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Red Capitalists: Political Connections and Firm Performance in China

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  • Jun Du
  • Sourafel Girma

Abstract

Using a unique firm level data, this paper analyses the role of political connections in the post-entry performance of private start-up companies in China. It documents robust evidence that political affiliation enhances firms' survival and growth prospects. But interestingly politically neutral start-ups enjoy faster productivity improvements conditional on survival. In addition, the benefits of political connections are largely confined to firms associated with local or top level governments, and they are more pronounced in capital-intensive industries. We conclude that the close association between the state and a segment of the business community is leading to sub-optimal resource allocation in the economy by interfering with the process of market selection. Copyright © 2010 Blackwell Publishing Ltd.

Suggested Citation

  • Jun Du & Sourafel Girma, 2010. "Red Capitalists: Political Connections and Firm Performance in China," Kyklos, Wiley Blackwell, vol. 63(4), pages 530-545, November.
  • Handle: RePEc:bla:kyklos:v:63:y:2010:i:4:p:530-545
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    References listed on IDEAS

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    Cited by:

    1. Kobil Ruziev & Don Webber, 2017. "SMEs access to formal finance in post-communist economies: Do institutional structure and political connectedness matter?," Working Papers 20171701, Department of Accounting, Economics and Finance, Bristol Business School, University of the West of England, Bristol.
    2. Min Du & Agyenim Boateng & David Newton, 2016. "The impact of state ownership, formal institutions and resource seeking on acquirers’ returns of Chinese M&A," Review of Quantitative Finance and Accounting, Springer, vol. 47(1), pages 159-178, July.
    3. Huyghebaert, Nancy & Xu, Weidong, 2015. "What determines the market share of investment banks in Chinese domestic IPOs?," China Economic Review, Elsevier, vol. 34(C), pages 150-168.
    4. 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.
    5. Du, Jun & Mickiewicz, Tomasz, 2016. "Subsidies, rent seeking and performance: Being young, small or private in China," Journal of Business Venturing, Elsevier, vol. 31(1), pages 22-38.
    6. Wang, Chengqi & Yi, Jingtao & Kafouros, Mario & Yan, Yanni, 2015. "Under what institutional conditions do business groups enhance innovation performance?," Journal of Business Research, Elsevier, vol. 68(3), pages 694-702.
    7. Ma, Xufei & Ding, Zhujun & Yuan, Lin, 2016. "Subnational institutions, political capital, and the internationalization of entrepreneurial firms in emerging economies," Journal of World Business, Elsevier, vol. 51(5), pages 843-854.
    8. Zhao, Hongxin & Lu, Jiangyong, 2016. "Contingent value of political capital in bank loan acquisition: Evidence from founder-controlled private enterprises in China," Journal of Business Venturing, Elsevier, vol. 31(2), pages 153-174.
    9. John Rand, 2017. "Are politically connected firms less constrained in credit markets?," WIDER Working Paper Series 200, World Institute for Development Economic Research (UNU-WIDER).
    10. Addisu A. Lashitew, 2014. "The Effect of Political Connections on Credit Access: Does the Level of Financial Development Matter?," Kyklos, Wiley Blackwell, vol. 67(2), pages 227-254, May.
    11. Hasan, Iftekhar & Jackowicz, Krzysztof & Kowalewski, Oskar & Kozlowski, Lukasz, 2013. "Politically Connected Firms in Poland and Their Access to Bank Financing," Working Papers 13-37, University of Pennsylvania, Wharton School, Weiss Center.
    12. Jackowicz, Krzysztof & Kozłowski, Łukasz & Mielcarz, Paweł, 2014. "Political connections and operational performance of non-financial firms: New evidence from Poland," Emerging Markets Review, Elsevier, vol. 20(C), pages 109-135.
    13. Xiao, Simon Shufeng & Jeong, Insik & Moon, Jon Jungbien & Chung, Chris Changwha & Chung, Jaiho, 2013. "Internationalization and Performance of Firms in China: Moderating Effects of Governance Structure and the Degree of Centralized Control," Journal of International Management, Elsevier, vol. 19(2), pages 118-137.
    14. Peerayuth Charoensukmongkol, 2016. "The interconnections between bribery, political network, government supports, and their consequences on export performance of small and medium enterprises in Thailand
      [Las interconexiones entre sob
      ," Journal of International Entrepreneurship, Springer, vol. 14(2), pages 259-276, June.
    15. Julien Hanoteau & Virginie Vial, 2014. "Grease or sand the wheel? The effects of individual bribe payments on aggregate productivity growth," EcoMod2014 6685, EcoMod.
    16. McGuinness, Paul B. & Vieito, João Paulo & Wang, Mingzhu, 2017. "The role of board gender and foreign ownership in the CSR performance of Chinese listed firms," Journal of Corporate Finance, Elsevier, vol. 42(C), pages 75-99.

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