Chapter 4

Political Capital and Enterprise

Performance in China: Empirical
Analysis Using Data from the People’s
Congress of Yangzhou City
and Industrial Enterprise

4.1 Introduction: Local People’s Congress

as “Chinese-Style Democracy”

Despite being an authoritarian state, China also has “democratic institutions” aimed
at reflecting the “people’s will” in politics at the central and local levels albeit to
a limited extent. Elections are regularly held to elect delegates. Recent studies on
Chinese politics, such as Kamo (2013), Kamo and Takeuchi (2013), and O’Brien
(1994, 2009), have demonstrated how the Chinese Communist Party (CCP) pursues
its survival by designing incentive mechanisms to co-opt and manage key players,
such as entrepreneurs, local officials, and various groups of citizens.
According to O’Brien (1994), the representatives of the People’s Congress play
the role of “agent” by communicating the policies of the CCP and local governments
to their own electoral districts. O’Brien additionally pointed out that the represen-
tatives of the People’s Congress work as “remonstrators.” In other words, delegates
of the People’s Congress who are familiar with the situation of the constituency will
provide the necessary information for policy planning to the CCP and local govern-
ments as well as convey policy inequities and mistakes of the local governments
to their constituency. Kamo (2013), using detailed data on the Yangzhou Municipal
People’s Congress (MPC) obtained from its website, insisted that delegates of the
People’s Congress acted not only as “agents” or “remonstrators” by the CCP and
local governments but also as “representatives” of constituencies.
According to these previous studies, local people’s congresses’ decisions
regarding the allocation of policies and funds have been closely related to the profit-
inducing behavior of the lower-level region. If this is true, how do the elections of
local council members as “political capital” affect its economic performance at the
local company level?
Many of the previous studies have examined the effects of political factors on firm
performance. Li et al. (2008), using a nationwide survey of private firms, found that

© The Author(s), under exclusive license to Springer Nature Singapore Pte Ltd. 2022 47
K. Kajitani and T. Kamo, Political Economy of Reform in China,
Kobe University Social Science Research Series,
https://doi.org/10.1007/978-981-19-0202-4_4
48 4 Political Capital and Enterprise Performance in China …

the Party membership of private entrepreneurs had a positive effect on the perfor-
mance of their firms, and that Party membership helped private entrepreneurs obtain
loans from banks or other state institutions and afforded them more confidence in the
legal system. Wu et al. (2012), using data on listed Chinese firms, found that private
firms with politically connected managers enjoyed tax benefits and outperformed
those without such managers. Cao et al. (2017), using a sample of listed non-state-
owned enterprises (SOEs), showed that politically connected chief executive officers
(CEOs) had a lower probability of turnover, leading to weaker turnover–performance
sensitivity than nonpolitically connected CEOs.
Ling et al. (2016), using a sample of 103 listed real estate firms from 1998 to
2012, examined the influence of firms’ political connections on external financing.
They demonstrated that political connections were negatively related to return on
assets and that firms with stronger connections were financed with more long-term
bank loans. Boubakri et al. (2012) examined the cost of equity capital of politically
connected firms using a propensity score matching model. They found that politically
connected firms enjoyed a lower cost of equity capital than their non-connected peers.
Liu et al. (2016) investigated how managerial, political, and professional connections
played a role in helping firms obtain trade credits. They documented the fact that
non-SOE firms with professionally well-connected managers received more trade
credit.
Of course, political capital often has a negative effect on the performance of firms
as well. Chen et al. (2011) investigated how the rent-seeking incentives of local
governments motivated private firms to establish political connections and whether
such connections led to more concentrated corporate control structures. He, Wan, and
Zhou (2014) analyzed the stock market’s reaction to CEO succession and found that
there were cumulative abnormal returns when CEO succession was accompanied
by increased political connections. Cheng (2018) tried to estimate the value of the
political connections that independent directors of private firms have by examining
stock price reactions to the sudden death of retired government officials acting as
independent directors of private firms.
Most previous studies used the political connections of individuals in a firm as
proxy, e.g., the firm manager or CEO who is also a member of the CCP or the National
People’s Congress and focused on the effects of these political connections on firm
economic performance using the data of listed firms. However, listed firms account
for less than 1 percent of all Chinese firms, so we cannot consider this sample size
to be representative of the general situation of Chinese firms. Most Chinese firms
have a close relationship with the local rather than the central government. It would,
therefore, make sense to investigate the effect of localized political connections.
Nevertheless, exceptional studies also exist. Cheng et al. (2019a), using the data
of China Employer-Employee Survey (CEES), found that innovation subsidies are
preferentially allocated to state-owned firms and politically connected firms with
National or Local People’s Congress or Chinese People’s Political Consultative
Conference (CPPCC) membership, which is a proxy for political favoritism. Cheng
et al. (2019b), also using CEES data, established that having political connections
4.1 Introduction: Local People’s Congress as “Chinese-Style … 49

