Indirect Reciprocity and Corporate Philanthropic Giving: How Visiting Officials Influence Investment in Privately Owned Chinese Firms

• Author: Zhe Zhang,Ming Jia,Yi Xiang
• Published date: 01 March 2019
• DOI: http://doi.org/10.1111/joms.12405
• Date: 01 March 2019

© 2018 John Wiley & Sons Lt d and Society for the Adva ncement of Management Stud ies

Indirect Reciprocity and Corporate Philanthropic

Giving: How Visiting Officials Influence Investment in

Privately Owned Chinese Firms

Ming Jiaa, Yi Xianga and Zhe Zhangb

aNorthwester n Polytechnical University; bXi’an Jiaotong University

ABST RACT This study ex amines how privately owned fir ms that are listed on Chinese stock

exchanges and often sur rounded by Buddhist or Taoist temples use money to bind themselves

to offic ials who can mitigate their under investment problems. Philanthropic giv ing is a

traditiona l way of achieving this task . Based on social-exchange theor y, we consider the

potential for indirec t reciprocity, in which visiting off icials do favours for local businesses t hat

do favours for other social actors. We ana lyse whether China’s Buddhist and Taoist cultures

inf luence how philanthropic g iving induces visiting of ficials to do favors. We also exam ine

temple locations and the behav iours of privately owned f irms listed on Chinese stoc k ex-

changes from 2001 to 2012 in an empirica l study that provides strong support for our arg u-

ments. Results show that phi lanthropic giving init iates and amplifies indi rect reciprocity

between visit ing officials and loca l businesses, thereby increasing cor porate investment. The

magnitudes of thes e effects depend on the magnitude of relig ious norms. Our study thus

illumin ates the influence of visiti ng officials on corporat e investment.

Keywo rds: China , corporate investment, indirect reciproc ity, philanthropic g iving, religion,

social exchang e theory

INTRODUCTION

What drives privately ow ned Chinese fir ms to invest? To answer this question, most

existing l iterature focuses on information asy mmetry and assumes pr ivately owned

Chinese fi rms rely on internal cash flow for growth ( Myers and Majluf, 1984; Stein,

2003), which often leads to suboptimal i nvestment levels (Li et al., 200 8; Xu et al., 2013).

Although investment opportunities a nd resources are certain ly important, Chi nese

Journal of Man agement Studi es 56:2 March 2019

doi: 10.1111/jom s.1240 5

Address for re prints : Yi Xiang , School of Management , Northwestern Poly technica l University, Shaan xi,

Xi’an 710072, China (yi xiang@mail .nwpu.edu.cn).

Indirect Reciprocity a nd Corporate Philanthropic Giving 373

© 2018 John Wiley & Sons Lt d and Society for the Adva ncement of Management Stud ies

officia ls also influence corporate investment. In pa rticular, these off icials control scarce

political resources (e.g., administr ative approvals) that determine corporate sur vival in

China (L i et al., 2008; Poncet et al., 2010; Xu et al., 2013). These officials also inf luence

how firms acces s primary resources (e.g., banks, investors, and suppliers). In China,

politically connected f irms borrow from state-controlled banks easily (L i et al., 2008).

Consequently, failure to forge ties with off icials reduces f irms’ chances of sur vival in

China by limiting their investment opportun ities (Xu et al., 2013) and making externa l

financi ng inaccessible (Cull et al., 2015; Li et al., 2008).

Ties with officials are thus essential for the survival of privately owned firms in China.

Previous studies have focused on the benefits of political ties for privately owned firms,

including CEO political affiliations and social connections to officials (Faccio et al., 2006;

Li et al., 2008; Xu et al., 2015). These benefits also provide access to financial resources

and valuable projects. Accordingly, many privately owned firms strategically use several

kinds of political activities (e.g., philanthropic giving) to alleviate the disadvantages of

competing with state-owned enterprises (SOEs) for external financing and growth oppor-

tunities (Chan, 2008; Huang and Rice, 2012; Scherer and Palazzo, 2011). Philanthropic

giving is a traditional way to forge ties with officials for accomplishing corporate political

goals. Many firms recognize the influence of philanthropic giving on government deci-

sion making as well (Jia and Zhang, 2013; Marquis and Qian, 2013; Wang and Qian,

2011). Consequently, exchanges between local firms and political officials through cor-

porate giving have attracted considerable attention from scholars.

