Haveman, Jia, Shi & Wang (2017). The Dynamics of Political Embeddedness in China

Authors:

Heather A. Haveman – U.C. Berkeley Sociology

Nan Jia – USC Marshall School of Business

Jing Shi – RMIT University

Yongxiang Wang – USC Marshall School of Business

Interviewers:

Yanhua Zhou – Harvard Business School

Yueran Zhang – Harvard University Sociology

Article link: http://journals.sagepub.com/doi/full/10.1177/0001839216657311

Question 1. You all have different disciplinary backgrounds and research trajectories. What was your motivation in investigating political embeddedness in China? What brought the team together to this project?

Heather: It was in some ways geography – physical proximity. I met Yongxiang when he was a PhD student at Columbia Business School. He audited my PhD seminar on organizations – unusal for someone in finance, but he told me he understood that financial economists were coming to realize that institutions and social networks were important predictors of market behavior. Yongxiang and Nan met when they both started working at USC’s Marshall School of Business.

Yongxiang: Jing Shi and I have also been working together for quite a few years.

Heather: In other ways, it was that all four of us have broad intellectual interests. Through working with Yongxiang (a paper published in Management and Organization Review in 2013), I became fascinated with China’s political-economic transition, and my interests became more macroscopic than a single industry/population – I started to pay attention to entire countries.

Question 2. The existing literature has provided a rich empirical and theoretical account of how political connections influence firms’ market performance and social performance. What is most exciting and unique in your paper is the dynamic perspective that captures the co-evolution of market transition and political ties over time. What was your inspiration of examining the interaction of market development and political embeddedness?

Yongxiang: I was inspired to gather the data by the big question of whether importance of guanxi decreases or increases over time during China’s economic transition. 

Nan: Multiple literatures suggest that political connections (or other informal institutions for that matter) will become less (not more, as our study found) important to firms as markets develop—which I never felt comfortable with and certainly disagree with at least in the context of China. If you closely examine those arguments, they almost always require a leap of faith about the role of the state in the economy: they implicitly assume that the state power recedes as markets develop—while the opposite occurs in China. Therefore, our findings are surprising and we have a clear explanation: when the state’s power remain strong (i.e., rule of law is weak), a larger market simply offers more opportunities for connected firms to use their connections to capture more value. 

Heather: We specifically wanted panel data so we could estimate dynamic models and get a handle on causal identification. As you pointed out, most previous studies of political connections were cross-sectional and therefore unsatisfyingly ahistorical as well as unable to handle causal identification.

Question 3. The paper argues that the reason why political ties become more valuable in an increasingly marketized economy is that the markets are nested in a broader political environment where the rule of law is ineffective and checks on bureaucrats’ power are few. However, some might argue that even in countries where legal and institutional checks and balances are well developed (e.g. the U.S.), political ties still bring advantages to firms. What do you make of this argument? Is it the case that in countries such as the U.S., political embeddedness matters to a lesser degree, or it matters in a different way that the current research design can’t capture?

Heather: Sure, political connections are valuable in countries with stronger rule of law. But no country has perfectly/maximally strong rule of law, so political connections can always help overcome deficiencies in the rule of law. It’s an empirical question as to whether the differences in the consequences of political connections between countries with stronger versus weaker rule of law is a matter of degree or a matter of kind – a quantitative difference (weaker where the rule of law is stronger) or a qualitative difference (takes different forms in countries that have different levels of rule of law strength). Also, the rule of law is a complex political-legal-social construction: it involves property rights, contracts, conditions of competition, and forms of organization, plus more. So countries’ rule of law can vary along several dimensions. And the effects of political connections are likely to differ depending on where (weak to strong) each country’s rule of law is on each dimension. In our paper, we focused on property rights because that was the most salient in the Chinese context – and in many other countries making the transition from state socialism to market capitalism.

Yongxiang: As a side note, there have been quite a few papers showing the value of political connections in the US, for example, connected banks got more funds from the federal government after the great recession in 2008. Similarly there exist also some papers showing that even in the least corrupt country like Sweden, connections bring value. But none of studies looks at the dynamic value of political connections. And in most cases, they investigate extreme events like the great recession in 2008.

Question 4. The main effect of “market development” is shown to be negative in model (1) of Table 2 and model (1) of Table 3. This seems surprising and counter-intuitive: as the market becomes more developed (i.e., the private sector accounts for higher ratio of employment and investment of the economy), we expect a greater degree of market-based competition and redistribution that would uplift firm’s performance (ROA). But your research shows the opposite finding. Do you have any theories/speculations to explain this?

Heather: The best answer I can give is that market development created competition that stressed all firms. Another analysis could be done to determine which firms (in terms of size, industry, and geographic location) were most harmed by competition and when during the market development process. You also see this effect in the sample of small and medium-sized privately owned firms (Table 6, Model 1).

Nan: I agree. Market competition, I think, is the best explanation. It is outside the scope of our paper to examine although we can offer a few speculations.

Question 5. In your paper, you neatly provide mediation tests, but you also acknowledge that these factors (access to bank loans and related-party loans) only partially mediate the relationship and other factors (e.g., know-how knowledge, business-government trust) maybe at play but you cannot test them due to data limitations. This is related to a broader phenomenon in our field: macro-organizational scholars and sociologists have been increasingly investing in hammering out the causal mechanisms and providing evidence for them. However, for quantitative researchers that rely mainly on large datasets, testing causal mechanisms can be very challenging given the data constraints. Oftentimes, researchers can only delineate the hypothesized mechanisms without testing them out. A typical criticism on this approach is: you do not have data to back up the mechanisms you hypothesized about. What is your perspective on causal mechanism testing in quantitative research? How do you see the trend in the future? Do you have any advice for young scholars in this field?

Heather: I think we need to make more effort to test causal mechanisms. Just because it’s difficult doesn’t mean we should shrink from doing it. Right now, we can get more data on firms and have more computerized tools and techniques for analyzing those data – including rich textual data – that may provide insights into causal mechanisms we couldn’t investigate 20 years ago.

Nan: We need to do the best we can to test at least some causal mechanisms and be frank about what we can and cannot infer instead of over claiming, in order to build a solid foundation for subsequent research to build on.

Reference:

Haveman, Heather A., and Yongxiang Wang. “Going (More) Public: Institutional Isomorphism and Ownership Reform among Chinese Firms.” Management and Organization Review 9.1 (2013): 17-51.

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