Political connections and entrepreneurial investment: Evidence from China's transition economy

Recent literature in entrepreneurship suggests that market and legal institutions matter for entrepreneurial investment. Yet, prior studies have focused on the role of formal institutions. Building on new institutional theory and political connections literature, this study aims to evaluate the role of political connections in entrepreneurial reinvestment in less developed and transition economies. The purpose of this paper is threefold. First, it aims to demonstrate systematically how political connections affect entrepreneurial reinvestment. Second, it applies this relationship to a subsample group, i.e., Small and Medium Enterprises (SMEs), in order to empirically test whether political connections are more beneficial for large firms or SMEs. Third, it demonstrates that political connections substitute for, rather than complement, formal market and legal institutions. The empirical test uses a nationally representative sample of entrepreneurial firms from China's transition economy.

► I evaluate the role of political connections in entrepreneurial reinvestment in less developed and transition economies.
► Entrepreneurial firms with political connections enjoy more security in property rights.
► Entrepreneurial firms with political connections have higher reinvestment rates.
► Political connections are more useful for smaller firms.
► Political connections have stronger effects under less developed market and legal institutions.