1. The Role of Political Capital in China:
Domestic vs Returnee Entrepreneurs
Dr. Haiyang Li
Rice University & CEIBS
haiyang@rice.edu
2. Background: Two Competing Views
Decline of the value of political capital (Guthrie,
1998; Nee, 1989, 1991) in transition economy
Firms no longer need government to steer
resources
Government will lose their power
Retaining/increase of the value of political capital
Rona-Tas (1994): Power conversion
Walder (2002): As long as the state controls
access to finance and technology and
enforcement of banking regulations, political
capital will continue to be valuable.
3. Two Studies
How do institutional changes affect the role of
entrepreneurs’ political capital in resource
acquisition in a transition economy? (Li, Zhao, &
Lu, working paper)
Returnees vs locals: Who perform better in China’s
technology entrepreneurship? (Li, Zhang, Li, Zhou,
& Zhang, SEJ 2012)
4. Resource acquisition in transition
economies
Resource acquisition for entrepreneurial firms
Liability of newness and lack of performance
record
Information asymmetry
Institutional constraints for resource acquisition of
entrepreneurial firms in a transition economy
Political authorities still have allocative
control over key factor resources
The existence of institutional voids and
underdeveloped intermediate institutions
Lack of legitimacy of private firms; suffer
social and political discrimination
5. Political Capital and Resource
Acquisition
Political capital embodied in the ties with key political
institutions provides direct avenue to reach political
resources
Enhance their social and political legitimacy, increasing
their credibility for resource acquisition.
In general, entrepreneurs’ political capital will facilitate
firms’ resource acquisition in a transition economy.
6. Political Capital and Institutional Change
Key argument
With the development of market institutions in a
transition economy, institutional constraints will be
reduced, which may affect the efficacy of political
capital in resource acquisition.
Two aspects of institutional change
Regional aspect
Government intervention
Development of intermediate institution
Temporal aspect
7. HYPOTHESES
H1. The positive effect of entrepreneurs’ political capital on
firms’ resource acquisition is likely weaker in regions where
the level of government intervention is lower.
H2. The positive effect of entrepreneurs’ political capital on
firms’ resource acquisition is likely weaker in regions where
intermediate institutions are better developed.
8. H3. The positive effect of entrepreneurs’ political
capital on firms’ resource acquisition will persist or
even get stronger over time.
9. It is generally expected that more market institutions
will be developed over time.
However, institutional changes toward market
orientation do not automatically lead to the decline
of the role of political authorities over time.
Path-dependent nature of transition
Inertia of old institutions is likely to be strong.
China’s gradual transition
The existing institutions still bear the stamp of
the past institutional arrangements.
Partial reform which confines only to economic
arenas
10. “The state advances and the private sector
retreats”.
“As the Chinese government has grown richer… it
has pumped public money into companies that it
expects to upgrade the industrial base and employ
more people” and the beneficiaries re state-owned
firms.
--Wines (2010, NYT)
11. Methodology
Data sources
Two national surveys of private
entrepreneurs in China conducted jointly by
three national organizations: the Chinese
Academy of Social Sciences, All China
Industry and Commerce Federation, and the
United Front Work Department of the Central
Committee of the Communist Party in 2002
and 2006.
The Marketization Index developed by the
National Economic Research Institute
12. Surveys
Random sampling approach
Though not a panel data, it provides a
longitudinal view of how the hypothesized
relationships change over time.
3,258 cases for 2002 and 3,837 for 2006 in 30
provinces
We only focused on those reporting the actual
amount of loans from banks.
N=1595 in 2002
N=1987 in 2006
13. Measures
Resource acquisition: the actual amount of loans from
banks (logged)
Political capital
Membership of People’s Congress (PC) and the
Chinese People’s Political Consultative Conference
(CPPCC).
PC has five levels: national, provincial, municipal,
county, and township. Its main functions include
making law and policies, and electing and appointing
top government officials (e.g., President and Premier).
CPCC is a political advisory body, exercising
democratic supervision of the party. It has four levels:
national, provincial, municipal and county.
