How does the institutional environment affect the formation of political connections

Based on a sample of 736 firm-year observations of Chinese private listed firms between 2002 and 2005, I found that: First, the better the status quo of institutional environment, the l

HOW DOES INSTITUTIONAL ENVIRONMENT AFFECT THE

FORMATION OF FIRMS’ VARIOUS POLITICAL CONNECTIONS?

YANG BENXIN

A THESIS SUBMITTED

FOR THE DEGREE OF MASTER OF SCIENCE IN BUSINESS

DEPARTMENT OF BUSINESS POLICY

NATIONAL UNIVERSITY OF SINGAPORE

2008

ACKNOWLEGEMENT

This thesis would not be possible without the help and support from many of my tutors, friends, and colleagues I greatly thank my supervisor, Associate Professor Ishtiaq Pasha Mahmood Some of the ideas presented in this thesis are originated from my numerous discussions with him He has the amazing ability

to approach an interesting research question His piercing insights, disciplined analysis, and passion inspire me to think critically and help me to improve the thesis in many aspects I thank Miss Hong-jin Zhu and Dr Qiang Fu for the contributions that they have made to my research, as well as to the improvement

of this thesis

I am grateful to senior students in NUS: Hong-jin Zhu, Zhong-hua Wu, Wei-wei

Xu, Yi Yuan, Jian-feng Shen, and Wen He among many others They are encouraging and considerate I value the friendship that I have made with fellow students in NUS: Xue-juan Zhao, Zhi-ying Jiang, Qing-xia Kong, Xu-hui Jin,

Navid Asgari, and Sairah Hussain among many others They are the sparkles in

my life I thank them to be important sources of my encouragement They have been my tutors at different points along the way

Needless to say, I am solely responsible for any errors or imperfections that may remain in the thesis

Yang Benxin

Dec, 19th, 2008

TABLE OF CONTENTS

ACKNOWLEGEMENT I TABLE OF CONTENTS III SUMMARY V LIST OF TABLES VII

INTRODUCTION 1

LITERATURE REVIEW AND THEORY 5

1 PROPERTY RIGHTS INSTITUTIONS AND CONTRACTING INSTITUTIONS 5

2 INSTITUTIONAL STATUS QUO AND CREDIBILITY 7

3 FORMAL POLITICAL CONNECTION AND INFORMAL POLITICAL CONNECTION 10

4 PROPERTY RIGHT INSTITUTIONS AND FORMAL POLITICAL CONNECTION 12

5 CONTRACTING INSTITUTIONS AND INFORMAL POLITICAL CONNECTION 13

6 MODERATION EFFECT OF POTENTIAL POLITICAL RECOURSES ON THE FORMATION OF POLITICAL CONNECTIONS 14

EMPIRICAL SETTING 17

1 INSTITUTIONAL ENVIRONMENT AND POLITICAL CONNECTIONS IN CHINA 17

2 ENDOGENOUS CONCERN OF POLITICAL CONNECTIONS 20

DATA AND MEASURES 23

1 DATA SOURCE AND SAMPLE 23

2 MEASURE 24

2.1 Dependent Variables 24

2.2 Independent Variables 25

2.3 Control Variables 26

EMPIRICAL ANALYSES 29

1 SUMMARY STATISTICS 29

2 ALTERNATIVE EXPLANATION 35

3 REGRESSION RESULTS 36

DISCUSSION 42

CONCLUSION 45

BILIOGRAPHY: 47

SUMMARY

While prior research has suggested that connections between business leaders and political actors are a primary determinant of firm strategy and performance, relatively little attention has been directed to how those political connections are determined by various institutional environments Drawing on institutional theory and the perspective of social network, I argue that the weak institutional environment fosters the political connections Specifically, as a complement to previous research that has clustered institutions, I unbundle institutions into property rights institutions and contracting institutions and specify how the

status quo and the credibility of different institutions differentially affect the

process of tie formation Moreover, I investigate whether the effects of institutions may vary across different types of political connections Lastly, I consider the moderation effect of entrepreneurs’ political capital on the relationship between institutional environment and tie formation

Based on a sample of 736 firm-year observations of Chinese private listed firms

between 2002 and 2005, I found that: First, the better the status quo of

institutional environment, the less likely the formation of political connections is

Second, firms are likely to establish formal political connections when property rights institutions are not credible, whereas they tend to engage in cultivating informal political connections when contracting institutions are not credible Third, entrepreneurs’ individual political capital negatively moderates the relationship between institutional environment and tie formation

