Hostname: page-component-6bf8c574d5-vmclg Total loading time: 0 Render date: 2025-02-20T05:52:06.574Z Has data issue: false hasContentIssue false
  • English
  • Français

The Quality of Local Government and Firm Performance: The Case of China's Provinces

Published online by Cambridge University Press:  22 December 2015

Jongmoo Jay Choi ,
Cao Jiang  and
Oded Shenkar
Jongmoo Jay Choi
Affiliation:
Temple University, USA
Cao Jiang
Affiliation:
Wenzhou-Kean University, USA and China Southwestern University of Finance and Economics, China
Oded Shenkar
Affiliation:
Ohio State University, USA
Get access Rights & Permissions [Opens in a new window]

Abstract

Extending La Porta, Lopez-de-Silanes, Shleifer, and Vishny (1999), we examine the effect of local government quality on firm performance, since regional and firm research provides a more fine-grained analysis especially in countries where local administration is an integral part of the bureaucratic apparatus. Using a dataset of 7,873 Chinese listed firm-years for 1994–2006, we find a positive relationship between the quality of provincial government and firm performance, controlling for location and firm-specific governance variables. Among various government quality variables, we find that having a special economic zone depicting low taxes and bureaucratic efficiency is the best predictor of firm performance, followed by the degree of marketization, efficient property registration, and environmental protection. Most intriguingly, political freedom has a significant impact on firm performance and productivity, even in a regime where democracy is not practiced. This has never been documented before at a microeconomic level and barely so at a macro level, vindicating Hayek's (1944) theory.

Keywords

Chinese corporate governancefirm performanceinstitutional theorylaw and economicsquality of government
Type
Articles
Information
Management and Organization Review , Volume 11 , Issue 4: Special Issue Expanding Research on Family Business in China , December 2015 , pp. 679 - 710
Copyright
Copyright © The International Association for Chinese Management Research 2015 

Access options

Get access to the full version of this content by using one of the access options below. (Log in options will check for institutional or personal access. Content may require purchase if you do not have access.)

