Since the market reform of 1978, China has seen phenomenal economic growth; however, this has come at the cost of significant environmental damage and rising social inequality. As such, the 2004 campaign of “Building a Harmonious Socialist Society” has become a key party resolution and government objective. Ultimately, China places maintaining social stability at the same level of importance as sustaining economic growth.

In the last 30 years, research has shown the importance of the state in national economic development, as well as its influence on corporate practices. One main strength of the state, as proposed by sociologist and political economist Max Weber, is that it provides predictable career paths for officials, such that officials are motivated by promotion to achieve national development objectives. Despite officials playing a key role in implementing the state’s agenda, individuals’ career concerns and variations in their incentives have been largely overlooked. Others have demonstrated how officials selectively apply state policies to maximise career gains, but downplay the role of state bureaucracy in shaping individuals’ political incentives. In other words, if their incentives differ, so will their priorities and their efforts to mobilise firms under their jurisdiction to achieve the state’s goals. Thus, by ignoring the agency of state actors, explanations of the heterogeneity in corporate implementation of state objectives are limited.

For this reason, a recent study by Danqing Wang and Xiaowei Rose Luo looks to understand how state bureaucracy influences policy outcomes and corporate behaviour through political incentives. The authors put forward that since officials need to balance multiple state goals, they may be motivated to prioritise different state goals at different stages of their careers, and to mobilise firms differently to help them achieve said goals. For example, senior officials close to the end of their careers are likely to seek a peaceful transition to retirement, whereas junior officials are more focused on advancing their careers.

To test their theory, Wang and Luo analyse Chinese publicly-listed firms’ diversification into new industries between 2001 and 2011 – a period when the state was looking to balance economic growth and social stability, and was faced with massive policy-induced layoffs from bankrupt state-owned firms. The authors explain that the Chinese context is ideal for a number of reasons. First, the state has maintained strong involvement in the country’s economy and society, meaning that it is closely linked to and regularly intervenes in the business sector. Second, the heterogeneity and complexity of China’s state bureaucracy enables the testing of the structural boundary conditions for political incentives. Finally, the country’s regional diversity results in variations in provincial states’ priorities in response to different pressures.

The results of the study show that when large layoffs occurred, some firms diversified into industries unrelated to their core business by acquiring bankrupt state-owned-enterprises and re-employing the workers. This was more likely to occur when the governor of the firm’s home province was close to retirement, consistent with the authors’ hypothesis that the state’s goal of social stability was more important than economic development for the retiring governor’s career objective. The study also found that the career stage effect was weaker for party leaders, who consistently prioritised social stability, and when a provincial state experienced intense collective actions. Again, in line with the authors’ argument on the structural conditions for political incentives. The effect was also found to be strengthened for firms that were more vulnerable to the influence of officials, such as firms with a strong socialist imprint and/or dependant on government resources.

Motivated by a gap in the literature, Wang and Luo’s study extends Weber’s literature on the state, as well as political economy research into incentives, and offers a political explanation for corporate diversification. However, the authors are quick to point out a number of limitations that could be addressed in future research. First, the dependent variable of new industry entries is a result of acquiring bankrupt state-owned-enterprises, and such acquisitions were not measured directly. Second, because the focus was on officials’ incentives, firm leaders’ individual characteristics were not analysed in detail. Finally, the context of the study was a strong state with a capable bureaucracy, meaning that the findings might not be generalisable to countries where this is not the case.