could help firms obtain economic benefits such as tax preferences, government subsi-
dies and that political connections contributed to innovative activities for firms with
innovative entrepreneurs. While these studies are excellent, the problem is that the
CEES is a three-year study (2013–2015) and therefore, does not capture the effects
of changes over a relatively longer time period, such as changes in the political status
of managers.
In our study, we used data from the MPC of Yangzhou city in Jiangsu Province,
focusing on the effect of the connections between the managers of local firms and
the local People’s Congress against local firm performance. We also used 10 years of
data in our analysis, corresponding to two periods of the MPC to provide an explicit
analysis of how the acquisition of new political status of corporate managers affects
corporate performance.
Firstly, we describe the structure of the Yangzhou MPC. We took Yangzhou City
in Jiangsu province as an example of local councils for two reasons. The first is infor-
mation disclosure: the Yangzhou People’s Congress provides their official website,
“Yangzhou People’s Congress” (http://rd.yangzhou.gov.cn/) with published infor-
mation and materials that are abundant compared with other local councils. The
website includes personal data of the People’s Congress’ delegates and materials
on the proposals, criticisms, and opinions submitted by delegation members to the
People’s Congress. These materials provide important information and clearly show
the economic functions of the local council. In addition, Yangzhou City has sufficient
representation as a medium-sized city in the coastal area wherein a certain degree of
industrialization has occurred. Thus, we considered Yangzhou City suitable for our
research.
Figure 4.1 shows the structural image of delegates of X Municipal People’s
Congress. This figure represents the structure of the People’s Congress of a ficti-
tious city, “X City.” The representative of X City’s People’s Congress will be elected
by the People’s Congress of A district, B district, C county, and D county located in
the lower administrative class of X City.
The elected representatives will act as the representatives of the delegation of each
district or county in the X City People’s Congress. Many representatives are senior
executives of parties and state agencies or executives of local enterprises. They can
be categorized by the delegation to which they belong. The People’s Liberation Army
also elects representatives that make up its own delegation. Reports on the activities
of government agencies in the X City People’s Congress and deliberations on bills
are conducted for each delegation (Kamo 2013).
Yangzhou MPC is also composed of delegates of the People’s Congress elected
from seven administrative districts under Yangzhou City and elected as representa-
tives of the People’s Liberation Army. The Yangzhou MPC delegation is not elected
by residents living in each administrative district but through elections that the repre-
sentatives of People’s Congresses have established for each of the seven administra-
tive districts under Yangzhou City. Table 4.1 shows the composition of the delegates
in the Yangzhou MPC from the fourth to the seventh congress.
Table 4.2 shows the number of bills submitted and the recommendations made in
each session of the Yangzhou MPC between the fourth and sixth congresses (Kamo
50 4 Political Capital and Enterprise Performance in China …

Fig. 4.1 Structural Image of Delegates of X Municipal People’s Congress. Source Kamo (2013),
p. 26

Table 4.1 Composition of the delegates in the Yangzhou MPC

4th period 5th period 6th period 7th period
congress congress congress congress
Period 1998–01 2001–06 2007–11 2012–16
Baoying County 64 66 71 74
Gaoyou City 67 66 63 69
Guangling 78 55 48 54
District
Hanjiang District 39 41 46 72
Jiangdu District 83 85 85 87
Yizheng City 53 56 54 53
Weiyang District – 46 47 –
Jiao-Qu 20 – – –
PLA 12 13 12 12
Total (CCP) 416(310) 428(327) 426(332) 421(331)
Source Yangzhou People’s Congress official website (http://rd.yangzhou.gov.cn/)

2013). The submitted bills address a wide range of concerns and questions, including
cultural and educational issues; environmental protection issues; urban development
issues, such as road construction and maintenance, bridge and port construction
projects, and requests for establishing economic development zones (jingji kaifa
4.1 Introduction: Local People’s Congress as “Chinese-Style … 51

