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Big business as vanguard:social welfare expansion in China

Big business as vanguard:social welfare expansion in China hao_chen@hks.harvard.edu 1 Why would an emerging market economy without Western democratic institutions Present Address: John F. Kennedy School of Government, provide and promote social welfare to its citizens? This paper explores the driving Harvard University, Cambridge, forces behind the rapid yet unequal expansion of social welfare in China, a phe- MA, USA nomenon notable since the late 1990s. Rather than adhering to the conventional state-centered approach that views welfare expansion as a strategy for one-party regimes to seek legitimacy, this study offers an alternate perspective that emphasizes the ‘demand’ side, particularly the role of business. Through a systematic analysis of all 336 Chinese municipalities from 2001 to 2012, the study demonstrates how big busi- nesses act as ‘vanguard,’ pushing local governments to enhance social welfare provi- sion. It suggests that big businesses, in the absence of institutionalized democratic institutions, serve as ‘functional equivalents,’ channeling societal demands to the gov- ernment. This paper also finds that firms’ influence on social policy in non-democracies is more capability based instead of institutional based; large domestic and multina- tional corporations are more capable in lobbying the government. Keywords: Social welfare, Welfare state, China, Big business, Local politicians © The Author(s) 2023. Open Access This article is licensed under a Creative Commons Attribution 4.0 International License, which permits use, sharing, adaptation, distribution and reproduction in any medium or format, as long as you give appropriate credit to the original author(s) and the source, provide a link to the Creative Commons licence, and indicate if changes were made. The images or other third party material in this article are included in the article’s Creative Commons licence, unless indicated otherwise in a credit line to the mate- rial. If material is not included in the article’s Creative Commons licence and your intended use is not permitted by statutory regulation or exceeds the permitted use, you will need to obtain permission directly from the copyright holder. To view a copy of this licence, visit http:// creat iveco mmons. org/ licen ses/ by/4. 0/. Chen Asian Review of Political Economy (2023) 2:4 Page 2 of 24 Introduction Since the late twentieth century, China has undergone a remarkable expansion in its social welfare system, encompassing social security, education, and healthcare. To elu- cidate, the mean public expenditure on education across Chinese cities constituted less than 1 percent of each city’s GDP in 2001, but this figure escalated to nearly 5 percent by 2012. This signifies a fivefold increase in government expenditure on education within a mere span of 12 years, marking a swift expansion from a relatively low baseline. This expansion of social welfare in China is characterized by two salient features. First, local governments play an instrumental role. In contrast to the OECD countries where major welfare programs are primarily funded by national governments, Chinese local governments shoulder the principal responsibility for the provision of social wel- fare within their respective jurisdictions. This is evident in the 2014 data, for instance, where local government social welfare expenditures amounted to RMB 4.7 trillion, in stark contrast to the central government’s expenditure of only RMB 0.2 trillion on social security, education, and healthcare combined. Second, the expansion of social welfare in China exhibits a high degree of inequality. The augmentation in social welfare has not been evenly distributed across the nation. In 2012, for instance, the per capita social expenditure of the city with the highest spending (RMB 17,421) was a staggering 15.6 times greater than that of the city with the lowest expenditure (RMB 1,114). This paper seeks to decipher the motivations and mechanisms underlying the rapid, albeit unevenly distributed, expansion of social welfare in China. From a theoretical perspective, I ask why an  emerging market economy, without formal democratic insti- tutions, promotes social welfare among its citizens. What compels the government to adopt this role, despite being neither popularly elected nor beholden to voters? Empiri- cally, how to comprehend the substantial sub-national variation in welfare provision across China? Specifically, why do some cities provide better social welfare than others? Conventional wisdom on non-democratic  governance often adopts a state-centered approach (Evans et  al. 1985) and perceives welfare expansion as a manifestation of the regime’s concern for legitimacy (Holliday and Wilding 2003). However, the role of busi- ness in social welfare expansion within a non-democratic  context is underexplored. In essence, the majority of studies on non-democratic  welfare expansion adhere a state- centric, “top-down” approach, often overlooking potential “bottom-up” mechanisms. To address this, this paper proposes an alternative theoretical framework that shifts the focus from the “supply” side to the “demand“ side of welfare provision. I argue that this “demand” is primarily driven by business interests, particularly those of large firms. To the best of my knowledge, this paper presents the first systematic exploration of the influence of big business on social policies in non-democratic emerging market econo - mies, such as China. Comprehending both the motivations and variations of social wel- fare provision across subnational China is vital for theoretical and empirical reasons. Theoretically, it prompts questions about the drivers behind social welfare provision Data is calculated from author’s own dataset, which is collected from various statistical yearbooks in Chinese such as Chinese City Statistical Yearbook and Chinese Regional Economic Statistical Yearbook, which have city-level statistics. In the context of the Chinese political system, there are five levels of government: 1) central, 2) provincial, 3) munici - pal, 4) county, and 5) town/township. This paper uses the term “local government” to represent non-central govern - ments, primarily referring to municipal governments as the unit of analysis. Calculated from author’s data. Chen Asian Review of Political Economy (2023) 2:4 Page 3 of 24 in  non-democratic regimes and how societal forces, such as business, hold unelected political officials accountable, especially in the absence of formal democratic institu - tions. Empirically, most welfare state theories in literature are based on evidence from advanced industrialized European countries (Esping-Andersen 1990; Hall and Sos- kice 2001; Martin and Swank 2012; Baccaro and Pontusson 2016). However, develop- ing countries’ social policies have been comparatively understudied (Mares and Carnes 2009), raising the question of whether European-based theories can be extrapolated to China. This paper contends that large firms, encompassing both large Chinese domestic firms and multinational corporations, play a decisive role in advocating social welfare provi- sion in Chinese cities. These large firms, by virtue of their interest in social policies, act as vanguards in lobbying the government to enhance social welfare in a city. Large firms such as Intel, Canon, and Alibaba prefer to invest in locales with a rich supply of skilled labor, which is essential for their production. Furthermore, large firms wield the power to influence social policies due to their crucial contribution to a city’s GDP, employment, and fiscal revenue. Municipal politicians are incentivized to respond to the demands of these firms as cities rely heavily on them to generate wealth and sustain growth. Welfare development also contributes to a politician’s political achievements (zhengji). Conse- quently, municipal politicians favor the creation of an environment that is conducive to the investment of large firms, leading to the formulation of policies that enhance pen - sion, education, health services, and the overall living environment of a city. Social welfare expansion in China Generally speaking, the expansion of social welfare in China commenced in the late 1990s. For instance, Fig.  1 illustrates the increase in the number of population covered by the two major social welfare programs in urban China, namely the Urban Employee Basic Pension (UEBP) program and the Urban Employee Basic Medical Insurance (UEBMI) program. As depicted in Fig.  1, the coverage of these two primary welfare programs experienced minimal growth between 1995 and 1998. However, from 1999 onwards, both programs witnessed a dramatic expansion in their coverage of the urban population. For example, the population covered by the UEBMI was approximately 20 million in 1999, but this figure surged to nearly 38 million in 2000, effectively doubling in just one year. As the coverage broadened, the total expenditure on social welfare cor- respondingly increased. Figure  2 presents the aggregate social welfare expenditure of all levels of government in China. From 2007 to 2014, public expenditure on educa- tion, healthcare, and social security all experienced an upward trend. For instance, gov- ernment expenditures on education in 2007 amounted to RMB 712 billion; this figure remarkably tripled to RMB 2,304 billion within a mere span of 7 years. The term “large firm” in this paper refers to both large Chinese domestic firms and large foreign- invested firms/mul - tinational corporations. For the purpose of brevity, the paper uses “large firm” to represent all types of large firms (state- owned, private, foreign invested). National Bureau of Statistics of China published specific criteria to categorize large, medium, and small firms. Criteria include a firm’s sales revenue, number of employee, and total assets. A large firm is defined as a firm with over 2,000 employees, 300 million yuan of sales revenue, and 400 million yuan of total asset. For details, see National Statistics Bureau. “guanyu huafen dazhongxiao qiye de biaozhun (Rules of Categorizing Large, Medium, and Small Firms),” Document No. 17, May 19, 2003. In welfare state literature, many studies have demonstrated that firms do have an interest in social welfare policies, see for example, Mares 2003. On discussing how welfare development advances a municipal politician’s political career, see Zuo 2015. Chen Asian Review of Political Economy (2023) 2:4 Page 4 of 24 Fig. 1 Coverage of Major Welfare Programs in China Another intriguing characteristic of the Chinese social welfare expansion is the cen- tral-local divide. The central government plays a significantly smaller role in funding welfare programs compared to local governments. As depicted in Fig.  3, from 2007 to 2014, local government social welfare expenditures were, on average, 21 times higher than those of the central government. Local governments provide more than 95% of the Fig. 2 Social Welfare Expenditure in China Chen Asian Review of Political Economy (2023) 2:4 Page 5 of 24 Fig. 3 The Central-Local Divide funding, while the central government’s funding accounts for an average of only 4.58%. Furthermore, as illustrated in Fig.  3, the central government’s expenditures on educa- tion, social security, and healthcare experienced a marginal increase. In contrast, local governments’ social expenditures in all these categories saw a dramatic surge. Local governments have assumed primary responsibility for the expansion of social welfare. Therefore, analyzing the motivations of local governments can provide deeper insights into the expansion of social welfare in China. Indeed, the expansion of welfare in China exhibits remarkable regional disparities. Figure  4 uses provinces in 2014 as a representation of the regional variation in gov- ernment social welfare expenditure, with darker color representing higher expenditure. Eastern coastal provinces (e.g. Shandong, Jiangsu, Guangdong) and those along the Yangtze River (e.g. Sichuan and Hunan) allocate more resources to social welfare than western and central provinces. According to the data I collected, between 2001 and 2012, the average city’s expenditure on social welfare across all categories equated to 7.84% of GDP, but with a variance of 36.03, indicating substantial variation across cities. Cities in the top decile spend an average 15% of their GDP on social welfare, while cities in the bottom decile only allocate 3% of their GDP to social welfare programs. Conse- quently, this paper also aims to understand the determinants of the variation in social spending across Chinese cities. A review of studies on social welfare Existing literature on social welfare in non-democracies predominantly adheres to the state-centered tradition in the  literature. When considering a non-democratic  regime, legitimacy invariably emerges as a significant concern. Holliday and Wilding 2003 con - ducted a systematic study of East Asian countries, arguing that a primary incentive for Chen Asian Review of Political Economy (2023) 2:4 Page 6 of 24 Fig. 4 Subnational Variation of Welfare Expenditure in China Chen Asian Review of Political Economy (2023) 2:4 Page 7 of 24 authoritarian states to provide social welfare is to counter social unrest during the pro- cess of economic development. Moreover, welfare benefits are perceived as a crucial tool for co-opting political and economic elites, as well as for mitigating both intra-elite and elite-public conflicts (Magaloni 2006; Stokes et al. 2013; Bueno de Mesquita et al. 2003). Several studies indicate that non-democratic regimes  rely less on repression and more on co-optation when the risk of regime liberalization escalates (Gandhi and Przeworski 2007) or when the security apparatus poses a potential threat to the rulers themselves (Magaloni and Kricheli 2010; Wintrobe 1998). Co-optation enhances the likelihood of   rulers’ survival, and it is typically achieved through the spoil system or redistribu- tive programs such as housing, wages, and pensions (Magaloni 2008; Bunce 1980; Collier 1982). While the existing literature on authoritarianism provides rich insights into the role of the state, it remains incomplete: our understanding of the impact of businesses on welfare provision in non-democratic countries is still limited. In the literature on welfare states in advanced industrialized European countries, tradi- tional power resource theory often posits that businesses have little interest in establish- ing welfare state (Korpi 1980). However, recent years have been an increasing discourse on the role of business in the social policy-making process and how firms’ preferences shape social welfare programs (Martin 1995; Estevez-Abe et  al. 2001). For instance, Swenson 1991 underscores the pivotal role of employers in promoting the centralized welfare system in Denmark and Sweden. His examination of the wage bargaining system in these countries reveals that export-dependent firms and labor unions collaborated in establishing such a system. Similarly, Thelen 2000 investigates German firms’ prefer - ences and contends that the failure to establish a centralized wage bargaining system is primarily due to the reluctance of German employers. Mares 2003 examines the devel- opment of the welfare state in France and Germany in the late 19th century and con- cludes that businesses actively supported the welfare state. In the context of the United States, Martin 1995 explores how firms’ preferences shape health care reform. She finds that both firm-level characteristics (e.g. size, sectors, level of skills, etc.) and institutional factors (e.g. relationship with national capital, participated groups, etc.) determine firms’ preferences in social policies. Martin and Swank 2012’s recent study further investi- gates how different types of employers’ associations shape member firms’ preferences on social policies differently. For instance, in Denmark, the peak associations not only facilitate discussion of shared concerns among firms but also bind firms to certain pol - icy outcomes. Conversely, the sectorally coordinated associations in Germany result in more diverse preferences. In summary, this literature demonstrates that firms’ prefer - ence indeed play a significant role in the process of social policy-making. Although the European welfare state literature provides discussions on the role of businesses in social policies, it remains unclear whether these findings, generated from advanced industri - alized democracies, can be applied