Title: Political Compliance in Labor Investment Decisions

Authors: Lixin (Nancy) Su (The Hong Kong Polytechnic University), Qihang Zhao (University of International Business and Economics), Kai Zhong (University of International Business and Economics)

Abstract: Political considerations significantly influence corporate decisions. We propose that companies in China will align their labor investment decisions with local government employment expectations. Our findings support this hypothesis, showing that local government employment targets are positively correlated with corporate labor growth, especially for firms controlled by local governments and when local officials are nearing the end of their current positions. However, firms that meet these employment requirements often experience lower labor production efficiency and severe performance deterioration during economic downturns. Despite these economic drawbacks, such firms receive both explicit and implicit political benefits, including government subsidies, tax rebates, procurement contracts, and reduced penalties. Our study suggests that labor investment serves as a means to build political connections, and corporate political compliance strategies may yield political benefits rather than economic efficiency.