The Art of Adversity Thinking: Political Turnover and Firm Innovation

Abstract

By integrating the political strategy literature and research on innovation, this article develops a theoretical framework and empirically tests how and why political turnover affects firm innovation. Drawing on the attention-based view, we argue that firms also use innovation as an attention-catching strategy to seek opportunities in uncertain environments. Furthermore, we highlight how the uncertainty rooted in political turnover varies by identifying two contingent values: 1) politicians’ career concerns and 2) firms’ political hierarchy. Using a longitudinal data set of industrial enterprises in the context of China, we find that there is a significant positive relationship between the replacement of government leaders at prefectural city level and firm innovation. Moreover, this positive relationship is strengthened when new government leaders are promoted locally, but is less salient if the politicians are at an early stage of their career or firms are affiliated with higher hierarchies. Our research expands the literature on uncertainty by highlighting the role of political agents, contributes to the theory of the attention-based view by treating attention from key external stakeholders as a key resource, and advances the understanding of how firms strategically respond to political shocks in China.