The Impact Of Political Connection On Chinese Manufacturing Enterprises' Market Power

Over the 40 years has been passed since the reform and opening-up,although China economic development has made remarkable achievements,the construction of legal,property rights protection and financial systems are relatively backward,and the development of marketization still needs to be improved.Especially in the process of production and operation,private enterprises are facing policies and systems "double discrimination",such as restrictions on industry access,imperfect judicial and credit financing systems,and insufficient protection of property rights contracts and so on,which causes enterprises falling into many troubles such as financing difficulties,key production factors scarcity and frequent infringement of property rights and interests.Under the above background,the enterprises hope to establish political connection with government in order to get extra attention and protection on resource allocation,property rights and policy support,and break through the development bottleneck.In recent years,the phenomenon of Chinese enterprises' political connection has attracted wide attention in academic circles.From the existing literature,most of the studies still focus on "what would political connections bring to the enterprises".Although some of the literature attempts to examine the internal mechanism between political connection and enterprises' value from the perspective of scale expansion,resource-acquisition effect and efficiency-impairment effect,as to how do the production and operation decisions made by enterprises after establishing political connections affect their market power and possible micro-mechanism,the existing literature is rarely involved.In order to understand the relationship between political connection and enterprises' market power,this paper constructs a heterogeneous enterprise analysis framework and explores the intrinsic mechanism from the perspective of"resource-acquisition effect,contract-protection effect,and efficiency-impairment effect".The theoretical results show that political connection has two opposite effects on enterprises' market power.Specifically,the positive effects come from the resource-acquisition effect and contract-protection effect,which would ease the financial constraints and improve the contract implementation environment,so as to promote enterprises to expand investment and improve production technology.The negative effects come from the efficiency-impairment,which would lead to the decline of enterprise management efficiency and the rise of productive costs.Therefore,whether political connection will increase or decrease enterprises' market power is ambiguous and depends on the above effects which take the dominant place.In order to provide a reliable empirical evidence for the theoretical hypothesis,we select the manufacturing enterprises listed in Shanghai and Shenzhen Stock Exchanges and construct the political connection index by using CSMAR and Wind database to extract the top executives resume information.Meanwhile,we calculate the market power index by using the merged Chinese industrial enterprises data and the listed enterprises data from 1999 to 2007.The empirical conclusions are as follows:Firstly,we identify the resource-acquisition effect and contract-protection effect by constructing the industry external financing dependence and contract intensity index individually,and find that political connections can enhance the enterprises'market power in financially-dependent and contract-intensive sectors.After conducting the endogenous problem and series of robustness tests,this conclusion is still valid.This means,the above effects of political connections do exist and the overall effect differs across sectors.Secondly,from the perspective of different types of political connections,we find that,the resource-acquisition effect is always significantly positive,but the contract-protection effect in government officials'and municipal and county governments'political connection is not significant in contract-intensive sector enterprises.Furthermore,the resource-acquisition and contract-protection effect are significant for private enterprises,but the resource-acquisition effect has no significant impact on the state-owned enterprises.In addition,the efficiency-impairment effect has always been negative.Thirdly,from the perspective of resource allocation,the resource-acquisition and efficiency-impairment effect expand the decentralization of market power and deepen resource misplacement among enterprises,while the contract-protection effect can reduce the polarization of market power and optimize the resources allocation efficiency.Therefore,the overall impact remains uncertain.Fourthly,from the perspectives of institutional environment,the empirical tests show that in the regions with poor institutional environment or low degree of marketization,although the establishment of political connection has negative impacts on enterprises' efficiency,the financing convenience and the efficiency of contract execution brought by political connection play a more obvious role in promoting the enterprises market power with higher dependence on external financing and contract-protection.This means,in the regions with poor institutional environment,establishing political connections has become an effective measure for enterprises to alleviate the scarcity of key resources and protect property rights from infringement,so as to promote enterprises to expand investment and technological innovation and increase the competitiveness of enterprises in financially-dependent and contract-intensive sectors.It is of great significance for private enterprises development in the poor institutional environment regions.Finally,from the perspectives of the impact of industrial policy on the political connected enterprises market power,the results show that both general and key encouragement industrial policies can significantly promote political connected enterprises market power.Specifically,industrial policy has a significantly effect through the tax and credit channel,but the government subsidies and market competition channels are not stable.The above conclusions indicate that,under the background of low marketization level and backward system in China,enterprises are seeking to establish and maintain close connections with government to get rid of the key resources scarcity,insufficient protection of property rights and acquire development at the expense of their efficiency,this is a pragmatic choice.At present,China's economy has entered a critical stage of high-quality development.The government should firstly recognize and comprehend the difficulties of domestic economic system and market-oriented reform fully,clarify the relationship between government and market continually and truly let the market play a decisive role in resource allocation.Secondly,the government should strive to optimize the business environment of enterprises and build "a new type of cordial and clean relationship between government and enterprise" actively.Finally,the government should improve the relevant system construction constantly to eliminate all kinds of discriminatory policies and create an efficient and fair development environment so as to promote enterprises'technological innovation and competitiveness,which would provide continuous impetus for high-quality economic growth in China.