to emerging market economies with weak or non- existent democratic institutions. Therefore, a significant contribution of this paper is to explore the potential effects of business on welfare provision in the context of China. Research on China has yet to fully address the extensive welfare expansion outlined above. Instead, much of the existing literature focuses on the reform of state-owned enterprises (SOEs, Steinfeld 1998). The reform of SOEs precipitated a correspond - ing reform in social welfare, as it dismantled the socialist lifetime employment and the Chen Asian Review of Political Economy (2023) 2:4 Page 8 of 24 work-unit (danwei) based system of social welfare (Gu 2001). This collapse of the work- unit system resulted in a “Great Lay Off ” in the late 1990s, sparking a significant wave of social protests in urban China (Hurst 2009; Hurst and O’Brien 2002; Cai 2002). Inspired by the literature on legitimacy, Pan 2015 utilizes survey experiments to study China’s Minimum Livelihood Guarantee (dibao) program. She finds that local bureau - crats leverage the dibao program to deter the poorest citizens from protesting. Simi- larly, through a provincial-level comparison, Huang 2015 discovers a positive correlation between the population covered by the health insurance program in a province and the province’s level of social risk. In provinces with significant social risk (e.g. thousands of people protesting on the streets), the provincial government tends to be more inclined to expand the population covered by basic health insurance. Beyond the legitimacy hypothesis, the career advancement of political officials is another important factor in explaining welfare provision. For example, Zuo 2015 examines the cadre management system in China and finds that different local cadre evaluation systems shape officials’ preferences on social welfare differently. Politicians in provinces with a welfare man - date are more incentivized to improve social welfare than those in provinces focused on economic development. Similarly, several studies contend that the political trajectories and promotion prospects of local politicians influence their behaviors in social spending (Liu, 2011). Upon reviewing existing studies on China, it becomes evident that the majority of research adopts the conventional state-centered approach to elucidate the expansion of social welfare in China. Nevertheless, insights from Western welfare state studies sug- gest that businesses may play a pivotal role in shaping and expanding welfare systems. Consequently, this paper proposes an alternative approach that deviates from the tradi- tional “top-down” methodology to study China’s welfare expansion. This approach scru - tinizes the role of business, thereby revealing a “bottom-up” mechanism of social welfare expansion in China. Theoretical argument and hypotheses In theory, politicians of non-democratic regimes have significantly less incentive to enhance citizens’ social well-being compared to their counterparts in democracies, because non-democratic politicians are not popular elected. However, since the market reform and opening in 1978, it is undeniable that the primary objective of the Chinese government is economic development. Given this overarching goal, I argue that politi- cal elites in China harbor preferences akin to those of elected politicians in democratic states, namely fostering economic development and elevating people’s living standards. The government cannot attain this goal without the help of the business sector, which acts as a crucial actor in the process of economic development. In China, taxes collected from firms constitute a major source of the government’s fiscal revenue, as the per - sonal income tax only comprises 3% of municipal fiscal revenue. Moreover, the growth of firms creates employment opportunities, mitigating potential social discontent, and ultimately promoting social stability. Therefore, I argue that politicians in   non-demo - cratic countries also heed employers’ needs just as their democratic counterparts do, as Calculated from author’s data. Chen Asian Review of Political Economy (2023) 2:4 Page 9 of 24 business acts as an indispensable partner to the government in achieving development goals and enhancing regime legitimacy. Local governments also face inter-regional competition to attract investment. Con- sequently, local politicians are motivated to establish an environment conducive to the development of firms within their territories. Firm power, thus, determines the capa - bilities of firms to lobby the government and to further influence public policies. A large firm tends to have more firm power and thus exerts more influence on public poli - cies than a small firm, primarily because a large firm 1) contributes more to economic growth; 2) pays more taxes to the government; and 3) creates more jobs. I argue that in a political regime with no or weak democratic institutions, the influence of business on public policy is predominantly capability-based. In other words, small and medium- sized firms are less likely to possess the same capabilities as large firms do in influencing public policies. Multinational corporations (MNCs) represent another crucial actor in the expansion of social welfare. When such entities establish a presence in countries like China, they introduce not only cutting-edge technology and capital but also impart ideologies asso- ciated with human rights and social welfare. They expect a commensurate level of wel - fare and services analogous to those in their countries of origin. MNCs exhibit concerns that extend beyond the realm of beneficial tax policies. They place a high priority on the ‘soft’ environment of a prospective city before committing to investment decisions. Within this ‘soft’ environment, social welfare is perceived as a vital component. Moreo- ver, subsequent to establishing their operations within a city, these foreign corporations hold a continuous interest in fostering improvements in education, healthcare, and labor welfare. They effectively serve as conduits or ‘transmission belts,’ articulating the views and preferences of their employees to the government via numerous channels. Employ- ees, in their pursuit of a better standard of living, tend to favor cities that offer supe - rior healthcare facilities, high-quality educational opportunities for their offspring, and comprehensive pension coverage. From a corporate perspective, a superior living envi- ronment is an attractive proposition for skilled labor, and a robust education system is conducive to corporate research and development endeavors. From the vantage point of local politicians, catering to the needs of businesses aids in advancing their political careers. Cadres in China are appointed by upper-level govern- ments rather than elected by the public. To ascend the political ladder, cadres must meet various policy targets set by upper-level governments, with economic development being one of the paramount factors (Edin 2003; Whiting 2004). Specifically, economic develop - ment encompasses three major objectives: GDP growth, fiscal revenue, and employment. A cadre stands a better chance of promotion if he/she manages to achieve a stable and high rate of GDP growth or a substantial level of fiscal revenue under his/her political rein (Chen et al. 2005; Li and Zhou 2005; Shih et al. 2012). Moreover, local politicians have a strong incentive to attract investments from large firms within their political territories. This is not solely because a large firm contributes more in terms of taxes, jobs, and GDP growth. More importantly, a large firm can serve as a ‘model firm’ or even a ‘calling card’ for local politicians to showcase their political competence and achievements to upper- level politicians. In the Chinese political system, routine political inspections (shicha) are common. Upper-level politicians frequently engage in these political inspections, either Chen Asian Review of Political Economy (2023) 2:4 Page 10 of 24 to demonstrate their commitment to their roles or to exploit rent-seeking opportunities. A large firm presents an ideal venue for political inspections for both local and upper- level political officials. Upper-level politicians view these large firms as the driving force behind economic development, hence visiting them underscores their profound concern for economic development. From the viewpoint of local politicians, large firms can serve as compelling evidence of their economic stewardship abilities. The success of a ‘model firm’ can be incorporated into their political narratives as a personal achievement. Con - sequently, local politicians are highly motivated to respond to the needs of large corpora- tions, thereby opening the gate for these firms to lobby the government and influence public policies relating to corporate development. Regarding social policies, large firms tend to favor investing in cities with a stable and skilled labor supply. These preferences often lead them to lobby for increased public spending on education (including voca- tional training and tertiary education) and the provision of more comprehensive social security measures, such as pensions and health insurance. There are multiple avenues through which substantial corporate entities can exercise their influence over governmental policies. Some giant firms have the capacity to engage in direct dialogues with mayors and key municipal authorities. Besides, large firms typi - cally opt to liaise with governmental bodies. These bodies can be broadly divided into two categories: specialized functional departments and more generalized ones. Within the sphere of social welfare, the Department of Human Resources and Social Security assumes a significant role. This entity performs regular audits of the aforementioned corporations, an activity that equips them with a comprehensive understanding of these corporations’ specific needs. The information gathered during these inspections is sub - sequently relayed to broader departments such as the Development and Reform Com- mittee. This committee holds the authority to make consequential decisions based on the reported needs. The interactions and cooperation between these varying govern - mental bodies and large corporations demonstrate a dynamic, complex system of corpo- rate lobbying and influence on government decisions and policies. In light of the theoretical premises posited, I hypothesize that: H1: Cities with more large firms provide better social welfare provision than cities with fewer or no large firms. H2: Cities exposed to more foreign influence have better welfare provision than cities with less foreign influence. To scrutinize the theory and test these hypotheses, a mixed methods approach com- bining quantitative and qualitative methods will be utilized. Initially, the hypotheses will be tested using a city-level panel dataset encompassing all Chinese municipalities. Sub- sequently, qualitative case studies grounded on primary field data will be conducted to provide a more nuanced elucidation of the underlying mechanisms. Quantitative evidence Data and measurement To test my hypotheses, I constructed a panel dataset encompassing all 336 Chinese municipalities. This data, pertaining to the social welfare expenditures from 2001 to Chen Asian Review of Political Economy (2023) 2:4 Page 11 of 24 2012, was obtained from a variety of Chinese statistical yearbooks. The dataset provides comprehensive information on each city government’s total fiscal expenditure, alongside the public expenditure allocated to education and social security. It also contains data regarding each city’s socio-economic and demographic conditions, including aspects such as GDP, fiscal revenue, population size, land size, and so forth. To measure firm power in each city, I employ the logarithm of the cumulative industrial out - put from all large firms (LGF) within the city. I follow the Chinese National Statistics Bureau’s criteria to define a large firm, which is a firm with over 2,000 employees, 300 million sales revenues, and 400 million total assets (detailed definition in Footnote 4).  The extent of for - eign influence is quantified using the logarithm of foreign direct investment (FDI). To test my hypotheses, I utilize the lagged forms of the two independent variables (LGF ; FDI ), as i,t-1 i,t-1 policy-making processes typically span one to two years. The use of lagged forms of the inde - pendent variables also assists in addressing potential endogeneity issue. My dependent vari- able here is the government’s social welfare expenditure (WELF ), measured by city ’s public i,t i expenditure on education and social security combined as a percentage of its GDP in year . Existing literature also suggests several other factors influencing welfare provision, and these variables are accounted for as controls in my statistical analysis. Primarily, legitimacy plays a significant role in government provision of social welfare in non-dem - ocratic regimes. Current literature uses the level of social risk as an indicator of govern- ment concern about legitimacy (Huang 2015; Pan 2015). In the context of China, welfare reform is inextricably linked to market reform, especially state-owned enterprise reform. During the late 1990s (from 1998-2000), Premier Zhu laid off a significant number of state-owned enterprise workers, aiming to alleviate the burden on these entities. The massive lay-offs, totaling in the tens of millions, subsequently imposed a significant bur- den on local governments (Hurst 2009). In this study, I utilize a city’s burden (BUR) as a measure of social risk, referring to the percentage of the population who are unem- ployed, retired, or under working age but require education and health care. Second, the degree of urbanization (URB) could also influence a city’s social welfare expenditure (Dickson et al. 2016). According to the National Bureau of Statistics, in 2013 alone, over 26 million migrant workers relocated from rural to urban areas. With such a massive influx of migrants, a city government may increase social welfare budgets (e.g., for more schools and hospitals) or public security budgets (e.g., for police), or both. This study uses population density as a measure of urbanization. Third, a city’s social expenditure is also influenced by its fiscal resources and capacity (Dickson et al. 2016; Huang 2015). A city with plentiful fiscal resources is more likely to allocate substantial funds to social welfare. I use the logarithm of fiscal revenue (REV) to measure a city’s fiscal resources. The data that support the findings of this study are available from CNKI Yearbooks Database but restrictions apply to the availability of these data, which were used under licence for the current study, and so are not publicly available. Data are however available from the authors upon reasonable request and with permission of CNKI. In studies on OECD welfare states, unemployment is a widely used variable. For example, see (Huber and Stephens 2001). However, in studies of welfare states in developing countries, unemployment schemes are either nonexistent or poorly developed. For example, in Latin American studies, “unem- ployment data are not generally available to be used in TCSC analysis.” See (Segura-Ubiergo 2007). In the case of China, what we do know is how many people are employed, and thus this study uses a city’s burden rather than unemployment rate. See Guojia Tongji Ju (National Statistics Bureau). “Quanguo Nongmingong Jiance Diaocha Baobao (Report on Chi- nese Rural Migrants),” May 12, 2014. Here the migrants are still considered as rural residents because of the Household Certificate System, or the so-called Hukou system, which was introduced in 1958 that identifies two main categories of household: urban and rural. The Hukou system does not offer full social benefits to rural people who live in urban areas. For example, rural residents who migrant and work in urban areas are not eligible to be enrolled in urban health insur- ance. Chen Asian Review of Political Economy (2023) 2:4 Page 12 of 24 Model The hypotheses are evaluated employing panel fixed effects models with clustered standard errors. A fixed effects model compensates for time-invariant confounders and overarching factors such as institutional and cultural influences. As discussed in the the - oretical section, the social welfare expenditure in a given year, denoted as year , typically is the outcome of the lobbying activities of firms in the preceding year, year . Conse- t-1 quently, the one-year lagged form of independent variables has