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Corporations often try to influence politicians and acquire political favors, which may serve as a competitive advantage. The authors investigate corporate donations and explore their role in a commencement of social exchanges between firms and local leaders in China.

How Is This Research Useful to Practitioners?

Political resources, including money, information, and favorable policy changes, are highly sought in a competitive economy. The purchase and sale of political products are more subtle in China than in an economic market and usually involve paying corporate funds for an obligation to reciprocate the favor in the future. The authors indicate that political markets are based on social exchanges between partners in which mutual trust plays a key role.
They note that in China, corporations often make donations to government-affiliated agencies in order to reach politicians. The authors focus their research on the relationship between firms and local leaders (i.e., city secretaries) because of the latter’s large influence on the business environment.
Turnover among local leaders generates uncertainty of both policy and opportunity. Those business players who want to preserve their competitive advantages are likely to pressure a new secretary to resist offering favors to others. Previously disadvantaged firms may want to take advantage of the opportunity to influence new officials.
To facilitate access to the local administration, firms make donations as a first step in initiating interactions with a new city leader. In turn, a new administrator may arrange an official visit to the donor’s firm, and thus the exchanges begin. The authors suggest that once a new secretary has settled in, donations may be less effective because the secretary may not be interested in further alliances.
They conclude that the best time to make donations is early in a new secretary’s tenure (i.e., the next fiscal year after turnover), because that is when the new leader is likely to look for financial alliances to achieve the leader’s political ambitions.

How Did the Authors Conduct This Research?

Using data over 2001–2012, the authors focus on three key datasets: city secretary turnover, corporate donations to government-linked agencies, and online news information on official visits to firms.
The authors obtain data on city secretary turnover from each city’s official website. Corporate donation data are based on their analysis of annual reports of Shenzhen- and Shanghai-listed companies. Because the data sample is both large (18,954 annual reports) and unstructured, the authors ensure the consistency and reliability of their results by calculating Cohen’s (Psychological Bulletin 1968) kappa.
They collect news information on official visits and grade it with respect to the visiting official’s position in the administration. They then merge donation data of firms headquartered in a particular prefecture with the level of attention from representatives of the new local leaders, as well as with other data (e.g., data on local market competition) and control data (e.g., data on natural disasters).
To capture correlation and dependence between the very large datasets, the authors use clustering analysis, citing particular routines in the Stata program. They then analyze the correlation matrices and compare the results, especially with regard to the timing after political turnovers.
Finally, the authors support their hypotheses, confirm the significance of the relationship between firms and local leaders, and run several robustness tests to ensure that their results are consistent with their main findings.

Abstractor’s Viewpoint

Corporations engage in lobbying activities to access political resources. Taking into account the unique political environment and the virtually unlimited power of local leaders in China, the role of this particular market seems more than substantial.
In Western countries, lobbying rules require extensive disclosure, and there is a large amount of information in the public sphere. In China, however, lobbying is illegal, which makes it very difficult to analyze. Therefore, the authors rely on proxies for political attention (e.g., official visits) and political funding by corporate donations to agencies. But it seems logical to assume that firms make donations to initiate relationships with local leaders.
The authors provide convincing empirical evidence on the mechanism of social exchange, including measures of its effectiveness. Although the data are not analyzed beyond 2012, thus excluding the anti-corruption campaign under Xi Jinping, most of the authors’ findings remain true. But it would be beneficial to verify the impact of new policies and restrictions (e.g., a ban on city officials and their families from running private businesses) on the mechanism of money transfer.
This study is comprehensive and well structured. It may be useful for investors, compliance officers, policymakers, researchers, and those who want to better understand the rules of social exchange that govern Chinese political markets.

About the Author(s)

Jakub M. Szudejko CFA