Viewed from recent literature, a complete institutional system is an essential foundation for the healthy development of enterprises. However, the conclusion of this system is challenged by the quick growth of certain enterprises in developing countries. In order to test the influence of political connections between enterprises, hypotheses are set up in this study, aiming for improvement of both financing capability and investment behaviors.
In the field of firm’s development, this thesis tries to evaluate in four aspects about the influence of political connections in private-owned enterprises’ financing and investment. To start, theoretical explanation of how the political connection effect the enterprise is offered, including the reason to build political connections as well. Then, by utilizing panel data analysis methods like empirical tests, the relationship between the political connections and the enterprises are demonstrated. Next, the different effects of high level and low level political connections are found by using a subdivided definition. Finally, explosions are made on whether the political connections, which is built by former government officials, is more effective than that by representatives of Chinese People's Political Consultative Conference or National People’s Congress.
The result of the empirical tests shows that, both lower financing cost and a higher investment rate is a characteristic of Chinese private-owned enterprises with political connection. As the political connection gets stronger, the private-owned enterprises can get more benefits. Low level political connections have more influence on the private-owned enterprises than high level political connections. The political connection built by former government officials is more effective than that by representatives of CPPCC and NPC.
Firstly, this study fails to analyze the phenomenon in long term, because all intercepts are based on a three-year sample interval. Alone with the small sample, the thesis also ignores the political connections built by relatives, friends and schoolfellows, which is hard to measure. Besides, this study excluded the negative effects caused by political connections.
It is not a sustainable development plan for private enterprises to use political connections. Instead, they ought to strengthen their own research. Additionally, it is also necessary for private enterprises to build up a complete management structure and a regular information disclosure regulation. Expect the two practical implications mentioned above, to encourage a better development of the private enterprises, the usage of political connection needs modification under the current circumstance.
By combining political influence on private enterprises’ financing capability and investment behaviors together, four different ways are proposed to represent the firm’s political connection, which may inspire the future research.
Political Connection; Private Enterprises; Financing Capability; Investment Behaviors