LIST OF TABLES

TABLE 1 SUMMARY STATISTICS 30

TABLE 2 CORRELATION MATRIX 31

TABLE 3 DESCRIPTION OF THE SAMPLE OF

POLITICAL CONNECTED FIRMS BY PROVINCE 32

TABLE 4 DESCRIPTION OF THE SAMPLE OF

POLITICAL CONNECTED FIRMS BY INDUSTRY 33

TABLE 5 DESCRIPTION OF THE SAMPLE OF

POLITICAL CONNECTED FIRMS BY YEAR 34

TABLE 6 DESCRIPTION OF THE SAMPLE OF

POLITICAL CONNECTED FIRMS BY INSTITUTIONS 34

TABLE 7 PROPERTY RIGHTS INSTITUTIONS

AND POLITICAL CONNECTIONS 38

TABLE 8 CONTRACTING INSTITUTIONS

AND POLITICAL CONNECTIONS 39

TABLE 9 FULL MODEL OF THE RELATIONSHIP

BETWEEN INSTITUTIONS AND POLITICAL TIES 44

Introduction

Scholars have gradually recognized the importance of political connections between business people and political actors to firm performance in both developed economies and emerging economies (i.e Fisman, 2001; Faccio, 2006) However, few papers studied the origination of political connections Besides the micro determinants of political connections such as ownership types of firms (Xin and Pearce, 1996) and managers’ political capital based on family, hometown connections, alumni, and even colleagues (Peng and Luo, 2000; Li and Zhang, 2007), previous research suggested seemingly controversial findings of the effect

of macro institutional environment on the emergence of political connections Some studies suggest that political connections tend to proliferate in weak institutional environment because they serve as substitutes of the underdeveloped institutional support (i.e Nee, 1992; Boisot and Child, 1996), while others imply that political connections, circumscribed by the strong institutional environment, are also very prevalent in developed economies due to the substantial resources and information they are able to leverage (Geletkanycz and Hambrick, 1997; Bertrand, et al., 2004) An interesting question for strategy research remains under-examined: How does institutional environment affect the formation of firms’ various political connections?

In light of the institutional theory and social network perspective, I argue that how

institutional environment shapes firms’ political networking may be explained if the broad cluster of institutions is unbundled based on their distinct nature Following Acemoglu and Johnson’s argument (2005), I view institutions as heterogeneous in the sense that two sets of institutions are pertinent to the survival and growth of firms: property rights institutions and contracting institutions (Williamson, 1975, 1985; De Long and Shleifer, 1993; Olson, 2000) The former institutions protect firms from expropriation by the government and the latter enable arm’s length transactions between firms (Acemoglu and Johnson, 2005)

Moreover, I specify the status quo of institutional environment and the credibility

of such environment The status quo of institutional environment refers to whether

the institutions are efficient to regulate property rights and the transaction between citizens (i.e Brunetti and Weder, 1994; Borner, et al, 1994) And the credibility of institutions refers to whether institutional safeguards are provided to prevent arbitrary changes in institutions (Brunetti and Weder, 1994) Realizing that institutions are changing, I argue that firms may decide whether to cultivate

political connections based on the status quo and the credibility of property rights

institutions and contracting institutions

Specifically, I consider two types of political connections that are most prevalent and important among private firms and the state: formal political connections that arise when founders of private firms serve as members of the Congress or Parliament (Faccio, 2006) and informal political connections that are based on face-to-face interactions between corporate leaders and political actors (Chung,

Mahmood, and Mitchell, 2007) I argue that firms are likely to establish formal

political connections when the status quo of property rights institutions is weak

and the credibility of property rights institutions is low, whereas they tend to

engage in cultivating informal political connections when the status quo of

contracting institutions is weak and the credibility of contracting institutions is low I further argue that these relations are negatively moderated by micro-level determinants, such as entrepreneurs’ political capital

I propose a contingency model to specify my argument of the emergence of political connections I test this model in the setting of private listed firms in China from 2002 to 2005 The prevalence of political connections maintained by private listed firms as well as the diversity in institutional environment across 31 provinces makes Chinese private listed firms an attractive setting to examine the theoretical arguments My empirical analysis is conducted using an extensive longitudinal dataset including 736 firm-year observations in total The results are

largely consistent with my hypotheses: The effects of the status quo and the

credibility of institutions on the formation of political connections are contingent

on the types of institutions as well as the types of political connections pursued

