Does Market Transition Eclipse the Value of Firms’ Political Connections? A Longitudinal Study of Publicly Listed Firms in China

Abstract

Economic transitions from state planning and redistribution to market exchange create many businesses opportunities. But such transitions also create great uncertainty because many interdependent factors – modes of exchange, types of products, and forms of organizations – are in flux. Uncertainty is even greater when political institutions remain authoritarian because then rule of law is weak and state bureaucrats retain considerable power over the economy. In such contexts, firms can reduce uncertainty by developing relationships with state bureaucrats, which help firms learn how state bureaucracies operate and engender trust between firms and bureaucrats. Together, knowledge and trust stabilize firms’ operations and help persuade bureaucrats to lighten regulatory burdens, grant access to state-controlled resources, and improve oversight. Therefore, in authoritarian regimes, as economic transitions proceed and uncertainty increases, business-state ties increasingly improve firm performance. We test this argument by studying China, which saw economic transition but persistent authoritarianism. We also investigate two likely contingencies (industry and firm size) and two important causal mechanisms (access to bank loans and protection from related-party loans). Empirical analysis supports most predictions, demonstrating the importance of dynamic analysis: the value of business-state relations varies over time, depending on the trajectory of both economic and political institutions.