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The interest group theory of financial development in China: Openness and the role of interest groups
Author(s) -
Zhang Chengsi,
Zhu Yueteng
Publication year - 2020
Publication title -
the world economy
Language(s) - English
Resource type - Journals
SCImago Journal Rank - 0.594
H-Index - 68
eISSN - 1467-9701
pISSN - 0378-5920
DOI - 10.1111/twec.12828
Subject(s) - opposition (politics) , openness to experience , economics , china , interest rate , empirical research , financial market , finance , political science , psychology , social psychology , philosophy , epistemology , politics , law
The interest group theory of financial development predicts that the incumbents' opposition to financial development will be weaker when an economy is open to both trade and capital flows. Based on regressions of financial development on trade and financial openness, existing studies only provide indirect tests of the hypothesis and deliver mixed findings. This paper proposes models for direct tests of interest group theory for China. Using Chinese cross‐province data, we define and measure interest groups based on the close tie between state‐owned enterprises and local government in China. The empirical results show that the opposition from interest groups to financial development cannot be weakened in provinces with high trade or financial openness alone. However, the opposition is indeed weakened in provinces with high levels of both trade and financial openness. These results provide robust support for interest group theory in accounting for cross‐province differences and time‐series variation in financial development in China.