Can Political Connections Help Nation Building in Emerging Markets? Evidence from Public-Private Partnerships in China and India

Abstract

Using 169 and 215 Public Private Partnerships (PPP) projects from China (1986-2012) and India (1991-2013), respectively, we find that politically connected PPP firms, on average have higher access to bank loans compared to competing and matched non-PPP firms. Our further analysis reveals that Chinese PPP projects with political connections, receive significantly higher bank loans for more productive firms (compared to non-PPP politically connected firms). On the contrary, in the case of Indian PPP projects, PPP firms that have political connections over-invest. We further test our results for robustness by running regression discontinuity design around political election events to show that, firms that are politically connected, benefit more through higher bank loans when the incumbent party or leaders regain their seats in the Government. Further, we find that the probability of default significantly increases for Indian PPPs that over-invest. Our results suggest that political connections help in nation building in China and the same political connections deter nation building in India.