No Free Lunch After All: Corporate Political Connections and Firms’ Location Choices

Organization Science, Forthcoming

44 Pages Posted: 25 Feb 2021 Last revised: 1 Mar 2021

See all articles by Nan Jia

Nan Jia

University of Southern California - Marshall School of Business

Bo Zhao

University of Hong Kong - Faculty of Business and Economics; International Monetary Fund

Wei Zheng

University of International Trade and Economics

Jiangyong Lu

Peking University

Date Written: May 1, 2017

Abstract

We examine how the presence of a firm’s political connections in a candidate location affects the firm’s likelihood of choosing that location over unconnected but otherwise comparable ones to establish a new subsidiary. First, because of various benefits that political connections can generate for firms, all else equal, firms are more likely to choose the locations in which they have connections with local political leaders. Second, this effect is dampened when local economic conditions may drive local politicians to demand that connected firms engage in economically inefficient but politically desirable tasks, such as hiring superfluous labor. As a result, firms are less likely to choose a politically connected location that also suffers from higher unemployment. Moreover, this dampening effect exists (and becomes stronger) when the connected politicians hold political positions that shoulder greater responsibility for resolving local unemployment issues. Using data on all new subsidiaries established by Chinese listed firms from 2003-2009, we obtain empirical evidence that corroborates the hypotheses. Therefore, whether and how firms use their political connections in making location choice is strategic in that it is highly dependent on the economic and political context.

Keywords: Political Connection, Location Choice, Political Exchange, Unemployment, China

Suggested Citation

Jia, Nan and Zhao, Bo and Zheng, Wei and Lu, Jiangyong, No Free Lunch After All: Corporate Political Connections and Firms’ Location Choices (May 1, 2017). Organization Science, Forthcoming, Available at SSRN: https://ssrn.com/abstract=3790987

Nan Jia (Contact Author)

University of Southern California - Marshall School of Business ( email )

701 Exposition Blvd
Los Angeles, CA California 90089
United States

Bo Zhao

University of Hong Kong - Faculty of Business and Economics ( email )

Pokfulam Road
Hong Kong

International Monetary Fund ( email )

700 19th St NW, Washington
Washington, DC 20036
United States

Wei Zheng

University of International Trade and Economics ( email )

Jiangyong Lu

Peking University ( email )

No. 38 Xueyuan Road
Haidian District
Beijing, Beijing 100871
China

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