been incorporated into the models. The full model is expressed as: WELF = β +β LGF +β FDI +β BUR +β URB +β REV +c +v i,t 0 1 i,t−1 2 i,t−1 3 i,t 4 i,t 5 i,t i i,t (1) In this equation, WELF refers to city ’s public expenditure on social welfare as a i,t i percentage of city ’s GDP in year ; LGF denotes the logarithm of the industrial out- i t i,t-1 put of large firms in city in the preceding year, year , and FDI represents the loga- i t-1 i,t-1 rithm of the total foreign direct investment in city in year . BUR, URB, and REV are i t-1 control variables as explained above. The symbol c refers to the city fixed effect that controls for unique city-specific characteristics (such as institutions and culture) that do not vary with time. Lastly, v signifies the error term of the model. i,t Extant scholarly work posits that the social welfare expenditure of a city or a country in a specific year, year , is likely influenced by the welfare expenditure in the preced - ing year, year (Martin and Swank 2012; Segura-Ubiergo 2007; Cusack et  al. 2007). t-1 Hence, for enhanced robustness, I also estimate the full model with a lagged depend- ent variable. A lagged dependent variable also caters to autocorrelation dynamics in the dependent variable (Beck and Katz 1995). In a bid to further nuance the analysis, this study examines the impact of firms on education expenditure and social security expenditure respectively. Such detailed disaggregation of social welfare enables a more comprehensive investigation into the diverse effects that firm power may exert on the varied components of a city’s social welfare programs. Results Table 1 delineates the impact of firm power on the provision of social welfare. Model 1 represents the results of large firms’ influence on a city’s social welfare. Model 2 shows the effect of foreign direct investment (FDI). Model 3 incorporates both of these variables. Model 4 introduces all the control variables, while Model 5 further adds the one-year lagged dependent variable into the model. All models employ city fixed effects and clustered standard errors. The regression results largely substantiate the theoretical predictions articulated previously. Cities possessing considerable firm power exhibit better social wel - fare provision compared to cities with less firm power. Notably, from Model 5, it is deduced that, all else being equal, for every 100% increase in the industrial output of large firms in year , it is likely to induce a 1.803 increase in social welfare at year . t-1 t Considering the mean social welfare expenditure as a percentage of GDP stands at 5.01, a 1.803 increase represents a substantial effect. Similarly, FDI also positively Chen Asian Review of Political Economy (2023) 2:4 Page 13 of 24 Table 1 Determinants of Social Welfare in China (1) (2) (3) (4) (5) WELF WELF WELF WELF WELF ∗∗∗ ∗∗∗ ∗∗∗ ∗∗∗ L.Large Firm 1.656 (0.0866) 1.301 (0.0797) 0.713 (0.218) 1.803 (0.491) ∗∗∗ ∗∗∗ ∗∗ ∗∗∗ L.Foreign Firm 0.834 (0.0717) 0.258 (0.0895) 0.233 (0.0938) 0.305 (0.115) ∗∗∗ ∗∗ Burden 0.0162 (0.00422) 0.00995 (0.00447) ∗∗∗ Urbanization 4.726 (6.353) 12.69 (4.389) ∗∗∗ Fiscal Capacity 0.789 (0.280) -0.938 (0.645) L. DV ✓ City FE ✓ ✓ ✓ ✓ ✓ Rbst.SE ✓ ✓ ✓ ✓ ✓ ∗∗∗ ∗∗∗ ∗∗∗ ∗∗∗ ∗∗∗ Constant -4.860 (0.503) -2.778 (0.628) -5.784 (0.599) -5.618 (0.799) -8.003 (1.316) N 2909 2977 2666 2604 1895 Standard errors in parentheses ∗ ∗∗ ∗∗∗ p < 0.10, p < 0.05, p < 0.01 Table 2 Determinants of education and social security respectively (1) (2) (3) (4) Education Education Social Security Social Security ∗∗∗ ∗∗ ∗∗∗ ∗∗∗ L.Large Firm 0.395 (0.0901) 0.294 (0.126) 0.649 (0.154) 1.531 (0.351) ∗∗∗ ∗∗ ∗ ∗∗ L.Foreign Firm 0.115 (0.0330) 0.110 (0.0444) 0.119 (0.0652) 0.172 (0.0700) ∗∗∗ Burden 0.00268 (0.00221) 0.00301 (0.00350) 0.0117 (0.00350) 0.00536 (0.00348) ∗∗∗ ∗∗∗ Urbanization 1.275 (2.165) 8.002 (2.799) 1.459 (5.019) 6.971 (2.186) ∗∗∗ ∗ Fiscal Capacity 0.281 (0.108) 0.0791 (0.133) 0.304 (0.208) -0.806 (0.442) L.DV ✓ ✓ City FE ✓ ✓ ✓ ✓ Rbst.SE ✓ ✓ ✓ ✓ ∗∗∗ ∗∗∗ ∗∗∗ ∗∗∗ Constant -1.904 (0.299) -1.601 (0.368) -4.955 (0.597) -6.961 (1.046) N 2888 2413 2605 1898 Standard errors in parentheses ∗ ∗∗ ∗∗∗ p < 0.10, p < 0.05, p < 0.01 impacts government social spending. Specifically, within a given city, every 100% increase in FDI is likely to trigger a 0.305 increase of social welfare. The impact of control variables on social welfare expenditure essentially aligns with existing scholarly findings pertaining to China’s social welfare provision. Specifically, as a city’s wealth accrues, the municipal government displays an increased propensity to enhance social welfare within its jurisdiction, such as elevating educational stand- ards, enhancing hospital quality, or bolstering the social security of its residents. The previous findings of social risk by other scholars also maintains a positive correlation with social welfare spending in my analysis, which confirms the validity of the legiti - macy hypothesis. Additionally, this study explores the influence of firm power on education and social security expenditure independently. Table 2 demonstrates that the effects of firm power on either education or social security align with the findings presented in Table  1. In cir- cumstances where a city houses a greater number of large firms or succeeds in attracting Chen Asian Review of Political Economy (2023) 2:4 Page 14 of 24 a substantial amount of foreign direct investment, it is probable that expenditure on education and social security will concurrently increase. Robustness check To corroborate the robustness of my findings, an extensive series of robustness checks were conducted from multifarious perspectives. The first set of checks encompassed the utilization of alternative dependent variables (i.e., welfare expenditure per capita and welfare expenditure as a percentage of total fiscal resources), alternative measurements of independent variables, execution of models without lagged independent variables, the incorporation of additional control variables (such as population size, land size, a city’s GDP) into the model, and the consideration of time fixed effects. Secondly, competing hypotheses were also evaluated. This included, for instance, the role of the central gov - ernment and central policy. Furthermore, the convenience of transportation could con- found the results, as it both attracts firm investments and influences the welfare level of cities. Thirdly, several other robustness checks were implemented to demonstrate that the results are not driven by a subset of the data. For instance, state-owned enter- prises (SOEs) may possess unique channels of welfare provision, thus leading to differ - ent lobbying incentives. Consequently, analyses on various types of firms were carried out to ascertain whether the results were driven by large SOEs. Moreover, the large firm hypothesis was tested across distinct regions of China to determine if the results were influenced by a specific region. It is worth noting that for all the aforementioned robustness checks, the same model setup used in the primary model (i.e., fixed effects model with clustered standard errors) was maintained. In summary, the core findings have demonstrated robustness across all the checks implemented. To ensure a cohesive structure throughout this paper, the detailed outcomes of all the robustness checks are meticulously presented in the Appendix. Qualitative evidence In complement to the quantitative evidence presented thus far, this section incorporates qualitative evidence to explicate the underlying mechanisms, detailing how large firms lobby the government and enhance social welfare within a city, as well as delineating the channels used for lobbying. The qualitative evidence is grounded in the field research I conducted in China in 2014 and 2015. Overall, the field research encompassed 14 Chi - nese cities within four provinces, including Liaoning, Hebei, Zhejiang, and Guangdong. Liaoning Province was selected to represent the Northeast region of China, notable for its extensive industrial development history since the early twentieth century and a plethora of large state-owned enterprises. Simultaneously, some cities within Liaoning, such as Dalian, have experienced a high degree of foreign direct investment, making the combined effect particularly intriguing. Zhejiang Province was chosen as a representa - tive of East China, renowned for its array of well-established private firms. Guangdong was incorporated due to the significant presence of foreign firms, while Hebei served as a representative province with minimal influence from foreign investment. Chen Asian Review of Political Economy (2023) 2:4 Page 15 of 24 Semi-structured interviews were conducted with municipal officials, firm managers, and employers’ associations, and an assortment of government documents (both pub- lished and internal), local gazetteers (known as difangzhi), and yearbooks were col- lected. This section provides a succinct presentation of three illustrative cases: Intel, Toshiba, and Alibaba, supplemented with detailed insights into the channels employed for lobbying. The case of Intel An analysis of Intel’s investment process qualitatively addresses the endogeneity concern by showing that the welfare of a city is indeed enhanced after the firm’s investment. It highlights Intel’s role as a proactive driver of societal welfare enhancement rather than a passive beneficiary of an already developed welfare system. Intel, an American multinational corporation, is a leading global semiconductor man- ufacturer. In March 2006, Intel committed to a USD 2.5 billion investment to estab- lish a 300nm wafer fabrication factory (Fab 68) in Dalian, commencing construction in May 2007. This state-of-the-art facility produces “leading-edge 65nm chipsets for lap - top computers, high-performance desktop PCs and powerful servers.” Inaugurated in 2010, Fab 68 represented Intel’s first wafer fabrication factory not only in China but across the entirety of Asia, marking a significant milestone. Before settling on Dalian as the location for Fab 68, Intel assessed four other cities in China. Even though some of these candidate cities presenting more favorable tax poli- cies, and one even extending courtesies on par with those given to U.S. Presidents, Intel ultimately chose Dalian. The determining factor was Dalian municipal government’s commitment to enchaining the city’s ‘soft environment’ and social welfare standard, especially fulfilling Intel’s particular educational and healthcare requirements. This com - mitment manifested in the construction of a new American-style K-12 school (bolstered by a USD 30 million government investment and accreditation from the Western Asso- ciation of Schools and Colleges), a new AAA grade hospital (sanjia, the highest hospi- tal ranking criterion in China) managed by the China Medical University, a new public library, and a world-class theatre, reputed as the finest in Northeast China. Signifi - cantly, these facilities are accessible to all Dalian residents, thereby enhancing the living environment and welfare standard of Dalian residents, underscoring the impact of Intel’s investment on the broader community. The case of Toshiba The case of Toshiba illuminates how large firms maintain an ongoing interest in elevat - ing a city’s social welfare standards even after their initial investments. Toshiba, a Japa- nese multinational conglomerate established in 1875 and based in Tokyo, operates two large factories in Dalian, China. One factory specializes in the production of LCD televi- sions, while the other manufactures medical equipment such as X-ray and CT machines. For a brief introduction on Intel’s Fab 68 in Dalian, see: https:// www. intel. com/ conte nt/ www/ us/ en/ jobs/ locat ions/ china/ sites/ dalian. html Interviews with Intel Dalian senior managers, July 2015. Interviews with Dalian municipal officials, July 2015. Chen Asian Review of Political Economy (2023) 2:4 Page 16 of 24 A senior manager at Toshiba asserted that the company has consistently lobbied the government to enhance Dalian’s social welfare since commencing their business in the city in 1991. In the early 2000s, Toshiba’s medical equipment factory confronted a shortage of skilled labor in automation. The company engaged in dialogues with the government on various occasions to address the issue. Senior managers of Toshiba Dalian articulated a strong desire to enhance the city’s human capital, asserting that “Toshiba has invested billions of money in Dalian and they do not want to move to other places which would cause them a big loss.” After a year of negotiations with various departments and direct discussions with the mayor, the municipal government resolved to fund a new Center of Numerical Control in Dalian. The new center also functioned as a “practical training camp” (shixun jidi) to cater to the specific skill requirements of various firms, includ - ing Toshiba. A key to Toshiba’s success lies in its status as “a large firm, a multinational corporation with a stellar reputation that can be used by government leaders as a model firm” to showcase their political achievements in fostering economic development. Fur - thermore, Toshiba is “one of the largest taxpayers to the government.” The case of Alibaba The case of Alibaba, one of China’s largest e-commerce companies, provides insights into how significant businesses can directly shape public services and social welfare within a city. Alibaba operates two substantial offices within the Hangzhou municipality, one located in Binjiang District, serving as the headquarters, and the other in Yuhang District. In December 2013, the Hangzhou Municipal Government announced a “stra- tegic cooperation” (zhanlue hezuo) agreement with Alibaba, which was designed to facilitate Alibaba’s development in a variety of aspects. These included the provision of superior public services, human capital enhancement within Hangzhou, the improve- ment of Hangzhou’s ‘soft’ environment, and the construction of five industrial parks. Alibaba’s ability to influence policy on such a broad scale can be attributed to its vital role in Hangzhou’s economy. In 2014, Alibaba paid 10.9 billion yuan in taxes, with 4.38 billion yuan contributing to Yuhang District (Economy and Nation Weekly, C. G. Z, 2014). Besides this significant tax contribution, Alibaba employs more than 30,000 employees in total. Furthermore, Alibaba’s web platforms, such as Taobao and T-mall, indirectly created 9.62 million job opportunities (People’s Daily, R. R, 2014). Such a substantial firm possesses a considerably greater capacity to influence public policies than smaller and medium-sized firms do. A government official of Hangzhou vividly characterized the relationship between the Hangzhou municipal government and Alibaba as a “common destiny” (mingyun gong- tongti), with the government’s support for Alibaba extending to “all 360 degree dimen- sions” (360du quanfangwei). This encapsulates not only favorable tax policies but also improvements to municipal social welfare and public services. Interview with Toshiba Dalian senior managers, August 2014. Interview with Toshiba Dalian senior managers, August 2014. Interview with Toshiba Dalian senior managers, August 2014. Interview with Hangzhou municipal officials, July 2014. Interviews with municipal officials of Hangzhou, July 2014. Chen Asian Review of Political Economy (2023) 2:4 Page 17 of 24 Channels for lobbying Firms have multiple pathways to lobby the government in order to enhance social wel- fare within a Chinese city. The first avenue is through employers’ associations such as Enterprise Associations and Foreign Enterprise Associations. These bodies serve as essential conduits for large firms to communicate their policy preferences and propos - als to the government. Firms might encounter potential retaliation from the govern- ment if they propose something not aligned with the government’s interests. Enterprise associations can provide a degree of cover for firms, making it more challenging for the government to identify the source of a proposal. Furthermore, policy proposals pre- sented through enterprise associations are usually perceived as common issues rather than individual firm problems, making the government more inclined to address them. However, this avenue has certain limitations. Membership in employers’ associations is voluntary, and firms have significant freedom in choosing when to join or leave. Such a voluntary-based membership makes it hard for enterprises associations to coordinate interests among different firms and maintain a clear, consistent policy position