Table 4.2 Bills and recommendations to the Yangzhou MPC

Year Period Congress Bills submitted Recommendations
2001 Fourth Fourth 63 224
2002 Fifth Fourth 51 103
2003 First Fifth 64 230
2004 Second Fifth 68 214
2005 Third Fifth 82 202
2006 Fourth Fifth 67 222
2007 Fifth Fifth 62 177
2008 First Sixth 74 229
2009 Second Sixth 76 237
2010 Third Sixth 96 264
2011 Fourth Sixth 86 253
2012 Fifth sixth 71 165
Source Yangzhou People’s Congress official website (http://rd.yangzhou.gov.cn/)

qu); and administrative issues, such as taxation, public transportation management,

and road management (2013).
As Kamo and Takeuchi (2013) have pointed out, most of the bills proposed to
the Yangzhou MPC were jointly submitted by delegates from the same district. For
example, among the 63 bills proposed in the fourth session of the fourth congress in
2001, 58 bills (92%) were submitted by multiple delegates from a single electoral
district.
For example, Bill No. 12 in the fourth session of the fourth congress required
the municipal government to grant the district government the authority to approve
economic projects and confer preferential taxation and other economic measures
upon the special economic zone in Hangji Town in Hangjian District (Kamo and
Takeuchi 2013). In this case, the delegates who submitted this bill were in a position
that would benefit from the economic development of Hangji and Hangjiang.
The president and the vice president of the Jiangsu Sanxiao Group, which was the
largest and most influential private enterprise in Hangji that would benefit most from
the designation of a special economic zone were also included as submitters of the
bill. Based on this consideration, we raise the following research question: How does
the election of local council members as the “political capital” affect its economic
performance at the local company level? We aim to clarify this empirically, using
the following steps.
First, by matching the data regarding the elected delegates of the Yangzhou MPC
with the Chinese industrial enterprises’ database provided by Huamei Information.
Next, by empirically investigating whether the manager’s inauguration as a delegate
in the People’s Congress changed the performance of the company managed by him
or her.
52 4 Political Capital and Enterprise Performance in China …

4.2 The Methodology of Empirical Studies

In our research, we used two different kinds of datasets: data on MPC delegates
and data on manufacturing enterprises. Regarding the former, the official website
of the Yangzhou City’s People’s Congress, which opened in the latter half of the
1990s, contains the personal information of the delegated representatives of the
People’s Congress. This website also has published materials on proposals, criti-
cisms, and opinions submitted to the People’s Congress. Therefore, we can access
detailed information about the behavior of individual delegates in the Yangzhou
MPC, including each delegate’s personal background (name, gender, year of birth,
affiliation and employment unit, ethnic identity, education, party affiliation, and other
personal information) for each congress. We also have access to the bills proposed
by the delegates in each session of each congress. In this research, we use data on
the representatives of the Yangzhou MPC in the fifth (2002–2006) and sixth (2007–
2011) sessions, as provided by the official website of Yangzhou People’s Congress
(http://rd.yangzhou.gov.cn/).
Regarding the latter, we used a database provided by Huamei Information, the
most comprehensive database on Chinese mining and manufacturing enterprises. It
covers data on production, workers, financial statements, etc., in industrial enterprises
with annual sales of 5 million yuan (2011 to 20 million yuan). From this database,
we extracted the data on manufacturing enterprises located in Yangzhou City.
We then matched the data regarding elected delegates of the Yangzhou MPC
with the Chinese industrial enterprises database provided by Huamei Information.
Specifically, we checked the names of the managers recorded in the latter database
and checked to see if they were listed in the former, and if they were, they were
deemed to have been appointed as delegates to the Yangzhou MPC for the relevant
year.1
We defined those as the treatment group wherein the enterprises’ managers were
elected delegates of People’s Congress in the sixth session and not elected in the
fifth. The other enterprises were defined as the control group. Then we determined
whether their election as delegates influenced economic performance, such as the
profit rates of the enterprises, using difference-in-differences (DID) analysis. Then,
we reconsidered the economic function of the local People’s Congress, based on the
results obtained from the empirical analysis.2

1 In the Chinese industrial enterprises database, there are many enterprises that changed their names
or merged with other enterprises. In such cases, we checked the location of the enterprise and the
name of the manager, and counted them as the same enterprise if the continuity of the main business
was confirmed.
2 Recent empirical studies that have analyzed policy effects in China using DID analysis include the

following: Wen and Zhao (2020) examined the impact of China Manufacturing 2025 (CM2025),
an industrial policy aimed at improving the innovation capacity and technological capability of the
manufacturing industry, on firms’ R&D investment using DID and Coordinated Exact Matching
(CEM). Using a panel data set of 1440 listed companies from 2012 to 2018, they found that
R&D investment increased substantially after policy intervention for companies whose business
was in the industries targeted by CM2025. Xu et al. (2021) conducted a DID estimation by using
4.2 The Methodology of Empirical Studies 53

