Theoretical And Empirical Research On Political Connection And Fiscal Subsidies

It has become a very common phenomenon for enterprises and government to establish various forms of political association in the process of economic development all over the world. As an informal alternative mechanism supplementary to the formal system defects to a certain extent, political association excerts a profound impact on the enterprise’s production and management, investing and financing decision-making and the entire operation of the capital market; also it has become one of the foci of domestic and international research. Some researches indicate that political association is a valuable resource, which can help the enterprise overcome the hindrance of the backward official system and gain more convenient access to scarce resource and government support, while others hold that political association is a means used by enterprises to seek rent from the government and government officials who are associated with the resource allocation power. In the economic transition of our nation, the special system and culture make it extremely important for enterprises to have close relationship with the government in order to develop themselves.In the study of China’s entrepreneurial activity and economic behavior, links between enterprises and government cannot be avoided. Therefore, it is necessary to discuss favorable and adverse impacts on enterprises by political connection from the perspective of obtaining and utilizing resources. It would be useful to clarify the future direction of relationship between government and enterprises in China. On the other hand, as one of the main resources provided by the government, the fiscal subsidies are what the enterprises strive for after establishing political association. Under modern market economy, as an important tool compensating for market failures and an important lever regulating the economy, fiscal subsidy is also a macro-economic tool for promoting the coordination of the overall socio-economic development functions and influencing at micro-economic enterprise level. Therefore, to study those problems, including whether it would contribute to obtaining fiscal subsidies for enterprise after political affiliation between enterprises and government is established; whether there exists some correlation between the political connection cost and financial subsidies the companies obtain; whether subsidies obtained by political connection are efficient and made full use of by enterprise and what kind of corporate ownership would facilitate companies to take advantage of greater "subsidy effects", it is necessary to combine political affiliations with financial subsidies for discussion. It is of great theoretical and practical importance to research on these issues for enriching research on political connection and financial subsidies and improving the government’s subsidy system and efficiency of using financial resources by enterprise.Based on economic and political environment and system background of our country, this paper takes analysis and test on the correlation between variables including the degree of political connection, political connection cost, fiscal subsidy and enterprise efficiency, using historical data of listing corporations in China from2006to2011, which follows from a logical analysis to empirical test, and then to the policy recommendations, on the basis of the rent seeking theory, agency theory, political cost theory and efficiency theory. Besides, it also analyses and tests on differences reflected on variables in state-owned enterprise and private enterprise and puts forward the corresponding policy recommendations according to the conclusions of empirical research. It is of certain realistic and directive significance in this research for examining and understanding the political association’s role in economic activities and further improvement of the efficiency in the use of fiscal subsidies and the relationship between government and enterprise comprehensively.This paper is divided into six chapters, the main content of each chapter is as follows:The first chapter is an introduction. The research questions raised in this paper mainly rely on theoretical and practical background to clarify the meaning of specific research and make a clear definition of major concepts involved in the paper. The main research progresses on the theory and experience related to political connection, financial subsidies and other topics were reviewed and summarized. In addition to the above, this chapter also describes the main innovation and shortage of this paper and makes a brief description of the contents, frameworks, ideas and methods mentioned in the paper.The second chapter is a theoretical analysis about political connections and fiscal subsidies. On the basis of document review, this chapter discusses the theoretical basis of the formation of enterprise political connections from the perspective of the rent-seeking theory, institutional change theory, resource dependence theory and social capital theory, expounds the motivation and analyzes the background and its main form of Chinese enterprise political connections under the background of economic transition. On this basis, this chapter thoroughly discusses our country’s enterprise political connections’ influence on the enterprise value from two aspects of positive and negative in theory. Finally, this chapter analyzes our country enterprise subsidies effect based on the perspective of political connections, thus it provides basic theoretical and political support to build specific