Local party committee and labor cost asymmetry

Abstract

Chinese state-owned enterprises (SOEs) operate under seemingly incompatible logics of economic and noneconomic objectives and thus within a setting of institutional complexity. This complexity manifests in the coexistence of the modern enterprise system and a firm-level Local Party Committee (LPC). LPCs check proposals from a political standpoint before executives decide on economic feasibility. We provide evidence that SOEs with more LPC participation exhibit greater labor stickiness, and this association is more pronounced after the enactment of the Labor Contract Law in 2008, when LPCs became more focused on noneconomic objectives. Additional analyses reveal that regional differences in market-based institutional quality moderate the association between LPC participation and labor cost asymmetry. Our results are relevant for emerging market investors who attempt to incorporate cost asymmetry into their profitability forecasts and for other stakeholders who strive to understand and anticipate the impact of the complex Chinese institutional setting on cost behavior.