Using Organization Structure to Buffer Political Ties in Emerging Markets: A Case Study

Abstract

We use and extend resource-dependence theory by analyzing how loosely-coupled organizational structures facilitate the management of political ties by business groups in emerging economies. This topic is particularly salient because business groups are a prevalent organizational form in these countries where they face both a high dependence on governments to secure key resources and a unique set of risks associated with political ties. We identify and analyze four buffering mechanisms that enable loosely-coupled business groups to protect themselves against the adverse effects of such ties. We ground and contextualize these mechanisms by relying on a longitudinal case study of the Salim Group -a very large and well-connected Indonesian business group under the Suharto regime. This study is particularly relevant in the context of the renewed interest in the study of firms' organizational structure.

Do Political Connections Buffer Firms from or Bind Firms to the Government? A Study of Corporate Charitable Donations of Chinese Firms

“…Even in the United States, political connections have been shown to help firms when they deal with regulators (Correia 2014, Yu andYu 2011). In emerging markets, such a buffering effect is seen as an effective mechanism to protect firms from government rent-seeking behavior (Chen et al 2011, Dieleman andBoddewyn 2012).…”

“…Even in the United States, political connections have been shown to help firms when they deal with regulators (Correia 2014, Yu andYu 2011). In emerging markets, such a buffering effect is seen as an effective mechanism to protect firms from government rent-seeking behavior (Chen et al 2011, Dieleman andBoddewyn 2012).In contrast, other studies consider these connections from the perspective of the government and emphasize the necessary costs of such linkages for the firm. From this perspective, political connections have a "binding" effect, i.e., they are a mechanism of co-optation, leading firms to be more likely to meet government's requirements McQuarrie 2008, Marquis andQian 2014), and correspondingly expose firms to government expropriation (Boubakri et al 2008, Caprio andCroci 2008).…”

How powerful political ties appropriate resources and how weaker organizations protect themselves: A case study from Indonesia

“…How appropriation by powerful partners happens in the context of politically connected organizations is not extensively addressed in the literature on political ties, although Dieleman and Boddewyn (2012) suggested that firms use organizational design to selectively open and close organizational boundaries to exclude co-opted political ties from internal processes and lessen the negative effects of political ties. However, till date there is little process-research that shows how boundary spanning becomes a contentious process with conflicting needs for more and less permeability that can be successfully exploited by political ties that seek to appropriate firm resources.…”

“…Later extensions of resource dependence have advanced our understanding of the dynamic nature of dependencies (Hillman et al, 2009;Xia, 2011) and the defense mechanisms that organizations can build to deal with appropriation concerns after the tie-formation stage (Inkpen & Currall, 2004;Kirsch, 1996). Research suggests that one way to deal with appropriation concerns is through careful management of organizational boundaries (Dieleman & Boddewyn, 2012;Katila et al, 2008).A crucial aspect of organizational boundaries is permeability, or the degree of organizational openness to the environment (Aldrich & Herker, 1977;Colignon, 1986;Oliver, 1993). Permeability is needed to share resources, for instance through boundary spanning activities or connections, but it also has negative effects (Lin & Si, 2010;Young, Peng, Ahlstrom, & Bruton, 2003).…”

“…For instance, Sun et al (2016) detailed how substantial shareholders colluded with political ties to expropriate minority shareholders, but they focus mostly on well-established publicly listed companies. Dieleman and Boddewyn (2012) investigated how large business groups buffer political ties as a defense mechanism, and argue that companies must carefully employ what they call boundary management strategies to prevent appropriation, but they limit their contribution to organizational design. Overall, insights on how powerful political partners go about appropriating resources are still limited, especially in new ventures.…”