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Research on Political Connection and Corporation Investment Behavior

Author: HeYiChuang
Tutor: LiChuanXian
School: Southwest University of Political Science
Course: Business management
Keywords: political connection investment decision investment efficiency privateenterprise
CLC: F275
Type: Master's thesis
Year: 2012
Downloads: 58
Quote: 0
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Abstract

The relevant relationship between enterprise and government officers or politicians is acommon phenomenon during economic developing process all over the world. Particularly,China has a special culture and institution under the reforming economic background, so it isvery important for Chinese enterprise maintain a close relationship with government. Base onthe enterprise investment theory and political connection, the paper focus on the influencerelationship between the political connection and the investment behavior and the investmentrisk. Then this paper discusses the advantage and disadvantage creating by the establishmentof political connection for the private enterprise in the background of economies intransformation, and how to guarantee the efficiency and equity in investment environment, sothat the value of enterprise can be realized.On the basis of reviewing the international and domestic research findings on thedefinition and measurement of political connection, and on how political connections impactthe investment decisions. And then the paper analyses the influence between the political andthe enterprise investment expenditure, foreign investment, diversified investment, andexcessive investment behavior. Base on the empirical data from the private listed companiesin China from2008to2010, the empirical test constructs multiple regression models, whichtakes the investment expenditure, foreign investment, diversified investment, excessiveinvestment as the dependent variable, and takes the political connection and degree ofpolitical connection as explanatory variables. It further discusses the correlation and influencebetween these variables. Research findings show that:(1) Political connection influences the Chinese private listed companies’ investmentbehavior significantly and far-reaching. In other same conditions, compared with no politicalconnection corporate, political connection business would spend more investment expenditure,and more inclined to foreign investment and diversified investment. At the same time, if thedegree of the political connection is stronger, the enterprise would have more investmentexpenditure, foreign investment enterprises and diversified investment. For it mainly wouldbring more financing, preferential tax, and industry access permission resources. Then theenterprise would get more political resources which advantageous the investment through thepolitical connections, such as more effective investment information, more lower industry access conditions et al.(2) Political connection on investment efficiency is expressed mainly in the excessiveinvestment. Compare with no political connection, political connection enterprise would bemore over-investment behavior, and the degree is stronger, the over-investment behavior ismore serious. To a certain extent, the political connection would reduce financing constraints,and the government would influence the investment decision-making by the management,which would lead to overconfidence and blind investment. In order to maintain and improvepolitical status, the enterprise would need larger business scale as political capital. So thepolitical connection enterprises often ignore the market risk on the investment projects andincrease the investment.(3) From the empirical results, we find out political connection would guide theinvestment behavior of the enterprise. Not only the political connection provides morebusiness opportunities and resources, but also takes a hidden danger for the market. Theenterprise can make more competitive advantage through the political connections, which willallow more enterprises to rely on the informal mechanisms and resources to survive anddevelop. The final result will damage the fair market competition, and then affects the marketorder. Based on this, we argue that the essence of political connection is impaired in the fairmarket competition mechanism. In the long run, we should further perfect the market faircompetition system and create a fair and open investment environment, and as much aspossible to reduce the influence of the political connection, and to maintain the normal orderof market economy and development.

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