A Bayesian Measurement of Political Connection and Entrepreneur Preference on Trade and Competition
| Published date | 01 February 2022 |
| Date | 01 February 2022 |
| DOI | 10.1177/1478929920978341 |
| Author | Yilang Feng |
| Subject Matter | Articles |
https://doi.org/10.1177/1478929920978341
Political Studies Review
2022, Vol. 20(1) 118 –147
© The Author(s) 2021
Article reuse guidelines:
sagepub.com/journals-permissions
DOI: 10.1177/1478929920978341
journals.sagepub.com/home/psrev
A Bayesian Measurement
of Political Connection and
Entrepreneur Preference
on Trade and Competition
Yilang Feng
Abstract
This article investigates how political connection shapes firm owner preference on economic
openness and international competition in China, a topic that is getting increasingly relevant today
amid China’s trade disputes with its trading partners over the nature of the country’s business-
government relations. Politically connected entrepreneurs and their enterprises usually exploit
and benefit from their political resources, but this can lead to both supporting and opposing
views on expanding trade liberalization. To solve this puzzle, this article proposes a theory
that focuses on (1) a selection effect of political connection on firm productivity and (2) trade-
related institutional development in China. With survey data on China joining the world trade
organization, I develop a modified Bayesian item response theory model to measure political
connection and find that Chinese politically connected entrepreneurs held a less supportive view
before joining the world trade organization than their less connected counterparts. This suggests
an anticipation that the imminent opening would neutralize the privileges of politically connected
entrepreneurs. By looking at trade liberalization, this article offers a firm level analysis that political
opposition to sustained economic reform may derive from the short-term winners, instead of the
losers, in transitional societies.
Keywords
corporate political connection, trade, WTO
Accepted: 4 November 2020
Does corporate political connection, a resource stemming from firm owners’ relationship
with the state, influence their preferences on economic openness and international com-
petition? Intuitively, the answer is probably yes, especially given the salience of state
involvement in international trade regulation and assistance in contemporary policy
Department of Business Administration, Gies College of Business, University of Illinois at Urbana–
Champaign, Champaign, USA
Corresponding author:
Yilang Feng, Department of Business Administration, Gies College of Business, University of Illinois at
Urbana–Champaign, 1206 S 6th St., Champaign IL 61820, USA.
Email: ylfeng@illinois.edu
978341PSW0010.1177/1478929920978341Political Studies ReviewFeng
research-article2020
Article
Feng 119
debates. After all, firms do not operate in apolitical environments, and political connec-
tion can affect many aspects of their business, including trade and investment activities
across borders. This effect is not limited to exporters and import-competing firms, because
firms in non-trading sectors can also feel the impact of greater openness through changes
in domestic input and output prices, and their political resources can influence how they
are affected by and react to those changes. How firms perceive international trade open-
ness differently is a precondition to their different business plannings and political actions
under economic globalization, which in turn influence policy-making circles in both
developed and developing nations. In societies undergoing postcommunist transitions,
these individual firm preferences can also aggregate to political support or opposition to
economic liberalization, affecting the sustainability of continued reforms.
However, there is very limited discussion on firm owners’ opinions on economic open-
ness and international competition with respect to their political connection. On one hand,
if political resources translate into favorable policies and additional protection (e.g.
Cingano and Pinotti, 2013; Faccio, 2006, 2010; Fisman, 2001; Li et al., 2008; Mobarak
and Purbasari, 2006; Polsiri and Jiraporn, 2012; Wu et al., 2012), PCEs should be less
worried about increasing foreign competition, while enjoying expanded opportunities
from abroad. Such a “connection to evade competition” mentality leads to a positive cor-
relation between political connection and support for trade. On the other hand, PCEs may
fear trade openness because it can neutralize existing domestic favoritism that disadvan-
tages their unconnected competitors: an “openness to neutralize privilege” mentality and
negative correlation between political connection and support for trade.1 These two logics
run in opposite directions. Which one dominates?
To answer this question, this article proposes a theory that pivots on the selection
effect of political connection and trade-related institutional development:
Under autarky, benefits of political connection allow some less competitive PCEs
to survive, resulting in a lower average competitiveness of PCEs than non-PCEs;
When free trade comes, benefits of political connection will be neutralized for
PCEs, unless sufficient trade-related institutions have developed to give PCEs an
additional leg-up to evade impact of foreign competition.
Transition from economic autarky to openness and respective institutional develop-
ment are characteristic of postcommunist societies, where, on one hand, effective insula-
tion of political pressure from losers of the reform is required until a constituency of
winners grow strong enough to sustain the progress (Przeworski, 1991). On the other
hand, if we recognize such structural reforms as being composed of multiple, incremental
stages, the main obstacle to further liberalization may derive from short-term winners’
incentive to “freeze the economy in a partial reform equilibrium that generates concen-
trated gains” for themselves at the expense of aggregate social welfare (Hellman, 1998).
To verify the theory proposed, the article looks at Chinese entrepreneurs in the private
sector that thrived after Deng Xiaoping’s Southern Tour in 1992 and the subsequent con-
solidation of reformist power in Beijing. Nationally representative surveys were taken on
these entrepreneurs in 2000 on what they thought about China’s imminent WTO acces-
sion in 2001, along with many firm and individual level questions, which provided the
window for us to empirically investigate the research question of the article. Unlike sur-
veys conducted for scholarly or commercial purposes, the goal of this survey is to collect
information on the country’s fast growing private sector for its project sponsor, the central
To continue reading
Request your trial