References

REFERENCES

Acemoglu, D., Johnson, S., & Robinson, J. A. 2001. The colonial origins of comparative development: An empirical investigation. American Economic Review, 91 (5): 1369–1401.Google Scholar
Acemoglu, D., Johnson, S., & Robinson, J. A. 2002. Reversal of fortune: Geography and institutions in the making of the modern world income distribution. Quarterly Journal of Economics, 117 (4): 1231–1294.Google Scholar
Aghion, P., Algan, Y., Cahuc, P., & Shleifer, A. 2010. Regulation and distrust. Quarterly Journal of Economics, 125 (3): 1015–1049.Google Scholar
Alesina, A., Devleeschauwer, A., Easterly, W., Kurlat, S., & Wacziarg, R. 2003. Fractionalization. Journal of Economic Growth, 8 (2): 155–194.CrossRefGoogle Scholar
Barro, R. 1991. Economic growth in a cross-section of countries. Quarterly Journal of Economics, 106: 407–443.Google Scholar
Barro, R. 1996a. Democracy and growth. Journal of Economic Growth, 1: 1–27.Google Scholar
Barro, R. 1996b. Determinants of economic growth: A cross-country empirical study. NBER Working Paper Series No. 5698.CrossRefGoogle Scholar
Beck, T., Demirguc-Kunt, A., & Levine, R. 2003. Law, endowments, and finance. Journal of Financial Economics, 70 (2): 137–181.CrossRefGoogle Scholar
Bertocchi, G., & Canova, F. 2002. Did colonization matter for growth? An empirical exploration into the historical causes of Africa's underdevelopment. European Economic Review, 46 (10): 1851–1871.CrossRefGoogle Scholar
Charumilind, C., Kali, R., & Wiwattanakantang, Y. 2006. Connected lending: Thailand before the financial crisis. Journal of Business, 79: 181–218.Google Scholar
Chen, Y., Wang, S., Li, W., & Tong, W. 2014. Institutional environment, firm ownership and IPO first-day returns: Evidence from China. Working Paper. Google Scholar
Choi, J. J., Park, S. W., & Yoo, S. 2007. The value of outside directors: Evidence from corporate governance reform in Korea. Journal of Financial and Quantitative Analysis, 42 (4): 941–962.CrossRefGoogle Scholar
Claessens, S., Djankov, S., Fan, J. P. H., & Lang, L. H. P. 1998. The pattern and valuation effects of corporate diversification: A comparison of the US, Japan, and other Eastern Asian economies. World Bank working paper.Google Scholar
Cull, R., Xu, L. C., Yang, X., Zhou, L., & Zhu, T. 2013. Market facilitation by local government and firm efficiency: Evidence from China. World Bank Policy Research working paper no. WPS 6688.CrossRefGoogle Scholar
De Soto, H. 1989. The other path. New York: Harper and Row.Google Scholar
DeLong, B., & Shleifer, A. 1993. Princes and merchants: Government and city growth before the industrial revolution. Journal of Law and Economics, 36: 671–702.Google Scholar
Demsetz, H. 1967. Toward a theory of property rights. American Economic Review, Papers and Proceedings, 57: 347–359.Google Scholar
Dethier, J., Hirn, M., & Straub, S. 2011. Explaining enterprise performance in developing countries with business climate survey data. World Bank Research Observer, 26 (2): 258–309.Google Scholar
Dinc, I. S. 2005. Politicians and banks: Political influences on government-owned banks in emerging countries. Journal of Financial Economics, 77 (2): 453–479.CrossRefGoogle Scholar
Djankov, S., La Porta, R., Lopez-de-Silanes, F., & Shleifer, A. 2002. The regulation of entry. Quarterly Journal of Economics, 117 (1): 1–37.Google Scholar
Djankov, S., McLiesh, C., Nenova, T., & Shleifer, A. 2003. Who owns the media? Journal of Law and Economics, 46 (2): 341–383.CrossRefGoogle Scholar
Dollar, D., Hallward-Driemeier, M., & Mengistae, T. 2005. Investment climate and firm performance in developing economies. World Bank Research Paper 0013–0079.Google Scholar
Doucouliagos, H., & Ulubasoglu, M. A. 2008. Democracy and economic growth: A meta-analysis. American Journal of Political Science, 52 (1): 61–83.Google Scholar
Easterly, W., & Levine, R. 2003. Tropics, germs, and crops: How endowments influence economic development. Journal of Monetary Economics, 50 (1): 3–39.Google Scholar
Faccio, M. 2006. Politically connected firms. American Economic Review, 96 (1): 369–386.Google Scholar
Faccio, M., & Lang, L. H. P. 2002. The ultimate ownership of western European corporations. Journal of Financial Economics, 65 (3): 365–395.CrossRefGoogle Scholar
Fan, G., Wang, X., & Zhang, L. 2001. Marketization index for China's provinces. Annual Report 2000. Beijing: National Economic Research Institute.Google Scholar
Fan, J. P. H., Wong, T. J., & Zhang, T. 2007. Politically connected CEOs, corporate governance, and post-IPO performance of China's newly partially privatized firms. Journal of Financial Economics, 84 (2): 330–357.Google Scholar
Firth, M., Gong, S. X., & Shan, L. 2013. Cost of government and firm value. Journal of Corporate Finance, 21: 136–152.Google Scholar
