Public-Private Partnership and Policy Uncertainty

Table of Contents

1. Frontmatter

2. Introduction

   1. Frontmatter

   2. Chapter 1. Fine Tuning the Market

      Weijie Luo

      Abstract

      This book aims to explore the investment decision-making of private enterprises from the perspective of policy uncertainty in the process of cooperation between the government and social capital. The vitality of private capital is an important means of promoting economic development and expanding social employment. The book includes the following contents: taking the investment willingness of private enterprises as the analysis unit, based on institutional theory, resource dependence theory, enterprise behavior theory, etc., systematically constructing a theoretical framework of “policy uncertainty-investment confidence-enterprise investment”; Explore the connotation and internal causes of the uncertainty of PPP policy, and construct a “central and prefecture-level city” policy uncertainty text thesaurus, measurement system and quantitative indicators; Explore the impact of policy uncertainty on investor confidence and the adaptability of private enterprise operations, and analyze the constraint or promoting effects of innovation vitality and industrial structure on policy uncertainty; Explore the spatial spillover effect of local PPP policy uncertainty on private enterprise investment. This book tests the hypothetical relationship between policy uncertainty, investment confidence, and private enterprise investment based on policy texts, PPP listed company information, and identifies key factors affecting private enterprise cooperative investment. This has important academic value for enriching institutional theory, expanding PPP research, and has significant theoretical and practical value for promoting social capital investment and stimulating the vitality of private enterprises.

   3. Chapter 2. Public-Private Partnership and Policy Uncertainty: A Literature Review

      Weijie Luo

      Abstract

      The investment activities of enterprises are an important link that affects the economic development of a country. How to promote the investment of social capital and mobilize the enthusiasm of private enterprises has always been a difficult problem for developing countries. The research on the influencing factors of enterprise investment decisions has a long history and is constantly deepening. In this chapter starts with a summary based on the institutional theory, resource dependence theory and behavioral theory of the firm. Second, the chapter reviews the literature on how public-private partnership policy affect firm operation, including public-private partnership policy analysis, and the impact of public-private partnership policy on private firm operation. Third, the chapter summarizes the research on the effect of policy uncertainty on firm operation.

3. Policy Uncertainty

   1. Frontmatter

   2. Chapter 3. Economic Policy Uncertainty

      Weijie Luo

      Abstract

      This paper analyzes the impact of economic policy uncertainty on firm performance. Utilizing a news-based index of economic policy uncertainty developed by Baker et al. (2016) and firm-level data in China, firm investment, employment, and revenue are found to be negatively associated with policy-related economic uncertainty. This negative relationship is weakened in state-owned enterprises (a fall in investment of 5.61%, employment growth of 0.09%, and sales growth of 0.31%) compared to that of non-state-owned enterprises (a fall in investment of 7.79%, employment growth of 0.14%, and sales growth of 0.34%). We explore several potential explanations and find evidence supporting that economic policy uncertainty reduces the incentives of firms to expand their operation through the mechanism of risk-taking, cash holdings and tax burden. Given this microscopic study on mechanisms, our analysis provides a reference for policy-makers to effectively reduce economic fluctuations.

   3. Chapter 4. Monetary Policy Uncertainty

      Weijie Luo

      Abstract

      This paper analyzes the impact of monetary policy uncertainty (MPU) on firm risk-taking. We introduce a model to explore the investment behavior of a firm when greater monetary policy uncertainty occurs. The model predicts that, to limit the risk exposure, the firm tends to lower its capital stock and henceforth reduce its risk-taking. Utilizing the firm-level data from China over the period 2000–2019, we show that MPU can significantly reduce the corporate risk-taking. Moreover, we find that firms with financing constraints become risk aversion in facing with MPU shocks. This paper sheds light on both theoretical basis and practical reference for firms to make better decisions on high-risk projects.

   4. Chapter 5. Environmental Policy Uncertainty

      Weijie Luo

      Abstract

      This study analyzed the impact of environmental regulation, specifically, the “2+26” regional strategy for air quality improvement, on corporate research and development (R&D) investment in China. We developed a theoretical model based on the argument that R&D investment rises with regulation intensity. Using 2010–2019 data from China’s listed companies located in the Beijing-Tianjin-Hebei region and its surrounding areas, we treated the 2+26 policy as a quasi-natural experiment and adopted a difference-in-differences approach to explore its effect on firm R&D input. A positive association was observed between firm R&D intensity and the 2+26 strategy’s implementation in major polluting industries. Our results provide in-depth insights into the 2+26 strategy’s economic consequences, which are potentially of interest to both scholars and policymakers.

   5. Chapter 6. Political Uncertainty

      Weijie Luo

      Abstract

      This paper explores cycles in innovative outcomes corresponding with the timing of political turnover. Utilizing the data on local government officials and innovative activities at the firm level in China, a turnover in local political leaders is found to be negatively associated with innovation. We examine several potential explanations and find evidence supporting that political turnover reduces the incentives of firms to innovate until the uncertainty is resolved. This paper also indicates that local political turnover significantly holds back research and development investment, government subsidy, and the decision of expansion, leading to less innovative outcomes.

