The Effects of Business and Political Ties on Firm Performance: Evidence from China

Abstract

Despite increasing attention to the role of social ties in emerging economies, few studies have explicitly distinguished the differential roles of business versus political ties. Drawing on relational governance and institutional theories, this study offers a contingent view of business and political ties in China. The findings from a survey of 241 Chinese firms indicate that business ties have a stronger positive effect on performance than political ties, and both effects depend on institutional and market environments. Business ties are more beneficial when legal enforcement is inefficient and technology is changing rapidly, whereas political ties lead to greater performance when general government support is weak and technological turbulence is low. These findings indicate that firms operating in China should be cautious in their use of business and political ties and adapt their tie utilization to changing institutional and market environments.

Political connections and corporate diversification in emerging economies: Evidence from China

“…Managerial political connections represent a unique type of managerial resource in emerging economies (Li et al, 2008;Peng & Luo, 2000;Sheng et al, 2011;Wan et al, 2010). Particularly in those economies where the formal institutional framework has not been well developed, political connections play a more important role in facilitating economic exchange (Fan, Huang, Morck, & Yeung, 2009;Tsang, 1998).…”

“…We would expect, therefore, that political connections would be more important when the institutional support for firm growth is weak than when it is strong. Institutional support in the form of state ownership, or from regional institutional development, may nullify the need for political connections as part of business practices, because companies could obtain the necessary resources either through government support or through market mechanisms (Li & Zhang, 2007;Sheng et al, 2011;Wan, 2005). In situations of strong institutional support, political connections would become less important to firm growth and companies can rely on other resources such as functional experience to achieve company expansion.…”

“…In contrast, companies in regions with developed market intermediaries are more likely to acquire necessary inputs through the help of market intermediaries. Their political connections might lose their exclusive value for securing resources and thus will be less important for firm growth (Sheng et al, 2011). Therefore, given that political connections are more important in firm growth for companies in regions with underdeveloped free market mechanisms and intermediate institutions, we would expect that these connections are more likely to be the driving forces of corporate diversification in these regions.…”

“…Yet little is known about which managerial resources are specifically important-and how these resources are related to corporate diversification-in emerging economies where institutions are underdeveloped. While prior studies have demonstrated the importance of managerial political connections in emerging economies (Li, Poppo, & Zhou, 2008;Peng & Luo, 2000;Sheng, Zhou, & Li, 2011;Xin & Pearce, 1996), the major focus of this line of research has been their effects on firm performance rather than on corporate diversification. This narrow focus limits understanding of how political connections are related to firm growth, and is a significant research gap in the literature.…”

Leaders’ social ties, knowledge acquisition capability and firm competitive advantage

“…Consistent with prior studies on managers' social ties in China (Chen & Wu, 2011;Peng & Luo, 2000), we mainly focus on the two most important social relations: (1) business ties which refer to leaders' personal relationships with business organizations such as key suppliers, key customers, and key distributors, and (2) government ties which refer to leaders' personal relationships with national and local governmental authorities, commerce bureau authorities, and financial organizations (Chen & Wu, 2011;Peng & Luo, 2000;Sheng, Zhou, & Li, 2011). While both leaders' business ties and government ties help firms to obtain resources and facilitate information exchange through personal interactions (Sheng et al, 2011), they may bring different benefits and costs, which we will discuss in the following sections.…”