A central proposition in the investment climate debate is that multiple and arbitrary fee payments imposed by state agencies harm private investment and economic growth. In China, the country with the most formidable record of investment and growth in recent history, such fee payments are very common. This seems odd. One would expect that an explanation has to do with the uneven imposition of the fees: investors that matter escape. However, in China the investors with the best political connections pay the highest fees. This is even odder. What is the explanation for this two-fold puzzle? In line with a recent critique of the investment climate debate, this study focuses on the relationships between state actors and private actors, in particular the relationships between local government leaders and officials and the owners of private enterprises. The study provides a rare insight into the economic and political interconnected of public and private sector growth at the local level.
Over the last two decades, there has been a phenomenal increase in the number of private enterprises operating in China. However, studies point out that government policies in China are far from ideal for private business development. This study examines a problem facing a number of private enterprises: the high level of fee extraction by local government. Unlike the usual meaning of fees as user charges, in China many fees are quasi-taxes. Local governments rely heavily on fees from enterprises for their revenues and have considerable discretion in assessing and collecting them. Excessive fee extraction by local governments from private firms reveals that the property rights of Chinese entrepreneurs are somewhat insecure from state predation. Conventional wisdom tells us that if the state encroaches on the property rights of investors, economic growth will suffer. The logic is simple: insecure property rights deprive entrepreneurs of incentives for investment, because they are not sure whether they will reap the fruits of their investment. So how is it possible that private businesses in China have grown rapidly under the condition that predation by local governments is a concern for many entrepreneurs?
This study employs both qualitative and quantitative methods. It draws upon field research, mostly in Zhejiang province and some in Jiangsu, Anhui, and Hubei provinces. In 2008, thirty-four in-depth interviews were carried out with business and government people. In addition to these in-depth interviews, this study uses statistical analysis and tests hypotheses by pooling four separate cross-sectional surveys on private enterprises for the years 1997, 2000, 2002, and 2004 .
This research was carried out by Eun Choi in 2008 while she was a Research Fellow in the Governance Team of IDS. She is now Assistant Professor in Ajou University in Korea.
As of February 2009 Mick Moore is also contributing to the project