Do political connections make businesspeople richer? Evidence from Russia, 2003–2010

Abstract

Extensive literature shows that businesspeople thrive on political connections. Most research, however, does not differentiate between types of political connection, thus effectively assuming that economic return on being connected should not differ systematically between federal and regional, legislative and executive, formal and informal connections. We collect a unique comprehensive dataset on Russia’s richest businesspeople in 2003–2010 and demonstrate that only certain types of connections work, depending on the political context. Our analysis shows that as Russian politics became centralized and the federal executive more powerful during the 2000s, businesspeople with informal connections to the federal executive increased their fortunes much faster compared with everyone else—including those with any other type of connections. Businesspeople’s wealth thus dynamically reflected these important political changes. This suggests a procedure for inferring nominally unobservable changes in the political system from politically connected businesspeople’s fortunes, while also shedding additional light on the institutional origins of informality in Russian politics today.

Behind the Political Connections Under Emerging Democracies

“…However, the effect of direct connections depends on the power of connected politicians. In contrast, firms can build political connections through indirect mechanisms such as joining politically active informal networks that include multiple politicians, which move beyond dyadic relationships (Grigoriev & Zhirkov, 2020; Wahab et al, 2020). Relying on informal networking with multiple candidates, firms can obtain a robust advantage when political power shifts.…”

“…We find that in an emerging democracy, indirect political connections are a source of sustainable competitive advantage. Such connections can be found in different countries regardless of different political systems, such as Russia (Grigoriev & Zhirkov, 2020), Malaysia (Wahab et al, 2020), China (Yan & Chang, 2018), Korea (Horak, 2014; Siegel, 2007), and Denmark (Amore & Bennedsen, 2013). This study suggests building strong political connections through informal networks is possible in different systems and countries.…”

“…Because different sources of political power stem from different network relationships, it is important to consider how and to whom connections are made and thus to distinguish variations in political connections (Tihanyi et al, 2019). Recent studies distinguish direct political connections, which take the form of ownership or representation on boards, and indirect political connections, which are made through informal networks (Bianchi & Viana, 2014; Grigoriev & Zhirkov, 2020; Tihanyi et al, 2019; Yan & Chang, 2018). As different connections differ in their political path dependence, power-dependent relationships, and different sources of power, they may have different effects on firm performance (Vasudeva et al, 2013; Wahab, Jamaludin, Agustia, & Harymawan, 2020).…”

“…Political connections such as personal service (Hillman et al, 1999), a large shareholder or top manager being a member of parliament or a minister (Faccio, 2006), and appointing a politician on board (Hillman, 2005; Khwaja & Mian, 2005) are direct mechanisms for connecting firms to formal political power through ownership or representation on boards (Grigoriev & Zhirkov, 2020; Wahab et al, 2020). In contrast, being closely related to politicians through friends or relatives, or membership in informal networks are where firms using indirect mechanism through which firms can form politically active informal networks with multiple politicians (Grigoriev & Zhirkov, 2020; Wahab et al, 2020; Westphal et al, 2006). The nature of democratic systems enables firms to use informal networks to exchange financial support and vote promises with politicians in return for policies, public goods, and government contracts on the political market (Bonardi, 2011).…”

“…Such informality prevails in political and social life in most former Soviet countries (Ibraeva & Nezhina, 2013). Informal business-political networks can be found in different countries regardless of different political systems, such as Russia (Grigoriev & Zhirkov, 2020), Malaysia (Wahab et al, 2020), China (Yan & Chang, 2018), Korea (Horak, 2014; Siegel, 2007), and Denmark (Amore & Bennedsen, 2013). Third, populist tendencies in political life emerged in Mongolia due to rich natural resources, and most political parties make populist promises during the elections.…”