4. Public-Private Partnership

   1. Frontmatter

   2. Chapter 7. Public-Private Partnership: Case Studies in China

      Weijie Luo

      Abstract

      This paper provides case studies for the Public-Private Partnership (PPP) mode in China. The key to promoting the PPP model lies in introducing social capital into the infrastructure and public utilities sector, in order to strengthen the supply level of public goods and improve the quality and efficiency of public services. Since the 1980s, China has embarked on the journey of introducing the PPP model, actively exploring and innovating in the continuous practice, and also emerging a number of more successful examples, but there are also some cases needed to be revisited. More importantly, in key infrastructure fields such as transportation, energy, and water conservancy, the PPP model is playing an indispensable role and becoming a key pathway for financing and construction. This model not only helps alleviate the financial burden on the government, but also significantly promotes the smooth implementation of large-scale projects.

   3. Chapter 8. Public-Private Partnership and Government Debt

      Weijie Luo

      Abstract

      This study analyzes how local governments use external financing instruments to adjust their capital structure. External financing instruments (public debt and public-private partnership [PPP]) have become critical options for most local governments to deal with budget constraints. We construct an indicator of the external financing ratio (EFR) to measure local governments’ dependency on external financing instruments. Based on the pecking order and trade-off capital structure theories, we utilize city-level panel data in China between 2015 and 2019 to investigate the financing strategies of local governments. We report two main findings. First, the financing strategies of China’s local governments follow the pecking order theory. In other words, internal financing has priority over debt and then PPP. Second, consistent with the trade-off theory, China’s local governments continuously adjust to a target EFR. In addition, compared with debt financing, the adjustment of PPP financing is relatively inelastic. Our study emphasizes the importance of public financial management reinforced by local governments to prevent fiscal risks in the context of intensified financial stress.

   4. Chapter 9. Public-Private Partnership Policy Uncertainty: Based on the Policiometrics

      Weijie Luo

      Abstract

      The uncertainty of infrastructure investment policy is a peculiar phenomenon in China, which is not conducive to the stable and sustainable development of the infrastructure investment market. However, there is no systematic analysis of this phenomenon in the literature. This article summarizes the 1337 central-level and infrastructure investment policy texts from 2014 to 2021, analyzes the inter-government relationship network behind the uncertainty of infrastructure investment policies by using Policiometrics methods, and constructs the infrastructure investment policy uncertainty index in China by text-mining. The study found that: first, the uncertainty of China’s infrastructure investment policy is characterized by irregular fluctuations, and is strongly related to the volatility of the infrastructure investment market; second, the cooperation network of the issuer of the infrastructure investment policy presents a “ternary center” pattern, which is still evolving in time trends. Coordination failure between departments is one of the internal causes of policy uncertainty. Finally, the uncertainty of infrastructure investment policy is affected by the external environment and is transmitted to the local government during the implementation process. Clarifying the formation mechanism of infrastructure investment policy uncertainty will help improve the inter-sectoral coordination mechanism in China and achieve effective governance of the infrastructure investment.

   5. Chapter 10. Public-Private Partnership Policy Uncertainty and Firm-Level Investment

      Weijie Luo

      Abstract

      This paper focuses on the subfield of Public-Private Partnership (PPP), and explores the relationship between policy uncertainty and firm-level investment. Based on the analysis of 905 central-level documents, one novel contribution of this paper is to construct an index of PPP policy uncertainty. We find evidence supporting that the gambling between central government departments is the main cause of policy uncertainty, which further leads to less investment by firms. Compared with other traditional indexes, the construction based upon policy text sheds light on risk management.

5. Further Consideration

   1. Frontmatter

   2. Chapter 11. Public-Private Partnership Policy Uncertainty: From the Perspective of Reverse Mixed-Ownership Reform

      Weijie Luo

      Abstract

      The investment decisions of private enterprises play an important role in mobilizing social capital activity and promoting economic development in emerging economies. The existing research literature mainly focuses on external environment, internal resources, and other aspects, and rarely explores the willingness of private enterprises to cooperate in investment from the perspective of policy uncertainty in the process of government and social capital cooperation. In addition, although some scholars have studied the policy uncertainty of the government, there has been little in-depth research on the policy uncertainty of PPP, no establishment of a central and prefecture level city text lexicon, and a lack of a complete measurement system and quantification process. Based on cutting-edge research literature and directions, this project intends to focus on exploring four issues. First, what is the connotation of PPP policy uncertainty? Second, how does policy uncertainty affect investment confidence and subsequent cooperative investment of private enterprises during the cooperation process? Third, does the environmental characteristics of the location of private enterprises have a moderating effect on incentivizing investment? Fourth, what are the spatial spillover effects of local policy uncertainty on investment decisions of private enterprises? These issues have clear leadership and pioneering significance in the fields of corporate behavior research and PPP research.

6. Backmatter