Political Connections And Capital Investment In Private Enterprises

Since Kruger did the pioneering study in1974, political connections had been the research focus of the Finance and Economics. Political connections become universal phenomena all over the world and widely exist in most countries, especially in emerging market countries. Although China is from the central highly centralized planned economic system transition to a market economy system, but the Chinese economy has dual-track colors, deep-rooted old ideas, the market is controlled by government too strictly. The development of private enterprises path is even more difficult than the state-owned enterprises, because the state-owned enterprises have the government’s "extra care", the Government will be more likely to give state-owned enterprises "green light". Private enterprises establish connection with the government for survival and development, its paths are as follows:(1) private entrepreneurs actively participate in politics (selected deputies to the NPC or CPPCC members);(2) the recruitment of retired government cadres into the enterprise;(3).The executives have political experience. The political connections of private enterprises bring the convenience of the financing, the more favorable tax rates, financial subsidies, and so on. But do these support the investment behavior of enterprises? Further, can political connections affect private enterprise investment in efficiency?The introduction of political connections in the field of capital investment is exploring the relationship between them. Rent-seeking theory, government intervention and support theory as a guide, this article analysis of the political connections with the impact of capital investment in private enterprises. In this paper, the theoretical analysis of the executives of political association and capital investment of private enterprises and empirical model building, empirical testing for the study sample and listed private enterprises in Shanghai and Shenzhen in2008to2010, the following conclusions: First. Politics associated with the scale of the investment of private enterprises. In the market economy, firms want to reap excess profits in order to find new profit growth point, however, with the addition of competitors, excess profits gradually disappear, manufacturers can only get the average profit and achieve dynamic equilibrium. But the market in resource allocation failure, this time the government began to intervene in the economy. The government began to play the role of the allocation of resources, the price of scarce resources is lower than the equilibrium price,and there will result in insufficient supply. However, in order to ensure normal production, manufacturers had to draw the relationship to appropriate resources, such as rent-seeking behavior is produced. China is a country of a transition from a highly centralized planned economic system to a market economy system, the old concept of deep-rooted legal system is not perfect, the degree of market-oriented is not enough, the market is still controlled by the government strictly. Therefore, the rent-seeking behavior is inevitable. Private enterprises with political connections obtain the benefits such as longer loan period, the more favorable interest rates, more favorable tax rates, more financial subsidies, more inclined to diversified investment and so on, private enterprises obtain these benefits that provide some financial support for investment. Meanwhile, the assessment of the Chinese government officials shifts from the political performance to economic. Performance-based local economic development relates to the promotion of government officials. The local government has introduced various preferential policies and vigorously persuades entrepreneurs to attract enterprises investment. Politics associated enterprises is undoubtedly the focus of government research object. According to descriptive statistics, political association of private business spends more investment than non-political association company. Political association and private business investment spending is significant positive correlation. We further distinguish between these two types of political relevance of the government troops class on behalf of the members of the class, the paper considers the essential difference between these two exists, it should be separated to explore the relationship between them with over-investment. The study found that there was no significant difference between them with over-investment. Second, the political association may be a means of government during the privatization process continued intervention2. Government intervention affects decision-making behaviors, the government will impose its own will to the enterprise, enabling businesses to an excessive burden. When we make investment decisions, we have to consider the wishes of the government and it is unlikely to adopt the economic principle of maximizing and thus lost the business part of the investment efficiency. Over-investment behaviors of private enterprises for the study sample, the empirical results show that:the political association and private enterprise is positively related to over-investment.Third, the political association is divided into government troop class political association on behalf of the members of the class politics associated with these two types. The empirical results show that:the government troop class politics is associated with the promotion of excessive investment in private enterprises. The type of political association is mainly derived from the former government officials in business or retired into the enterprise. This political association is often hidden, and often become the way of government intervention; on behalf of the members of class politics associated with over-investment has a positive impact on private enterprise, but not significantly. With the gradual growth of the enterprise, business executives actively pursue this type of political association. They will use this relationship to reap benefits for the enterprise, so that the possibility of the enterprise value decreases due to deteriorating external environment. The contribution of this article:the political relevance of this factor to introduce the company’s capital investment research in the field, in a unique china economic environment, revealing the political association of the company’s capital investment. The political relevance of this article refers to.the background of executive government executives including Chairman and general manager. Political association is the chairman or general manager that has been or whether it is now served as NPC deputies and CPPCC members, government officials or military officers. Further in this article of political association, a distinction is divided into on behalf of the members of the class of political association and the government army class of political association, respectively, to examine its impact on the company’s investment, because these two kinds of relationships, in essence, has a huge difference. Especially in a period of economic restructuring, the study has a positive contribution to transform government functions, improve the efficiency of investment and develop the financial system.Deficiencies of this article:(1)This paper mainly studies the politics associated with the scale of capital investment in private enterprises, and political association of over-investment in private enterprises. We don’t study the question Whether the political association alleviate underinvestment or exacerbate overinvestment, so my study is not comprehensive enough.(2)We use the method of dummy variables to portray the political association of enterprises. This means that political influence is the same between Government officials in the State Department and government officials in local government. However, it’s not true. In the central vertical administrative system, the same level of Central Government officials on the political influence is obviously greater than the local official. Differences in political influence may affect the micro-economic level.