Political connection and business transformation in family firms: Evidence from China

Abstract

A B S T R A C TWe investigate the impact of family ownership on core business transformation and the moderating role of political connections in this relation through a Probit model, conditional Logit model, and Heckman selection model with instrumental variable using data from Chinese listed companies covering 2001-2010. The results demonstrate that, compared with non-family firms, family firms are more likely to transform their core business, enter strongly correlative industries and non-regulated industries, and adopt a mergers and acquisitions (M&A) mode. Furthermore, compared with politically non-connected family firms, family firms with political connections are more likely to conduct business transformation and adopt M&A rather than an internal cultivation mode to realize transformation. In addition, political connections make family firms more likely to enter weakly correlative industries and increase their chances of entering government-regulated industries.

Researching Entrepreneurship in Family Firms

“…Entrepreneurial entry, in the context of an existing firm, is generally known as corporate entrepreneurship (CE). CE involves three main activities: Corporate venturing is the creation of organizations within or outside the existing organizational domain (Marchisio et al ); S trategic renewal is organizational renewal involving major strategic and/or structural changes (e.g., Wang et al ); and Innovation is the introduction of something new to the market (e.g., Block et al ). …”

“…Corporate venturing is the creation of organizations within or outside the existing organizational domain (Marchisio et al 2010); Strategic renewal is organizational renewal involving major strategic and/or structural changes (e.g., Wang et al 2016); and Innovation is the introduction of something new to the market (e.g., Block et al 2013).…”

“…Only one empirical paper (Marchisio et al 2010) focused on corporate venturing and two (Salvato, Chirico, and Sharma 2010;Wang et al 2016) proposed an empirical investigation of strategic renewal. Innovation is definitely the most studied form of CE, with 34 papers: the paradox of family firms that they invest less in innovation yet outperform nonfamily businesses (e.g., Duran et al 2016), has attracted considerable scholarly attention.…”

A Recent Literature Review on Corporate Political Connections

“…In this review paper, it is also found some papers that empirically investigate the effect of corporate political connections on business strategy, innovation and R & D intensity. For instance, Wang et al (2016) study how family firms with political connections transform their business and adopt M & a strategy. Linking political connections and corporate innovation has also been studied by some papers not only in management field (Song et al, 2015) but also in corporate finance (Hou et al, 2017).…”

Political Connections and Corporate Financial Decision Making

“…In the search for a valid instrument we aim to find an exogenous variable that is economically correlated with the political connections variable but not with financial policies. In the spirit of earlier studies such as Ferris et al, (2016) and Wang et al (2016) the extent of political connections in the connected firm's industry (Indus_connection) is taken as a discerning instrumental variable for political connections. Specifically, it is defined as the number of connected firms in a given industry divided by the total number of firms in that industry.…”