEO pay," Journal of Business Research, Elsevier, vol. 91(C), pages 169-180.
    17. Chen, Zhiyuan & Li, Yong & Zhang, Jie, 2016. "The bank–firm relationship: Helping or grabbing?," International Review of Economics & Finance, Elsevier, vol. 42(C), pages 385-403.
    18. Su, Zhong-qin & Xiao, Zuoping & Yu, Lin, 2019. "Do political connections enhance or impede corporate innovation?," International Review of Economics & Finance, Elsevier, vol. 63(C), pages 94-110.
    19. Zengji Song & Abraham Nahm & Zongyi Zhang, 2015. "The value of partial state ownership in publicly listed private sector enterprises: evidence from China," Post-Communist Economies, Taylor & Francis Journals, vol. 27(3), pages 336-353, September.
    20. Chen, Tao, 2015. "Institutions, board structure, and corporate performance: Evidence from Chinese firms," Journal of Corporate Finance, Elsevier, vol. 32(C), pages 217-237.

    More about this item

    Statistics

    Access and download statistics

    Corrections

    All material on this site has been provided by the respective publishers and authors. You can help correct errors and omissions. When requesting a correction, please mention this item's handle: RePEc:bla:econom:v:85:y:2018:i:337:p:41-74. See general information about how to correct material in RePEc.

    If you have authored this item and are not yet registered with RePEc, we encourage you to do it here. This allows to link your profile to this item. It also allows you to accept potential citations to this item that we are uncertain about.

    If CitEc recognized a bibliographic reference but did not link an item in RePEc to it, you can help with this form .

    If you know of missing items citing this one, you can help us creating those links by adding the relevant references in the same way as above, for each refering item. If you are a registered author of this item, you may also want to check the "citations" tab in your RePEc Author Service profile, as there may be some citations waiting for confirmation.

    For technical questions regarding this item, or to correct its authors, title, abstract, bibliographic or download information, contact: Wiley Content Delivery (email available below). General contact details of provider: https://edirc.repec.org/data/lsepsuk.html .

    Please note that corrections may take a couple of weeks to filter through the various RePEc services.

    IDEAS is a RePEc service. RePEc uses bibliographic data supplied by the respective publishers.