My study makes five key contributions to the literature First, I contribute to network research by investigating the institutional origin of network ties between business arena and political arena, which has been under-studied in extant research Second, by explicitly distinguishing two sets of institutions in which

firms are embedded in, I also enrich institutional theory by highlighting the heterogeneity of institutions in their nature and exhibiting their influence on

organizational actions Third, not only do I identify the effect of the status quo of

institutions on firm’s behaviors, but my findings also first empirically support the importance of institutional credibility, an aspect of research on institutions that has received little notice in the literature Fourthly, I conduct a cross-level analysis to indentify the moderation effect of micro-level determinants on institutional origin

of network ties Fifthly, my study also improves our understanding of the political strategy of Chinese private firms, which are a vital and fast growing component of China’s transition economy

Literature Review and Theory

1 Property Rights Institutions and Contracting Institutions

Acemoglu and Johnson (2005) summarized the growing consensus among economists and political scientists that “the broad outlines of North’s story are correct: the social, economic, legal, and political organization of a society, i.e., its

‘institutions,’ is a primary determinant of economic performance” They view institutions heterogeneous in their nature and classified the cluster of institutions into two categories: On the one hand, following the contract theory literature, starting with Coase (1937, 1960) and Williamson (1975, 1985), Acemoglu and Johnson (2005) argued that the legal framework that enables contracts between organizations (i.e contracting institutions) is provided by the state and associated institutions to facilitate economic transactions On the other hand, Acemoglu and Johnson (2005) condensed the ideas from Jones (1981), De Long and Shleifer (1993), and Olson (2000), and argued that the state and associated institutions also enact laws and regulations to protect individuals and firms against expropriation

by the government and powerful elites (i.e property right institutions)

Highly supportive empirical result found by Acemoglu and Johnson (2005) confirms the distinction between contracting and property rights institutions:

“They think of contracting institutions as mainly affecting the costs of enforcing

private contracts…Contracting institutions affect private transactions and create

ex post transfers between parties… For example, when it is more difficult for lenders to collect their loans, interest rates increase, or banks that can monitor effectively will play a more important role, or reputation-based credit relationships will develop.”

“On the other hand, property rights institutions determine the interaction between individuals and the government (and the political elites who control the government)… Property rights institutions, which determine the degree to which the government, politicians, and elites are constrained in their relationships with the rest of the society…When property rights institutions do not constrain elites, these elites are more likely to violate the property rights of individual producers and expropriate their incomes or assets When it comes to arrangements regulating property rights and the relationship between the state and individuals, i.e., property rights institutions, the option to engage in ex ante contracts to avoid

ex post distortions is not available Individuals cannot write contracts with the state to constrain future actions by the state and elites controlling the state…It is impossible to write credible contracts with the state to prevent future expropriation, since the state, with its monopoly of legitimate violence, is the ultimate arbiter of contracts (see Acemoglu 2003).”

Acemoglu and Johnson (2005) also concluded that property rights institutions have a more important effect on economic outcomes than do contracting

institutions Accordingly, property right institutions are fundamental to the survival and development of private firms Without secure property rights, private firms are less likely to invest and grow It is found that secure property rights are both necessary and sufficient to induce investment by entrepreneurs (i.e Johnson, McMillan, and Woodruff, 2002) Thus, firms pursue long-lasting and reliable political protection of property right institutions In contrast, contracting institutions regulate the transaction between private parties They are concerned about issues such as resolving disputes and competing for resources Quick response and problem-solving approaches are expected by the firms when they face troubles in contracting institutions

To get a fine-grained understanding about how firms are motivated to establish ties with local authorities in specific institutional environment, it is necessary to unbundle institutions based on their distinct nature and specify how firms mitigate specific institutional risk by taking advantage of political connections Thus, in light of Acemoglu and Johnson’s argument (2005), I will investigate the distinct influences on organizations of property right institutions and contracting institutions in this paper

2 Institutional Status quo and Credibility

Prior studies have shown that strong institutional environments may promote the formation of political connections It is found that political networks in developed

economies such as United States create conduits for timely market information, and abundant factor resources, which are likely to exert paramount influence on firm performance (Geletkanycz and Hambrick, 1997) However, weak institutional environments are more often seen as facilitating the proliferation of political connections (i.e Nee, 1992; Boisot and Child, 1996) Due to the insufficient institutional support, such as reliable government and well-established legal system, firms cultivate political connections to manage uncertain environment and to satisfy their resource needs (Xin and Pearce, 1996) For example, Nee (1992) considered the close ties between private firms and local government in China, which are maintained by paying “management fee” for assistance in obtaining reliable access to factor resources and political protection