14. Government intervention reduction (3 items)
Distribution of economic resources is market-oriented
Government intervention in firm activities is reduced
Government scales back
Development of intermediate institutions
Share of lawyers in the total population
Share of accountants in the total population
Degree of legal protection of production entities
Degree of property right protection
Controls
Entrepreneur’s education, age, party membership
Firm age, size, R&D activity, industry, region
15. Year 2002 (n=1595) Year 2006 (n=1987)
Variables Model 1 Model 2 Model 3 Model 4 Model 5 Model 6 Model 7 Model 8 Model 9 Model 10
Controls
Firm age .046† .042 .040 .041 .041 .082*** .064** .062** .061** .062**
Firm size .014 .011 .012 .009 .007 .169*** .215*** .167*** .137*** .132***
Entrepreneur age .001 .016 .019 .020 .020 .044* .040* .040* .050** .051**
Entrepreneur as party .017 .016 .045
member .047†
.017 .008 .018 .033 .038 .041
Number of prior jobs .011 .007 .005 .007 .008 .023 .009 .008 .009 .011
R&D intensity .095*** .074** .075** .075** .076** .027 .027 .031 .020 .012
Results
Industry (1=manufacturing) .181*** .126*** .149*** .149*** .149*** .006 .008 .009 .011 .006
Region (1=coastal area) .013 .016 .017 .013 .011 .061** .060** .084** .072* .061*
Inverse Mills Ratio .502*** .377*** .454*** .450*** .447*** .373*** .101** .222** .289*** .312***
Independent Variables
Political capital .122*** .093** .089** .092** .201*** .169*** .162*** .153***
Education .128*** .127*** .126*** .122*** .221*** .214*** .213*** .213***
Moderators
Government intervention
reduction .018 .018 .020 .047* .047* .060*
Intermediate institution
development .067† .068+ .057 .087** .082** .098**
Interactions
Political capital X -.023 -.035 -.080*** -.088***
government
Intervention reduction
Political capital X -.022 -.058**
Intermediate
institution development
Education X Government .026 .011 .051** .043*
Intervention reduction
Education X Intermediate .030 .041*
institution development
R2 .236 .236 .354 .358
.207 .232 .234 .276 .341 .347
Change R2 .025*** .003† .002 .000 .065*** .006* .007** .004**
F 46.06**** 43.37*** 37.23*** 32.45*** 28.71*** 83.63*** 94.61*** 80.65*** 72.16*** 64.63***
16. Moderating Effect of Government Intervention
10
9
Bank Loan
8
7
6
5
Low High
Political Capital
Low Government Intervention
High Government Intervention
17. Returnees vs Locals: Who Perform Better
in China’s Technology Entrepreneurship?
Haiyang Li
Yan Zhang
Rice University
Yu Li
University of International Business & Economics
Li-An Zhou
Weiying Zhang
Peking University
18. The Value of Returnees
Returnees possess superior capabilities and skills
particularly in the technology areas through their
education and scientific and technical training in
developed countries.
They are exposed to the technological and business
practice gaps between developed countries and their
home countries.
They can access social networks that are typically not be
accessible to local talents.
The presence of returnees serve as an important signal of
the quality of the new ventures.
19. The Darkside of Returnees
After years of living out of their home countries,
returnees face a seemingly familiar, yet different,
environment.
Returnees may not have an accurate
comprehensive understanding of how to conduct
businesses there (Lack of local knowledge).
Returnees may have limited connections with
important constituents in their home counties.
Such connections are critical because they
represent important channels for accessing
information and resources in emerging markets.
20. State Controlling Ownership
Hypothesis 1. State controlling ownership will improve the
performance of new technology ventures with returnee
leaders relative to ventures with local leaders.
Ventures with state controlling ownership are considered
as “insiders” in China’s political institution access to
complementary resources
Returnees may rely on government ties precisely
because they lack the social ties that facilitate competition
in China’s personalized market (Solinger, 1991).
Help state-controlled ventures to explore overseas
business opportunities.
21. Venture age
H2. Older venture age will improve the performance
of new technology ventures with returnee leaders
relative to ventures with local leaders.
