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Invest to win: A study of "Local bias jumping" in China

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  • Li, Jidong
  • Yuan, Cheng
  • Huang, Zhichun

Abstract

We document a paradoxically positive relationship between the strong preference of local governments for local business and domestic capital inflow in China. Confronted by barriers posed by the bias of local governments towards local suppliers in procurement markets, firms strategically move through capital markets via investments. We call this phenomenon "local bias jumping" (LBJ). Using comprehensive datasets of procurement winners and losers, we find that the probability of local firms winning contracts is 1.44 times that of nonlocal firms. Furthermore, investing in local subsidiaries appears to provide a significant advantage in procurement competitions. Nonlocal firms with investments one to three years prior to bidding are 1.5 times more likely to win contracts than those without such investments. LBJ-driven investments flow from developed to less developed regions, promoting interregional capital mobility. Our findings underscore the dual impact of local bias in China's investment landscape, revealing its complex effects on economic development.

Suggested Citation

  • Li, Jidong & Yuan, Cheng & Huang, Zhichun, 2025. "Invest to win: A study of "Local bias jumping" in China," Journal of Economic Behavior & Organization, Elsevier, vol. 236(C).
    • Handle: RePEc:eee:jeborg:v:236:y:2025:i:c:s016726812500246x
    DOI: 10.1016/j.jebo.2025.107127
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    Keywords

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    JEL classification:

    • H57 - Public Economics - - National Government Expenditures and Related Policies - - - Procurement
    • H70 - Public Economics - - State and Local Government; Intergovernmental Relations - - - General
    • G11 - Financial Economics - - General Financial Markets - - - Portfolio Choice; Investment Decisions
    • F21 - International Economics - - International Factor Movements and International Business - - - International Investment; Long-Term Capital Movements

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