Two dimensions of the overall institutional goodness or perfectness are considered Firstly, a number of prior studies have focused on how the status quo of the institutional environment may influence the emergence of political connections Scholars examined how well the institutions are to regulate property rights and the transaction between citizens (i.e Brunetti and Weder, 1994; Borner, et al, 1994), namely, are there enough institutions to regulate property rights and the transaction between citizens For example, as Borner, Brunetti and Weder (1995)

presented in their Nicaragua case: “Refining property rights in the narrow sense is merely a question of accounting: you must know how large a property is, who the owner is, and you must register this information…property-rights problems were more or less resolved in Nicaragua in 1993 (p50)” Thereby, in this paper, I define

status quo of institutional environment as the amount of institutions which regulate the relationship between the state and the citizens, as well as the relationship among citizens in a region

Secondly, scholars also resorted to the credibility or reliability of institutions, which are characterized by “rules that are not enforced in an arbitrary fashion and

a process of rule-making that is transparent and predictable” (Borner, et al, 1994 Brunetti, et al, 1998) For example, Borner, Brunetti and Weder (1995) presented:

“Although, according to this narrow view, property-rights problems were more or less resolved in Nicaragua in 1993, the climate of constant threat to property has still had a devastating effect on the expectations of private investors There is simply no confidence in the sanctity of private property and in the enforcement of property laws We even argue that this uncertainty has spread to a general mistrust of the reliability of enforcement of all laws and regulation (p51)”

Furthermore, scholars provided detailed cases to support the importance of this institutional dimension in Thailand, Philippine and many other less developed countries (Brunetti and Weder, 1994; Borner, et al, 1994; Borner, et al, 1995)

Compared with the situation with no institution, the context with a few institutions, where executives or the political elites still are endowed with large discretionary power, is better for entrepreneurs Thus, to some extent, the status quo of institutions refers to the part of discretionary power that has been restrained Better status quo of institutions associates with higher level of institutional

perfection In contract, the credibility of institutions refers to the part of discretionary power that has not been restrained For example, in Nicaragua case presented by Borner, et al, (1994), the institutional environment is not credible when entrepreneurs feel the property rights institutions are not reliable (i.e a powerful politician could change laws at anytime (p154)) For another example,

in Indonesia case also presented by Borner, et al, (1994), the institutional environment is not credible when entrepreneurs feel the contracting institutions are not reliable (i.e “the judge has enough discretionary power The party who pays more will win the court case.”(p5)) Therefore, lower level of credibility of institutions associates lower level of institutional perfection

Considering the fact that firms are likely to take actions, like cultivating political connections, based on their perceived institution (Duncan, 1972), I examine the

effects of the status quo of institutions and the credibility of institutions on the

likelihood of firms to form political connections Specifically, I investigate the

status quo of institutions and the credibility of two types of institutions that are

crucial to the survival and development of firms: property right institutions and contracting institutions

3 Formal Political Connection and Informal Political Connection

I define political connections as individually-based linkages between business leaders and political actors such as party leaders, government officials, and elected

legislators (Taira and Wada, 1987; Zeitlin and Ratcliff, 1988) Specifically, I consider two approaches adopted by business leader to connect with the political arena (Chung, Mahmood, and Mitchell, 2007): Firms may get formally connected with politicians when their leaders occupy two distinct positions, one in business arena and the other in political arena Firms may also establish informal political connections through face-to-face interactions between corporate leaders and political actors

The formal position interlocks provide firms with reliable conduits to pursue political protection because the corporate executive and the politician are the same person Entrepreneur’s membership of the Congress or Parliament is one of the prevalent types of formal political connection (Faccio, 2006) However, the establishment of such political connections is time consuming with persistent investment of resources Moreover, formal political connections usually face stringent public scrutiny from the media and other observers, thereby cannot facilitate firms unrestrictedly

In contrast, informal political connections are less reliable than formal ones in seeking long-lasting political protection because they highly depend on particular government officials The change of regimes could quickly diminish the value of such political connections (Siegel, 2007) However, “grease money” and

“protection money” always facilitate the quick constitution of informal political connections that are based on face-to-face interactions between corporate leaders

and political actors (Cai, Fang and Xu, 2007) Further, informal political connections are more inconspicuous than formal ones, and thus bear less opportunity costs resulting from the possible disclosure of malfeasance

