Proximity to Political Power, Government Subsidies, and Investment Efficiency: Evidence From China*

Abstract This paper investigates the relationship between guanxi ‐based (relation‐based) proximity to political power ( GUPPP ), government subsidies, and investment efficiency within the context of China. Employing a sample of Chinese listed firms from 2007 to 2019, we find that firms in provinces with high GUPPP receive more government subsidies, particularly non‐tax subsidies, compared to those in provinces with low GUPPP . Moreover, we find that the association between GUPPP and government subsidies is more pronounced for firms that have local political connections. We further find that subsidies improve the investment efficiency of under‐invested firms but exacerbate the investment inefficiency of over‐invested firms. Our results suggest that effective political connections encompass both central–province and province–firm relationships, at least within the context of our study on subsidies.