Fisman, R. 2001. Estimating the value of political connections. American Economic Review, 91 (4): 1095–1102.Google Scholar
Fredriksson, P. G., & Svensson, J. 2003. Political instability, corruption and policy formation: The case of environmental policy. Journal of Public Economics, 87 (7-8): 1383–1405.Google Scholar
Friedman, M. 1962. Capitalism and freedom. Chicago, IL: University of Chicago Press.Google Scholar
Glaeser, E., La Porta, R., Lopez-de-Silanes, F., & Shleifer, A. 2004. Do institutions cause growth? Journal of Economic Growth, 9 (3): 273–303.Google Scholar
Gompers, P., Ishii, J., & Metrick, A. 2003. Corporate governance and equity prices. Quarterly Journal of Economics, 118 (1): 107–155.Google Scholar
Hayek, F. 1944. The road to serfdom. London: G. Routledge and Sons.Google Scholar
Heckman, J. 1978. Dummy endogenous variables in a simultaneous equation system. Econometrica, 46: 931–959.Google Scholar
Helliwell, J. F. 1994. Empirical linkages between democracy and economic growth. British Journal of Political Science, 24 (2): 225–248.Google Scholar
Holderness, C. G. 2003. A survey of blockholders and corporate control. Federal Reserve Bank of New York, Economic Policy Review, 9 (1): 51–64.Google Scholar
Huang, Y., & Di, W. 2004. A tale of two provinces: The institutional environment and foreign ownership in China. MIT Sloan working paper No. 4482–04; William Davidson Institute working paper No. 667.Google Scholar
Jensen, M. C., & Meckling, W. H. 1976. Theory of the firm: Managerial behavior, agency costs and ownership structure. Journal of Financial Economics, 3 (4): 305–360.Google Scholar
Johnson, S., Kaufmann, D., & Shleifer, A. 1997. The unofficial economy in transition. Brookings Papers on Economic Activity, 159–240.Google Scholar
Joumard, I., & Kongsrud, P. M. 2003. Fiscal relations across government levels. OECD Economic Studies, 2003 (1): 155–229.CrossRefGoogle Scholar
Kahn, M. E., Li, P., & Zhao, D. 2013. Pollution control effort at China's river borders: When does free riding cease? NBER Working Paper No. 19620.Google Scholar
Kaplan, S., & Zingales, L. 1997. Do investment-cashflow sensitivities provide useful measures of financing constraints? Quarterly Journal of Economics, 112: 169–215.Google Scholar
Kim, C., Pantzalis, C., & Park, J. C. 2012. Political geography and stock returns: The value and risk implications of proximity to political power. Journal of Financial Economics, 106 (1): 196–228.Google Scholar
Knack, S., & Keefer, P. 1997. Does social capital have an economic payoff? A cross-country investigation. Quarterly Journal of Economics, 11: 1251–1288.Google Scholar
Kornai, J. 1990. The road to a free economy (Shifting from a socialist system: The example of Hungary). New York: Norton.Google Scholar
Kornai, J. 1992. The socialist system: The political economy of communism. Princeton, NJ: Princeton University Press.Google Scholar
La Porta, R., Lopez-de-Silanes, F., Shleifer, A., & Vishny, R. W. 1997. Legal determinants of external finance. Journal of Finance, 52: 1131–1150.Google Scholar
La Porta, R., Lopez-de-Silanes, F., Shleifer, A., & Vishny, R. W. 1998. Law and finance. Journal of Political Economy, 106 (6): 1113–1154.Google Scholar
La Porta, R., Lopez-de-Silanes, F., Shleifer, A., & Vishny, R. W. 1999. The quality of government. Journal of Law, Economics & Organization, 15 (1): 222–279.Google Scholar
La Porta, R., Lopez-de-Silanes, F., Shleifer, A., & Vishny, R. W. 2000. Investor protection and corporate governance. Journal of Financial Economics, 58 (1): 3–27.Google Scholar
La Porta, R., Lopez-de-Silanes, F., Shleifer, A., & Vishny, R. W. 2002. Government ownership of banks. Journal of Finance, 57 (1): 265–301.Google Scholar
Landes, D. 1998. The wealth and poverty of nations. New York: W. W. Norton.Google Scholar
Li, S., Li, S., & Zhang, W. 2000. The road to capitalism: Competition and institutional change in China. Journal of Comparative Economics, 28: 269–292.Google Scholar
Mauro, P. 1995. Corruption and growth. Quarterly Journal of Economics, 110: 681–712.Google Scholar
Marx, K. 1872. Das kapital. London: Lawrence and Wishart.Google Scholar
McGuckin, R. H., & Dougherty, S. M. 2002. Restructuring Chinese enterprises: The effects of federalism and privatization initiatives on business performance. The Conference Board Research Report R-1311-02-RR.Google Scholar
von Mises, L. 1962. Planning for freedom. South Holland, IL: Libertarian Press.Google Scholar
Nee, V. 1992. Organizational dynamics of market transition: Hybrid forms, property rights, and mixed economy in China. Administrative Science Quarterly, 37 (1): 1–27.CrossRefGoogle Scholar
North, D. 1981. Growth and structural change. New York: W. W. Norton.Google Scholar
