Starting in 1978, markets developed rapidly in China, creating new business opportunities and heightening uncertainty. The political system remained autocratic, so business remained dependent on state officials – increasingly on local officials, as authority was decentralized. Moreover, local officials depended more on business to meet the central state’s economic targets. Therefore, state-business relations became more mutual and thus more embedded and normative, more imbued with trust rooted in shared goals. As market development proceeded, these changes made business-state ties more beneficial to firms: firms that became politically embedded (tied to state authorities) faced less uncertainty and more easily grasped business opportunities, and so improved their performance.
We test this prediction and then investigate two important contingencies (industry and firm size) and two causal mechanisms (access to bank loans and protection from pressure to make related-party loans). Analysis of panel data supports most predictions, demonstrating the importance of attending to institutional context (state policy and authority structures) and probing t temporal and cross-sectional variation: institutional context fundamentally shapes the nature and impact of exchange relations. Our analysis also indicates that China’s economy remains a form of networked capitalism, which reinforces the importance of context – this time national.
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