As a new venture ages, it builds its track record
and external relationships, thus reducing its
dependence on the personal connections of its
leaders.
22. Methodology
Technology ventures in Zhongguancun Science
Park (ZSP) in Beijing, China
Preferential policies in ZSP
Qualification for being a high-tech firm
Data is compiled from the annual reports filed by
all certified firms 1995-2003.
Our sample consisted of 33,290 firm-year
observations from 13,163 firms.
23. Model Specification
Random-effect Tobit model
Random effect was used to address the lack
of independence among the multiple
observations associated with one venture.
Tobit model was used because the
dependent variable (Ln(Sales)) was skewed
(most ventures had a small amount of sales).
24. Employment Size Sales
Mode 1a Model 2a Model 3a Model 4a Model 1b Model 2b Model 3b Model 4b
Predictors
Returnees Venture -0.132*** -0.149*** -0.179** -0.190*** -0.480*** -0.513*** -0.639*** -0.656***
(0.021) (0.022) (0.026) (0.026) (0.077) (0.080) (0.094) (0.096)
Moderators
State Controlling 0.301*** 0.291*** 0.300*** 0.292*** 0.384*** 0.365*** 0.383*** 0.369***
Ownership (0.017) (0.018) (0.017) (0.018) (0.062) (0.063) (0.062) (0.063)
Venture Age 0.066*** 0.066*** 0.064*** 0.064*** 0.403*** 0.403*** 0.394*** 0.395***
(0.004) (0.004) (0.004) (0.004) (0.013) (0.013) (0.013) (0.013)
Interactions
Returnees Dummy* 0.139* 0.119* 0.282 0.208
State Controlling (0.057) (0.057) (0.212) (0.214)
Ownership
Returnees Venture* 0.029*** 0.027** 0.103** 0.098**
Venture Age (0.009) (0.009) (0.036) (0.036)
Controls
R&D Investment 0.230*** 0.230*** 0.230*** 0.230*** 0.506*** 0.506*** 0.506*** 0.506***
(0.005) (0.005) (0.005) (0.005) (0.020) (0.020) (0.020) (0.020)
Foreign-Owned 0.250*** 0.252*** 0.251*** 0.252*** 0.692*** 0.695*** 0.693*** 0.695***
Venture (0.022) (0.022) (0.022) (0.022) (0.073) (0.073) (0.073) (0.073)
Business Group 0.351*** 0.352*** 0.351*** 0.351*** 0.673*** 0.674*** 0.672*** 0.673***
Affiliation (0.025) (0.025) (0.025) (0.025) (0.094) (0.094) (0.094) (0.094)
Educational Level of 0.072*** 0.072*** 0.073*** 0.073*** 0.075** 0.076** 0.077** 0.077**
Legal Representative (0.007) (0.007) (0.007) (0.007) (0.025) (0.025) (0.025) (0.025)
Year Dummies Included Included Included Included Included Included Included Included
Industry Dummies Included Included Included Included Included Included Included Included
Constant 2.770*** 2.769*** 2.768*** 2.766*** 5.908*** 5.906*** 5.902*** 5.901***
(0.262) (0.262) (0.262) (0.262) (1.020) (1.020) (1.020) (1.020)
Wald Chi2(90) 4657.42 4666.21 4672.59 4678.64 5086.52 5088.97 5095.41 5096.84
Prob > chi2 0.000 0.000 0.000 0.000 0.000 0.000 0.000 0.000
Number of observations 33290 33290 33290 33290 33290 33290 33290 33290
26. Some Thoughts
How do entrepreneurs’ political capital interact with
institutions to affect resource acquisition in the
context of transition economy.
It is not institutional change per se but the
changes along different dimensions that are
likely to induce the changing effects of political
capital observed.
Institutional change is not homogeneous.
“A dual liability” for returnees
may be created by institutional changes
State controlling ownership helps mitigate their
disadvantages
27. Makes a significant contribution to the literature
on the role of managerial resources in
entrepreneurial firms.
Both human capital (education) and political
capital are increasingly important.
