# **C2 The Impact of political connections on competition during the Suharto era**

One of the assumptions of the paper is that a higher degree of political connectedness during the Suharto era led to lower competition. To assess whether this assumption finds support in the data we regress competition indicators on the aggregate market share held by politically connected firms during the Suharto era, controlling for industry and year fixed effects, as well as time-varying industry controls including government and foreign ownership shares, imports and exports. The timespan of our data is fairly short, and changes in the market share of politically connected firms are partially driven by entry (recall that we only observe political connectedness in 1997). The results, which are presented in Table C2.1 below, do point towards higher market shares of connected firms being associated with less competition. According to our estimates a 10% increase in the market share of Suharto family firms, which is roughly one standard deviation, is associated with an increase in the Herfindahl index of 0.025 points (see column 5) and a decrease in the competition index of -0.48 (e.g. approximately 0.12 standard deviations, see column 9). Similarly a 10% increase in the market share of firms with broad connections is associated with an increase in the Herfindahl index of 0.039 points (column 4), a 2.7 percentage points increase in the market share of the 4 largest firms (column 15), and a 0.43 point decrease in the competition index (column 18).

**Table C2.1: Impact of political connectedness on competition during the Suharto era (1993-1996)**

||(1)<br>Entry|(2)<br>Exit|(3)<br>PCM|(4)<br>PE|(5)<br>HHI|(6)<br>MS4|(7)<br>lnN|(8)<br>lnP|(9)<br>Z|
|---|---|---|---|---|---|---|---|---|---|
|Panel A: Family C|onnections|||||||||
|PC family (MS)|-0.018|-0.097|0.186|-0.515|0.252**|0.197|0.126|-0.020|-4.795**|
||(0.082)|(0.068)|(0.292)|(1.875)|(0.116)|(0.123)|(0.212)|(0.095)|(2.118)|
|Observations|800|800|800|800|800|800|800|800|800|
|Industries|200|200|200|200|200|200|200|200|200|
|R-squared|0.065|0.102|0.072|0.055|0.110|0.082|0.401|0.672|0.173|
|Panel B: Broad co|nnections|||||||||
||(10)|(11)|(12)|(13)|(14)|(15)|(16)|(17)|(18)|
||Entry|Exit|PCM|PE|HHI|MS4|lnN|lnP|Z|
|PC broad (MS)|0.031|-0.021|0.090|0.502|0.392***|0.274***|-0.012|-0.057|-4.354**|
||(0.066)|(0.035)|(0.127)|(0.852)|(0.100)|(0.093)|(0.152)|(0.071)|(1.805)|
|Observations|800|800|800|800|800|800|800|800|800|
|Industries|200|200|200|200|200|200|200|200|200|
|R-squared|0.065|0.102|0.072|0.056|0.164|0.110|0.401|0.672|0.178|

_Note_ : PCM=price cost margin, PE=profit elasticity, HHI=Herfindahl Hirschman index, MS4=cumulative market share of 4 largest firms, lnN= natural log of the number of firms, lnP=natural log of price, Z is a summary competition index. The sample period spans 1993–96. All specifications include industry and year fixed effects, as well as imports, exports, the cumulative market shares of state-owned and foreignowned firms, entry regulation, dependence on external finance, and asset tangibility. Appendix A defines all the variables. Standard errors are clustered at the industry level and presented in parentheses. * indicates significance at the 10 percent level, ** - at the 5 percent level, and *** - at the 1 percent level.

56