CEO’s Industry Experience and Firm Performance: The Effects of Corruption and Political Uncertainty

Abstract

We examine how CEO’s industry-specific experience influences firm performance in emerging markets. Drawing from upper echelons theory and a learning perspective, we argue that as CEOs accumulate industry-specific experience, they increase their understanding of the environmental dynamics within emerging markets, strengthen intra-industry connections to key suppliers, creditors, regulators, and influential resource networks that helps firms acquire and maintain access to critical resources. As such, firm performance should increase as its CEO gains industry knowledge. However, we also argue that as CEOs acquire industry-specific experience, they develop commitment to industry practices and the value of older knowledge gained from their early years in the industry decreases, hurting firm performance. Therefore, we posit that an inverted U-shaped relationship exists between CEOs’ industry-specific experience and firm performance. We also examine the effect of two important moderators in the context of emerging markets: corruption and political instability. We argue that the increased environmental uncertainty and complexity caused by corruption or political instability accelerate CEO learning effects making for greater performance gains and steeper performance declines with increasing CEO industry experience. We test our hypotheses using data from the World Bank’s Enterprise Survey of firms in emerging economies from 2006 to 2019 covering 143 countries. The results largely support our hypotheses. We conclude by discussing the implications of this research for CEO learning, CEO experience, and firms in lesser-developed institutional environments.