Do political connections matter for firm innovation? Evidence from emerging markets in Central Asia and Eastern Europe

Abstract

We posit that the investments in political connections made by a firm in an emerging market will impact differently its propensity to introduce radical and incremental innovations. In addition, we argue that this effect will be moderated by alternate non-market firm strategies, such as bribery. Using a dataset of more than 9000 firms in 30 emerging economies from Eastern Europe and Central Asia we find that political connections increase the probability of radical innovation but have no significant impact on incremental innovation. Moreover, larger bribing reduces the positive impact of political connections on radical innovation. Our results confirm the importance of political connections for firm activities, but also caution firms on their heterogeneous impact on various types of innovations, and their detrimental interplay with other non-market strategies.