conceptual models and research hypotheses about enterprise political connections and fiscal subsidies efficiency.The third chapter is an empirical research related to the relationship between political connection and its costs. This chapter takes the political connections which will certainly bring the non-productive expenditure based on rent-seeking purposes and for bearing on the government’s target of transfer cost occurring in the course of "price" as the basic train of thought. This chapter also makes definition and description of specific concept about political connection’s cost, generating process and the method of measuring. On this basis, this paper puts forward a relation hypothesis about enterprise political connection’s degree and its costs, and divides them into state-owned enterprises and private enterprises according to the ownership of the enterprises, then compares motivation and consequences about these two kinds of enterprises political connection and makes assumptions about these two types of political connection’s differences. Finally, the data of the listed companies of our countryis used to test the above hypothesis empirically.The fourth chapter is an empirical research about the relationship between political connections and fiscal subsidies. This chapter uses political connection as an important external factor that affects enterprise to get fiscal subsidies, which works on corporate fiscal subsidies through the internal mechanism of the costs’as the basic train of thought. Also, this chapter analyzes the intrinsic relationship between the degree of corporate political connection and political costs associated with its financial subsidies^and then compares the differences between state-owned enterprises and private enterprises in political connection and fiscal subsidies, and then respectively propose corresponding assumptions. Finally this paper uses the data of the listed companies of our country to empirically test the above hypothesis.The fifth chapter is an empirical study of relationship between political connection and corporate efficiency of fiscal subsidies. This chapter uses two different kinds of viewpoints on "efficiency" and "relationship" theory of political connection as the basis of analysis and logical starting point. The basic idea is that political connection is one of the important external factors which will impact the use efficiency of fiscal subsidies; additionally, this paper analyzes how political connection level affects its actual economic and social efficiency after obtaining fiscal subsidies (i.e., the service efficiency of fiscal subsidies), and then compares the differences in fiscal subsidy efficiency between state-owned enterprises and private enterprises with political connection, thus proposes the research hypothesis respectively according to the above theoretical analysis. Finally, this paper uses the data of the listed companies of our country to empirically test the above hypothesis.The sixth chapter is about research conclusions and policy recommendations. Mainly according to the result of the previous theoretical and empirical analysis, this chapter summarizes the research conclusion of this paper, and then refines the main problem behind conclusion; at the same time, this paper proposes corresponding policy recommendations to provide some practical reference for perfecting the market economy, enhancing the relationship between government and enterprises and building a sound system of fiscal subsidy.The main conclusions are as follows:The research finds out a more positive correlation between the degree of political relevance and the costs of political association in private enterprises than in state-owned firms. In the situation of high degree of political relevance and the market activities influenced by "the relationship culture", politically connected companies must pay for the rent-seeking activities to get the support from government and to protect their long-term development, these costs include the employment cost when the government faces the political and social goals of employment, and the cost of non-recurring expenses to improve the success rate of rent-seeking.From these government officers who have the deposition of the resources,companies in high attention by society should assume more costs of political association for maintaining its own social image and getting the governmental resources in the high degree of political association environment.In terms of distinguishing the types of enterprise ownership, the state-owned enterprises of our country enjoy the government support by policies because of having the "natural kinship" relationship with the government, but private enterprises not closely linked with the government are facing more obstacles than state-owned enterprises. When conducting business, the political association is regarded as an important way to get the limited resources naturally by private enterprises. In order to maintain the relationship with government, private companies need to pay more costs of political association.The degree of political association is defined by the administrative levels owned by the key person in the enterprise, so in a sense with the "natural kinship", state-owned enterprises are less effected by the costs of political association than the private enterprises.By this conclusion, we can see that the private enterprises have to bear more pillage and infringement from government, and confirm the existence of "grabbing hand".In a corporation, the degree of political relevance and the cost of it, as well as the fiscal subsidies acquired, are all