Government Connections and Financial Constraints
Report

Government Connections and Financial Constraints

Evidence from a Large Representative Sample of Chinese Firms

Robert Cull, Wei Li, Bo Sun and Lixin Colin Xu
Federal Reserve Board, 2015
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Recommendation

It’s no secret that politics plays a significant role in corporate dealings in China. Economists Robert Cull, Wei Li, Bo Sun and Lixin Colin Xu examine the effects that state ties have on Chinese businesses’ access to capital. They find that the advantages connected firms enjoy have a negative impact on companies operating without such political favor, and thus the apparent government preference for politically connected enterprises may be choking off some of China’s most promising companies. getAbstract recommends this noteworthy report to investors, executives and analysts studying the effects of state ownership on emerging market companies.

Summary

Large corporations in developing markets face a different set of governance issues than those in developed markets. Because many of the former are currently or previously state-owned enterprises (SOEs) – or have politically appointed CEOs – governments retain a strong voice in directing these businesses’ financial resources and allocating credit. In addition to better access to loans and equity markets, state-connected organizations enjoy subsidies and tax breaks, and these firms are more likely to receive bailout funds than those without such links. ...

About the Authors

Robert Cull and Lixin Colin Xu are lead economists at the World Bank, Bo Sun is an economist with the Board of Governors of the Federal Reserve, and Wei Li is a professor at the Cheung Kong Graduate School of Business in Beijing.

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