Study On The Impact Of Political Connections On Private Enterprises’ Capital Allocation

Reform and opening up more than30years, the private economy developedrapidly with the reform tide, which has become an important force in promotingnational economic growth. The impact of private entrepreneurs in the social andpolitical field has increased significantly; entrepreneurs participating in politics activelyare very common; many private enterprises are willing to hire government officials as acorporate senior; by these ways many private enterprises build close politicalconnections with government.Political connection as a factor of corporate governance bring the interests ofenterprises and government (including its officials) together, both sides have their owninterest demands. In order to obtain more economic resources allocation as well aspolitical asylum, many enterprises take initiative to build close ties with governmentand its officials, through the authority of government to achieve firm interest demands.The government and its officials realize the value of the authority in their hands, sopower rent-seeking is hard to avoid. While providing assistance to private enterprises,they have their own interest demands, and need these enterprises make certain“contributions”. Thus it can be seen, while building political connections withgovernment, private enterprises involuntarily place themselves under the governmentintervention at the same time; they not only possible to obtain help from government’s“helping hand”, also may be subject to misappropriation by government’s “grappinghand”.To better understand the pros and cons impact of political connections on privateenterprises, starting from the real economic issues and market phenomena, adopting theresearch ideas of “institutional background analysis, logical reasoning, empirical testingand policy recommendations”, this paper studied the impact of political connections onprivate enterprises’ capital allocation and its related governance issues deeply andsystematically.The main contents and conclusion:(1) Choosing Chinese private listed firms during2005~2010as samples, this paperstudies the impact of political connections and degree of regional marketization on scaleand efficiency of capital investment of private firms. The results show that: Firms withpolitical connections have more capital investment than those without political connections; but higher the marketization degree is, weaker the positive impact ofpolitical connections on capital investment scale is. In the region of higher degree ofmarketization, political connections have no influence on the value effect of capitalinvestment; but in the region of lower degree of marketization, firms with politicalconnections have lower value effect of capital investment than those without politicalconnections. Finally, we have the conclusion: From the perspective of capitalinvestment, building political connections in the region of lower degree ofmarketization is “harm” than “profit” for private firms; through the ties of politicalconnections, government intervention on private firms will lead capital investment to be“political contributions”, so harm the firm value.(2) Based on the theory of R&D investment derived from internal and externalresources, choosing private listed enterprise in China A share market during2007~2010as samples, this paper studies the impact of organizational slack and political connectionon private firms’ R&D investment in different market circumstance, the empiricalresults show that: Available slack and potential slack can increase private firms’ R&Dinvestment, but save recoverable slack will crowd out R&D investment; With theimprovement of the degree of regional marketization, the positive effect of availableslack and potential slack on R&D investment will become weaker. The politicalconnection as an important channel of access to external resources does not necessarilypromote firms’ R&D investment; in the region of lower degree of marketization,political connection has negative effect on R&D investment; but in the region of higherdegree of marketization, political connection has slightly positive effect on R&Dinvestment. Only in the region of higher degree of marketization, political connectioncan promote the available slack change into R&D investment significantly; but haven’tfound significant complementarities between other slack and political connection. Atlast, we provide some policy suggestions for government departments to designincentive mechanism for private firms’ R&D investment.(3) Choosing Chinese private listed enterprises during2005~2010as samples, thispaper studies the impact of political connections of private enterprises and differencesof institutional environments on acquiring bank loans, and analyzes the governanceeffect of bank-debt and its impact on firm value. The results show that: Politicalconnections have influenced bank’s lending policy; the private enterprises who havepolitical connections could acquire more loans from bank. Poorer the institutionalenvironments are, stronger the effect of political connections in helping private enterprises to acquire more bank loans is; building political connections is an informalsubstitute mechanism for private enterprises to overcome the drawbacks of marketinstitutions. The bank loans have governance effect in private enterprises with politicalconnections and can increase firm value; the allocation of bank loans through politicalconnections is efficient. This study provides a meaningful perspective for deepeningunderstand the impact of political connections on firm value and allocation of socialresources.