Political Connections, State Ownership and Productivity in China

Subordination of business to political influence has remains pervasive in China. We construct a Schumpeterian-type model of growth with managerial time allocation between productive activities and building up political connections. The model predicts the impact of different patterns of state ownership and/or political connectedness on firm productivity linked to a period of liberalization. We then investigate the relationship between political connections, state ownership, and total factor productivity (TFP) using firm-level data for China between 1998 and 2007. We find, consistent with the model, that the firms with the highest levels of TFP had low levels of political affiliation and/or state ownership.