North, D. 1990. Institutions, institutional change, and economic performance. Cambridge, UK: Cambridge University Press.Google Scholar
Olson, M. 1993. Dictatorship, democracy, and development. American Political Science Review, 87: 567–576.Google Scholar
Park, S. H., Li, S., & Tse, D. K. 2006. Market liberalization and firm performance during China's economic transition. Journal of International Business Studies, 37: 127–147.CrossRefGoogle Scholar
Petersen, M. 2009. Estimating standard errors in finance panel data sets: Comparing approaches. Review of Financial Studies, 22: 435–480.CrossRefGoogle Scholar
Qian, Y., & Weingast, B. R. 1996. China's transition to markets: Market-preserving federalism, Chinese style. The Journal of Policy Reform, 1 (2): 149–185.Google Scholar
Rajan, R. G., & Zingales, L. 2003. The great reversals: The politics of financial development in the twentieth century. Journal of Financial Economics, 69 (1): 5–50.Google Scholar
Rauch, J. E. 1995. Bureaucracy, infrastructure, and economic growth: Evidence from U.S. cities during the progressive era. American Economic Review, 85: 968–979.Google Scholar
Rauch, J. E., & Evans, P. B. 1999. Bureaucracy and growth: A cross-national analysis of the effects of ‘Weberian’ state structures on economic growth. American Sociological Review, 64 (5): 768–765.Google Scholar
Rauch, J. E., & Evans, P. B. 2000a. Bureaucratic structure and economic performance. Journal of Public Economics, 74: 49–71.Google Scholar
Rauch, J. E., & Evans, P. B. 2000b. Bureaucratic structure and bureaucratic performance in less developed countries. Journal of Public Economics, 75 (1): 49–61.Google Scholar
Rock, M. T., & Bonnett, H. 2004. The comparative politics of corruption: Accounting for the East Asian paradox in empirical studies of corruption, growth and investment. World Development, 32 (6): 999–1017.Google Scholar
Sapienza, P. 2004. The effects of government ownership on bank lending. Journal of Financial Economics, 72: 357–384.Google Scholar
Shleifer, A. 1998. State versus private ownership. Journal of Economic Perspectives, 12 (4): 133–150.Google Scholar
Shleifer, A. 2011. Efficient regulation. Regulation vs. litigation, Daniel Kessler, , ed., Chicago, IL: University of Chicago Press.Google Scholar
Shleifer, A., & Vishny, R. W. 1993. Corruption. Quarterly Journal of Economics, 108: 599–617.Google Scholar
Shleifer, A., & Vishny, R. W. 1994. Politicians and firms. Quarterly Journal of Economics, 109: 995–1025.Google Scholar
Shleifer, A., & Vishny, R. W. 1998. The grabbing hand: Government pathologies and their cures. Cambridge, MA: Harvard University Press.Google Scholar
Smith, A. 1776. An inquiry into the nature and causes of the wealth of nations. Chicago, IL: University of Chicago Press, 1976 edition.Google Scholar
Stigler, G. J. 1971. The theory of economic regulation. The Bell Journal of Economics and Management Science, 2 (1): 3–21.Google Scholar
Stultz, R., & Williamson, R. 2003. Culture, openness, and finance. Journal of Financial Economics, 70 (3): 313–349.Google Scholar
Sun, Q., & Tong, W. H. S. 2003. China share issue privatization: The extent of its success. Journal of Financial Economics, 70 (1): 183–222.Google Scholar
Thompson, S. B. 2011. Simple formulas for standard errors that cluster by both firm and time. Journal of Financial Economics, 99: 1–10.Google Scholar
Treisman, D. 2000. The causes of corruption: A cross-national study. Journal of Public Economics, 76 (3): 399–457.Google Scholar
Walder, A. G. 1995. Local governments as industrial firms: An organizational analysis of China's transitional economy. American Journal of Sociology, 101 (2): 263–301.Google Scholar
Wang, J. 2013. The economic impact of Special Economic Zones: Evidence from Chinese municipalities. Journal of Development Economics, 101: 133–147.Google Scholar
Wong, C. 1992. Fiscal reform and local industrialization: The problematic sequencing of reform in post-Mao China. Modern China, 18 (2): 197–227.Google Scholar
Wong, W. K. 2004. How good are trade and telephone call traffic in bridging income gaps and TFP gaps? Journal of International Economics, 64 (2): 441–463.Google Scholar
Zhao, Y. 1998. Media, market, and democracy in China: Between the party line and the bottom line (history of communication). Champaign, Illinois: University of Illinois Press.Google Scholar
Zheng, S., Sun, C., Qi, Y., & Kahn, M. E. 2013. Incentivizing China's urban mayors to mitigate pollution externalities: The role of the central government and public environmentalism. NBER Working Paper No. 19624.Google Scholar
Supplementary material: File

Choi supplementary material

Translated abstracts

Download Choi supplementary material(File)
File 24.1 KB