over the long term. Furthermore, enterprise associations do not possess substantial formal political power when negotiating with the government. Bureaus within a municipal gov- ernment have no obligations to heed or report to enterprise associations, making their lobbying efforts primarily issue-based. In other words, if an issue proposed by the enter - prise associations does not match the government’s plan, it is less likely to be accepted. Another significant channel for firms to influence public policy is through government agencies. Typically, the Mayor’s Office functions as the municipal government’s hub, overseeing economic and social development. High-profile firms like Alibaba in Hang - zhou or Tencent in Shenzhen can directly negotiate with municipal politicians. For other, less influential large firms, a typical process to convey their policy preferences is through government departments. I categorize municipal departments into two types: general departments and functional departments. General departments, such as the Department of Finance, Department of Development and Reform (fagaiwei), and Department of Economy and Information (jin- gxinwei), are responsible for collecting information from functional departments, planning development, deciding on large projects and funding allocations, and reconciling conflicts of interest among various functional departments. On the other hand, Education Depart- ment, Health Department, and Human Resource and Social Security Department are the functional departments primarily responsible for social policies. They handle technical matters and collect information from firms. These departments gather data about firms’ difficulties, human capital needs, and employee working conditions through various forms of fieldwork, including surveys, meetings (zuotanhui), and on-site or telephone inter - views. Firms also submit their most pressing concerns to these technical bureaucrats. After conducting fieldwork, these bureaucrats draft reports and send them to gen - eral departments to address the identified issues. At this point, it is up to the general departments to coordinate all requests. They then write reports for the municipal government, outlining policy priorities and proposals for funding allocations. Upon Interviews with large firms managers in several Chinese cities between 2014 and 2015. Interviews with municipal officials in several cities in July and August 2015. Chen Asian Review of Political Economy (2023) 2:4 Page 18 of 24 municipal government approval, the Department of Finance allocates funding to each project based on instructions from the municipal government. However, it is essential to note that the priorities of municipal politicians do not always align with the general departments’ reports and recommendations. In cities with frequent rotation of munici- pal politicians, large firms often invest more in relationships with technical bureaucrats, whereas, in cities with less frequent rotation of mayors or party secretaries, large firms prefer to build their relationship with municipal politicians directly. Conclusion The expansion of social welfare in China is an important question both theoreti - cally and empirically. Theoretically, it prompts us to consider why a  non-dem - ocratic  regime  would invest in social welfare for its citizens. Without formal democratic institutions, what motivates politicians to improve the social well-being of the populace? Empirically, while most welfare state studies focus on European countries, our understanding of welfare provision in developing countries remains limited. China’s unique situation provides an excellent testing ground for existing the- ories, and the potential to generate new insights that could enrich our cross-national understanding of welfare states. This paper introduces an alternative perspective, examining the ‘demand’ side, spe - cifically the role of business in the welfare expansion process. It discovers that the size and type of business are crucial factors in explaining motivations and variations in social welfare expansion across Chinese cities. These findings also shed light on the puzzling resilience of the Chinese party-state. Despite being a single-party regime, Chinese government officials still attend to the needs of businesses as vital players in economic development. The influence businesses wield over the government in the policymaking process is dictated by their power. In China’s context, large firms contribute more significantly to local employment, government fiscal revenue, and GDP growth, making them more influential in policymaking. Regarding social policies, large firms prefer an environment rich in human capital and a stable labor source. Therefore, large firms, being key taxpayers in a city, have both the motivation and capability to enhance the city’s overall welfare standards. The channels of lobbying present an interesting area to explore further. This paper briefly suggests two pathways for firms’ lobbying for social policies (enterprise associa - tions and government departments) based on field insights, but more systematic studies are necessary for future research. Field research indicates that employers’ associations have an awkward relationship with the government – they lack formal political rankings, leading to less attention from the government in a nomenklatura system. Therefore, a systematic study on the effectiveness of employers’ associations in successfully lobbying the government for social policies would be a compelling direction for future research. Furthermore, in cities with fewer large firms or less foreign influence from multinational corporations, the capacity of firms to influence social or public policies is also of inter - est. While existing research emphasizes the role of employers’ associations in facilitating industrial upgrades (e.g. Yu et al. 2011), their effectiveness in public or social policies is less understood and warrants further exploration. Chen Asian Review of Political Economy (2023) 2:4 Page 19 of 24 Appendix Alternative dependent variable In my main model, I use a municipal government’s public expenditure on social wel- fare as a percentage of its GDP as a measurement of social welfare provision. To test the robustness of the results, I adopt two alternative measurements of social welfare provision. The first alternative measurement is social welfare expenditure relative to a government’s total fiscal revenue, which measures how much of a government’s budget is spent on welfare and indicates the level of willingness of government to do so. The second alternative measurement is social welfare per capita. This measurement reflects the level of social welfare of a city; if the per capita social welfare is higher, it means that level of social welfare of that city is higher. The following Table  3 displays results of these two alternative dependent variables. As we can see, all results follow the same logic as what I find in Table 1 . Alternative independent variables I adopt different measurements of my independent variables to test the robustness of my results. For the first independent variable, I further restrict the criterion for large firms by only including super large firms, and I use the logarithm of output of super large firms as a robustness check. In terms of the second independent variable, I use economic openness as an alternative measurement of FDI, which is measured by the logarithm of a city’s total exports. Table 4 summarizes the results of welfare provision by using alterna- tive measurements of independent variables. All my main findings in Table 1 hold here. Models without lagged X To further check the robustness of my models presented in Table  1, I  do not include lagged form of my independent variables. To elaborate, I use a city ’s logarithm of large firms’ output at year to measure large firm power, rather than using city ’s logarithm of t i large firms’ output at year to measure it. I adopt exactly the same method to operate the t-1 second independent variable, which is a city ’s logarithm of foreign direct investment at year rather than year . Table 5 below summarizes the results, which remain robust. t t-1 Table 3 Alternative dependent variables (1) (2) (3) (4) WELF WELF WELF WELF %FisRev %FisRev per capita per capita ∗∗∗ ∗∗∗ ∗∗∗ ∗∗ L.Large Firm 3.135 (0.229) 6.198 (1.500) 365.1 (72.47) 114.5 (45.99) ∗ ∗∗ ∗∗∗ ∗∗∗ L.Foreign Firm 0.300 (0.176) 0.434 (0.184) 24.89 (7.028) 19.81 (7.532) Covars ✓ ✓ L.DV ✓ ✓ City FE ✓ ✓ ✓ ✓ Rbst.SE ✓ ✓ ✓ ✓ N 1970 1894 1971 1895 Standard errors in parentheses ∗ ∗∗ ∗∗∗ p < 0.10, p < 0.05, p < 0.01 Chen Asian Review of Political Economy (2023) 2:4 Page 20 of 24 Table 4 Alternative independent variables (1) (2) (3) WELF WELF WELF ∗∗∗ ∗∗∗ ∗∗∗ L.Super Large Firm 0.357 (0.0848) 0.156 (0.0481) 0.178 (0.0362) ∗∗∗ ∗∗∗ ∗∗∗ L.Openness 0.576 (0.118) 0.234 (0.0659) 0.267 (0.0932) Covars ✓ ✓ L.DV ✓ City FE ✓ ✓ ✓ Rbst.SE ✓ ✓ ✓ N 871 834 519 Standard errors in parentheses ∗ ∗∗ ∗∗∗ p < 0.10, p < 0.05, p < 0.01 Table 5 Models without Lagged X (1) (2) (3) WELF WELF WELF ∗∗∗ ∗∗∗ ∗∗∗ Large Firm 1.342 (0.0503) 0.597 (0.123) 0.677 (0.135) ∗∗∗ ∗∗∗ ∗ Foreign Firm 0.241 (0.0369) 0.176 (0.0371) 0.0667 (0.0382) Covars ✓ ✓ L.DV ✓ City FE ✓ ✓ ✓ Rbst.SE ✓ ✓ ✓ N 2634 2576 2269 Standard errors in parentheses ∗ ∗∗ ∗∗∗ p < 0.10, p < 0.05, p < 0.01 More controls and time fixed effects To further test the robustness, I add more city characteristics as control variables including a city’s GDP, population size, land size, and I also add time fixed effects. To be consistent with the main model setup, I use the exact same model setup for this robustness check. Results remain robust (Table 6). Types of firms State-owned enterprises (SOEs) in theory may have different channels in the provi - sion of welfare, and thus may have different incentives in lobbying local governments. In addition, central SOEs and local SOEs may also be different in the way that central SOEs may rely less on local governments as the local SOEs do. To address this, I tested the robustness by adding in private and foreign firms only, without adding in SOEs. The results remain robust (Table 7). Central policy Generally, in the realm of social welfare, the central government provides broad guidance and allows significant leeway for each province to formulate their own policies accord - ing to their unique circumstances and characteristics, because local governments are the dominant actor in funding social welfare programs. Interestingly, provincial governments Chen Asian Review of Political Economy (2023) 2:4 Page 21 of 24 Table 6 More controls and time fixed effects (1) (2) (3) WELF Education Social Security ∗∗∗ ∗∗ ∗∗∗ L.Large Firm 0.871 (0.316) 0.271 (0.137) 0.596 (0.225) ∗∗∗ ∗∗∗ ∗ L.Foreign Firm 0.205 (0.0755) 0.112 (0.0342) 0.0935 (0.0535) ∗ ∗∗∗ Burden 0.00643 (0.00370) -0.00355 (0.00219) 0.0100 (0.00356) Urbanization -2.566 (14.35) 0.170 (7.108) -2.708 (7.464) Fiscal Capacity -0.00686 (0.438) 0.172 (0.251) -0.160 (0.270) ∗∗∗ ∗∗∗ ∗∗ GDP –3.789 (1.362) –2.391 (0.839) -1.413 (0.582) ∗∗ ∗∗∗ Population Size 2.106 (0.984) 1.922 (0.604) 0.189 (0.535) Land Size -0.209 (0.416) -0.0893 (0.210) -0.119 (0.210) Lagged DV ✓ ✓ ✓ City FE ✓ ✓ ✓ Year FE ✓ ✓ ✓ Rbst. SE ✓ ✓ ✓ N 2296 2300 2297 Standard errors in parentheses ∗ ∗∗ ∗∗∗ p < 0.10, p < 0.05, p < 0.01 Table 7 Types of firms (1) (2) (3) WELF WELF WELF ∗∗∗ ∗∗∗ Private 0.0336 (0.00341) 0.0228 (0.00328) ∗∗∗ ∗∗∗ Foreign 0.834 (0.0593) 0.623 (0.125) City FE ✓ ✓ ✓ Rbst.SE ✓ ✓ ✓ N 1849 2984 1704 Standard errors in parentheses ∗ ∗∗ ∗∗∗ p < 0.10, p < 0.05, p < 0.01 typically follow a similar approach, providing their municipalities with the discretion to make their own decisions. This policy-making process somewhat mitigates concerns about central treatment. However, this is not to suggest that the role of the central gov- ernment is insignificant. Indeed, in the early 2000s, the central government implemented a social security reform experiment in several provinces before it became national policy. This experiment aimed at expanding the population coverage and the level of local gov - ernment fiscal expenditure on social security programs (see State Council, g, 2000, State Council, g, 2005). To account for this, I conduct a robustness check on central policy by coding provinces and cities that received the central policy as 1, and others as 0. Overall, the results remain robust; they indicate that while central policy matters, the large firm hypothesis also holds, both with and without control variables (Table 8). Across regions I further conduct a robustness check on the large firm hypothesis across different regions in China, which would allow us to ascertain whether the results are driven by a single region or if the hypothesis holds across all regions. I categorize cities into three regions: Chen Asian Review of Political Economy (2023) 2:4 Page 22 of 24 Table 8 Central policy (1) (2) (3) Social Security Social Security Social Security ∗∗∗ ∗∗∗ Central Policy 1.490 (0.143) 0.357 (0.0979) ∗∗∗ ∗∗∗ Large Firm 0.776 (0.0495) 0.718 (0.0513) ∗∗∗ ∗∗∗ Foreign Firm 0.138 (0.0486) 0.139 (0.0487) City FE ✓ ✓ ✓ Rbst.SE ✓ ✓ ✓ N 3252 2635 2635 Standard errors in parentheses ∗ ∗∗ ∗∗∗ p < 0.10, p < 0.05, p < 0.01 East, Middle, and West, based on the standards set by the National Bureau of Statistics of China. The table below presents the results. Broadly, the large firm hypothesis is robust in all regions of China. By comparing the coefficients of the large firm variable across the three regions, it becomes evident that large firms in the West exert more influence on welfare provision than those in the Middle or the East. This can be attributed to the competitive dynamics in different regions. In the Western region, which has fewer large firms, each firm appears more important to a city and therefore can exert more influence on the government regarding welfare provision. Moreover, the eastern region comprises wealthier cities with greater fiscal capacity, and welfare expansion can be attributed to these socio-economic factors in addition to the influence of business (Table 9 ). Table 9 Across regions (1) (2) (3) East Central West ∗∗∗ ∗∗∗ ∗∗∗ Large Firm 1.060 (0.0586) 1.503 (0.0759) 2.426 (0.198) City FE ✓ ✓ ✓ Rbst.SE ✓ ✓ ✓ N 775 736 1030 Standard errors in parentheses ∗ ∗∗ ∗∗∗ p < 0.10, p < 0.05, p < 0.01 Table 10 Non-provincial capitals (1) (2) (3) WELF WELF WELF ∗∗∗ ∗∗∗ Large Firm 1.713 (0.0818) 1.369 (0.0821) ∗∗∗ ∗∗∗ Foreign Firm 0.834 (0.0593) 0.246 (0.0736) City FE ✓ ✓ ✓ Rbst.SE ✓ ✓ ✓ N 2858 2984 2391 Standard errors in parentheses ∗ ∗∗ ∗∗∗ p < 0.10, p < 0.05, p < 0.01 Chen Asian Review of Political Economy (2023) 2:4 Page 23 of 24 Non‑provincial capitals Transportation convenience can be another factor that influences firm investments, which could confound the large firm hypothesis on welfare. To address this concern, I performed a robustness check using a proxy to distinguish provincial capital cities, which are typically transportation hubs. Overall, the large firm hypothesis remains valid, even in cities that are less convenient in terms of transportation (Table 10). Acknowledgements I would like to thank Gao Chen, Dino Christenson, Bruce Dickson, Joseph Fewsmith, Cathie Jo Martin, Meng Tianguang, Meg Rithmire, Tony Saich, Saul Wilson, and participants at the Harvard Kennedy School Asia Fellows Seminar and the MIT Urban China Workshop for their helpful suggestions and comments. Authors’ contributions All author(s) read and approved the final manuscript. Authors’ information Hao Chen is an Asia Fellow in the Ash Center for Democratic Governance and Innovation at Harvard Kennedy School. Previously he was a distinguished visiting professor in the Schwarzman Scholars Program at Tsinghua University. His research centers on social welfare, state-business relations, and leadership politics. He received his PhD in political sci- ence from Boston University. Funding Open access funding provided by Shanghai Jiao Tong University. Availability of data and materials The data that support the findings of this study are available from CNKI Yearbooks Database but restrictions apply to the availability of these data, which were used under license for the current study, and so are not publicly available. Data are however available from the authors upon reasonable request and with permission of CNKI. Declarations Competing interests The authors declare that they have no competing interests. Received: 9 May 2023 Accepted: 20 July 2023 References Baccaro, L., and J. Pontusson. 2016. Rethinking comparative political economy: The growth model perspective. Politics and Society 44 (2): 175–207. Beck, N., and J.N. Katz. 1995. What to do (and not to do) with time-series cross-section data. American Political Science Review 89 (3): 634–647. Bueno de Mesquita, B., A. Smith, R.M. Siverson, and J.D. Morrow. 2003. The logic of political survival. Cambridge: The MIT Press. Bunce, V.J. 1980. 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Big business as vanguard:social welfare expansion in China

