ABSTRACT
Although reform in China has eliminated many of the rents that characterized the Maoist economy and has created a market environment in which interfirm competition is likely to dissipate remaining rents, evidence of rent-seeking behavior in the form of local protectionism continues to surface.1 This chapter argues that even though firms continue to seek rents and local governments continue to interfere with the market in order to generate rents for local firms, reform has significantly altered the logic of rent-seeking. In the past, the correspondence between local firms and local governments was relatively straightforward. Local government often owned or had a controlling interest in local firms, thus giving them a direct financial interest in maximizing local firms’ profits. During the mid-1990s, however, mergers and acquisitions by firms seeking to expand into new markets rendered the correspondence between local governments and “local” firms more complex. Mergers and acquisitions allowed outsiders to jump over informal local trade barriers and “buy” into the political relationships that putatively wed local governments to local firms and hence to the ability of local governments to generate rents. In the process, the distinction between “outsiders” and “locals” obviously blurred. As multiple firms established themselves within specific market segments, the one-to-one correspondence between firms and governments also increasingly became a thing of the past.
