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CEO political connections and OFDI of Chinese firms under the Belt and Road Initiative

Business

CEO political connections and OFDI of Chinese firms under the Belt and Road Initiative

Y. Wang, S. Chen, et al.

This study by Yueqi Wang, Shouming Chen, and Peien Chen explores how CEO political connections bolster the outward foreign direct investment of Chinese firms amidst the Belt and Road Initiative. It reveals fascinating insights about the complexities of institutional environments and the role of state ownership as a substitute for political ties.

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Playback language: English
Introduction
The Belt and Road Initiative (BRI), launched by the Chinese government in 2013, has spurred significant outward foreign direct investment (OFDI) from Chinese firms. This paper investigates the role of CEO political connections in driving this investment. The BRI, while economically motivated, is also a geopolitical strategy, influencing firm behavior. Existing research on CEO political connections and OFDI yields mixed results, potentially due to the lack of consideration of specific contexts. This study addresses this gap by focusing on the BRI context, where a positive home-host country relationship is assumed, allowing for a clearer examination of the impact of CEO political connections. The authors hypothesize that CEO political connections facilitate OFDI under the BRI, but this effect is moderated by the institutional environment in both the home and host countries. Understanding these dynamics is critical for comprehending Chinese firms' internationalization strategies and the BRI's effectiveness.
Literature Review
The literature review explores the existing research on firm-government relationships and their influence on OFDI. Resource dependence theory suggests that firms with strong political connections have better access to resources, reducing transaction costs and risks. The resource-based view complements this by emphasizing how firms leverage unique resources to gain competitive advantage. However, studies on the impact of CEO political connections on OFDI show mixed results: some find a positive effect, while others find a negative or insignificant effect. This inconsistency might be due to the varying contexts of the studies and neglecting the interplay between domestic and host-country institutional environments. This study seeks to reconcile these conflicting findings by examining the role of CEO political connections within the specific context of the BRI and its boundary conditions, including the institutional environments of both home and host countries.
Methodology
The study employs a negative binomial regression model due to the non-negative, integer-valued, and over-dispersed nature of the dependent variable—the number of overseas subsidiaries in a single host country. The data are gathered from multiple sources including the China Stock Market Accounting Research (CSMAR) database, Wind database, and the World Bank's World Governance Indicators (WGI). The sample consists of Chinese A-share listed companies with OFDI in BRI participating countries from 2013 to 2021. The independent variable is CEO political connections (measured by a dummy variable indicating whether the CEO holds or has held a government position), while the moderators are the institutional environment in the home region (measured by the marketization index of the province) and the institutional environment in the host country (measured by the WGI). Numerous control variables are included, encompassing macroeconomic characteristics of host countries (GDP per capita, GDP growth, Gini coefficient, population density, CPI) and firm characteristics (size, adjusted ROA, Tobin's Q, book-to-market ratio, net profit growth, patent stock, concentration, separation ratio, R&D employee ratio). Industry-fixed effects and year-fixed effects are also controlled for. The authors use several robustness checks to validate their findings, including using a one-year lag of the independent variable, implementing instrumental variable methods, removing data from 2020 (due to the pandemic), and adding strategic and competitive factors (multinational strategy, financial condition, key BRI provinces/industries, export, trade flows, trade openness). Finally, the sample is divided into central state-owned and non-central state-owned companies to examine whether state ownership acts as a substitute for CEO political connections.
Key Findings
The regression analysis reveals that CEO political connections significantly and positively influence the scale of OFDI under the BRI, supporting the primary hypothesis (H1). This suggests that politically connected CEOs help their firms gain access to resources, reduce transaction costs and political risks, and enhance legitimacy, ultimately leading to greater investment opportunities. The interaction effects support the moderating role of institutional environments (H2 and H3). In regions with a strong institutional environment (both home and host), the positive impact of CEO political connections weakens. This is because, in fair and transparent markets, the advantages gained through political connections are diminished. Further analysis reveals a substitute role for central state ownership. For non-central state-owned enterprises, CEO political connections significantly and positively affect OFDI, while this relationship is absent for central state-owned enterprises. The robustness checks, employing various methodologies and data adjustments, consistently support these key findings.
Discussion
The findings demonstrate that CEO political connections play a significant role in facilitating OFDI for Chinese firms engaged in BRI projects. This is particularly relevant in countries with less developed institutional environments where political influence can be crucial for navigating regulatory hurdles and accessing resources. The moderating effect of institutional environment highlights the importance of good governance in reducing the reliance on political connections. This implies that fostering a strong rule of law and transparent institutional frameworks can level the playing field for all firms, regardless of their political connections. The findings contribute to the existing literature by providing empirical evidence on how political connections shape firm behavior within the specific context of a large-scale government initiative. The findings extend our understanding of how firms strategically combine market and non-market strategies in their international expansion.
Conclusion
This study shows that CEO political connections positively influence the scale of OFDI for Chinese firms under the BRI, particularly for non-central state-owned enterprises. This positive effect is, however, contingent upon the strength of institutional environments in both the home and host countries. Future research should explore the nuances of political connections' role in different BRI member countries, investigate additional factors affecting OFDI, examine the potential conflict between CEO self-interest and shareholder interests, and delve deeper into the negative consequences of political connections, such as bribery or corruption.
Limitations
The study focuses solely on CEO political connections in the home country and does not comprehensively analyze political and economic dynamics within specific BRI member countries. While numerous control variables are included, there might be unobserved factors that influence OFDI. The study primarily emphasizes the positive benefits of political connections, overlooking potential negative consequences such as agency problems. Data limitations hinder a comprehensive examination of potential negative effects from practices like lobbying, campaign contributions, or bribery.
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