State ownership, political connections and entry barriers: evidence from China

ABSTRACT

Private enterprises may encounter high industrial barriers in China because of government administrative restrictions. We analyse the effect of partial state ownership on a privately controlled company’s participation in industries with state-imposed barriers. The results indicate that state ownership in privately controlled enterprises has a significantly positive effect on participation in high barrier industries. After controlling for partial state ownership, we find that personal political identity of entrepreneurs, a previously investigated dimension of political connections, becomes less important in explaining private enterprises’ participation in barrier industries. We also find the effect of state ownership on access to barrier industries will become weaker when local economy is more developed.

KEYWORDS:

• State ownership
• political connections
• industry barrier
• private enterprises

Disclosure statement

No potential conflict of interest was reported by the authors.

Notes

¹ The Shanghai and Shenzhen Stock Exchange announced on 22 April 1998 that the stock exchange transactions of listed firms with abnormal situation in finance or other conditions will be specially dealt with, named Special Treatment, abbreviated as ‘ST’. So these companies are referred to as ST companies. ‘ST’ represents that the stock issuance company’s financial situation is abnormal and the stock has delisting risk. ‘ST’ mark is a warning to investors that should trade such companies’ stocks highly prudent.

² ‘PT’ is the abbreviation of ‘Particular Transfer’. This particular transfer service provides a means of circulation for the suspension of listing of stocks. According to the provisions of the Chinese Company Law and the Securities and Exchange Law, listed companies have deficit for three consecutive years and their stocks will be suspended from listing. Since 9 July 1999, the Shanghai and Shenzhen Stock Exchanges have implemented the ‘particular transfer service’ for stocks that have been suspended from listing. ‘PT’ companies’ stocks are not included in the index calculation, the transfer of information is not displayed in the trading market, and transaction data is not included in the market statistics. The stocks of ‘ST’ companies and ‘PT’ companies are nonnormal. In order to reflect the circumstances of listed firms accurately, we excluded these two types of data from the empirical study.

³ Chen et al.(2008) conducted an index characterization of barriers to entry confronted by private sector enterprises according to various industries in Wind Database. They classified the industries of listed companies into three broad categories quantified by index. Category I: industries with high-level barriers to entry (entry barriers index is between 7 and 10), including energy equipment and services, metals, nonmetal and mining, automotive, capital markets, electricity, gas, complex utilities and water, road and rail, media, maritime, aviation and aviation logistics, freight services and so on, these industries are usually state-owned monopolies or have strong monopoly characteristics. Category II: industries with moderate barriers to entry (entry barriers index is between 4 and 6), including engineering, construction products, real estate and the like. Category III: industries with low-level barriers to entry (entry barrier index is between 1 and 3), including textiles, clothing and luxury goods, hotel restaurants and leisure, containers and packaging, foodstuffs and main products etc. This article follows the classification of industries in the above studies and considered the first class of industries as higher-barrier industries.

⁴ This classification follows ‘Listed Company Industry Classification Guidelines’ issued by the China Securities Regulatory Commission, revised in 2012.

Additional information

Funding

This work was supported by the National Social Sciences Foundation of China [14BGL047].