Political connection, contract intensity, and OFDI: Evidence from China

Abstract

A typical feature of business-government relationships in China is that many Chinese firms have politically connected managers or board members; thus, these firms have greater access to privileges and resources in the domestic market. In this context, we examine how this domestic political connection affects firms' greenfield investments. We first present a simple heterogeneous firm framework by incorporating political connections and contract enforcement into a monopolistic model. The theoretical proposition shows that the negative effect of political connections on a firm's probability of conducting outward foreign direct investment (FDI) is more pronounced in sectors that are more reliant on contract enforcement. Using merged Chinese listed company data and the fDi Markets database from 2004 to 2017, we empirically test and provide solid support for the theory that more connected firms are less likely to conduct greenfield investments in sectors with higher degrees of contract intensity. In addition, the negative effect is found to be more pronounced for state-owned firms, those with higher productivity, and those in which the firm's chairman is also the firm's chief executive officer (CEO); however, the effect decreases for the years after 2013, which is when a nationwide anticorruption campaign was initiated.

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