This study responds to the calls by Cropanzano and Mitchell (2005), Cropanzano et

al. (2017), Westphal et al. (2012), and Khadjavi (2016) for additional field evidence of

indirect reciprocity among exchange partners. We achieve this goal by focusing on one

central concept: indirect reciprocity. Specifically, we examine an indirect perspective of

exchanges between local firms and visiting officials, and we integrate this perspective

with corporate political activities (CPAs) (i.e., philanthropic giving) and social norms.

Indirect reciprocity has been widely investigated by social scientists and economists. In

indirect reciprocity, one actor A helps another actor B and is reciprocated by a third actor

C, and each partner joins in building relationships of indirect reciprocity guaranteed by

their reputations (Nowak and Sigmund, 2005).

An example highlights indirect reciprocity triggered by corporate philanthropic giv-

ing. After the Ya’an earthquake in Sichuan Province on 20 April, 2013, the Guangzhou

Pharmaceutical Group donated 3 million RMB in materials for disaster rescue and in-

vested 300 million RMB to construct a product centre in the disaster area. On 21 March,

2014, Wei Hong, the governor of Sichuan Province, visited the construction site of this

product centre. During his visit, Wei not only solved problems regarding the construc-

tion but also encouraged the firm to increase its investment and promoted the construc-

tion (available at https://www.wljhealth.com/news/544.html). On the third anniversary

of the Ya’an earthquake, Li Yuanchao, the vice president of the People’s Republic of

China, accompanied by Yi Li, the governor of Sichuan Province, visited the product

centre and highly praised the company’s contribution to Ya’an’s reconstruction (available

at https://www.wljhealth.com/news/917.html).

374 M. Jia et al.

© 2018 John Wiley & Sons Lt d and Society for the Adva ncement of Management Stud ies

Traditionally, social exchange theory (SET) is based on the direct reciprocity mech-

anism, in which person A becomes obligated to repay person B for past support.

Many studies of political affiliations follow the traditional lens of SET (e.g., Cull

et al., 2015; Xu et al., 2013; Xu et al., 2015) and generally assume that CEOs have

direct access to political officials in the first place. However, they fail to distinguish

presumed access from actual access (e.g., official visits). Previous studies assume that

officials treat every politically affiliated firm equally; they ignore the fact that political

officials may have preferences among firms and selectively reciprocate. The studies

also neglect visiting officials’ obligations to reciprocate, as well as how the scale of

corporate philanthropic giving can encourage visiting officials to repay favours from

local firms. Religious norms such as Buddhism and Taoism in China legitimize local

firms’ requests for payback from visiting officials, which warrants research attention

in a Chinese context.

We depart from many of SET’s existing implications that mainly focus on direct or

dyadic reciprocity (Appendix A1). In particular, inequity aversion provides the basis for

indirect reciprocity (Westphal et al., 2012). By contrast, we examine whether and how

local firms engaged in philanthropic giving receive favours or payback from visiting

officials, which increases their actual investment. In essence, we argue that (1) under

indirect reciprocity, when actor A helps actor B, actor C reciprocates; (2) indirect reci-

procity strengthens exchanges between local firms and visiting officials; (3) during their

exchanges, visiting officials apply the Tit for Tat strategy and only help firms that offer

favours; (4) the extent of visiting officials’ obligations to reciprocate depends on the cor-

porate expectations of payback, which are based on the magnitude of favours local firms

provide along with local religious norms; and (5) religious norms legitimize corporate

expectations of payback.

We test our hypotheses by integrating unique data on official visits and religious norms

with archival data from privately owned Chinese firms. The Chinese market provides a

great opportunity and challenge not only for local firms but also for multinational enter-

prises. Understanding how local, privately owned firms forge ties with officials has valu-

able implications for other firms preparing to enter or already operating in China. Our

findings indicate that corporate philanthropic giving initiates their indirect exchanges

with visiting officials, and these officials facilitate corporate investments variously among

regions with different magnitudes of religious norms.

We make three contributions to literature. First, we contribute to SET by exploring

the indirect reciprocity mechanism between businesses and politicians along with the

factors that stabilize these exchanges. Our primary hypotheses suggest that, when busi-

ness actor A helps social actor B, visiting official C reciprocates. Second, we contribute to

the literature on CPAs by exploring philanthropic giving as a strategy used by privately

owned firms to initiate and magnify exchanges with visiting officials in China. Third, in

response to the calls for study on the impact of religion on management (Chan-Serafin

et al., 2013; Tracey, 2012), we explore how and to what extent religious norms influence

the level of local firms’ payback expectation for philanthropic giving, which reflects the

political favours the focal firms have done.