Chen, Hao
Asian Review of Political Economy , Volume 2 (1) – Sep 1, 2023
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hao_chen@hks.harvard.edu 1 Why would an emerging market economy without Western democratic institutions Present Address: John F. Kennedy School of Government, provide and promote social welfare to its citizens? This paper explores the driving Harvard University, Cambridge, forces behind the rapid yet unequal expansion of social welfare in China, a phe- MA, USA nomenon notable since the late 1990s. Rather than adhering to the conventional state-centered approach that views welfare expansion as a strategy for one-party regimes to seek legitimacy, this study offers an alternate perspective that emphasizes the ‘demand’ side, particularly the role of business. Through a systematic analysis of all 336 Chinese municipalities from 2001 to 2012, the study demonstrates how big busi- nesses act as ‘vanguard,’ pushing local governments to enhance social welfare provi- sion. It suggests that big businesses, in the absence of institutionalized democratic institutions, serve as ‘functional equivalents,’ channeling societal demands to the gov- ernment. This paper also finds that firms’ influence on social policy in non-democracies is more capability based instead of institutional based; large domestic and multina- tional corporations are more capable in lobbying the government. Keywords: Social welfare, Welfare state, China, Big business, Local politicians © The Author(s) 2023. Open Access This article is licensed under a Creative Commons Attribution 4.0 International License, which permits use, sharing, adaptation, distribution and reproduction in any medium or format, as long as you give appropriate credit to the original author(s) and the source, provide a link to the Creative Commons licence, and indicate if changes were made. The images or other third party material in this article are included in the article’s Creative Commons licence, unless indicated otherwise in a credit line to the mate- rial. If material is not included in the article’s Creative Commons licence and your intended use is not permitted by statutory regulation or exceeds the permitted use, you will need to obtain permission directly from the copyright holder. To view a copy of this licence, visit http:// creat iveco mmons. org/ licen ses/ by/4. 0/. Chen Asian Review of Political Economy (2023) 2:4 Page 2 of 24 Introduction Since the late twentieth century, China has undergone a remarkable expansion in its social welfare system, encompassing social security, education, and healthcare. To elu- cidate, the mean public expenditure on education across Chinese cities constituted less than 1 percent of each city’s GDP in 2001, but this figure escalated to nearly 5 percent by 2012. This signifies a fivefold increase in government expenditure on education within a mere span of 12 years, marking a swift expansion from a relatively low baseline. This expansion of social welfare in China is characterized by two salient features. First, local governments play an instrumental role. In contrast to the OECD countries where major welfare programs are primarily funded by national governments, Chinese local governments shoulder the principal responsibility for the provision of social wel- fare within their respective jurisdictions. This is evident in the 2014 data, for instance, where local government social welfare expenditures amounted to RMB 4.7 trillion, in stark contrast to the central government’s expenditure of only RMB 0.2 trillion on social security, education, and healthcare combined. Second, the expansion of social welfare in China exhibits a high degree of inequality. The augmentation in social welfare has not been evenly distributed across the nation. In 2012, for instance, the per capita social expenditure of the city with the highest spending (RMB 17,421) was a staggering 15.6 times greater than that of the city with the lowest expenditure (RMB 1,114). This paper seeks to decipher the motivations and mechanisms underlying the rapid, albeit unevenly distributed, expansion of social welfare in China. From a theoretical perspective, I ask why an  emerging market economy, without formal democratic insti- tutions, promotes social welfare among its citizens. What compels the government to adopt this role, despite being neither popularly elected nor beholden to voters? Empiri- cally, how to comprehend the substantial sub-national variation in welfare provision across China? Specifically, why do some cities provide better social welfare than others? Conventional wisdom on non-democratic  governance often adopts a state-centered approach (Evans et  al. 1985) and perceives welfare expansion as a manifestation of the regime’s concern for legitimacy (Holliday and Wilding 2003). However, the role of busi- ness in social welfare expansion within a non-democratic  context is underexplored. In essence, the majority of studies on non-democratic  welfare expansion adhere a state- centric, “top-down” approach, often overlooking potential “bottom-up” mechanisms. To address this, this paper proposes an alternative theoretical framework that shifts the focus from the “supply” side to the “demand“ side of welfare provision. I argue that this “demand” is primarily driven by business interests, particularly those of large firms. To the best of my knowledge, this paper presents the first systematic exploration of the influence of big business on social policies in non-democratic emerging market econo - mies, such as China. Comprehending both the motivations and variations of social wel- fare provision across subnational China is vital for theoretical and empirical reasons. Theoretically, it prompts questions about the drivers behind social welfare provision Data is calculated from author’s own dataset, which is collected from various statistical yearbooks in Chinese such as Chinese City Statistical Yearbook and Chinese Regional Economic Statistical Yearbook, which have city-level statistics. In the context of the Chinese political system, there are five levels of government: 1) central, 2) provincial, 3) munici - pal, 4) county, and 5) town/township. This paper uses the term “local government” to represent non-central govern - ments, primarily referring to municipal governments as the unit of analysis. Calculated from author’s data. Chen Asian Review of Political Economy (2023) 2:4 Page 3 of 24 in  non-democratic regimes and how societal forces, such as business, hold unelected political officials accountable, especially in the absence of formal democratic institu - tions. Empirically, most welfare state theories in literature are based on evidence from advanced industrialized European countries (Esping-Andersen 1990; Hall and Sos- kice 2001; Martin and Swank 2012; Baccaro and Pontusson 2016). However, develop- ing countries’ social policies have been comparatively understudied (Mares and Carnes 2009), raising the question of whether European-based theories can be extrapolated to China. This paper contends that large firms, encompassing both large Chinese domestic firms and multinational corporations, play a decisive role in advocating social welfare provi- sion in Chinese cities. These large firms, by virtue of their interest in social policies, act as vanguards in lobbying the government to enhance social welfare in a city. Large firms such as Intel, Canon, and Alibaba prefer to invest in locales with a rich supply of skilled labor, which is essential for their production. Furthermore, large firms wield the power to influence social policies due to their crucial contribution to a city’s GDP, employment, and fiscal revenue. Municipal politicians are incentivized to respond to the demands of these firms as cities rely heavily on them to generate wealth and sustain growth. Welfare development also contributes to a politician’s political achievements (zhengji). Conse- quently, municipal politicians favor the creation of an environment that is conducive to the investment of large firms, leading to the formulation of policies that enhance pen - sion, education, health services, and the overall living environment of a city. Social welfare expansion in China Generally speaking, the expansion of social welfare in China commenced in the late 1990s. For instance, Fig.  1 illustrates the increase in the number of population covered by the two major social welfare programs in urban China, namely the Urban Employee Basic Pension (UEBP) program and the Urban Employee Basic Medical Insurance (UEBMI) program. As depicted in Fig.  1, the coverage of these two primary welfare programs experienced minimal growth between 1995 and 1998. However, from 1999 onwards, both programs witnessed a dramatic expansion in their coverage of the urban population. For example, the population covered by the UEBMI was approximately 20 million in 1999, but this figure surged to nearly 38 million in 2000, effectively doubling in just one year. As the coverage broadened, the total expenditure on social welfare cor- respondingly increased. Figure  2 presents the aggregate social welfare expenditure of all levels of government in China. From 2007 to 2014, public expenditure on educa- tion, healthcare, and social security all experienced an upward trend. For instance, gov- ernment expenditures on education in 2007 amounted to RMB 712 billion; this figure remarkably tripled to RMB 2,304 billion within a mere span of 7 years. The term “large firm” in this paper refers to both large Chinese domestic firms and large foreign- invested firms/mul - tinational corporations. For the purpose of brevity, the paper uses “large firm” to represent all types of large firms (state- owned, private, foreign invested). National Bureau of Statistics of China published specific criteria to categorize large, medium, and small firms. Criteria include a firm’s sales revenue, number of employee, and total assets. A large firm is defined as a firm with over 2,000 employees, 300 million yuan of sales revenue, and 400 million yuan of total asset. For details, see National Statistics Bureau. “guanyu huafen dazhongxiao qiye de biaozhun (Rules of Categorizing Large, Medium, and Small Firms),” Document No. 17, May 19, 2003. In welfare state literature, many studies have demonstrated that firms do have an interest in social welfare policies, see for example, Mares 2003. On discussing how welfare development advances a municipal politician’s political career, see Zuo 2015. Chen Asian Review of Political Economy (2023) 2:4 Page 4 of 24 Fig. 1 Coverage of Major Welfare Programs in China Another intriguing characteristic of the Chinese social welfare expansion is the cen- tral-local divide. The central government plays a significantly smaller role in funding welfare programs compared to local governments. As depicted in Fig.  3, from 2007 to 2014, local government social welfare expenditures were, on average, 21 times higher than those of the central government. Local governments provide more than 95% of the Fig. 2 Social Welfare Expenditure in China Chen Asian Review of Political Economy (2023) 2:4 Page 5 of 24 Fig. 3 The Central-Local Divide funding, while the central government’s funding accounts for an average of only 4.58%. Furthermore, as illustrated in Fig.  3, the central government’s expenditures on educa- tion, social security, and healthcare experienced a marginal increase. In contrast, local governments’ social expenditures in all these categories saw a dramatic surge. Local governments have assumed primary responsibility for the expansion of social welfare. Therefore, analyzing the motivations of local governments can provide deeper insights into the expansion of social welfare in China. Indeed, the expansion of welfare in China exhibits remarkable regional disparities. Figure  4 uses provinces in 2014 as a representation of the regional variation in gov- ernment social welfare expenditure, with darker color representing higher expenditure. Eastern coastal provinces (e.g. Shandong, Jiangsu, Guangdong) and those along the Yangtze River (e.g. Sichuan and Hunan) allocate more resources to social welfare than western and central provinces. According to the data I collected, between 2001 and 2012, the average city’s expenditure on social welfare across all categories equated to 7.84% of GDP, but with a variance of 36.03, indicating substantial variation across cities. Cities in the top decile spend an average 15% of their GDP on social welfare, while cities in the bottom decile only allocate 3% of their GDP to social welfare programs. Conse- quently, this paper also aims to understand the determinants of the variation in social spending across Chinese cities. A review of studies on social welfare Existing literature on social welfare in non-democracies predominantly adheres to the state-centered tradition in the  literature. When considering a non-democratic  regime, legitimacy invariably emerges as a significant concern. Holliday and Wilding 2003 con - ducted a systematic study of East Asian countries, arguing that a primary incentive for Chen Asian Review of Political Economy (2023) 2:4 Page 6 of 24 Fig. 4 Subnational Variation of Welfare Expenditure in China Chen Asian Review of Political Economy (2023) 2:4 Page 7 of 24 authoritarian states to provide social welfare is to counter social unrest during the pro- cess of economic development. Moreover, welfare benefits are perceived as a crucial tool for co-opting political and economic elites, as well as for mitigating both intra-elite and elite-public conflicts (Magaloni 2006; Stokes et al. 2013; Bueno de Mesquita et al. 2003). Several studies indicate that non-democratic regimes  rely less on repression and more on co-optation when the risk of regime liberalization escalates (Gandhi and Przeworski 2007) or when the security apparatus poses a potential threat to the rulers themselves (Magaloni and Kricheli 2010; Wintrobe 1998). Co-optation enhances the likelihood of   rulers’ survival, and it is typically achieved through the spoil system or redistribu- tive programs such as housing, wages, and pensions (Magaloni 2008; Bunce 1980; Collier 1982). While the existing literature on authoritarianism provides rich insights into the role of the state, it remains incomplete: our understanding of the impact of businesses on welfare provision in non-democratic countries is still limited. In the literature on welfare states in advanced industrialized European countries, tradi- tional power resource theory often posits that businesses have little interest in establish- ing welfare state (Korpi 1980). However, recent years have been an increasing discourse on the role of business in the social policy-making process and how firms’ preferences shape social welfare programs (Martin 1995; Estevez-Abe et  al. 2001). For instance, Swenson 1991 underscores the pivotal role of employers in promoting the centralized welfare system in Denmark and Sweden. His examination of the wage bargaining system in these countries reveals that export-dependent firms and labor unions collaborated in establishing such a system. Similarly, Thelen 2000 investigates German firms’ prefer - ences and contends that the failure to establish a centralized wage bargaining system is primarily due to the reluctance of German employers. Mares 2003 examines the devel- opment of the welfare state in France and Germany in the late 19th century and con- cludes that businesses actively supported the welfare state. In the context of the United States, Martin 1995 explores how firms’ preferences shape health care reform. She finds that both firm-level characteristics (e.g. size, sectors, level of skills, etc.) and institutional factors (e.g. relationship with national capital, participated groups, etc.) determine firms’ preferences in social policies. Martin and Swank 2012’s recent study further investi- gates how different types of employers’ associations shape member firms’ preferences on social policies differently. For instance, in Denmark, the peak associations not only facilitate discussion of shared concerns among firms but also bind firms to certain pol - icy outcomes. Conversely, the sectorally coordinated associations in Germany result in more diverse