Embedded Giants: The Political Economy of Production Networks and Local Business Environments in China

Abstract

Why do governments differ in the quality of business environments they provide, even under similar political institutions and levels of economic development? This dissertation addresses this puzzle by developing and empirically testing a theory of how firm-level production network complexity shapes both business demand and government supply of public goods. I argue that large firms embedded in complex production networks—those with dense, multi-stage, and interdependent supplier and client relationships—have stronger incentives to seek improvements in legal, regulatory, and infrastructural conditions, and also have greater leverage to induce government responsiveness. These firms face higher coordination risks and are more sensitive to transaction costs in the external business environment, making public goods more critical to their operations.The empirical chapters draw on firm-level survey data, annual reports of publicly listed firms, and firm registry records in China. Chapter 3 shows that firms with high levels of backward and forward linkages place greater importance on business-related public goods. Chapter 4 demonstrates that firms benefit not only from their own political connections but also from those of their supply chain partners in accessing government subsidies. Chapter 5 shifts to the local level, showing that counties where large firms are embedded in complex production networks are more likely to invest in business-friendly infrastructure and regulatory practices. A case study of Kunshan illustrates the underlying mechanisms and addresses endogeneity concerns. By integrating insights from political economy, development studies, and organizational theory, this dissertation advances our understanding of how the structural characteristics of industrial organizations and market economies shape state behavior and governance. It contributes to the literature on state-business relations and industrial policy, offering new perspectives on China’s subnational governance and the political consequences of industrial development.