Growing up under Mao and Deng : On the ideological determinants of corporate policies

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Title: Growing up under Mao and Deng : On the ideological determinants of corporate policies
ISBN: 978-952-323-345-4
Author: Hao, Liang ; Rong, Wang ; Haikun, Zhu
Organization: Bank of Finland
Department / Unit: Institute for Economies in Transition (BOFIT)
Series: BOFIT Discussion Papers
ISSN: 1456-5889
Series year: 2020
Series number: 20/2020
Year of publication: 2020
Publication date: 27.8.2020
Pages: 57
Subject (yso): politiikka; ideologiat; vaikutukset; yritykset
Keywords: Bofit-kokoelma; Kiina
JEL: G30; M14; P16
Other keywords: political ideology; corporate policy; regression discontinuity; China
Abstract: Economic activities have always been organized around certain ideologies, yet little is known about how ideology shapes corporate behavior and how it is different from other political forces. We investigate the impact of politicians’ ideology on corporate policies by exploring a unique setting of ideological change in China from Mao’s ideology to Deng’s around 1978. Using textual analysis based on keywords in People’s Daily, we find a discontinuity in ideological exposure among people who later became city mayors. Those who were at least 18 years old in 1978 and had joined the Chinese Communist Party (CCP) are more likely to have adopted Mao’s ideology, and those who did not join by 1978, due to age limit, but joined soon thereafter were more likely to have adopted Deng’s ideology. This ideological difference has had an enduring effect on contemporary firm and city policies. Firms in cities governed by mayors with Mao’s ideology have made more social contributions, lowered within-firm pay inequality, and pursued less internationalization than those with Deng’s. These effects are stronger in firms with political connections, less state ownership, and more government subsidies as well as in regions that are more market-oriented and not “revolutionary bases.” Our results are robust to OLS regressions with various pair fixed effects besides regression discontinuity. We further find that corporate policies promoted by Mao’s ideology are associated with slower firm growth but greater stakeholder engagement.
Table of contents: Abstract .... 4 1 Introduction .... 5 2 Conceptual framework and hypotheses development .... 10 2.1 Institutional transition and the economic thoughts of Mao vs. Deng .... 10 2.2 Hypothesis development .... 12 3 Data and methodology .... 15 3.1 Data .... 15 3.2 Empirical methodology .... 19 4 Results .... 23 4.1 The impact of ideology on firm policies .... 3 4.2 Evidence from the textual analysis .... 28 4.3 Economic mechanisms and cross-regional variations .... 30 4.4 Ideology and firm performance .... 37 4.5 City-level results .... 41 4.6 Additional robustness tests .... 42 5 Discussions and conclusions .... 45 References .... 47 Appendix A Variables definition .... 51 Appendix B Distribution of Mao’s and Deng’s ideologies across Chinese cities .... 53 Appendix C The indoctrination process on CCP members .... 4 Appendix D Graphical illustration of McCrary’s density test (2008) .... 55 Appendix E Controlling for economic zone-year pair and mayor native place-firm location pair fixed effects .... 56

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