In the last 20 years, the share of German firms with political connections has increased, but the impact of political connections on firm growth is not clear. This column examines how German firm outcomes are affected when federal politicians serve as firm directors or officers. Firms appointing a politician to a corporate position are less likely to exit over the next five years than firms who appoint a non-politician, possibly due to better access to credit. Firms appointing a parliamentary politician also grow faster. However, productivity tends to slow down.
Politicians and firms have many common interests, and connections between the political and corporate sectors are widespread around the world (Faccio 2006). In the US, the involvement of corporate executives in politics is highly prevalent, and Babenko et al. (2022) show a significant increase of ‘business politicians’ over the last two decades. Politicians can benefit from corporate connections via financial contributions or the creation of local jobs that boost their election campaigns (Bertrand et al. 2018). Firms can benefit from direct access to government decisions, public funds, procurement contracts, or tax breaks.
A lively literature discusses whether firms’ advantages from a political connection are just helping them overcome market frictions or whether connected firms gain unfair advantages over their competitors. The available empirical evidence tends to support the latter argument. Political rent-seeking by firms is common in many contexts and leads to imbalances in the allocation of public resources (Pinotti and Cingano 2009). Akcigit et al. (2018 2023) show that in Italy, market leaders avoid competition by investing more in connections to local politicians than in innovation. This leads to distortions in the process of creative destruction and has the potential to depress growth at the aggregate level.
A large number of studies focus on stock corporations and identify current or former local politicians who serve as board members in order to investigate their impact on stock returns. But the literature offers less systematic evidence of the impact of political connections on firm growth. Germany, a large economy with well-developed institutions and low corruption levels, presents an interesting benchmark to study the potential for rent-seeking from political connections.
In contrast to other countries, Germany allows federal politicians to hold corporate positions, subject to disclosure obligations. Nissen and Ruenzi (2010) present first evidence for Germany by comparing market values of connected and unconnected stock companies and show that the gap in favour of connected companies declines in the year after a stricter disclosure policy was implemented. In a recent study (Diegmann et al. 2024), we examine how a wide range of firm outcomes are affected when federal politicians serve as firm directors or officers.
New data
We assembled a novel comprehensive dataset linking information on all members of the Bundestag (Germany’s federal parliament) since 1949 with the universe of German firms provided by Creditreform and organised by the ZEW – Leibniz Centre for European Economic Research in Mannheim. The linked data allow us to identify entries and exits of politicians in corporate positions. We further match politicians to candidate lists and election outcomes at federal elections to pin down dates of government mandates and to identify winning and losing candidates. Firm-level outcomes include credit scores, employment, sales, and firm entry and exit. In addition, we link data on economic subsidies provided by the Halle Institute for Economic Research (IWH) and European-wide public procurement data from Tenders Electronic Daily provided by the European Commission.
The dataset includes 4,084 politicians who served in the federal parliament since 1949; 1,790 have served since 2000, the starting year of the firm data. Out of 1.28 million German firms, 3,842 have a connection to a federal politician either during or after their time in office, and 14,078 firms have a connection to a candidate on one of the election lists. Similar to the US (Babenko et al. 2022), we find an increase in the share of firms with a political connection over the last 20 years in Germany. Figure 1 shows the share of firms with a current or former politician in a corporate position (blue line) and the share of firms with a connection to a parliamentary politician during their election term (red line). Both shares almost doubled over the two decades.
Figure 1 The share of politically connected firms over time
Notes: The figure shows the share of politically connected firms between 2000 and 2018. The upper blue line shows the share of all connections, including connections to former politicians, relative to the firm population, whereas the lower red line shows connections to current politicians.
To analyse the effects of political connections on firm outcomes, we exploit the timing of firm positions and government mandates and adopt two identification strategies. First, we implement an event study design, comparing firms that newly appoint politicians with similar firms appointing non-politicians. This method assumes the timing of appointments is independent of anticipated outcomes. To address potential biases, we develop a strategy based on election outcomes, focusing on the random nature of winners on ranked lists of candidates that are submitted by political parties before each election. This design compares firms gaining a connection through candidates just winning a seat to firms with candidates who are just losing a seat in parliament.
Political connections boost firm survival
Figure 2 shows event study results of the effect of appointing a politician on the probability of market exit in the first five years after the appointment. The graph shows a clear negative trend in firm exits. Compared to firms that appoint a non-politician to one of their corporate positions, firms appointing a politician with a government mandate are about 7 percentage points less likely to exit over the next five years. Interestingly, this large reduction in exits also holds for firms appointing a former politician who has already concluded their parliamentary position.
Figure 2 The effect of appointing a politician on market exit
Notes: The figure shows the effect of appointing a current politician at time t=0 on market exit one to five years after the appointment. 95% confidence intervals around point estimates. For further details, see Figure 3 in Diegmann et al. 2024.
To advance the identification, we exploit events where the connection is as good as random by using information from party candidate lists. Each of those lists contains a marginal seat with a candidate just winning and entering parliament and a candidate on the inframarginal seat who just loses. We set up a pooled regression discontinuity design around the marginal seat on 256 election lists to estimate the effect of winning a connection on firm outcomes.
Figure 3 shows the results for firm exit over the next two years. Firms with candidates on the left of the marginal seat threshold who miss entry into parliament have higher exit rates than those on the right of the threshold. Importantly, there is also a sharp downward jump in the exit rate just at the threshold where the election result is as good as random. The regression discontinuity analysis thus confirms that a firm winning a connection to parliament after a close election reduces firm exits.
Figure 3 Exit dynamics after election
Notes: The figure shows market exit two years after the election against the normalised party list threshold for firms connected to candidates without a current political mandate who run for parliament. Observations to the right of the party list cut-off (vertical dashed line) represent firms connected to candidates with a placement on the party list at the marginal seat or above. Likewise, negative values depict firms that are connected to candidates who did not win a seat via the party list. The solid black line represents local linear regressions on each side of the cut-off. The dashed lines represent 90% confidence intervals. The dots represent conditional means of the outcomes. The blue and red lines present linear regressions with different bandwidths.
Impacts on other firm outcomes
One advantage of our data is that we observe multiple firm outcomes and can document very detailed effects of political connections. Here we summarise the main findings. In terms of employment dynamics, we find that firms appointing a parliamentary politician grow faster. However, a corresponding effect on employment growth is not confirmed for candidates winning an election on the marginal seat. Productivity tends to slow down with the new appointment of a politician or with winning a seat in parliament. This effect is driven by a decline in sales relative to employment dynamics.
We further investigate credit ratings, examining information if a business relation is not recommended and therefore further collateral is needed. Here we find that firms gaining a new connection either through an appointment of a politician or by winning an election strongly improve their credit ratings. This positive signal to the market might give the firm better access to credit and thus explain the reduction in firm exits. We also find evidence that a new connection improves firms’ access to subsidies and procurement contracts. But these effects are smaller in magnitude, and the estimated coefficients are less precisely estimated.
Conclusion
In summary, our research provides new evidence on the influence of political connections to high-level politicians in Germany. Our findings highlight that, even in a highly regulated setting, politicians in leadership positions can have an impact on firm dynamics. Firms are shielded from closure in the years after they become connected and they experience changes in employment and productivity dynamics. These economic effects might be mediated by improved credit ratings. Our research underscores the need for continuous scrutiny of political influence in business to ensure fair competition and efficient market outcomes.
Source : VOXeu
