The learning-by-exporting effect can vary by mode of export (direct or indirect via intermediaries), which raises the importance of understanding factors associated with how firms export. This paper investigates the effect of political connections, one form of informal institutions particularly important in China, on the choice of export mode by Chinese private enterprises. By using firm-level survey data and addressing endogeneity, we find that having political connections significantly increases the probability of direct exporting, while it has no effect on indirect exporting through trade intermediaries. We further test the underlying mechanisms behind these findings. The results show that corporate political connections can help alleviate financial constraints by promoting the (external) access to bank credits and by reducing the (internal) extra-tax burdens, which are disproportionately important for direct exporting relative to indirect exporting. In addition, we find limited evidence supporting the importance of contract enforcement and managerial efficiency as channels though which political connections affect the choice of export mode.

Introduction

At the current state of economic development, one fundamental question for China’s growth is how to shift from input-led growth to innovation-led growth (Wei, Xie, & Zhang, 2017). This puts the issue of competence building for innovation center stage. Recent studies have shown that an important mechanism of innovation and productivity improvement for developing economies is to enter the foreign markets through exporting (Van Biesebroeck, 2005; De Loecker, 2007; Aw, Roberts, & Xu, 2011; Bustos, 2011; Atkin, Khandelwal, & Osman, 2017). The so-called learning-by-exporting mechanism suggests that exporting firms may learn and absorb new knowledge and technology through the access to new markets, production methods, products design, or management practices. As one of the world’s leading export economies, China seems to have a large potential to generate growth opportunities by exploiting the learning-by-exporting effect. Nevertheless, recent studies have pointed out that how much firms can learn from exporting to a large extent depends on how firms export and particularly how they choose between direct trading and indirect trading (Bai, Krishna, & Ma, 2017). More precisely, it has been documented that compared with firms exporting through intermediaries, firms exporting directly have better access and more opportunities to learn about foreign technology and preferences.