Governments typically set a wide range of goals. This is reasonable and expected: For a society to grow sustainably, social stability-related targets are just as critical as economic ones.

Faced with a broad array of objectives and limited hours in a day, government officials will prioritise projects that befit their career stage. This, in turn, may affect local firms more than they realise.

For instance, younger officials will pay more attention to hard KPIs that could lead to a promotion. Meanwhile, older ones will focus on softer targets that could bring them personal benefits after retirement or at least ensure a smooth transition when they leave office.

They may not be as interested in pushing large economic growth-enhancing projects whose results may come too late to help their career.

In our newly published article,Running out of steam? A political incentive perspective of FDI inflows in China (co-authored with Zhitao Zhu and Shuo Chen), we looked at foreign direct investments (FDI) inflows into 224 Chinese cities at the prefecture level, from 2003 to 2010. We showed that the political term, as a core feature of career advancement in state bureaucracy, influences newly appointed government officials’ efforts to attract FDI.

In Chinese bureaucracy, large-scale leadership turnover happens every five years, right on the heels of the Party’s National Congress.

Think of it as a window of opportunity for promotions, but with a few constraints.

  • First, the law often mandates how many terms an official can serve in one specific position.
  • Second, promotions are based on tournaments rewarding quantified economic objectives.
  • Third, depending on their rank, officials must retire by age 55, 60 or 65. Under these rigid career progression rules, the optimal strategy is to keep moving before reaching retirement age.

Goals may be set at the national level, but decisions are often made locally

A promotion creates momentum in the career of government officials. Past research showed that 86 percent of promotions are given to first-term leaders, while the likelihood of promotion decreases after the first term of office.

These odds are not lost on officials. In our study, we show that newly promoted officials – motivated by their fast-tracking potential – work harder to attract FDI inflows. Conversely, officials who remain at the same level for a second term are less inclined to achieve the state’s objectives, considering their reduced chances of success in the next round of competition.

We ruled out a vast array of alternative explanations for the differences we observed between the cities and provinces we studied. Our results remained robust to every control we applied, such as a region’s history of attracting FDIs, the leaders’ other personal characteristics and a host of other factors found to influence the location of FDIs.

Overall, first-term leaders were associated with a 19.1 percent increase in FDI inflows to their cities compared with sitting leaders. However, the closer the leaders were to retirement, the smaller the…

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INSEAD Knowledge is the expert opinion and management insights portal of INSEAD, The Business School for the World. Knowledge showcases the latest business thinking and views from award-winning faculty and global contributors

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