Political connections and entrepreneurial finance in an emerging market: the China case

Recent literature in entrepreneurship suggests that institutions matter for entrepreneurial investment. Prior studies, however, have focused on the role of formal institutions. Yet, many emerging economies have had high levels of entrepreneurial investment for a relatively long period with deficient formal institutions. This study argues that political connections, which are a more fundamental aspect of networking in emerging economies, may act as substitutes for deficient market and legal institutions, thus facilitating entrepreneurial investment. The empirical test uses a nationally representative sample of entrepreneurial firms in reform-era China. The results suggest that entrepreneurial firms with political connections (or higher level political connections) have significantly higher reinvestment rate, in particular, among smaller firms.