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

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