The Dynamics of Political Embeddedness in China: The Case of Publicly Listed Firms

Markets developed rapidly in China during the reform era, opening many new opportunities for business, increasing competition, and heightening uncertainty. But because the political system remained autocratic, state officials retained considerable power over the economy through their control over resources such as land and capital. Moreover, decentralization gave local officials substantial authority over local businesses. We argue that in this context, politically embedded firms (i.e., those with ties to state authorities) bore lower regulatory burdens and had easier access to statecontrolled resources; therefore they faced less uncertainty, could more easily take advantage of new business opportunities, and performed better than politically unembedded firms. Political embeddedness was especially important in more competitive markets because there was more uncertainty and more at stake there, and for smaller firms because they were not well-positioned to handle increased competition or gain access to state-controlled resources. We investigate two mechanisms by which political embeddedness affected firm performance in this context: by facilitating access to bank loans and by protecting firms from pressure to make loans to other firms in their business groups. Analysis of panel data from 1992 to 2007 on firms listed on the domestic stock exchanges supports our arguments about overall firm performance and both mechanisms. In combination, these results suggest that connections between economic and state actors have highly contingent effects – strong in some contexts, for some firms – and that they operate through flows of funds into and out of firms.