Political Lending By Heterogeneous Firms

• In Event: Firms in the Global Economy

Abstract

The “new, new trade theory” argues that firm-level characteristics like size or productivity determine firms’ desire for international trade and foreign direct investment (FDI). This productivity assumption implies that only efficient firms that are capable of securing more wealth at equal production cost can engage in FDI. Yet, previous studies neglect the important political influence of firms. I argue that across a range of productivity, governments’ financial lending will be concentrated on a subgroup of firms that are politically active. In turn, these politically connected firms will be advantaged in FDI creation. Using a unique, hand-coded political career dataset of 4,936 directors of South Korean firms and the investment project announcement data for these individual firms, I show that firms with strong political connections that are better at borrowing from government-owned banks, can generate greater FDI.

Author

• Seungjun Kim, University of Maryland, College Park