NBB Working Paper, 2024, 451: State-owned suppliers, political connections and performance of privately-held firms

While past decades were characterized by economic liberalization and deregulation, there re-mains an enduring presence of political influence over the private economy. Such influence can either benefit (e.g. government support addressed at survival and growth prospects) or harm (e.g. reduced efficiency and innovation) firms. This study investigates the impact of government ownership among suppliers on the behavior and performance of privately-held firms. We argue that this channel of government …

While past decades were characterized by economic liberalization and deregulation, there re-mains an enduring presence of political influence over the private economy. Such influence can either benefit (e.g. government support addressed at survival and growth prospects) or harm (e.g. reduced efficiency and innovation) firms. This study investigates the impact of government ownership among suppliers on the behavior and performance of privately-held firms. We argue that this channel of government influence on the private economy plays a prominent role, in addition to that of political connections (i.e. the direct presence of politicians on the boards of firms), a more established channel of political influence. Leveraging Belgian firm-level trans-action data, the research reveals that purchasing inputs from state suppliers is associated with lower firm profitability and productivity, along with higher leverage and employment. Notably, the relationship between state suppliers and performance persists even when controlling for the direct presence of politicians on the boards of firms. These findings underscore the influence of government support on firms’ behavior and financial performance and highlight the importance of considering both state suppliers and political connections when assessing the comprehensive impact of government influence on private enterprises