preferences. In summary, this literature demonstrates that firms’ prefer - ence indeed play a significant role in the process of social policy-making. Although the European welfare state literature provides discussions on the role of businesses in social policies, it remains unclear whether these findings, generated from advanced industri - alized democracies, can be applied to emerging market economies with weak or non- existent democratic institutions. Therefore, a significant contribution of this paper is to explore the potential effects of business on welfare provision in the context of China. Research on China has yet to fully address the extensive welfare expansion outlined above. Instead, much of the existing literature focuses on the reform of state-owned enterprises (SOEs, Steinfeld 1998). The reform of SOEs precipitated a correspond - ing reform in social welfare, as it dismantled the socialist lifetime employment and the Chen Asian Review of Political Economy (2023) 2:4 Page 8 of 24 work-unit (danwei) based system of social welfare (Gu 2001). This collapse of the work- unit system resulted in a “Great Lay Off ” in the late 1990s, sparking a significant wave of social protests in urban China (Hurst 2009; Hurst and O’Brien 2002; Cai 2002). Inspired by the literature on legitimacy, Pan 2015 utilizes survey experiments to study China’s Minimum Livelihood Guarantee (dibao) program. She finds that local bureau - crats leverage the dibao program to deter the poorest citizens from protesting. Simi- larly, through a provincial-level comparison, Huang 2015 discovers a positive correlation between the population covered by the health insurance program in a province and the province’s level of social risk. In provinces with significant social risk (e.g. thousands of people protesting on the streets), the provincial government tends to be more inclined to expand the population covered by basic health insurance. Beyond the legitimacy hypothesis, the career advancement of political officials is another important factor in explaining welfare provision. For example, Zuo 2015 examines the cadre management system in China and finds that different local cadre evaluation systems shape officials’ preferences on social welfare differently. Politicians in provinces with a welfare man - date are more incentivized to improve social welfare than those in provinces focused on economic development. Similarly, several studies contend that the political trajectories and promotion prospects of local politicians influence their behaviors in social spending (Liu, 2011). Upon reviewing existing studies on China, it becomes evident that the majority of research adopts the conventional state-centered approach to elucidate the expansion of social welfare in China. Nevertheless, insights from Western welfare state studies sug- gest that businesses may play a pivotal role in shaping and expanding welfare systems. Consequently, this paper proposes an alternative approach that deviates from the tradi- tional “top-down” methodology to study China’s welfare expansion. This approach scru - tinizes the role of business, thereby revealing a “bottom-up” mechanism of social welfare expansion in China. Theoretical argument and hypotheses In theory, politicians of non-democratic regimes have significantly less incentive to enhance citizens’ social well-being compared to their counterparts in democracies, because non-democratic politicians are not popular elected. However, since the market reform and opening in 1978, it is undeniable that the primary objective of the Chinese government is economic development. Given this overarching goal, I argue that politi- cal elites in China harbor preferences akin to those of elected politicians in democratic states, namely fostering economic development and elevating people’s living standards. The government cannot attain this goal without the help of the business sector, which acts as a crucial actor in the process of economic development. In China, taxes collected from firms constitute a major source of the government’s fiscal revenue, as the per - sonal income tax only comprises 3% of municipal fiscal revenue. Moreover, the growth of firms creates employment opportunities, mitigating potential social discontent, and ultimately promoting social stability. Therefore, I argue that politicians in   non-demo - cratic countries also heed employers’ needs just as their democratic counterparts do, as Calculated from author’s data. Chen Asian Review of Political Economy (2023) 2:4 Page 9 of 24 business acts as an indispensable partner to the government in achieving development goals and enhancing regime legitimacy. Local governments also face inter-regional competition to attract investment. Con- sequently, local politicians are motivated to establish an environment conducive to the development of firms within their territories. Firm power, thus, determines the capa - bilities of firms to lobby the government and to further influence public policies. A large firm tends to have more firm power and thus exerts more influence on public poli - cies than a small firm, primarily because a large firm 1) contributes more to economic growth; 2) pays more taxes to the government; and 3) creates more jobs. I argue that in a political regime with no or weak democratic institutions, the influence of business on public policy is predominantly capability-based. In other words, small and medium- sized firms are less likely to possess the same capabilities as large firms do in influencing public policies. Multinational corporations (MNCs) represent another crucial actor in the expansion of social welfare. When such entities establish a presence in countries like China, they introduce not only cutting-edge technology and capital but also impart ideologies asso- ciated with human rights and social welfare. They expect a commensurate level of wel - fare and services analogous to those in their countries of origin. MNCs exhibit concerns that extend beyond the realm of beneficial tax policies. They place a high priority on the ‘soft’ environment of a prospective city before committing to investment decisions. Within this ‘soft’ environment, social welfare is perceived as a vital component. Moreo- ver, subsequent to establishing their operations within a city, these foreign corporations hold a continuous interest in fostering improvements in education, healthcare, and labor welfare. They effectively serve as conduits or ‘transmission belts,’ articulating the views and preferences of their employees to the government via numerous channels. Employ- ees, in their pursuit of a better standard of living, tend to favor cities that offer supe - rior healthcare facilities, high-quality educational opportunities for their offspring, and comprehensive pension coverage. From a corporate perspective, a superior living envi- ronment is an attractive proposition for skilled labor, and a robust education system is conducive to corporate research and development endeavors. From the vantage point of local politicians, catering to the needs of businesses aids in advancing their political careers. Cadres in China are appointed by upper-level govern- ments rather than elected by the public. To ascend the political ladder, cadres must meet various policy targets set by upper-level governments, with economic development being one of the paramount factors (Edin 2003; Whiting 2004). Specifically, economic develop - ment encompasses three major objectives: GDP growth, fiscal revenue, and employment. A cadre stands a better chance of promotion if he/she manages to achieve a stable and high rate of GDP growth or a substantial level of fiscal revenue under his/her political rein (Chen et al. 2005; Li and Zhou 2005; Shih et al. 2012). Moreover, local politicians have a strong incentive to attract investments from large firms within their political territories. This is not solely because a large firm contributes more in terms of taxes, jobs, and GDP growth. More importantly, a large firm can serve as a ‘model firm’ or even a ‘calling card’ for local politicians to showcase their political competence and achievements to upper- level politicians. In the Chinese political system, routine political inspections (shicha) are common. Upper-level politicians frequently engage in these political inspections, either Chen Asian Review of Political Economy (2023) 2:4 Page 10 of 24 to demonstrate their commitment to their roles or to exploit rent-seeking opportunities. A large firm presents an ideal venue for political inspections for both local and upper- level political officials. Upper-level politicians view these large firms as the driving force behind economic development, hence visiting them underscores their profound concern for economic development. From the viewpoint of local politicians, large firms can serve as compelling evidence of their economic stewardship abilities. The success of a ‘model firm’ can be incorporated into their political narratives as a personal achievement. Con - sequently, local politicians are highly motivated to respond to the needs of large corpora- tions, thereby opening the gate for these firms to lobby the government and influence public policies relating to corporate development. Regarding social policies, large firms tend to favor investing in cities with a stable and skilled labor supply. These preferences often lead them to lobby for increased public spending on education (including voca- tional training and tertiary education) and the provision of more comprehensive social security measures, such as pensions and health insurance. There are multiple avenues through which substantial corporate entities can exercise their influence over governmental policies. Some giant firms have the capacity to engage in direct dialogues with mayors and key municipal authorities. Besides, large firms typi - cally opt to liaise with governmental bodies. These bodies can be broadly divided into two categories: specialized functional departments and more generalized ones. Within the sphere of social welfare, the Department of Human Resources and Social Security assumes a significant role. This entity performs regular audits of the aforementioned corporations, an activity that equips them with a comprehensive understanding of these corporations’ specific needs. The information gathered during these inspections is sub - sequently relayed to broader departments such as the Development and Reform Com- mittee. This committee holds the authority to make consequential decisions based on the reported needs. The interactions and cooperation between these varying govern - mental bodies and large corporations demonstrate a dynamic, complex system of corpo- rate lobbying and influence on government decisions and policies. In light of the theoretical premises posited, I hypothesize that: H1: Cities with more large firms provide better social welfare provision than cities with fewer or no large firms. H2: Cities exposed to more foreign influence have better welfare provision than cities with less foreign influence. To scrutinize the theory and test these hypotheses, a mixed methods approach com- bining quantitative and qualitative methods will be utilized. Initially, the hypotheses will be tested using a city-level panel dataset encompassing all Chinese municipalities. Sub- sequently, qualitative case studies grounded on primary field data will be conducted to provide a more nuanced elucidation of the underlying mechanisms. Quantitative evidence Data and measurement To test my hypotheses, I constructed a panel dataset encompassing all 336 Chinese municipalities. This data, pertaining to the social welfare expenditures from 2001 to Chen Asian Review of Political Economy (2023) 2:4 Page 11 of 24 2012, was obtained from a variety of Chinese statistical yearbooks. The dataset provides comprehensive information on each city government’s total fiscal expenditure, alongside the public expenditure allocated to education and social security. It also contains data regarding each city’s socio-economic and demographic conditions, including aspects such as GDP, fiscal revenue, population size, land size, and so forth. To measure firm power in each city, I employ the logarithm of the cumulative industrial out - put from all large firms (LGF) within the city. I follow the Chinese National Statistics Bureau’s criteria to define a large firm, which is a firm with over 2,000 employees, 300 million sales revenues, and 400 million total assets (detailed definition in Footnote 4).  The extent of for - eign influence is quantified using the logarithm of foreign direct investment (FDI). To test my hypotheses, I utilize the lagged forms of the two independent variables (LGF ; FDI ), as i,t-1 i,t-1 policy-making processes typically span one to two years. The use of lagged forms of the inde - pendent variables also assists in addressing potential endogeneity issue. My dependent vari- able here is the government’s social welfare expenditure (WELF ), measured by city ’s public i,t i expenditure on education and social security combined as a percentage of its GDP in year . Existing literature also suggests several other factors influencing welfare provision, and these variables are accounted for as controls in my statistical analysis. Primarily, legitimacy plays a significant role in government provision of social welfare in non-dem - ocratic regimes. Current literature uses the level of social risk as an indicator of govern- ment concern about legitimacy (Huang 2015; Pan 2015). In the context of China, welfare reform is inextricably linked to market reform, especially state-owned enterprise reform. During the late 1990s (from 1998-2000), Premier Zhu laid off a significant number of state-owned enterprise workers, aiming to alleviate the burden on these entities. The massive lay-offs, totaling in the tens of millions, subsequently imposed a significant bur- den on local governments (Hurst 2009). In this study, I utilize a city’s burden (BUR) as a measure of social risk, referring to the percentage of the population who are unem- ployed, retired, or under working age but require education and health care. Second, the degree of urbanization (URB) could also influence a city’s social welfare expenditure (Dickson et al. 2016). According to the National Bureau of Statistics, in 2013 alone, over 26 million migrant workers relocated from rural to urban areas. With such a massive influx of migrants, a city government may increase social welfare budgets (e.g., for more schools and hospitals) or public security budgets (e.g., for police), or both. This study uses population density as a measure of urbanization. Third, a city’s social expenditure is also influenced by its fiscal resources and capacity (Dickson et al. 2016; Huang 2015). A city with plentiful fiscal resources is more likely to allocate substantial funds to social welfare. I use the logarithm of fiscal revenue (REV) to measure a city’s fiscal resources. The data that support the findings of this study are available from CNKI Yearbooks Database but restrictions apply to the availability of these data, which were used under licence for the current study, and so are not publicly available. Data are however available from the authors upon reasonable request and with permission of CNKI. In studies on OECD welfare states, unemployment is a widely used variable. For example, see (Huber and Stephens 2001). However, in studies of welfare states in developing countries, unemployment schemes are either nonexistent or poorly developed. For example, in Latin American studies, “unem- ployment data are not generally available to be used in TCSC analysis.” See (Segura-Ubiergo 2007). In the case of China, what we do know is how many people are employed, and thus this study uses a city’s burden rather than unemployment rate. See Guojia Tongji Ju (National Statistics Bureau). “Quanguo Nongmingong Jiance Diaocha Baobao (Report on Chi- nese Rural Migrants),” May 12, 2014. Here the migrants are still considered as rural residents because of the Household Certificate System, or the so-called Hukou system, which was introduced in 1958 that identifies two main categories of household: urban and rural. The Hukou system does not offer full social benefits to rural people who live in urban areas. For example, rural residents who migrant and work in urban areas are not eligible to be enrolled in urban health insur- ance. Chen Asian Review of Political Economy (2023) 2:4 Page 12 of 24 Model The hypotheses are evaluated employing panel fixed effects models with clustered standard errors. A fixed effects model compensates for