Here, we will briefly explain the basic concept of DID analysis. When certain
policies are implemented in a specific region, it is not sufficient to compare the ex-
post outcomes among regions for measuring the effect of policy intervention because
the improvement in performance may also be seen in areas where the policies were
not implemented. Therefore, after policy intervention, we not only compared the
outcome differences between the “treatment group” as the object of intervention
and the “control group,” which is not subject to intervention but also measure the
differences before intervention and tried to obtain an estimate of the pure policy
effect by comparing the differences before and after the intervention.
DID analysis should satisfy two assumptions: (1) parallel trends and (2) common
shocks. The former is the assumption that the treatment group and control group
would draw parallel trends if the policy tested had not been introduced. The latter
assumes, between the measurements before and after the policy’s introduction, a
“separate event” that would affect the outcome had not occurred or, if it had, only
works for two groups in the same way. In this study, we also examine whether the
data we used meet these conditions.
In the next section, we will test three working hypotheses on the relationship
between the performance of Chinese local enterprises and their political capital using
DID analysis as follows.
H1. The performance of enterprises whose managers are elected as the delegates
of the MPC will be improved in the terms of volume because profits can be channeled
to those enterprises through the introduction of bills and by setting the agenda.
H2. Because the effect of profit inducement as described in H1 does not provide
incentives for firms to improve their management voluntarily, the performance of
firms whose managers are elected as delegates to the MPC will not show any
improvement in terms of efficiency.
H3. These enterprises can receive preferential treatment from the local branch
of the financial institution. This hypothesis seems plausible because the increase in
the political capital of enterprises in Chinese local cities will increase its financial
credibility and make it easier to obtain loans from the local branch of financial
institutions.
In Tables 4.3, 4.4, 4.5 and 4.6, we provide the descriptive statistics of manufac-
turing enterprises subject to our analysis. In Tables 4.3 and 4.4, we provide descriptive
statistics of all of the enterprises in our datasets and enterprises that belong to the
treatment group.
Comparing Tables 4.3 and 4.4, we find that enterprises of the treatment group have
more employees, more total assets, higher SOEs ratio, higher labor productivity and
profit ratios, and higher paid taxes than the average of all of the samples. These
descriptive statistics indicate that the character of the enterprises belonging to the
treatment group is quite different from that of the control group.

unique provincial-level data set on coal mines from 2004 to 2015 to investigate the effect of an
anti-corruption campaign on fatality rates in the coal-mining industry. They found evidence that
provinces with stronger exposure to the anti-corruption campaign experienced significantly larger
decreases in coal mine death rates.
54 4 Political Capital and Enterprise Performance in China …

Table 4.3 Descriptive statistics of all enterprises, 2002–2011

Variable Definition Obs Mean Std. dev Min Max
Employees Number of 23,695 183.62 385.10 1.00 12,840.00
Employees
at the end
of year
Years Years that 23,695 9.87 9.41 0.00 208.00
the
company
has been
running
State-owned Variable = 23,695 0.01 0.10 0.00 1.00
Enterprises 1 if the
company is
SOE
Total assets Total of 23,695 300.10 739.17 1.51 38,290.88
(1000 yuan) fixed
assets,
liquid
assets, and
intangible
assets
owned by
the
company
Total debt Total of 23,695 27,936.20 125,384.20 −10,738.77 5,774,512.00
(1000 yuan) long-term
debt,
current
liabilities,
accounts
payable
Operation Operation 23,695 4307.79 21,527.35 −97,241.00 1,148,881.00
profit (1000 profits from
yuan) the main
business of
the
company
Main business Total main 23,695 93,465.87 352,451.70 18.00 17,000,000.00
revenue(1000 business
yuan) revenue
Tax payment Total taxes 23,695 3273.11 13,560.89 −666,195.00 531,075.00
(1000 yuan) paid by
companies
for the year
(continued)
4.2 The Methodology of Empirical Studies 55

Table 4.3 (continued)

Variable Definition Obs Mean Std. dev Min Max
Profit per The total 23,695 27.56 62.83 −763.28 1341.76
labor (1000 added
yuan) value per
number of
total
employees
Revenue per Main 23,695 630.66 880.02 0.40 22,717.95
labor (1000 business
yuan) revenue per
number of
total
employees
Profit ratio Ratio of 23,695 2.96 11.44 −938.89 40.69
(%) total Profit
against
total sales
Source Chinese industrial enterprises database, provided by Huamei Information

In Tables 4.5 and 4.6, we provide descriptive statistics of the enterprises belonging
to the treatment group in the pre-treatment and post-treatment periods.
From these descriptive statistics, we easily find that some figures on the economic
performance of treated enterprises have explicitly improved after treatment. However,
as can be seen in Tables 4.3 and 4.4, the nature of the enterprises in the treatment
group has a clear bias compared to the other enterprises in the analysis, so it is not
possible to determine whether the improved performance of these enterprises can be
explained by the impact of management’s appointment as the representative of the
MPC.
So, we try to analyze whether election as delegates of MPC influenced economic
performance in a more stringent manner by using the following induction model of
DID analysis.

