Political hazards and firms' geographic concentration

Abstract

Research summary: We examine the relationship between the geographic concentration of a firm's sales and the firm's vulnerability to expropriation hazards. Although expanding outside the home location can initially increase a firm's exposure to government expropriation, we find that this effect reverses when a firm's sales outside its home location have reached a point at which it has sufficient resources to better influence government actions and to pose a credible threat to exit the market in which it is being targeted. We supplement this main result by identifying two moderating factors: the firm's level of political capital and the effectiveness of institutional constraints on government behavior. We find support for these hypotheses from survey data on privately owned enterprises in China. Managerial summary: This research advises firm managers that certain market activities might knock their firms' economic interests out of alignment with the government's political interests, and thus, influence the political hazards they face, particularly in emerging markets such as China, which has attracted strong interest of many firms with respect to entering the market. Here, all else being equal, the firms' geographic concentration exposes them to different levels of state expropriation—but not in a simple linear fashion as suggested by the conventional wisdom of local protectionism or that of the bargaining advantage generated by the threat of relocation: Those who are “stuck in the middle” ended up paying twice or even three times as much unauthorized levies as the purely local or the most expansive firms. Copyright © 2015 John Wiley & Sons, Ltd.

Entrepreneurs' socioeconomic status and government expropriation in an emerging economy

“…We included several control variables in the modeling to eliminate potential alternative explanations. We treated firm sales, equity, profits, and age as controls in the regressions (Jia & Mayer, 2017). Because sales, equity, and profits all have skewed distributions and profits can be negative, we applied an inverse hyperbolic sine transformation to all three variables.…”

“…Export intensity was another control. The rationale was that sales outside a region might increase a firm's likelihood of being expropriated by the local government (Jia & Mayer, 2017). R&D intensity was a control as it captures firms' resource endowment (H. Li & Zhang, 2007).…”

Research on Customer Geographic Proximity and Inventory Management—Empirical Evidence from Chinese Manufacturing Listed Companies

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