time-invariant confounders and overarching factors such as institutional and cultural influences. As discussed in the the - oretical section, the social welfare expenditure in a given year, denoted as year , typically is the outcome of the lobbying activities of firms in the preceding year, year . Conse- t-1 quently, the one-year lagged form of independent variables has been incorporated into the models. The full model is expressed as: WELF = β +β LGF +β FDI +β BUR +β URB +β REV +c +v i,t 0 1 i,t−1 2 i,t−1 3 i,t 4 i,t 5 i,t i i,t (1) In this equation, WELF refers to city ’s public expenditure on social welfare as a i,t i percentage of city ’s GDP in year ; LGF denotes the logarithm of the industrial out- i t i,t-1 put of large firms in city in the preceding year, year , and FDI represents the loga- i t-1 i,t-1 rithm of the total foreign direct investment in city in year . BUR, URB, and REV are i t-1 control variables as explained above. The symbol c refers to the city fixed effect that controls for unique city-specific characteristics (such as institutions and culture) that do not vary with time. Lastly, v signifies the error term of the model. i,t Extant scholarly work posits that the social welfare expenditure of a city or a country in a specific year, year , is likely influenced by the welfare expenditure in the preced - ing year, year (Martin and Swank 2012; Segura-Ubiergo 2007; Cusack et  al. 2007). t-1 Hence, for enhanced robustness, I also estimate the full model with a lagged depend- ent variable. A lagged dependent variable also caters to autocorrelation dynamics in the dependent variable (Beck and Katz 1995). In a bid to further nuance the analysis, this study examines the impact of firms on education expenditure and social security expenditure respectively. Such detailed disaggregation of social welfare enables a more comprehensive investigation into the diverse effects that firm power may exert on the varied components of a city’s social welfare programs. Results Table 1 delineates the impact of firm power on the provision of social welfare. Model 1 represents the results of large firms’ influence on a city’s social welfare. Model 2 shows the effect of foreign direct investment (FDI). Model 3 incorporates both of these variables. Model 4 introduces all the control variables, while Model 5 further adds the one-year lagged dependent variable into the model. All models employ city fixed effects and clustered standard errors. The regression results largely substantiate the theoretical predictions articulated previously. Cities possessing considerable firm power exhibit better social wel - fare provision compared to cities with less firm power. Notably, from Model 5, it is deduced that, all else being equal, for every 100% increase in the industrial output of large firms in year , it is likely to induce a 1.803 increase in social welfare at year . t-1 t Considering the mean social welfare expenditure as a percentage of GDP stands at 5.01, a 1.803 increase represents a substantial effect. Similarly, FDI also positively Chen Asian Review of Political Economy (2023) 2:4 Page 13 of 24 Table 1 Determinants of Social Welfare in China (1) (2) (3) (4) (5) WELF WELF WELF WELF WELF ∗∗∗ ∗∗∗ ∗∗∗ ∗∗∗ L.Large Firm 1.656 (0.0866) 1.301 (0.0797) 0.713 (0.218) 1.803 (0.491) ∗∗∗ ∗∗∗ ∗∗ ∗∗∗ L.Foreign Firm 0.834 (0.0717) 0.258 (0.0895) 0.233 (0.0938) 0.305 (0.115) ∗∗∗ ∗∗ Burden 0.0162 (0.00422) 0.00995 (0.00447) ∗∗∗ Urbanization 4.726 (6.353) 12.69 (4.389) ∗∗∗ Fiscal Capacity 0.789 (0.280) -0.938 (0.645) L. DV ✓ City FE ✓ ✓ ✓ ✓ ✓ Rbst.SE ✓ ✓ ✓ ✓ ✓ ∗∗∗ ∗∗∗ ∗∗∗ ∗∗∗ ∗∗∗ Constant -4.860 (0.503) -2.778 (0.628) -5.784 (0.599) -5.618 (0.799) -8.003 (1.316) N 2909 2977 2666 2604 1895 Standard errors in parentheses ∗ ∗∗ ∗∗∗ p < 0.10, p < 0.05, p < 0.01 Table 2 Determinants of education and social security respectively (1) (2) (3) (4) Education Education Social Security Social Security ∗∗∗ ∗∗ ∗∗∗ ∗∗∗ L.Large Firm 0.395 (0.0901) 0.294 (0.126) 0.649 (0.154) 1.531 (0.351) ∗∗∗ ∗∗ ∗ ∗∗ L.Foreign Firm 0.115 (0.0330) 0.110 (0.0444) 0.119 (0.0652) 0.172 (0.0700) ∗∗∗ Burden 0.00268 (0.00221) 0.00301 (0.00350) 0.0117 (0.00350) 0.00536 (0.00348) ∗∗∗ ∗∗∗ Urbanization 1.275 (2.165) 8.002 (2.799) 1.459 (5.019) 6.971 (2.186) ∗∗∗ ∗ Fiscal Capacity 0.281 (0.108) 0.0791 (0.133) 0.304 (0.208) -0.806 (0.442) L.DV ✓ ✓ City FE ✓ ✓ ✓ ✓ Rbst.SE ✓ ✓ ✓ ✓ ∗∗∗ ∗∗∗ ∗∗∗ ∗∗∗ Constant -1.904 (0.299) -1.601 (0.368) -4.955 (0.597) -6.961 (1.046) N 2888 2413 2605 1898 Standard errors in parentheses ∗ ∗∗ ∗∗∗ p < 0.10, p < 0.05, p < 0.01 impacts government social spending. Specifically, within a given city, every 100% increase in FDI is likely to trigger a 0.305 increase of social welfare. The impact of control variables on social welfare expenditure essentially aligns with existing scholarly findings pertaining to China’s social welfare provision. Specifically, as a city’s wealth accrues, the municipal government displays an increased propensity to enhance social welfare within its jurisdiction, such as elevating educational stand- ards, enhancing hospital quality, or bolstering the social security of its residents. The previous findings of social risk by other scholars also maintains a positive correlation with social welfare spending in my analysis, which confirms the validity of the legiti - macy hypothesis. Additionally, this study explores the influence of firm power on education and social security expenditure independently. Table 2 demonstrates that the effects of firm power on either education or social security align with the findings presented in Table  1. In cir- cumstances where a city houses a greater number of large firms or succeeds in attracting Chen Asian Review of Political Economy (2023) 2:4 Page 14 of 24 a substantial amount of foreign direct investment, it is probable that expenditure on education and social security will concurrently increase. Robustness check To corroborate the robustness of my findings, an extensive series of robustness checks were conducted from multifarious perspectives. The first set of checks encompassed the utilization of alternative dependent variables (i.e., welfare expenditure per capita and welfare expenditure as a percentage of total fiscal resources), alternative measurements of independent variables, execution of models without lagged independent variables, the incorporation of additional control variables (such as population size, land size, a city’s GDP) into the model, and the consideration of time fixed effects. Secondly, competing hypotheses were also evaluated. This included, for instance, the role of the central gov - ernment and central policy. Furthermore, the convenience of transportation could con- found the results, as it both attracts firm investments and influences the welfare level of cities. Thirdly, several other robustness checks were implemented to demonstrate that the results are not driven by a subset of the data. For instance, state-owned enter- prises (SOEs) may possess unique channels of welfare provision, thus leading to differ - ent lobbying incentives. Consequently, analyses on various types of firms were carried out to ascertain whether the results were driven by large SOEs. Moreover, the large firm hypothesis was tested across distinct regions of China to determine if the results were influenced by a specific region. It is worth noting that for all the aforementioned robustness checks, the same model setup used in the primary model (i.e., fixed effects model with clustered standard errors) was maintained. In summary, the core findings have demonstrated robustness across all the checks implemented. To ensure a cohesive structure throughout this paper, the detailed outcomes of all the robustness checks are meticulously presented in the Appendix. Qualitative evidence In complement to the quantitative evidence presented thus far, this section incorporates qualitative evidence to explicate the underlying mechanisms, detailing how large firms lobby the government and enhance social welfare within a city, as well as delineating the channels used for lobbying. The qualitative evidence is grounded in the field research I conducted in China in 2014 and 2015. Overall, the field research encompassed 14 Chi - nese cities within four provinces, including Liaoning, Hebei, Zhejiang, and Guangdong. Liaoning Province was selected to represent the Northeast region of China, notable for its extensive industrial development history since the early twentieth century and a plethora of large state-owned enterprises. Simultaneously, some cities within Liaoning, such as Dalian, have experienced a high degree of foreign direct investment, making the combined effect particularly intriguing. Zhejiang Province was chosen as a representa - tive of East China, renowned for its array of well-established private firms. Guangdong was incorporated due to the significant presence of foreign firms, while Hebei served as a representative province with minimal influence from foreign investment. Chen Asian Review of Political Economy (2023) 2:4 Page 15 of 24 Semi-structured interviews were conducted with municipal officials, firm managers, and employers’ associations, and an assortment of government documents (both pub- lished and internal), local gazetteers (known as difangzhi), and yearbooks were col- lected. This section provides a succinct presentation of three illustrative cases: Intel, Toshiba, and Alibaba, supplemented with detailed insights into the channels employed for lobbying. The case of Intel An analysis of Intel’s investment process qualitatively addresses the endogeneity concern by showing that the welfare of a city is indeed enhanced after the firm’s investment. It highlights Intel’s role as a proactive driver of societal welfare enhancement rather than a passive beneficiary of an already developed welfare system. Intel, an American multinational corporation, is a leading global semiconductor man- ufacturer. In March 2006, Intel committed to a USD 2.5 billion investment to estab- lish a 300nm wafer fabrication factory (Fab 68) in Dalian, commencing construction in May 2007. This state-of-the-art facility produces “leading-edge 65nm chipsets for lap - top computers, high-performance desktop PCs and powerful servers.” Inaugurated in 2010, Fab 68 represented Intel’s first wafer fabrication factory not only in China but across the entirety of Asia, marking a significant milestone. Before settling on Dalian as the location for Fab 68, Intel assessed four other cities in China. Even though some of these candidate cities presenting more favorable tax poli- cies, and one even extending courtesies on par with those given to U.S. Presidents, Intel ultimately chose Dalian. The determining factor was Dalian municipal government’s commitment to enchaining the city’s ‘soft environment’ and social welfare standard, especially fulfilling Intel’s particular educational and healthcare requirements. This com - mitment manifested in the construction of a new American-style K-12 school (bolstered by a USD 30 million government investment and accreditation from the Western Asso- ciation of Schools and Colleges), a new AAA grade hospital (sanjia, the highest hospi- tal ranking criterion in China) managed by the China Medical University, a new public library, and a world-class theatre, reputed as the finest in Northeast China. Signifi - cantly, these facilities are accessible to all Dalian residents, thereby enhancing the living environment and welfare standard of Dalian residents, underscoring the impact of Intel’s investment on the broader community. The case of Toshiba The case of Toshiba illuminates how large firms maintain an ongoing interest in elevat - ing a city’s social welfare standards even after their initial investments. Toshiba, a Japa- nese multinational conglomerate established in 1875 and based in Tokyo, operates two large factories in Dalian, China. One factory specializes in the production of LCD televi- sions, while the other manufactures medical equipment such as X-ray and CT machines. For a brief introduction on Intel’s Fab 68 in Dalian, see: https:// www. intel. com/ conte nt/ www/ us/ en/ jobs/ locat ions/ china/ sites/ dalian. html Interviews with Intel Dalian senior managers, July 2015. Interviews with Dalian municipal officials, July 2015. Chen Asian Review of Political Economy (2023) 2:4 Page 16 of 24 A senior manager at Toshiba asserted that the company has consistently lobbied the government to enhance Dalian’s social welfare since commencing their business in the city in 1991. In the early 2000s, Toshiba’s medical equipment factory confronted a shortage of skilled labor in automation. The company engaged in dialogues with the government on various occasions to address the issue. Senior managers of Toshiba Dalian articulated a strong desire to enhance the city’s human capital, asserting that “Toshiba has invested billions of money in Dalian and they do not want to move to other places which would cause them a big loss.” After a year of negotiations with various departments and direct discussions with the mayor, the municipal government resolved to fund a new Center of Numerical Control in Dalian. The new center also functioned as a “practical training camp” (shixun jidi) to cater to the specific skill requirements of various firms, includ - ing Toshiba. A key to Toshiba’s success lies in its status as “a large firm, a multinational corporation with a stellar reputation that can be used by government leaders as a model firm” to showcase their political achievements in fostering economic development. Fur - thermore, Toshiba is “one of the largest taxpayers to the government.” The case of Alibaba The case of Alibaba, one of China’s largest e-commerce companies, provides insights into how significant businesses can directly shape public services and social welfare within a city. Alibaba operates two substantial offices within the Hangzhou municipality, one located in Binjiang District, serving as the headquarters, and the other in Yuhang District. In December 2013, the Hangzhou Municipal Government announced a “stra- tegic cooperation” (zhanlue hezuo) agreement with Alibaba, which was designed to facilitate Alibaba’s development in a variety of aspects. These included the provision of superior public services, human capital enhancement within Hangzhou, the improve- ment of Hangzhou’s ‘soft’ environment, and the construction of five industrial parks. Alibaba’s ability to influence policy on such a broad scale can be attributed to its vital role in Hangzhou’s economy. In 2014, Alibaba paid 10.9 billion yuan in taxes, with 4.38 billion yuan contributing to Yuhang District (Economy and Nation Weekly, C. G. Z, 2014). Besides this significant tax contribution, Alibaba employs more than 30,000 employees in total. Furthermore, Alibaba’s web platforms, such as Taobao and T-mall, indirectly created 9.62 million job opportunities (People’s Daily, R. R, 2014). Such a substantial firm possesses a considerably greater capacity to influence public policies than smaller and medium-sized firms do. A government official of Hangzhou vividly characterized the relationship between the Hangzhou municipal government and Alibaba as a “common destiny” (mingyun gong- tongti), with the government’s support for Alibaba extending to “all 360 degree dimen- sions” (360du quanfangwei). This encapsulates not only favorable tax policies but also improvements to municipal social welfare and public services. Interview with Toshiba Dalian senior managers, August 2014. Interview with Toshiba Dalian senior managers, August 2014. Interview with Toshiba Dalian senior managers, August 2014. Interview with Hangzhou municipal officials, July 2014. Interviews with municipal officials of Hangzhou, July 2014. Chen Asian Review of Political Economy (2023) 2:4 Page 17 of 24 Channels for lobbying Firms have multiple pathways to lobby the government in order to enhance social wel- fare within a Chinese city. The first avenue is through employers’ associations such as Enterprise Associations and Foreign Enterprise Associations. These bodies serve as essential conduits for large firms to communicate their policy preferences and propos - als to the government. Firms might encounter potential retaliation from the govern- ment if they propose something not aligned with the government’s interests. Enterprise associations can provide a degree of cover for firms, making it more challenging for the government to identify the source of a proposal. Furthermore, policy proposals pre- sented through enterprise associations are usually perceived as common issues rather than individual firm problems, making the government