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The Quality of Local Government and Firm Performance: The Case of China's Provinces

Published online by Cambridge University Press:  22 December 2015

Jongmoo Jay Choi ,
Cao Jiang  and
Oded Shenkar
Jongmoo Jay Choi
Affiliation:
Temple University, USA
Cao Jiang
Affiliation:
Wenzhou-Kean University, USA and China Southwestern University of Finance and Economics, China
Oded Shenkar
Affiliation:
Ohio State University, USA
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Abstract

Extending La Porta, Lopez-de-Silanes, Shleifer, and Vishny (1999), we examine the effect of local government quality on firm performance, since regional and firm research provides a more fine-grained analysis especially in countries where local administration is an integral part of the bureaucratic apparatus. Using a dataset of 7,873 Chinese listed firm-years for 1994–2006, we find a positive relationship between the quality of provincial government and firm performance, controlling for location and firm-specific governance variables. Among various government quality variables, we find that having a special economic zone depicting low taxes and bureaucratic efficiency is the best predictor of firm performance, followed by the degree of marketization, efficient property registration, and environmental protection. Most intriguingly, political freedom has a significant impact on firm performance and productivity, even in a regime where democracy is not practiced. This has never been documented before at a microeconomic level and barely so at a macro level, vindicating Hayek's (1944) theory.

Keywords

Chinese corporate governancefirm performanceinstitutional theorylaw and economicsquality of government
Type
Articles
Information
Management and Organization Review , Volume 11 , Issue 4: Special Issue Expanding Research on Family Business in China , December 2015 , pp. 679 - 710
Copyright
Copyright © The International Association for Chinese Management Research 2015 

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