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Editor’s note

Prof. Xiaobo Zhang and his co-authors conducted empirical investigation to study the pattern of interregional investment after bureaucratic transfers across Chinese cities. Their research strategy is unique in that instead of using ofstatic social ties widely adopted in the political-economicliterature, they chose tothe use the transfers of local leaders asa sourceof variation to identify personal connection. In addition, compared to other papers that have studied the role that social ties play in shaping economic outcome, Prof. Xiaobo Zhang and his authors highlighted that these social ties are created as a product of bureaucratic transfers and comovements of leaders and investments. They believe that this stems inherently from the institutional setting of the Chinese bureaucracy. Key contributions of their research include the following. First, a transferred leader from city Ato Bis associated with approximately 3% increase in investment activities along the same direction, and such impacts can last for more than four years. Next, they highlight that such correlation only exists for private but not state-owned enterprises. Finally, with regards to comoving firms, the team showed pivotal evidence indicating that these firms tend to be able to purchase larger parcels of land and at lower prices relative to their counterparts. Crucially, comoving firms’ advantage in the local market is dependent upon the presence of the transferred officials.

BACKGROUND AND DATA SETS

Since the late 1970s, after China’s economic reform took place, personal friendship with local leaders has been instrumental in facilitating new markets for private firms through eliminating local entry barriers. In addition, from a ‘‘supply-side’’ perspective, helping private sectors grow may be of interest for the local leaders given the relatively weak institutional environment. Hence, local leaders and private firms can form a mutually beneficial relationship. Studying how interregional investment is associated with bureaucratic transfers is important. In the presence of local protectionism, there are entry barrier for outside investors. Local leaders in China are frequently transferred among different jurisdictions and regions by their political superiors without much discussion with the stakeholders themselves. Do the bureaucratic transfers facilitate or hamper interregional investment flows?

This study focuses oninterregional investment across Chinese cities in 2000– 2011 using the following four major datasets.

First, theprimary data set used includes information on inter-city investments obtained from the State Administration for Industry and Commerce (SAIC), which all firms were required to formally deposit and provide legal documentation for paid-in capital until 2014. This is the most comprehensive picture for the trend of firm investment activities in China. By aggregating the data, they constructed a measure for investment flow across regions.

Second, Prof. Xiaobo Zhang and his team made use of manually collected biographic data set related to city and provincial leaders. This contains detailed information on their bureaucratic transfers, turnovers and prosecutions as well as personal characteristics. For instance, with regards to turnover rates, the study found that in their sample, 23.5% of the leader-terms ended up with termination, 67.4% remained at the same ranking, and only 9.1% received a promotion.

Third, they combined data sets on land transactions between firms and local governments so as to estimate the price discount enjoyed by comoving firms. It is also found that among all the land transactions in the investigated sample period, approximately 4% were purchased by comoving firms with local leaders.

Fourth, they interpreted firms’ duration information from SAIC firm registration and cancellation records. They divided firms into four categories based on their connection with local leaders in relation to the timing in office. From this, the team found thatthat the share of comoving firms is similar to that of unconnected firms but considerably smaller than local firms.


RESEARCH FINDINGS

One of the main findings is related to bureaucratic transfers and investment flows. A baseline model was used to estimate the impact. The study found thatbureaucratic transfers have a significant positive effect on the flow of investment by private firms, but not on the flow of investment by state-owned enterprises (SOEs). This finding confirms their hypothesis that bureaucratic transfers would be more significant for private firms, as they face a higher entry barrier when moving to a new market and need more supports from government officials. However, the authors acknowledge that alternative explanations for the pattern of inter-city investments established by the baseline estimations can exist. One of the prominent alternative explanations would be that the connection between cities established by immediate bureaucratic transfers may be confounded by other types of networks such as hometown affiliation and more. To address the alternate explanations, the addition of another controlling dummy variable (which indicates that there is an incumbent leader transferring from a city other than the previously stated one), random assignations and other measures were employed in the study. These strategies allowed the team to capture impacts of such connections.

Next, transferred leaders themselves, rather than policy coordination at the upper levels, play a major role in inducing investment flows along the same direction as the transfers. An estimated model was used for this purpose. The test on the dynamic trends of investments within dyads before and after the occurrence of a transfer was conducted to partially relieve the concern of endogeneity.

To gain more insight on the mechanisms, they turned to land transaction data. The paper finds that comoving firms tend to purchase a larger parcel of land compared with unconnected firms. Local officials playing an active role in brokering the land purchase of connected firms.

Moreover,comoving firms are more likely to survive in the market. The authors do acknowledge the alternative explanation that opportunism, rather than low performance, may account for the findings that the movement of local leaders are associated with investment flows across cities. Finally, it is observed that personal favor for connected firms may crowd out unconnected ones and hence potentially inhibit productive entrepreneurship.

ADDITIONAL ANALYSIS

Prof. Xiaobo Zhang and his co-authors took the additional step to study the political incentives of local officials for playing an active, personal role inin facilitating those investments across cities. To do that, they explored how the magnitude of coordinated business movement is correlated with the probabilities of promotion and prosecution for corruption.

A logit modela lawas employed to estimatethe categorical changes in the career mobility of local leaders who were transferred among different cities. The study found that, firstly, the comovement of local leaders and investments does not increase the probability of promotion for officials. Secondly, having co-moved investments does increase the chance of persecution during the subsequent anti-corruption campaign. Overall, it seems that opportunism and personal enrichment are likely be the major drivers behind the observed patterns of interregional investment flows in sync with transferred officials.


About the author:

Xiaobo Zhang has published over 80 articles in peer-reviewed English journals, includingJournal of Political EconomyAmerican Journal of Agricultural EconomicsJournal of Development EconomicsJournal of Economic PerspectiveJournal of International EconomicsJournal of Public Economics, andProceedings of National Academy of Science. His main research areas focus on development economics and Chinese economy. He received the Sun Yefang Prize for Economics Research in China (the most prestigious award in the field of economics in China) in 2015, the Zhang Peigang Development Economics Outstanding Achievement Award (the highest award in the field of development economics) in 2016, and Pushan Award on Outstanding Articles in International Economics in 2021. He has rich field experience in developing countries, such as leading Guizhou Household Panel Survey, China Family Panel Studies (CFPS) survey as a co-PI, Enterprise Survey for Innovation and Entrepreneurship in China (ESIEC), Quarterly Online Survey on Micro- and-small Enterprises (OSOME) in China, cluster surveys in Bangladesh, China, Egypt, Ethiopia, and Myanmar, and village surveys in China and India.