Near and dear: How the politicians' home bias influences corporate philanthropy in China

Abstract

AbstractBuilding on institutional theory, we examine the effect of politicians' hometown favouritism on a firm's philanthropic engagement in China. We propose that firms headquartered in the politicians' hometowns tend to reduce their philanthropic investment because identification with their hometown activates the politicians' tendency to extend political legitimacy to hometown firms. Analysing a large sample of publicly listed Chinese firms for 2003–2015, we demonstrate that hometown firms evade their social responsibility by taking advantage of the incumbent provincial political leader's “home bias”. We also find that such a “home bias” effect exists when the political leader comes into power and disappears after the leader leaves office. Further analyses show that the firms' political dependency strengthens the “home bias” effect, so that firms in sensitive industries, with greater financial resources and private ownership, are more likely to evade their social engagement by taking advantage of the politicians' hometown favouritism. Our study highlights the critical role of hometown connections in corporate social responsibility in the Chinese relationship‐based business system. It also advances a normative institutional assessment of hometown‐based favouritism by highlighting its distinct dynamics and impacts on focal firms' social decision‐making.