Per f or manceit = β1 T r eati ∗ Postt + β2 Postt + β3 Enter priseContr olsit

+ β4 T + μi + ∈it (4.1)

In Eq. (4.1), we use asset per capita, debt per capita, operating profit (per capita),
the profit-to-revenue ratio, total main business revenue (per capita), and tax payment3
as the dependent variables (Performanceit). As the independent variable, Postt, which
is also a dummy variable, takes the value of 1 for the data after 2007, and Treat i
× Postt is the cross term of these two variables. EnterpriseControlsit stands for
other variables specific to each enterprise, including SOE dummy, two-digit industry
classification dummy, years in business, number of employees, and total assets per

3 Total taxes paid by the enterprises for the year include value-added tax and corporate income tax.
56 4 Political Capital and Enterprise Performance in China …

Table 4.4 Descriptive statistics of enterprises in the treated group, 2002–2011

Variable Definition Obs Mean Std. dev Min Max
Employees Number of 225 1054.91 1248.07 16.00 6500.00
Employees at
the end of
year
Years Years that the 225 15.21 13.78 1.00 55.00
company has
been running
State-owned Variable = 1 225 0.04 0.21 0.00 1.00
enterprises if the
company is
SOE
Total assets Total of fixed 225 1254.84 5090.60 15.18 38,290.88
(1000 yuan) assets, liquid
assets, and
intangible
assets owned
by the
company
Total debt Total of 225 272,285.70 615,506.10 318.00 5,774,513.00
(1000 yuan) long-term
debt, current
liabilities,
accounts
payable
Operation Operation 225 54,820.07 140,602.80 −29,805.25 1,148,881.00
profit (1000 profits from
yuan) the main
business of
the company
Main business Total main 225 603,466.10 976,022.70 6700.00 7,644,613.00
revenue(1000 business
yuan) revenue
Tax payment Total taxes 225 24,274.57 49,016.84 −135,530.00 322,965.00
(1000 yuan) paid by
companies
for the year
Profit per labor The total 225 49.44 106.28 −152.00 703.65
(1000 yuan) added value
per number
of total
employees
Revenue per Main 225 794.77 1108.70 36.35 8244.79
labor (1000 business
yuan) revenue per
number of
total
employees
(continued)
4.2 The Methodology of Empirical Studies 57

Table 4.4 (continued)

Variable Definition Obs Mean Std. dev Min Max
Profit ratio (%) Ratio of total 225 5.55 6.65 −36.30 28.94
Profit against
total sales
Source Chinese industrial enterprises database provided by Huamei Information

Table 4.5 Descriptive statistics of the treatment group in pre-treatment

Variable Obs Mean Std. dev Min Max
State-owned enterprises 101 0.05 0.22 0.00 1.00
Years 101 14.60 13.92 1.00 50.00
Employees 101 935.16 1072.21 16.00 4925.00
Total asset 101 702.54 3792.07 15.18 38,290.88
(1000 yuan)
Total debt 101 174,558.90 331,282.10 318.00 1,935,092.00
(1000 yuan)
Operation profit 101 22,432.28 51,979.29 −8604.00 307,051.00
(1000 yuan)
Main business revenue(1000 101 349,612.20 531,705.50 6700.00 3,204,087.00
yuan)
Tax payment 101 8925.20 22,782.01 −135,530.00 97,947.00
(1000 yuan)
Profit per labor 101 17.93 34.49 −152.00 158.11
(1000 yuan)
Revenue per labor 101 475.11 455.15 36.35 2467.65
(1000 yuan)
Source Chinese industrial enterprises database provided by Huamei Information

capita. In the estimate, the time trend variable(T) and the individual effects of the
enterprise (µi) are also included.

