How do entrepreneurs’ diverse political ties affect firm performance? New insights from Chinese private firms

Abstract

ABSTRACT Existing studies provide mixed results concerning the impact of political connections on firm performance with both value-foster and value-destructive effects being observed. This paper addresses this ambiguity by conceptually distinguishing three types of entrepreneurs’ political ties – private, official, and business ties – and investigating whether entrepreneurs’ diverse political ties influence the performance of Chinese private firms differently. Using data from 12,735 Chinese private firms, our analysis reveals that official ties positively influence firm performance, whereas private ties have detrimental impacts. Business ties have no significant impact. The mechanisms reveal that firms with official ties benefit from improved access to loans from state-owned banks and land, and they also enjoy protection from unwanted government expropriation. The negative ramifications of private ties arise from their limited capability to secure scarce resources such as bank loans and land, coupled with additional levies. Furthermore, this study suggests that the impacts of these ties are moderated by a host of corporate, industrial, and institutional characteristics. These findings contribute to the literature by unpacking the heterogeneity of political ties, highlighting the need for entrepreneurs to be strategic in establishing diverse business-political relationships.