Cleaning house before hosting new guests: A political path dependence model of political connection adaptation in the aftermath of anticorruption shocks

Abstract

Research Summary We develop a political path dependence model that integrates the network embeddedness perspective and the literature on corporate political strategy to understand how firms adapt their political connections when anticorruption efforts lead to the turnover of government officials. We posit that although firms that have close associations with ousted corrupt officials can benefit from both removing existing political connections (“cleaning house”) and developing new connections with their successors (“hosting new guests”), political path dependence enables firms to do the former but constrains them from doing the latter. These effects are magnified when firms are highly dependent on the government, and when the ousted corrupt officials have great political power. Evidence from anticorruption campaigns in China between 2012 and 2018 lends support for our theoretical predictions. Managerial Summary It is common for firms to strive to stay connected with government officials. Of interest is, when political power shifts, can firms “update” their connections by severing ties with politicians who fall out of power and building new ones? Our political path dependent model demonstrates that it may not be a symmetric process. After the downfall and replacements of public officials due to corruption indictments, firms that are more closely associated with ousted, corrupt officials will indeed be more motivated and able to remove existing connections. However, the successors of ousted officials will more likely distance themselves from these firms, thereby undermining the firms' abilities to build new connections with them. Empirical evidence from anticorruption campaigns in China between 2012 and 2018 supports our predictions.

Effects of political networking capability and strategic capability on exploratory and exploitative innovation: evidence from traditional manufacturing firms in China

“…However, during past two decades, many sovereign governments have started anticorruption shocks, which renders many corrupt officials have been removed from office in disgrace and even been sent to prisons. These shocks compel firms to abruptly sever their existing political ties with the ousted corrupt officials and building new ties with their successors (Jiang et al. , 2021).…”

“…Our sample was collected from TMFs in China, thus our model may not hold in contexts other than China. Whereas China presents an appropriate setting to examine our arguments, as discussed earlier, we acknowledge that Chinese government is stronger in directing firms' innovation activities, as well as the degree of closeness in business–government ties is stronger in China than other economies (Jiang et al. , 2021).…”

Behind the Political Connections Under Emerging Democracies

“…Studies examining direct connections suggest that political connections that are valuable at one point in time can become a handicap later (Jiang et al, 2021; Sun et al, 2010). This is the main weakness of direct political connections because their source of power comes directly from de jure political power in a dyadic relationship.…”

“…Furthermore, the market value of firms connected to Malaysia's Deputy Prime Minister Anwar Ibrahim dropped significantly after he lost his position, whereas firms connected to Prime Minister Mahathir gained USD 5 billion in market value (Johnson & Mitton, 2003). In sum, when regimes change, firms connected to former politicians lack relationships with incumbents and thus underperform (Jiang, Jia, Bai, & Bruton, 2021; Siegel, 2007).…”

Busting the ‘Princeling’? Demystifying the Effect of Corporate Depoliticization on Green Innovation: The Moderating Effect of Politician Turnover

“…However, few studies have examined the depoliticization of firms (i.e., the loss of political connections). In fact, corrupt politicians have been removed from government and, thus, have fallen out of power in disgrace during China's anticorruption campaign [22,23]. China's anticorruption activities have enacted various provisions, which have subjected firms to depoliticization since 2012.…”