When Does Investment in Political Ties Improve Firm Performance? The Contingent Effect of Innovation Activities

Prior research on firm behavior in emerging economies like China has highlighted the extensive building and use of political ties by business managers. However, there are mixed findings regarding the value of political ties on firm performance. In this study, we propose a task-contingency approach to explain when the investment in political ties will improve performance and when they will not. In particular, we study how the value of investing managerial time to cultivate political ties with local government officials may vary when firms engage in different types of technological innovation activities. We hypothesize that when a firm pursues exploratory innovation involving high institutional uncertainty, such time investment will improve firm performance. In contrast, when a firm undertakes exploitative innovation that involves low institutional uncertainty but requires high internal operational improvement such as marketing and sales, such time investment in political ties would distract managers' attention from internal improvement, and hence may harm firm performance. Results based on a World Bank survey of 1,500 Chinese manufacturing firms confirm these hypotheses. Our findings offer fresh insights on how firm managers in emerging economies should manage their institutional environment when pursuing innovation activities