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Impact of political connections on constructing a unified national market: Evidence from inter-regional capital flows

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  • Wan, Mengfei
  • Li, Li

Abstract

An essential form of capital flow, inter-regional investment consistently promotes regional coordination while accelerating economic development. In China, it is a key force in constructing a unified national market. As informal institutions, political connections can impact corporate investment decisions. This study examines panel data from Chinese A-share firms listed on the Shanghai and Shenzhen stock exchanges, focusing on the geographic diversification of investments. We investigate the impact of political connections on constructing a unified national market. Political connections reduce inter-regional investment and slow the construction of a unified national market. This effect operates through the mechanisms of higher rent-seeking costs and policy “burdens”. A lack of cross-provincial tenure among officials, high local fiscal deficits, and high regional unemployment rates significantly increase the negative impact of political connections on firms' cross-regional subsidiary distribution. Further analysis indicates that the negative effects of political connections on inter-regional investment are more pronounced in regions with lower levels of marketization and stronger local protectionism. The conclusions of this study augment the understanding of how political connections affect corporate decision-making and capital flows across regions, providing essential insights for advancing the construction of a unified national market.

Suggested Citation

  • Wan, Mengfei & Li, Li, 2025. "Impact of political connections on constructing a unified national market: Evidence from inter-regional capital flows," International Review of Financial Analysis, Elsevier, vol. 104(PA).
    • Handle: RePEc:eee:finana:v:104:y:2025:i:pa:s1057521925004181
    DOI: 10.1016/j.irfa.2025.104331
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