How Politically Connected Firms Obtain More State Resources: Evidence from China

• In Event: The Politics of Corruption and Anti-corruption in China

Abstract

Cronyism posits that politically connected firms have interpersonal and institutional networks, have access to politicians, and can more easily obtain state resources than non-connected firms. This paper seeks to move beyond this simple explanation to explore variations in the amount of state resources that connected firms receive. Put differently, why do some connected firms obtain fewer state resources than other connected firms? This paper argues that politically connected firms obtain more resources when they signal that they are working to meet the needs of citizens. The logic is that some connected firms may act strategically to enhance their access to state resources. Data on firms listed in China’s Shenzhen and Shanghai (e.g., general contributions to society (2008–22), contributions for the victims of the 2008 Sichuan earthquake, and contributions in response to the COVID-19 pandemic) support the argument.

This paper highlights five results. First, politically connected firms spent more money on contributing to society but less on socializing with politicians and officials. Second, politically connected firms received more subsidies and accessed foreigners’ portfolio investment when they provided more contributions to society. Third, connected firms contributed more to society in times of public health crisis, relative to other times. Fourth, connected firms obtained more state resources when they contributed in times of crisis. Fifth and lastly, connected firms had access to more state resources when they increased employment, another way to signal that they are working to meet the needs of citizens. This paper doubts state-business relations simply as cronyism: favoritism toward connected groups at the expense of the citizen interest.

Author

• Youngjoon Lee, University of Maryland, College Park