A Bayesian Measurement of Political Connection and Entrepreneur Preference on Trade and Competition

Abstract

This article investigates how political connection shapes firm owner preference on economic openness and international competition in China, a topic that is getting increasingly relevant today amid China’s trade disputes with its trading partners over the nature of the country’s business-government relations. Politically connected entrepreneurs and their enterprises usually exploit and benefit from their political resources, but this can lead to both supporting and opposing views on expanding trade liberalization. To solve this puzzle, this article proposes a theory that focuses on (1) a selection effect of political connection on firm productivity and (2) trade-related institutional development in China. With survey data on China joining the world trade organization, I develop a modified Bayesian item response theory model to measure political connection and find that Chinese politically connected entrepreneurs held a less supportive view before joining the world trade organization than their less connected counterparts. This suggests an anticipation that the imminent opening would neutralize the privileges of politically connected entrepreneurs. By looking at trade liberalization, this article offers a firm level analysis that political opposition to sustained economic reform may derive from the short-term winners, instead of the losers, in transitional societies.