Do institutions mitigate the negative effect of social conflict on enterprises’ risk-taking?
(2.Center for Firm and Organization Studies, Renmin University of China)
(3.Chinese University of Hong Kong)
【Abstract】“Creative destruction” drives economic growth (Schumpeter, 1934). However, such destruction also brings huge risk. Enterprises play a major role in the process of creative destruction. Enterprises’ risk-taking ability is quite important for the improvement of total factor productivity, asset value and economic growth. Given that marketization reform is essentially the adjustment of the interest structure, the number of conflicts of interest simultaneously increases as marketization develops, which inevitably exacerbates uncertainty and decreases enterprises’ risk-taking ability. Thus, it is significant to know how to reduce the negative effect of social conflict to increase the innovation and investment energy of enterprises. Does an increase in social conflict reduce the risk-taking capacity of enterprises in a transition economy, such as China? How can we minimize the effect of social conflict on risk-taking ability, either through better institutions or more stability maintenance? If institutions can help lessen the negative effect of social conflict, which institutions play a more important role—property right institutions or contractual institutions? We aimed to answer these questions. We explored how social conflict affects the risk-taking ability of small and medium enterprises, focusing especially on how institutions help reduce the negative effect of social conflict.We build a dataset that matches the financial data of enterprises listed in the Shenzhen Small and Medium Enterprise Board, city-level social conflict data and the marketization index from 2005 to 2013. We used the fixed-effects model and instrumental variable regression to empirically verify the preceding questions. We found that social conflict has a negative effect on the risktaking ability of enterprises, whereas institutions alone have positive effects and lessen the negative effect of social conflict via the interaction effect. Furthermore, since 2008, the effect of social conflict and the interaction effect of institutions and social conflict have both been lower in magnitude, whereas institutions themselves have shown no significant effects. To evaluate the value of institutions in detail, we divided institutions into property right institutions and contractual institutions. We found that property right institutions have larger positive effects on the risk-taking ability of enterprises than contractual institutions, but smaller effects on reducing social conflict’s negative effect on risk-taking ability. Finally, we found that institutions can reduce the negative effect of social conflict on the risk-taking ability of private enterprises rather than state-owned enterprises. We make two theoretical contributions. First, we use social conflict data for the first time, empirically studying how institutions perform at reducing the negative effect of social conflict and quantifying the value of the market system. This adds to the literature that analyzes the risk-taking ability of enterprises from the perspective of macroeconomics and social environment. Second, the analysis in this paper focuses on small and medium enterprises, which are innovative. Despite research regarding the risk-taking of new enterprises, no study has considered innovative enterprises. However, risky investment is what innovative small and medium enterprises need during their development.This paper has important policy implications. Deepening reforms lead to interest restructuring and marketization results in some conflicts. Despite the negative effect of social conflict, building contractual relationships between economic agents effectively protects enterprises from the risk of uncertainty on investment. The marketization process also requires a sound contractual system. Building good relationships between enterprises and the government and ameliorating property right institutions are important in improving the risk-taking ability of innovative enterprises. Finally, small and medium enterprises are main contributors to technology advancement. Whether these innovative enterprises can bear the risk is key to not only improvements in innovativeness, but also the cultivation of a new growth engine.