Subsidies, rent seeking and performance: Being young, small or private in China

Abstract

Entrepreneurs in emerging market economies operate in weak institutional contexts, which can imply different types of government. In some countries (e.g., Russia), the government is predatory, and the main risk faced by (successful) entrepreneurs relates to expropriation. In other countries (like China) this kind of risk is lower; nevertheless the government is intrusive, and the rules of the game remain fluid. The implication of the latter for entrepreneurs is that they are more likely to spend time and resources on influence (rent seeking) activities rather than on productive activities. We illustrate this type of government by focusing on the distribution of subsidies in China. We present a simple formal model that explores not only the direct effects of rent seeking for a company but also externalities under a situation of policy-generated uncertainty in the distribution of subsidies. We explore how these effects differ for the entrepreneurial sector (young, private and small companies) compared with other sectors. We posit that while the performance of private companies is more affected than the performance of state firms, the impact of government-induced uncertainty on young and small companies is actually less pronounced. Our empirical analysis, based on a unique large dataset of 2.4 million observations on Chinese companies, takes advantage of the regional and sectoral heterogeneity of China for empirical tests.