Abstract | Common acts of rent-seeking are virtually illegal everywhere and prevalent in every corner of the world, especially in transition economies such as China. The rent-seeking consists of red packets and banquets made to a person—a government official or an employee of a privately-owned company—to get a favor such as obtaining a permit, a lessening of red taps. It is also considered as a style of investment in company innovative activities or networks. And these investments, may, in turn, energize companies to entry new markets and facilitate companies’ efforts to gain higher performance. If going back to the earliest days of this field, at some point in that history, there was a close tie between rent-seeking and innovation. The near-complete focus on rent-seeking in business-related disciplines is striking since a company’s involvement in rent-seeking is basically driven by the tedious business system. In order to eliminate the adverse effects of rent-seeking on market competition, since the beginning of 2013 Chinese government has proposed to reform the commercial system and not only canceled the existing rigid regulations on the company’s registered capital, amount of capital contribution but also simplified the registration and approval of business. Consequently, “supervision” has been changed to “light approval and heavy supervision”. To make the reform goes well, Chinese government have amended, annulled a series of laws, regulations. State Council and other related ministries have promulgated, amended and perfected supporting rules, to ensure the reform is done in rule-of-law way.
The purpose of this paper is to examine whether the reform of the business system can help eliminate short-term “gray added value” caused by rent-seeking, create a fair market competition environment and guide enterprises to carry out innovation activities that face the market.
The data of variables comes from the World Bank’s “China-Enterprise Survey 2012” (CES). The World Bank interviewed a representative sample of the private sector composed of 2700 business establishments from November 2011 through March 2013 across 25 of the largest cities in China. It covers several topics of the business environment as well as performance measures for each firm (See full methodology at the CES website). Like many secretive things that are too embarrassed to mention, corruption is relatively different to quantify. However, the CES, which started about 15 years ago, is highly typical firm-level surveys that are well-designed and implemented according to the propositions in previous literature. Based on the survey data, we used the binary model at the enterprise level to systematically discuss how the business system reform regulates the innovation effect of rent-seeking. To ensure the reliability of the regression results, we split our sample according to the time that the manager handles the administrative regulations every week. Furthermore, we considered tax management as an instrument variable and used IV Probit to reduce the possible endogeneity.
The study found that short-term rent-seeking has a positive impact on market innovation, and rent-seeking will have a negative impact on market innovation in the long-term. The marginal contribution of the commercial system reform to eliminating rent-seeking has increased markedly as the reforms continue to increase. What’s more, the vigorous reform of the commercial system can not only promote market innovation, but also has a good effect in eliminating rent-seeking and its innovative effects. The marginal impact of low-density commercial system reform on rent-seeking and market innovation, however, is not significant. The above conclusions are still robust after a series of tests. Besides, technological innovation activities are more sensitive to the reform of the commercial system and thus different reform efforts have diametrically opposed effects on technological innovation activities.
Our paper makes the following contributions. Firstly, it uses managers’ valuation of institutional environment to overcome the disadvantages of the inability to quantify institutional variables. Secondly, it utilizes the average semi-elasticity to analyze the influence of commercial system reform on rent-seeking and market innovation. Thirdly, this paper enriches the literature on institutional reform, rent-seeking and market innovation by expanding it to include the additional dimension of rent-seeking.
The policy implications are that business system reform is operating as a brake on the wheel of rent-seeking and an accelerator for market innovation. To impel innovation and control the vicious competition in the market, the current reform still needs to be further strengthened and anti-corruption campaign should reduce rent-seeking activities and subsequently increase market innovation.
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