more inclined to address them. However, this avenue has certain limitations. Membership in employers’ associations is voluntary, and firms have significant freedom in choosing when to join or leave. Such a voluntary-based membership makes it hard for enterprises associations to coordinate interests among different firms and maintain a clear, consistent policy position over the long term. Furthermore, enterprise associations do not possess substantial formal political power when negotiating with the government. Bureaus within a municipal gov- ernment have no obligations to heed or report to enterprise associations, making their lobbying efforts primarily issue-based. In other words, if an issue proposed by the enter - prise associations does not match the government’s plan, it is less likely to be accepted. Another significant channel for firms to influence public policy is through government agencies. Typically, the Mayor’s Office functions as the municipal government’s hub, overseeing economic and social development. High-profile firms like Alibaba in Hang - zhou or Tencent in Shenzhen can directly negotiate with municipal politicians. For other, less influential large firms, a typical process to convey their policy preferences is through government departments. I categorize municipal departments into two types: general departments and functional departments. General departments, such as the Department of Finance, Department of Development and Reform (fagaiwei), and Department of Economy and Information (jin- gxinwei), are responsible for collecting information from functional departments, planning development, deciding on large projects and funding allocations, and reconciling conflicts of interest among various functional departments. On the other hand, Education Depart- ment, Health Department, and Human Resource and Social Security Department are the functional departments primarily responsible for social policies. They handle technical matters and collect information from firms. These departments gather data about firms’ difficulties, human capital needs, and employee working conditions through various forms of fieldwork, including surveys, meetings (zuotanhui), and on-site or telephone inter - views. Firms also submit their most pressing concerns to these technical bureaucrats. After conducting fieldwork, these bureaucrats draft reports and send them to gen - eral departments to address the identified issues. At this point, it is up to the general departments to coordinate all requests. They then write reports for the municipal government, outlining policy priorities and proposals for funding allocations. Upon Interviews with large firms managers in several Chinese cities between 2014 and 2015. Interviews with municipal officials in several cities in July and August 2015. Chen Asian Review of Political Economy (2023) 2:4 Page 18 of 24 municipal government approval, the Department of Finance allocates funding to each project based on instructions from the municipal government. However, it is essential to note that the priorities of municipal politicians do not always align with the general departments’ reports and recommendations. In cities with frequent rotation of munici- pal politicians, large firms often invest more in relationships with technical bureaucrats, whereas, in cities with less frequent rotation of mayors or party secretaries, large firms prefer to build their relationship with municipal politicians directly. Conclusion The expansion of social welfare in China is an important question both theoreti - cally and empirically. Theoretically, it prompts us to consider why a  non-dem - ocratic  regime  would invest in social welfare for its citizens. Without formal democratic institutions, what motivates politicians to improve the social well-being of the populace? Empirically, while most welfare state studies focus on European countries, our understanding of welfare provision in developing countries remains limited. China’s unique situation provides an excellent testing ground for existing the- ories, and the potential to generate new insights that could enrich our cross-national understanding of welfare states. This paper introduces an alternative perspective, examining the ‘demand’ side, spe - cifically the role of business in the welfare expansion process. It discovers that the size and type of business are crucial factors in explaining motivations and variations in social welfare expansion across Chinese cities. These findings also shed light on the puzzling resilience of the Chinese party-state. Despite being a single-party regime, Chinese government officials still attend to the needs of businesses as vital players in economic development. The influence businesses wield over the government in the policymaking process is dictated by their power. In China’s context, large firms contribute more significantly to local employment, government fiscal revenue, and GDP growth, making them more influential in policymaking. Regarding social policies, large firms prefer an environment rich in human capital and a stable labor source. Therefore, large firms, being key taxpayers in a city, have both the motivation and capability to enhance the city’s overall welfare standards. The channels of lobbying present an interesting area to explore further. This paper briefly suggests two pathways for firms’ lobbying for social policies (enterprise associa - tions and government departments) based on field insights, but more systematic studies are necessary for future research. Field research indicates that employers’ associations have an awkward relationship with the government – they lack formal political rankings, leading to less attention from the government in a nomenklatura system. Therefore, a systematic study on the effectiveness of employers’ associations in successfully lobbying the government for social policies would be a compelling direction for future research. Furthermore, in cities with fewer large firms or less foreign influence from multinational corporations, the capacity of firms to influence social or public policies is also of inter - est. While existing research emphasizes the role of employers’ associations in facilitating industrial upgrades (e.g. Yu et al. 2011), their effectiveness in public or social policies is less understood and warrants further exploration. Chen Asian Review of Political Economy (2023) 2:4 Page 19 of 24 Appendix Alternative dependent variable In my main model, I use a municipal government’s public expenditure on social wel- fare as a percentage of its GDP as a measurement of social welfare provision. To test the robustness of the results, I adopt two alternative measurements of social welfare provision. The first alternative measurement is social welfare expenditure relative to a government’s total fiscal revenue, which measures how much of a government’s budget is spent on welfare and indicates the level of willingness of government to do so. The second alternative measurement is social welfare per capita. This measurement reflects the level of social welfare of a city; if the per capita social welfare is higher, it means that level of social welfare of that city is higher. The following Table  3 displays results of these two alternative dependent variables. As we can see, all results follow the same logic as what I find in Table 1 . Alternative independent variables I adopt different measurements of my independent variables to test the robustness of my results. For the first independent variable, I further restrict the criterion for large firms by only including super large firms, and I use the logarithm of output of super large firms as a robustness check. In terms of the second independent variable, I use economic openness as an alternative measurement of FDI, which is measured by the logarithm of a city’s total exports. Table 4 summarizes the results of welfare provision by using alterna- tive measurements of independent variables. All my main findings in Table 1 hold here. Models without lagged X To further check the robustness of my models presented in Table  1, I  do not include lagged form of my independent variables. To elaborate, I use a city ’s logarithm of large firms’ output at year to measure large firm power, rather than using city ’s logarithm of t i large firms’ output at year to measure it. I adopt exactly the same method to operate the t-1 second independent variable, which is a city ’s logarithm of foreign direct investment at year rather than year . Table 5 below summarizes the results, which remain robust. t t-1 Table 3 Alternative dependent variables (1) (2) (3) (4) WELF WELF WELF WELF %FisRev %FisRev per capita per capita ∗∗∗ ∗∗∗ ∗∗∗ ∗∗ L.Large Firm 3.135 (0.229) 6.198 (1.500) 365.1 (72.47) 114.5 (45.99) ∗ ∗∗ ∗∗∗ ∗∗∗ L.Foreign Firm 0.300 (0.176) 0.434 (0.184) 24.89 (7.028) 19.81 (7.532) Covars ✓ ✓ L.DV ✓ ✓ City FE ✓ ✓ ✓ ✓ Rbst.SE ✓ ✓ ✓ ✓ N 1970 1894 1971 1895 Standard errors in parentheses ∗ ∗∗ ∗∗∗ p < 0.10, p < 0.05, p < 0.01 Chen Asian Review of Political Economy (2023) 2:4 Page 20 of 24 Table 4 Alternative independent variables (1) (2) (3) WELF WELF WELF ∗∗∗ ∗∗∗ ∗∗∗ L.Super Large Firm 0.357 (0.0848) 0.156 (0.0481) 0.178 (0.0362) ∗∗∗ ∗∗∗ ∗∗∗ L.Openness 0.576 (0.118) 0.234 (0.0659) 0.267 (0.0932) Covars ✓ ✓ L.DV ✓ City FE ✓ ✓ ✓ Rbst.SE ✓ ✓ ✓ N 871 834 519 Standard errors in parentheses ∗ ∗∗ ∗∗∗ p < 0.10, p < 0.05, p < 0.01 Table 5 Models without Lagged X (1) (2) (3) WELF WELF WELF ∗∗∗ ∗∗∗ ∗∗∗ Large Firm 1.342 (0.0503) 0.597 (0.123) 0.677 (0.135) ∗∗∗ ∗∗∗ ∗ Foreign Firm 0.241 (0.0369) 0.176 (0.0371) 0.0667 (0.0382) Covars ✓ ✓ L.DV ✓ City FE ✓ ✓ ✓ Rbst.SE ✓ ✓ ✓ N 2634 2576 2269 Standard errors in parentheses ∗ ∗∗ ∗∗∗ p < 0.10, p < 0.05, p < 0.01 More controls and time fixed effects To further test the robustness, I add more city characteristics as control variables including a city’s GDP, population size, land size, and I also add time fixed effects. To be consistent with the main model setup, I use the exact same model setup for this robustness check. Results remain robust (Table 6). Types of firms State-owned enterprises (SOEs) in theory may have different channels in the provi - sion of welfare, and thus may have different incentives in lobbying local governments. In addition, central SOEs and local SOEs may also be different in the way that central SOEs may rely less on local governments as the local SOEs do. To address this, I tested the robustness by adding in private and foreign firms only, without adding in SOEs. The results remain robust (Table 7). Central policy Generally, in the realm of social welfare, the central government provides broad guidance and allows significant leeway for each province to formulate their own policies accord - ing to their unique circumstances and characteristics, because local governments are the dominant actor in funding social welfare programs. Interestingly, provincial governments Chen Asian Review of Political Economy (2023) 2:4 Page 21 of 24 Table 6 More controls and time fixed effects (1) (2) (3) WELF Education Social Security ∗∗∗ ∗∗ ∗∗∗ L.Large Firm 0.871 (0.316) 0.271 (0.137) 0.596 (0.225) ∗∗∗ ∗∗∗ ∗ L.Foreign Firm 0.205 (0.0755) 0.112 (0.0342) 0.0935 (0.0535) ∗ ∗∗∗ Burden 0.00643 (0.00370) -0.00355 (0.00219) 0.0100 (0.00356) Urbanization -2.566 (14.35) 0.170 (7.108) -2.708 (7.464) Fiscal Capacity -0.00686 (0.438) 0.172 (0.251) -0.160 (0.270) ∗∗∗ ∗∗∗ ∗∗ GDP –3.789 (1.362) –2.391 (0.839) -1.413 (0.582) ∗∗ ∗∗∗ Population Size 2.106 (0.984) 1.922 (0.604) 0.189 (0.535) Land Size -0.209 (0.416) -0.0893 (0.210) -0.119 (0.210) Lagged DV ✓ ✓ ✓ City FE ✓ ✓ ✓ Year FE ✓ ✓ ✓ Rbst. SE ✓ ✓ ✓ N 2296 2300 2297 Standard errors in parentheses ∗ ∗∗ ∗∗∗ p < 0.10, p < 0.05, p < 0.01 Table 7 Types of firms (1) (2) (3) WELF WELF WELF ∗∗∗ ∗∗∗ Private 0.0336 (0.00341) 0.0228 (0.00328) ∗∗∗ ∗∗∗ Foreign 0.834 (0.0593) 0.623 (0.125) City FE ✓ ✓ ✓ Rbst.SE ✓ ✓ ✓ N 1849 2984 1704 Standard errors in parentheses ∗ ∗∗ ∗∗∗ p < 0.10, p < 0.05, p < 0.01 typically follow a similar approach, providing their municipalities with the discretion to make their own decisions. This policy-making process somewhat mitigates concerns about central treatment. However, this is not to suggest that the role of the central gov- ernment is insignificant. Indeed, in the early 2000s, the central government implemented a social security reform experiment in several provinces before it became national policy. This experiment aimed at expanding the population coverage and the level of local gov - ernment fiscal expenditure on social security programs (see State Council, g, 2000, State Council, g, 2005). To account for this, I conduct a robustness check on central policy by coding provinces and cities that received the central policy as 1, and others as 0. Overall, the results remain robust; they indicate that while central policy matters, the large firm hypothesis also holds, both with and without control variables (Table 8). Across regions I further conduct a robustness check on the large firm hypothesis across different regions in China, which would allow us to ascertain whether the results are driven by a single region or if the hypothesis holds across all regions. I categorize cities into three regions: Chen Asian Review of Political Economy (2023) 2:4 Page 22 of 24 Table 8 Central policy (1) (2) (3) Social Security Social Security Social Security ∗∗∗ ∗∗∗ Central Policy 1.490 (0.143) 0.357 (0.0979) ∗∗∗ ∗∗∗ Large Firm 0.776 (0.0495) 0.718 (0.0513) ∗∗∗ ∗∗∗ Foreign Firm 0.138 (0.0486) 0.139 (0.0487) City FE ✓ ✓ ✓ Rbst.SE ✓ ✓ ✓ N 3252 2635 2635 Standard errors in parentheses ∗ ∗∗ ∗∗∗ p < 0.10, p < 0.05, p < 0.01 East, Middle, and West, based on the standards set by the National Bureau of Statistics of China. The table below presents the results. Broadly, the large firm hypothesis is robust in all regions of China. By comparing the coefficients of the large firm variable across the three regions, it becomes evident that large firms in the West exert more influence on welfare provision than those in the Middle or the East. This can be attributed to the competitive dynamics in different regions. In the Western region, which has fewer large firms, each firm appears more important to a city and therefore can exert more influence on the government regarding welfare provision. Moreover, the eastern region comprises wealthier cities with greater fiscal capacity, and welfare expansion can be attributed to these socio-economic factors in addition to the influence of business (Table 9 ). Table 9 Across regions (1) (2) (3) East Central West ∗∗∗ ∗∗∗ ∗∗∗ Large Firm 1.060 (0.0586) 1.503 (0.0759) 2.426 (0.198) City FE ✓ ✓ ✓ Rbst.SE ✓ ✓ ✓ N 775 736 1030 Standard errors in parentheses ∗ ∗∗ ∗∗∗ p < 0.10, p < 0.05, p < 0.01 Table 10 Non-provincial capitals (1) (2) (3) WELF WELF WELF ∗∗∗ ∗∗∗ Large Firm 1.713 (0.0818) 1.369 (0.0821) ∗∗∗ ∗∗∗ Foreign Firm 0.834 (0.0593) 0.246 (0.0736) City FE ✓ ✓ ✓ Rbst.SE ✓ ✓ ✓ N 2858 2984 2391 Standard errors in parentheses ∗ ∗∗ ∗∗∗ p < 0.10, p < 0.05, p < 0.01 Chen Asian Review of Political Economy (2023) 2:4 Page 23 of 24 Non‑provincial capitals Transportation convenience can be another factor that influences firm investments, which could confound the large firm hypothesis on welfare. To address this concern, I performed a robustness check using a proxy to distinguish provincial capital cities, which are typically transportation hubs. Overall, the large firm hypothesis remains valid, even in cities that are less convenient in terms of transportation (Table 10). Acknowledgements I would like to thank Gao Chen, Dino Christenson, Bruce Dickson, Joseph Fewsmith, Cathie Jo Martin, Meng Tianguang, Meg Rithmire, Tony Saich, Saul Wilson, and participants at the Harvard Kennedy School Asia Fellows Seminar and the MIT Urban China Workshop for their helpful suggestions and comments. Authors’ contributions All author(s) read and approved the final manuscript. Authors’ information Hao Chen is an Asia Fellow in the Ash Center for Democratic Governance and Innovation at Harvard Kennedy School. Previously he was a distinguished visiting professor in the Schwarzman Scholars Program at Tsinghua University. His research centers on social welfare, state-business relations, and leadership politics. He received his PhD in political sci- ence from Boston University. Funding Open access funding provided by Shanghai Jiao Tong University. 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Journal

Asian Review of Political Economy – Springer Journals

Published: Sep 1, 2023

Keywords: Social welfare; Welfare state; China; Big business; Local politicians

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