positively correlated with each other. Moreover, the positive effect generated by political relevance of private enterprise is higher than state-owned enterprises. In terms of information asymmetry, the higher political association degree an enterprise has, the stronger the signal-display mechanism reveals it’s developing potentials and social image. Thus, it will be more favored when the government provides fiscal subsidies. At the same time, the fiscal decentralization system of our country endows local governments much autonomous rights in policy making. As a result, the government is willing to leave rent-seeking space for enterprises which have higher political association degree when it sets terms of fiscal subsidies, providing convenience for them to receive more subsidies. Besides, taking the inner mechanism of political association cost into account, as rational-economic men, both government and enterprises are hoping to maintain the balance and long-period of the rent-seeking ties brought by political association. The ties will be hardly kept up if enterprises have paid much political association cost while receiving unmatched compensations and rewards. So, fiscal subsidies are actually the compensations provided by the government to enterprises that have paid high political association cost. The more the latter is paid, the more the former is received.From the point of distinguishing types of enterprise ownership, the avantage of chinese private enterprises in access to government resources and policy support is far beneath state-owned enterprises. The stated-owned enterprises do not need some ways, especially, relying on building political connection, to compete for government limited resources such as fiscal subsidies, which is urgently needed by the private enterprises. The positive and close relationship between government and enterprises is an important guarantee for private enterprises to achieve the goals of long-term development and expanding living space. The higher the degree of political connection of private enterprises, the more positive effect that companies strive for fiscal subsidies and other resources will be greater.(3)The enterprises that own political connection do not have a significant economic and social efficiency, and even incur to a decline in efficiency after obtaining fiscal subsidies, which means that the establishment of political connection does not give companies an efficient use of financial subsidies. In addition, an influence that the companies that own political connection exert on the economic and social performance after obtaining fiscal subsidies is better than what state-owned enterprises generate, which indicates that the efficiency of using fiscal subsidies by state-owned enterprises that own political connection is inferior to private enterprises. Owing to classical rent-seeking activities behind the politial connection, it is no longer very importatnt whether they possess the necessary conditions and abilities of rationally using government subsidies. Because government officials pay more attention to whether a company can help them achieve various interest targets, they do not care about where and how effectively companies use the fiscal subsidies. Therefore,"rent-seeking concept" is more in line with actual situation of use efficiency of fiscal subsidies for companies that own political connection. The fiscal subsidies have actually become a bargaining chipby which government and enterprises maintain rent-seeking relationships.From the point of distinguishing types of enterprise ownership, private enterprises pay more political connection costs than state-owned enterprises for obtaining fiscal subsidies. Based on the consideration of their personal interests, the management will more actively use fiscal subsidies. However, due to the state-owned enterprises’ outstanding of governance issues and special nature of property rights, the importance that the senior management attaches to the use efficiency of fiscal subsidies is inferior to private enteiprises. Thus, on the overall point of view, although the use efficiency of fiscal subsidies to the country’s companies that own political connection is generally low, after private enterprises that own political connection obtained fiscal subsidies, the impact that fiscal subsidies have on the economic and social performance is still better than the state-owned enterprises.The main innovations of this paper are:(1) it studies a framework that includes the degree of political connection of enterprises, political connection costs, the number of fiscal subsidies obtained and the use efficiency of fiscal subsidies that is the efficiency after enterprises obtain fiscal subsidies and makes more in-depth quantitative analysis on the relationship of three variables that are political connection, fiscal subsidies and enterprise efficiency;(2) it makes this variable of political connection costs as the internal mechanism that enterprises establish political connection and obtain fiscal subsidies and being included into relevant research model, which further clarifies the substantive effect factors that corporate political connection effects fiscal subsidies obtained;(3) it includes the phenomena that state-owned enterprises own political connection into the scope of the study, extends the research sample of political connection, enriches the research on the relationship between political connection and fiscal subsidies, and provides a new perspective and ideas for comparing the differences of economic behaviors and consequences between the state-owned enterprises and private enterprises.