Business And Political InfluencePeer-Reviewed Research

Royal Favor

Signals of government confidence
  • In China, where information on public companies is scarce, a visit from a high official is a coveted signal of government confidence.
  • Such visits result from complex, longtime bonds between the state and the firm.
  • Depending on the status and location of the host company, some high-level visits have more market value than others.

For a Chinese business owner, when the sixth Premier of the State Council of the People’s Republic of China inspects your factory, it’s likely to be one of the biggest days of your career: the modern equivalent of a royal handshake.

It may signal that your firm is the kind of enterprise the Chinese government supports. It may mean your firm’s sector holds strategic importance for the most populous country on earth. And if your business or economic sector is suffering a global downturn, it indicates that one of the world’s most powerful states supports your efforts.

Surprisingly, though, there’s little literature about the interactions that make such high-profile appearances happen. Does a visit from the Chinese premier or president mean more for some types of firms than for others? Is it more important for a privately held firm than for a state-owned enterprise? And is it more or less significant for a firm in parts of China not normally exposed to such attention?

Rice Business Professors Douglas Schuler and Robert E. Hoskisson joined Wei Shi of Indiana University’s Kelly School of Business and Tao Chen of Nanyang Business School in Singapore for a close look at high-level visits and their implications. To conduct their research, the team first combed the Internet for accounts of such visits. Then they did a deep dive into reports of 84 visits by Wen Jiabao, Chinese premier from 2003 to 2013, and Hu Jintao, Chinese president from 2002 to 2012, to study the impact of these visits to firms on the Shanghai Stock Exchange.

Official visits, the team found, largely took place in the context of previously existing relationships between managers and government representatives. And though the visits ultimately occurred after senior government officials requested them, advance work always came first. Curiously, the researchers found, these visits weren’t necessarily designed to influence government policies. Instead, they were a continuation of relationships that were already flourishing.

In China, government looms large in business, and information about the health of a given firm may be opaque. So government visits send a message of assurance, especially to investors. That said, the researchers found that the impact of a high level government visit varied, depending on factors that include the firm’s ownership status and even its location.

The researchers found that a visit had the greatest impact on stock prices of firms in provinces not known for economic development. They found a similar positive effect from visits to privately-owned companies, as opposed to public companies, which are mostly government-owned but publicly traded.

While China’s government has a direct interest in propping up state-owned businesses, a visit to a privately-owned business telegraphs its willingness to stake its reputation on that company. It may also suggest that firm managers have a personal government link, worth its weight in gold in Chinese business.

Political connections do enhance a company’s appeal. But for the Shanghai stock market, a high-level visit to a company that’s not politically connected may be even more impressive. It signifies a scrappy business that has overcome ordinary obstacles and been recognized by the premier or president strictly on its merits. Investors around the world, it seems, still love a rags to riches story.

Douglas A. Schuler is an associate professor of business and public policy and Robert E. Hoskisson is the George R. Brown Emeritus Professor of Strategic Management at Jones Graduate School of Business at Rice University.

For learn more, please see: Schuler, D.A., Shi, W., Hoskisson, R.E., & Chen, T. (2017). Windfalls of emperors’ sojourns: Stock market reactions to Chinese firms hosting high-ranking government officialsStrategic Management Journal, 38(8), 1668-1687.