Therefore, to maximize the benefit and minimize the cost of their political investments, firms could choose appropriate forms of political connections based

on the specific institutional environment they face

4 Property Right Institutions and Formal Political Connection

As referred, property rights institutions are fundamental to the survival and development of private firms Borner, et al (1994) alleged that creditable property rights are “the most important precondition for development based on private-sector activity” The secure property rights are both necessary and sufficient to induce investment by entrepreneurs (Johnson, McMillan, and Woodruff, 2002) Compared to formal political connections, though informal political connections are more flexible and efficient in problem solving and cost less, they cannot guarantee the long-lasting security of a firm because of the weak accountability of informal political connections (Chung, Mahmood, and Mitchell, 2007) Thereby, when property rights institutions are weak, especially when the credibility of property rights institutions is low, firms pursue long-lasting and reliable political protection, which does not change with the alteration of legislators and government officials Entrepreneur’s formal political connections,

like the membership of the Congress or Parliament are very appropriate to provide firms with reliable conduits to impel the legislation, by which firms obtain the sustaining protection by a strong legal effectiveness of laws

In line with this argument, I propose the following hypotheses:

Hypothesis 1a (Property rights institutions and formal political connections): The probability of a formal political connection decreases with the level of perfection

of property rights institutions

Hypothesis 1b (Property rights institutions and formal political connections): The probability of a formal political connection decreases with the level of credibility

of property rights institutions

5 Contracting Institutions and Informal Political Connection

Contracting institutions regulate transactions between private firms and other private parties It concerns issues such as resolving disputes and competing for resources Compared to informal political connections, formal political connections are more reliable and are able to provide sustaining protection, but they cost more and have response lag When contracting institutions are weak, especially when the credibility of contracting institutions is low, firms prefer direct transactional facilitation approaches which can induce quick response and solve case-by-case problems in business transactions A negotiation between

private firms and local authorities, facilitated by an informal political connection, appears to introduce flexibility into resolving problems with business transactions and to allow for the reconstitution of transactions to respond to new opportunities and changing circumstances For example, Pye (1995) indicated that many business transactions in China are settled through negotiation between entrepreneurs and connected local government officials Risks in transitions can

be managed informally in the political networks on the basis of reciprocity rather than by reliance on formal laws of contract (Boisot and Child, 1996)

Hence, I propose the following hypotheses:

Hypothesis 2a (Contracting institutions and informal political connections): The probability of an informal political connection decreases with the level of perfection of contracting institutions

Hypothesis 2b (Contracting institutions and informal political connections): The probability of an informal political connection decreases with the level of credibility of contracting institutions

6 Moderation Effect of Potential Political Recourses on the Formation of

Political Connections

Chinese entrepreneurs do not have influential political connections before they are involved in business arena Nevertheless, the previous experiences of Chinese

entrepreneurs make their firms different in specifics of their potential political recourses Consistent with previous studies, entrepreneurs may work in the government or join political party before they are involved in business arena (i.e Faccio, 2006; Li, Meng and Zhang, 2006) For example, Mr ZHOU Lian-Qi, the founder of Septwolves Group, which is a listed private firm in textile industry (Company ID is 002029 in my sample.) worked in a local branch of provincial ministry of finance 15 years before he started his business

Though these potential political recourses do not mean a direct linkage between business executives and political actors, they facilitate entrepreneurs’ understanding of the institutions and assist entrepreneurs to respond appropriately For example, entrepreneurs worked in the government might experience an execution of public policies and have a chance to know the procedures of policy-making, and might have more information about the key persons in policy-making procedures (i.e Faccio, 2006) Therefore, firms with potential political recourses are less likely to invest in political connections, ceteris paribus,

in terms of their higher understanding of the institutions and their better responses, both of which are partial targets of firms to conduct political connections

Hence, I argue that the likelihood of the formation of political connections could

be negatively moderated by this micro-level determinant, entrepreneurs’ potential political recourses I propose the following hypothesis:

Hypothesis 3 (Both types of institutions and political connections): The relationship between the institutions and the political connections is negatively moderated by entrepreneurs’ political capital in that firm

Empirical Setting

1 Institutional environment and political connections in China

The diversity in institutional environments across 31 provinces as well as the prevalence of political connections maintained by private listed firms makes Chinese private listed firms an attractive setting to examine the theoretical propositions