4.3 Results and Discussion

Now we can see the estimated results in Table 4.7 in which we use the panel data
from 2002 to 2011. From the results in these tables, only the estimates in which the
profit per capita, revenue per capita, and tax payments are dependent variables are
significantly positive.4

4We adopted a fixed-effects model for the estimation; the dummy variable for the treatment group
was omitted in the estimation.
58 4 Political Capital and Enterprise Performance in China …

Table 4.6 Descriptive statistics of the treatment group in post-treatment

Variable Obs Mean Std. dev Min Max
State-owned enterprises 124 0.04 0.20 0.00 1.00
Years 124 15.70 13.70 2.00 55.00
Employees 124 1152.45 1371.39 16.00 6500.00
Total asset 124 1704.71 5920.13 26.11 35,834.67
(1000 yuan)
Total debt 124 351,885.80 765,818.70 1458.00 5,774,513.00
(1000 yuan)
Operation profit 124 81,200.45 179,562.80 −29,805.25 1,148,881.00
(1000 yuan)
Main business revenue(1000 124 810,234.10 1,187,009.00 18,840.00 7,644,613.00
yuan)
Tax payment 124 36,776.88 60,021.24 −16,535.00 322,965.00
(1000 yuan)
Profit per labor 124 75.11 134.62 −49.10 703.65
(1000 yuan)
Revenue per labor 124 1055.14 1384.89 72.48 8244.79
(1000 yuan)
Source Chinese industrial enterprises database provided by Huamei Information

Now we investigate the three working hypotheses, which were presented in the
last section:
First, the total operating profit and main business revenue of the treatment group’s
enterprises evidently increased in the sixth session of the People’s Congress, which
was after treatment. These results mean that the performance of enterprises whose
managers were elected as the delegates of MPC had improved, and thus, H1 is
supported. After the managers were elected as delegates of the MPC, the tax payment
of the treatment group’s enterprises also significantly increased. This result is consis-
tent with H1 because firms’ tax payments are closely linked to the size of firms’ sales
and profits.
Second, as opposed to total profits and sales, the coefficients of DID on profit and
revenue per employee, or profit per revenue of the treatment group’s enterprise, were
not significant. These results mean that H2 is supported.
Third, the total debt of the treatment group’s enterprises significantly increased in
the sixth period of the congress. This result means that H3 in which these enterprises
could have received preferential treatment from the local branch of financial institu-
tions is supported. Total debt includes long-term and short-term debt, especially the
expansion of long-term debt, which will not occur without an increase in financing
from financial institutions.
This result also is consistent with the above implication that the election of busi-
ness owners to seats on the council resulted in an increase in scale rather than an
Table 4.7 Results of DID analysis, 2002–2011
(1) (2) (3) (4) (5) (6) (7)
Dependent valuable Total debt Operating profit Main business revenue Tax payment Profit/revenue Profit/labor Revenue/labor
Treated* 194,699.100** 58,434.52** 366,639.600*** 22,554.620*** 1.189 28.639 93.619
Post
(86,681.72) (28,856.63) (133,302.60) (8012.89) (1.36) (21.17) (207.34)
Post −971.837 655.890 1697.720 1428.14*** −0.681* −5.325*** −73.670***
4.3 Results and Discussion

(1112.28) (327.90) (2937.32) (268.32) (0.35) (1.88) (22.41)

State-owned enterprises −31,060.14 −3142.320 −44,435.920 −4191.295 −3.033 6.416 121.655
(31,734.54) (4840.12) (71,556.78) (3733.13) (2.015) (8.14) (80.94)
Years in business −1.145 21.116 −141.449 −8.373 −0.004 0.208*** 2.414***
(96.88) (26.76) (390.36) (16.43) (0.03) (0.06) (0.87)
Employees 158.643*** 33.828*** 338.282*** 15.295*** 0.002** 0.010* −0.086**
(40.14) (7.47) (123.60) (5.43) (0.00) (’0.00) (0.04)
Total asset /labor 22.898*** 3.446*** 31.900*** 0.359* 0.001** 0.053*** 0.792***
(5.42) (0.97) (8.95) (0.21) (0.00) (0.01) (0.17)
Time trend 1732.595*** 673.029*** 16,498.87*** 377.834*** 0.434*** 6.154*** 102.982***
(262.40) (77.32) (730.96) (51.02) (0.06) (0.22) (2.29)
Industrial dummy y y y y y y 2.29
Method Fixed effect Fixed effect Fixed effect Fixed effect Fixed effect Fixed effect Fixed effect
Number of obs 23,695 23,695 23,695 23,695 23,695 23,695 23,695
Number of groups 4990 4990 4990 4990 4990 4990 4990
(continued)
59
Table 4.7 (continued)
60

(1) (2) (3) (4) (5) (6) (7)

R-sq (within) 0.2320 0.173 0.014 0.100 0.217 0.335 0.515
Note 1: Figures in parentheses are standard errors
Note 2: *** , ** , * denote significance at the 1 percent, 5 percent, and 10 percent levels, respectively.
4 Political Capital and Enterprise Performance in China …
4.3 Results and Discussion 61

improvement in efficiency of the enterprises. This is because if the increase in polit-

ical capital led to an increase in debt from financial institutions, then this process
seems to be not necessarily efficient.
Overall, while the acquisition of political capital by local enterprises has the effect
of increasing the “scale” of the enterprise, including the number of employees, our
analysis did not confirm the effect of improving productivity and efficiency.

