Relation-based governance, financial crisis shock, and economic growth in China

Abstract

The relationship between relation-based governance and economic growth has drawn much academic attention; however, previous studies have not fully recognized the causal effect between them from the perspective of development stages. Based on government–enterprise relations, this study first defines relation-based governance by the days enterprises deal with the government. It takes the shock of the 2008 global financial crisis as a quasi-natural experiment to investigate the impact of relation-based governance on China's economic growth with the generalized difference-in-differences approach. Using panel data of Chinese cities from 2003 to 2018, we find that after the shock of the global financial crisis, as China shifted from an extensive development stage to an innovation-driven development stage, relation-based governance significantly hindered economic growth and cities with a stronger dependence on relation-based governance exhibit decreasing economic growth. Further analysis reveals that the key mechanisms involve excluding rule-based governance and weakening enterprise innovation respectively.