In China, the Right Political Ties Count

No one who has done business in China will be surprised to learn that relationships with government matter. Executives in China devote a substantial amount of time to interaction with government, even with the country’s ongoing economic liberalization. A new paper measures the return to firms from political connections in China, and sheds light on when they do and don’t pay off. Yes, political ties can sometimes improve firms’ chances of success, but not all connections are equally important. Researchers from The Hong Kong Polytechnic University, Rotman School of Management, and the National University of Singapore Business School sought to quantify the effect of political connections in China, looking specifically at the TV manufacturing industry from 1993 to 2003, a period of significant liberalization. They looked at whether firms had a former government employee on their leadership team, or whether a former executive of the firm was now employed in government. With that data they were able to compare firm performance — whether the firm went out of business in a given period, as well as its revenue — before and after these political connections were formed. Most interesting, the researchers distinguished between ties to local government and ties to national government. They found that ties to local government were associated with higher rates of firm survival as well as, in some cases, increased revenue. By contrast, ties to national government had no effect on either metric of success. These results held even after accounting for firm size, age, degree of state ownership, and level of diversification. Notably, local ties were most likely to improve the odds of survival for poorly performing firms. And the positive effect on revenue was only found for firms that were already performing well. This suggests that political ties are more effective at keeping companies afloat — even struggling ones — than at helping them to excel. The authors offer multiple reasons why connections to local government would matter more: Local governments directly experience the benefits and costs of firms’ operations in their jurisdictions with, for example, stronger firm performance increasing local employment and tax revenues. Local governments often have greater discretion than their central equivalents and therefore are more likely to focus on local issues and to address the needs of local firms. National government agencies, in contrast, have a wider breadth of concerns and interests to balance, making them less responsive to the interests of any one firm or even industry. Another way of explaining this difference comes from a 2010 HBR article on doing business in China by Lynn Paine: Executives often believe that obtaining government support for big business deals is just a matter of forging high-level connections or lining the right pockets. Connections are no doubt useful, but experienced leaders know that they must also demonstrate their project’s contribution to China’s development. It’s impossible to discuss political ties in China without noting the widespread corruption of local government, and the bribery scandals that have resulted. It’s conceivable that some of what this study is capturing isn’t merely the impact of a revolving door between government and industry, but rather a proxy for that corruption. Nonetheless, the takeaway for firms looking to build leadership teams or assess partners in China is that not all political connections are equal. Time spent cultivating local ties may yield higher returns, whereas for national government, offering strategic value is more critical.

In China, the Right Political Ties Count

Partner Center