4.4 Robustness Check

In the next step, for the test of the parallel trends and common shock assumption
of the last section’s analysis, we resorted to an event-study approach. Specifically,
we investigated the panel analysis as we did in the previous section, only using the
data from 2002 to 2006, with the interaction of each year dummy variable and the
treatment dummy variable included in the regression instead of the treatment dummy
variable and post-treatment dummy variable. If the assumptions of parallel trends
and common shock were true, we should see no significant effects for the interaction
terms before the treatment year. We can see the results of the test in Table 4.8.
The results in Table 4.8 confirm that the parallel trends and common shock
assumption is true for the total debt and profit rate, as none of the interaction terms are
dominant. However, for the other variables, no clear results were obtained, and the
parallel trends and common shock assumptions could not be confirmed. Therefore, it
is undeniable that the enterprises in the treatment group improved their performance,
especially their management size, even before they were elected as delegates of the
MPC.
For this reason, we followed the description in Chap. 5, pp. 238–224 in Angrist
and Pischke (2009), following which we added the enterprise-specific time trend
trends to the regression equation as an improvement. Specifically, we added the
intersection term between the identification numbers assigned to each enterprise
and the variable representing time trends to the regression equation.5 The improved
estimation equation is shown in the following equation.

Per f or mance = β1 T r eati ∗ Postt + β2 Postt + β3 Enter priseContr olsit

+ β4 I Di ∗ T + μi + ∈it (4.2)

In Eq. (4.2), IDi*T means the enterprise-specific time trend coefficient, which is
the intersection term between the ID of each enterprise and the time trend, which
will capture the linear trends in enterprise-level characteristics that influence the
dependent variables. The estimation results of Eq. (4.2) are shown in Table 4.9.
The coefficients, signs, and significance of the main variables, including the inter-
section terms of Treat and Postt, in the estimating equations shown in Table 4.9 are
almost the same as those in Table 4.7. In other words, even if we take into account

5 For more information on this method, also see Friedberg (1998).

Table 4.8 Test of parallel trends assumption
62

(1) (2) (3) (4) (5) (6) (7)

Dependent valuable Total debt Operating profit Main business revenue Tax payment Profit/revenue Profit/labor Revenue/labor
Treated* 21,465.380 5752.693 81,741.770** 2582.599 −0.357 2.218 1.070
2003
(18,709.78) (4021.50) (39,311.67) (2037.09) (1.25) (2.49) (30.86)
Treated* 30,380.220 8326.391 125,375.400 8388.826** −0.863 0.434 −28.974
2004
(38,584.50) (6268.48) (78,651.31) (3488.99) (1.54) (4.67) (69.18)
Treated* 68,169.710 19,465.530* 279,201.200** 6769.390* −0.229 9.568 102.686
2005
(54,806.00) (10,152.69) (114,978.5) (3664.33) (1.47) (6.01) (64.17)
Treated* 90,833.610 30,732.900* 408,520.500** 7684.002 −0.784 14.739* 177.110*
2006
(64,617.62) (17,415.08) (169,735.4) (6440.51) (1.92) (8.37) (100.53)
State-owned enterprises −50,330.800 −5800.155 −94,435.070 −1552.383 −2.444 0.703 32.099
(49,903.77) (6835.47) (87,737.58) (2056.33) (2.81) (2.98) (37.72)
Years in business −3.021 −4.300 −131.608 3.745 −0.056 0.010 −0.447
(56.210) (13.34) (171.78) (6.34) (0.06) (0.03) (0.89)
Employees 124.515*** 20.376 −109.938 11.774 0.007 0.004 −0.244***
(44.403) (12.62) (243.43) (7.48) (0.00) (0.00) (0.09)
Total asset 7.812* 1.010* 1.123 0.511 0.001 0.014 0.280**
/labor
(4.52) (0.53) (8.63) (0.38) (0.00) (0.01) (0.14)
Industrial dummy y y y y y y y
(continued)
4 Political Capital and Enterprise Performance in China …
Table 4.8 (continued)
(1) (2) (3) (4) (5) (6) (7)
Time trend 2225.911*** 299.447*** 13,832.520*** 249.503*** 0.134 2.641*** 77.529***
(332.51) (78.37) (1621.55) (84.38) (0.15) (0.19) (3.54)
Industrial dummy y y y y y y y
Number of groups 3,015 3,015 3,015 3,015 3,015 3,015 3,015
4.4 Robustness Check