The various institutional environments across different provinces result from not only the differences in economic development and indigenous social traditions that are deeply embedded and extremely persistent (Granovetter, 1985), but also from legal system characterized by multiple agencies regulating the economic life with laws, rules, and regulations I note that the distribution of political power among agencies that constitute the institutions and the difference in effectiveness across laws, rules, and regulations may shed light on the institutions-political connection relationship in China’s transition economy As indicated by Borner, Brunetti and Weder (1994; 1995), political discretionary power is institutionalized

on two levels: First, the constitution allows some agencies to “enact institutions more or less without congressional approval” Second, existing institutions “leave much room for interpretation and ad-hoc decisions, instead of providing clear and predictable interpretations” Accordingly, laws are most credible And credibility could not be established by rules or decrees because neither are they approved by

the congress nor are they decided transparently They also nor leave much room for interpretation and ad-hoc decision (Brunetti and Weder, 1994)

In China, both the provincial government and the provincial legislatures, including Provincial People’s Congress1 (PPC) and Chinese People’s Political Consultative Conference (CPPCC), have been empowered to constitute the provincial institutions by the National People’s Congress since 1979 (9th National People’s Congress, 1979; 15th National People’s Congress, 2000) The provincial

government constitutes rules (decrees) as a quick response to the fast-changing

demands and problems with the development of economy PPC and CPPCC

constitute laws to provide long-lasting institutions Regulations, which balance

the influence of government and the legislatures, are constituted by the provincial governments with the approval of PPC

The three forms of institutions have different legal effectiveness and credibility The legal effectiveness is strongest for laws, followed by regulations, and then rules The same hierarchy applies to the credibility of the three forms of institutions Rules are most likely to be influenced by the changes in government officials and thus are least credible and stable, while laws are least affected by the

1 “As stipulated by the Chinese constitution, People’s Congress is the highest organ of state power in China Following the government hierarchies, there is People’s Congress at each administrative level, including the central, provincial and country levels.” (Li, Meng

& Zhang 2006) “The Chinese People’s Political Consultative Conference (CPPCC) is an advisory body to the party/government in China, somewhat analogous to an advisory legislative upper house.” (Li, Meng & Zhang 2006) Before 1954, CPPCC is Chinese legislature, which constituted the first constitution of China.

alteration of legislators and bear sustaining effect The more rules relative to laws are constituted, the less creditable the institutions are

Chinese entrepreneurs of private firms usually maintain extensive political connections through either formal position interlocks or informal relationships, or both (Li, Meng and Zhang 2006) Private firms lack the legitimacy and necessary political backing to enjoy reliable access to resources and thus are highly motivated to establish political connections More than one third of Chinese private entrepreneurs are eager to obtain the membership of People’s Congress (central or local) and the membership of Chinese People’s Political Consultative Conference (central or local)” in 2006 (ACFIC 2006) However, it is not easy to establish formal political connections because the Chinese Communist party and the government control the election of members of PPC and CPPCC across different levels and entrepreneurs will not be able to obtain candidatures unless their firms meet certain criteria regarding size, profitability, tax contribution

Alternatively, Chinese entrepreneurs of private firms establish informal political connections by directly bribing the government officials or paying grey “grease money” with the guidance of “acquaintances”, such as classmates and homo-hometown townies For example, Cai and his colleagues (2007) found that entertainment and travel cost (ETC) expenditures, which account for about 2.6%

of the average Chinese manufacturing firm’s total sales2, are mainly composed of

2 Among all listed manufacturing firms in Korea, ETC expenditure is about 0.74 percent

“grease money” and “protection money” for government officials ETC expenditures usually involve payment for eating, drinking, gifts, Karaoke, sports club membership, travel cost and so on (Cai, Fang and Xu 2007)

To the extent that the ownership of property in China does not furnish unambiguous legal property rights and such rights still largely depend on the sanction of governments (Boisot and Child, 1996), private firms are eager to minimize the non-credibility of property rights institutions through the enactment

of laws for long-lasting protection Since PPC is the legislature and CPPCC serves

as the advisory legislative upper house to PPC and government, joining PPC and CPPCC is the most direct and effective approach to manage uncertainty in property rights institutions By sitting on the PPC and CPPCC, entrepreneurs can raise their concerns and put forward suggestions on how to protect their property rights

In summary, I have argued that the impact of the status quo and the credibility of

institutions on the formation of political connections is contingent on types of institutions as well as the forms of political connections

2 Endogenous Concern of Political Connections

The fact that Chinese entrepreneurs do not have influential political connections

of their total sales in 2000-03 (Cai, Fang & Xu2007)