We study how firms build relations with local governments in emerging markets without established rules of political lobbying. We document that following a turnover of the Party Secretary or mayor of a city in China, firms (especially privately owned enterprises, POEs hereafter) headquartered in that city significantly increase their “perk spending,” for example, expenses for travel and entertainment among others. Both the instrumental-variable-based results and heterogeneity analysis are consistent with the interpretation that the perk spending is used to build relations with local governments. In addition, we find that local political turnover in a city tends to be followed by changes of the Chairmen or the CEOs of state-owned enterprises that are controlled by the local government. We also discuss and rule out several alternative explanations for the above findings.

This article investigates how transportation networks shape firms’ geographic footprint by reducing monitoring costs of distant investments. Exploiting the staggered expansions of China’s passenger high-speed rail (HSR) network, we document that the amount of intercity investment between a pair of cities increases by 45% with the introduction of an HSR line connecting the cities. We enhance the causal inference by applying high-dimensional fixed effects, and focusing on city pairs that are “accidentally” connected in the network. The HSR effect is the strongest in industries that require on-site monitoring, as well as for controlling stakes in large distant investments.