R-sq (within) 0.192 0.116 0.090 0.004 0.012 0.126 0.268

Note 1: Figures in parentheses are standard errors
Note 2: *** , ** , * denote significance at the 1 percent, 5 percent, and 10 percent levels, respectively.
63
 64

Table 4.9 Results of DID analysis (2002–2011), controlling enterprise-specific time trend
(1) (2) (3) (4) (5) (6) (7)
Dependent valuable Total debt Operating profit Main business revenue Tax payment Profit/revenue Profit/labor Revenue/labor
Treated* 195,770.200** 58,814.550** 378,473.400*** 22,756.050*** 1.520 33.560 177.479
post
(86,643.00) (28,783.35) (132,390.70) (7978.31) (1.37) (20.78) (205.59)
Post 4096.85** 2737.970*** 44,834.340*** 2634.428*** 0.390 9.176*** 164.196***
(1955.62) (541.01) (6965.92) (323.67) (0.26) (1.36) (14.927)
State-owned enterprises −31,295.920 −3228.430 −46,929.67 −4237.825 −3.101 5.408 104.569
(31,943.21) (4880.76) (73,137.35) (3765.03) (2.00) (7.19) (66.52)
Years in business 123.580 72.289** 922.821** 21.255 0.022 0.567*** 8.301***
(87.41) (29.40) (431.70) (17.05) (0.03) (0.10) (1.48)
Employees 159.136*** 34.044*** 341.848*** 15.425*** 0.002** 0.011** −0.071*
(40.03) (7.47) (124.50) (5.45) (0.00) 0.00) (0.04)
Total asset per labor 23.847*** 3.837*** 39.954*** 0.586*** 0.001** 0.056*** 0.837***
(5.41) (0.999) (10.01) (0.21) (0.00) (0.01) (0.17)
Industrial dummy y y y y y y y
Enterprise-specific time trend y y y y y y y
Method fixed effect fixed effect fixed effect fixed effect fixed effect fixed effect fixed effect
Number of obs 23,695 23,695 23,695 23,695 23,695 23,695 23,695
Number of groups 4990 4990 4990 4990 4990 4990 4990
R-sq (within) 0.233 0.174 0.220 0.101 0.015 0.336 0.518
Note 1: Figures in parentheses are standard errors
Note 2: *** , ** , * denote significance at the 1 percent, 5 percent, and 10 percent levels, respectively.
4 Political Capital and Enterprise Performance in China …
4.4 Robustness Check 65

the enterprise-specific time trend is, the hypotheses are supported in our analysis, as
in the previous section.

4.5 Conclusion

In our study, we first matched the data on elected representatives of the Yangzhou
People’s Congress with the Chinese industrial enterprises’ database. Then, we empir-
ically investigated whether the managers’ inaugurations as delegates in the People’s
Congress changed the performance of the company managed by him or her, using
the method of panel DID analysis.
In summary, our analysis demonstrates that the acquisition of political capital by
being elected as a representative of the MPC certainly improved the performance of
some local enterprises in terms of scale by bringing political or economic benefit to
these enterprises. It can be pointed out that the expansion of their political “credit”
makes it possible for them to receive more loans and make more investments, or
that the local government can offer favors that could increase their tax revenue as
they expand their scale. On the other hand, our study also suggests that the acquisi-
tion of political capital by local enterprises does not improve the efficiency of their
performance.
We also added a cross term of enterprise-specific coefficients and a time trend to
the DID analysis to account for the possibility that each company had a different time
trend throughout the analysis period, but the results did not change. In summary, the
conclusions of our analysis are consistent with Kamo’s (2013) point that delegates
to the People’s Congress act as “representatives” of the interests of the constituency.
We believe that this analysis is still quite undeveloped and that there are many
things that might be improved. For example, it should be clarified how political
capital positively and negatively influences a company’s outcomes by analyzing the
activity of the delegates, such as bill submissions or proposals in the MPC. It is also
necessary to test the effects of central policy, such as the anti-corruption campaign
that began in 2013.
Our research of the impact of “political capital” on the performance of local
enterprises through the local People’s Congress in China has just begun. Due to data
limitations, our analysis was conducted only for the case of Yangzhou City, but we
plan to conduct additional analyses for other cities with different conditions and
compare the results.

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