Political Strategy and Performance Tradeoffs for SMEs in an Emerging Economy

Abstract

We examine how unique features of institutional transition shape the adoption and performance implications of political strategy by small and medium-sized enterprises (SMEs). We focus on three inherent tradeoffs – hazardous versus developmental governmental actions, developing business networks versus relying on personal ties, and legitimacy building versus favoritism. To pursue opportunities during institutional transition, SMEs need to adopt an ambidextrous political strategy, where they engage in both compliance and influence. Yet, SMEs that have a larger size, need to rely less on personal ties, or can benefit from developmental government actions enjoy even higher performance. Empirical analysis of 310 SMEs from China confirms these expectations. These findings have important implications to political strategy by SMEs, the institution-based view of business strategy, and emerging economy SMEs.