Growing Up Under Mao and Deng: On the Ideological Determinants of Corporate Policies

Growing Up Under Mao and Deng: On the Ideological Determinants of Corporate Policies

Hao Liang, Rong Wang, Haikun Zhu

January 15 2020

Throughout history, economic activities have been fundamentally shaped by ideology. Scholars usually consider ideology as a set of ethical ideas, principles, or doctrines of a social movement, institution, or class that concerns a specific form of government (e.g., democracy or autocracy) and economic system (e.g., capitalism or socialism). Corporations as the nexus of governments and markets are also organized around certain ideologies. Studying the role of ideologies in corporate decisions is important in understanding how resources are allocated across projects and social groups, yet it can be empirically challenging. First, it is notoriously difficult to measure ideology, which typically transcends traditional boundaries between the political right and left and falls within a political spectrum. Such ambiguity makes it challenging to measure ideology ex ante using observable characteristics of politicians and CEOs. Second, ideology and economic activities are likely to be endogenously formed and can be jointly driven by unobservable factors such as culture and education. Third, it is difficult to disentangle the effect of ideology from that of other political and economic incentives, such as those stemming from government ownership or political connections. Therefore, establishing the causality between political ideologies and economic activities is not an easy task.

In this paper, we study the systematic impact of political ideology on corporate policies by exploring a unique setting in China. It has been commonly recognized that a clear and sharp change in political ideology occurred before and after 1978 in China. Communist ideology during the Mao Zedong era (1949–1978) comprised the traditional ‘‘Marxist-Leninist doctrine” and completely rejected capitalism. Following the death of Mao, however, the Communist government of China dramatically changed course with the ‘‘Reform and Opening-Up’’ policy, inaugurating a period beginning in 1978. In that year, China began to establish a market economy by legitimating profit seeking, entrepreneurship, and inbound and outbound foreign direct investment. Thus the subsequent communications and behaviors of the Chinese Communist Party (CCP), which currently embrace markets and increasingly encourage internationalization, pose a sharp contrast to the rhetoric and propaganda during Mao’s rule. The political economy literature has generally classified the difference between Mao and Deng in terms of their economic policies into three pillars (e.g., Naughton, 1993; Lotta, 1994; Chang, 1996; Naughton, 1996): (1) the tradeoff between social and economic benefits, (2) the gap between rich and poor, and (3) the choice between self-sustaining and leveraging on foreign capitalism. Therefore, we examine three aspects of corporate outcomes that are closely related to these pillars.

To address the issue of endogenous matching between ideology and corporate policies, we use a regression discontinuity design (RDD) approach in the spirit of Marquis and Qiao (2018). The basic tenet of RDD is that an exogenously determined discontinuity in some explanatory variables helps researchers identify a (local) causal effect. In this setting, the age of politicians is an exogenous and predetermined qualification—i.e., from the inception of the CCP until 1978, individuals younger than 18 were not allowed to join the Party (with very few exceptions). Namely, politicians who did not join the CCP before 1978 because of the age qualification (e.g., the 17-year-old cohort), but then subsequently became members compose the control group, while those who were already approximately 18 years old (18–19) in 1978 and joined the CCP compose the treatment group. Marquis and Qiao (2018) consider the intensive training a person receives upon and after joining the CCP and show that this imprinting process has a lasting effect on an individual’s ideology. In this restricted sample of politicians within a small age range, it is reasonable to assume that they share similar personal characteristics (which is indeed the case in our empirical setting, as a whole battery of observables between the two groups do not differ significantly) with the exception of ideology, while the “age discontinuity” (i.e., whether someone was 18 years old) around 1978 captures the impact of CCP imprinting. Therefore in this quasi-natural experiment design, age discontinuity helps distinguish the impact of ideology from other individuals’ dispositional interest.

Empirically, we find that the age discontinuity of politicians around 18 years old in 1978 that had already joined the CCP or joined soon thereafter and later became city mayors, has had a lasting effect on contemporary city- and firm-level policies. Firms in cities with mayors joining the CCP under Mao’s ideological regime have more social contributions (e.g., tax contribution, employee payments, and donations), lower within-firm pay inequality (e.g., the ratio of average top-three executives to average employees’ salary), and less internationalization (e.g., the proportion of foreign assets and foreign sales) than those under Deng’s regime. We also find that the above-documented effects are stronger in firms with political connections, in non-state-owned enterprises, and in regions that are more market-oriented and not “revolutionary bases.” We find further evidence that ideology-induced corporate policy biases have some impact on firm performance and valuation.

The key takeaway from our paper is that ideologies are behavioral biases that affect agent decision-making. The impact of ideologies on economic activities is distinct from that of rational economic and political incentives. Once a certain ideology is formed, individuals collectively make decisions consistent with such beliefs regardless of external incentives. Politicians under the same political incentives can adopt strikingly different economic policies derived from their exposure to different ideologies. Corporations affiliated with a certain political ideology may voluntarily design corporate policies to adhere to the doctrine even without economic incentives through such actions as ownership.

Authors

Dr.
Real name:
Research Member
Singapore Management University, Lee Kong Chian School of Business
Real name:
Rong Wang
Real name:
Haikun Zhu