Hometown-based business associations and the cross-regional development of firms

【Abstract】Due to the natural frictions in business networks (such as lack of information, trust, etc.), it is difficult for firms to develop effective business relationships with each other. This often leads to network-based barriers of development. Theoretically, business associations (BAs) have the potential to overcome the barriers caused by the lack of business relations, but few empirical studies examine this prediction due to the lack of data and the endogeneity problem. Cai and Szeidl (2018) provided the first empirical evidence using field experiments. They found that local BAs can help firms overcome development barriers and help firm to grow. This paper went a step further and focused on the influence of cross-regional BAs. Using the establishment of hometown-based BAs (HBAs) as an exogenous shock, this paper explored whether cross-regional BAs can help firms break through the cross-regional development barriers. The endogeneity arising from the relation between BAs and firms’ development is the biggest challenge for this research topic. Since the implementation of Opinions on Registration of Hometown-based Business Association by the Ministry of Civil Affairs of the People’s Republic of China, the application and approval of HBAs has not been influenced by hometown firms, which provides an exogenous shock to examine the influence of HBAs on firms’ cross-regional development. Using hand-collected data on the cross-regional subsidiaries of listed companies from 2002 to 2013 as a measure of firms’ cross-regional development, we conducted a difference-in-differences test. We found that firstly HBAs significantly promote cross-regional investment, and the new subsidiaries of hometown province firms in the HBA’s operating province increase by 47.3% after an HBA is established. Secondly, the promoting effect of an HBA on cross-regional investment is unidirectional, and is stronger in target provinces with underdeveloped inputs/products markets, serious government intervention, and limited access to information. These results suggested that the effect of HBAs is related to business networks’ information transmission and resource acquisition functions through non-market channels. In addition, we found a substitutional relation between HBAs and other informal social networks. Finally, we showed that HBAs can improve the performance and reduce the costs of subsidiaries in the province that the HBA is registered in. The HBAs discussed in this paper are formal social networks in the market, which can be effectively dominated by the government. Therefore, our study has important policy implications for local governments: they can take advantage of HBAs to improve cross-regional investment between provinces, especially when informal social networks are absent. It may be an important micro-path to solving the imbalance and inadequate development among regions in China. Our study has made the following contributions. First, our study expanded the literature by showing that BAs can overcome firm development barriers. Cai and Szeidl’s (2018) field experiments provided evidence that BAs can improve local firms’ performances by expanding their business relationship. We used the establishment of HBAs at different times as an exogenous shock to examine the impact of cross-regional BAs on firms’ cross-regional development, which complements Cai and Szeidl’s research (2018) by breaking through the space constraints of local BAs. Second, this paper contributed to the hometown-based networks literature. Studies of hometown-based networks focus on informal social networks based on the relationships of local individuals, such as executives and officials. This paper focused on HBAs, which are formal networks. Third, this paper enriched our understanding of the “bridge effect” of intermediary organizations. Recent studies show that foreign institutional investors facilitate cross-border mergers and acquisitions. We provided evidence for the bridge effect of HBAs, which can form formal social networks in the market, on firm cross-regional investments.

【Keywords】 hometown-based business association; formal social network; non-market approach; cross-regional development;

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ISSN:0577-9154

CN: 11-1081/F

Vol 55, No. 04, Pages 150-166

April 2020

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