Repaying the State’s 'Helping Hand': The Costs of Political Connections in China

Abstract

This study examines the heretofore-unexplored costs of political connections in the context of China’s corporate restructuring. Leveraging original surveys of the same Chinese firms over an eleven-year period and the variations in their post-restructuring board composition, we find that restructured state-owned enterprises (SOEs) with political connections, measured as current or former government officials on the firm board, receive more preferential access to key inputs and policy opportunities controlled by the state, but they also pay more tax, independent of profits. We argue this is repayment by politically connected firms for the state’s “helping hand.” Our findings suggest that state-firm relations be recast as a reciprocal exchange rather than a one-sided provision of benefits from the state to its politically connected firms. Shifting the focus from profits to taxes also offers an explanation as to why China continues to favour SOEs over the private sector even when they are less profitable.