Abstract
Corporate political connections (CPCs)—ties that firms forge with political actors—directly affect firms, political actors, and various stakeholders in societies. This topic has been studied extensively in multiple disciplines, including management, economics and finance, political science, and sociology. However, this body of research remains rather fragmented within the confines of each discipline or field, and synergies in theoretical and empirical domains remain underexploited. Differences between CPCs and other forms of corporate political activities are also often unclear. This article develops a focused, comprehensive, and theoretically deep review of the rapidly growing but disparate literature on CPCs in multiple disciplines and fields and distinguishes, compares, and connects multiple, heterogeneous theoretical perspectives that have been adopted in these different literatures. By conducting an extensive literature search of the articles published between 1990 and 2020 in 24 leading peer-reviewed journals in management, economics and finance, political science, and sociology, we build our review framework by organizing the reviewed articles into three groups of topics based on their logical connections: the conceptualization of CPCs, the antecedents of CPCs, and the outcomes of CPCs. Within each group, we distinguish two primary angles—the firm and the political actor—that correspond to the two entities joined by CPCs. On the basis of this framework, we identify major gaps and suggest avenues for future research. Our review works together with a companion review on corporate political activity, published in this same issue, to offer a wholistic perspective on the boundary between corporations and political actors.
The term corporate political connections (CPCs) refer to the relationships developed between firms and political actors (Faccio, 2006, 2010). CPCs have become a prominent research topic in management as they significantly affect firm value through various channels (see, e.g., Tihanyi, Aguilera, Heugens, Van Essen, Sauerwald, Duran, & Turturea, 2019). Building CPCs has thus become an important aspect of firm strategy (Hillman & Hitt, 1999; Jia & Mayer, 2017), especially when it comes to dealing with market regulation (Holburn & Vanden Bergh, 2014), international expansion (L. Chen, Li, & Fan, 2018), product innovation (Krammer, 2019), or even corporate social responsibility (CSR; P. Zhou, Arndt, Jiang, & Dai, 2020). This topic has also attracted increased attention from policy makers and civil society due to growing concerns over societal issues such as corruption (Enikolopov, Petrova, & Sonin, 2018; Rose-Ackerman & Palifka, 2016), inequality (Zingales, 2017), and regulatory capture (Bonardi, Holburn, & Vanden Bergh, 2006).
The burgeoning research on CPCs in multiple disciplines and fields creates numerous opportunities and challenges, however. First, different theoretical perspectives and empirical approaches in a variety of disciplines and fields generate diverse views on CPC. A better understanding of the convergence and divergence across disciplines informs and enriches the insights that each discipline, including the management field, can develop on its own. Although scholars from different theoretical perspectives have started to heed one another's work (e.g., Pearce, Dibble, & Klein, 2009; Truex, 2014), the current state of this body of research remains rather fragmented within the confines of each discipline or field; as a result, synergies in theoretical and empirical domains remain underexploited. Second, in the growing body of research in management that commonly considers CPCs as generative of favorable firm outcomes, many key theoretical processes—including whether and how CPCs function and the connotations of CPCs—are underdeveloped. For example, multiple gaping holes exist in the chain of logic, including why connected policy makers should agree to grant favors, what constrains the capacity of these policy makers to do so, who in the firm owns and uses CPCs, and how CPC owners split the value created by CPCs with the firm; all of these critically shape how firms develop and use CPCs. Finally, recent review papers either have allocated limited attention to CPCs in an effort to survey a much broader set of nonmarket strategies (Dorobantu, Kaul, & Zelner, 2017; Hillman, Keim, & Schuler, 2004; Mellahi, Frynas, Sun, & Siegel, 2016; Sun, Doh, Rajwani, & Siegel, 2021) or have examined CPCs in narrower contexts of application, such as international business (Cui, Hu, Li, & Meyer, 2018), emerging economies (Sun, 2019), or industry regulation (Carboni, 2017). Lux, Crook, and Woehr's (2011) meta-analysis synthesizes findings from a decade ago with less focus on theory examination, and R. Gao, Sun, Grosman, and Okhmatovskiy (2021) conducted a recent review but within a narrower discipline.
It should be noted the common misperception that equates CPCs with other corporate political activities (CPAs), in particular, campaign contributions (e.g., Claessens, Feijen, & Laeven, 2008; Cooper, Gulen, & Ovtchinnikov, 2010) and lobbying (e.g., Fidrmuc, Roosenboom, & Zhang, 2018; Lambert, 2019).1 While lobbying and campaign contributions may be correlated with CPCs (e.g., helping to build them), these political activities are neither necessary nor sufficient conditions for CPCs. Campaign contributions are easier to distinguish from CPCs, as they imply a well-identified financial investment. While some research uses campaign contributions to proxy for CPCs (Claessens et al., 2008), others point out that campaign contributions only provide access to politicians to provide an opportunity for firms to engage in further influencing activities (Boas, Hidalgo, & Richardson, 2014).
Lobbying might be less obvious (Yu & Yu, 2011). Lobbying and CPCs certainly have common features as both involve information provision and connections (Bertrand, Bombardini, & Trebbi, 2014). However, there are good reasons to differentiate them and to devote a specific literature review to CPCs. First, CPCs typically constitute a stronger and longer commitment than lobbying. Hillman (2005: 469), for instance, suggests that “unlike more ‘transactional’ lobbying where a firm engages in an episodic exchange of information with a political decision maker, appointing a director to the board is a long-term commitment.” Lobbying may help build CPCs (Unsal, Hassan, & Zirek, 2016) but not necessarily equate to CPCs. In fact, in their recent review of the political strategy literature, Katic and Hillman (2022) classify lobbying and CPCs in two different quadrants of their typology: Lobbying is presented as a formal tactic with direct connections with policy makers, whereas CPCs are among informal and direct tactics. Second, research on political knowledge within firms suggests in fact that this political knowledge is of different kinds and that lobbying and CPCs differ on that account: Lobbying typically constitutes generic political knowledge, while CPCs include richer firm-specific political knowledge (Bonardi & Vanden Bergh, 2015). As external lobbyists’ services can be hired (Jia, 2018), their content and value are much better defined than the daily work of former politicians appointed as top managers or board members. Third, if we place CPCs in the context of a social network (Bian, 2006) or political exchange relationships (Bonardi, Hillman, & Keim, 2005), many activities dictated by CPCs occur not because firms actively seek to engage in them (as they do in lobbying) but because of firms’ response to a broader demand for reciprocity. From that point of view, there may be little relationship between CPCs and lobbying. The links between the two must therefore be clarified, particularly if researchers want to better understand the articulation between them (Blau, Brough, & Thomas, 2013).2
For all these reasons, it is thus time for a focused, comprehensive, and theoretically deep review of the rapidly growing but disparate literature on CPCs in multiple disciplines and fields in recent years. Such an up-to-date review is necessary to distinguish, compare, and connect multiple, heterogeneous theoretical perspectives that have been adopted in the literature and to address theoretical gaps, including those stated already. By conducting an extensive literature search in 24 leading peer-reviewed journals in management, economics and finance, political science, and sociology, we have identified a total of 269 articles and coded each article's theoretical perspectives, main hypotheses, data sources, measurements, analytical methods, and key findings. We build our review framework by organizing these articles into three groups—the conceptualization, antecedents, and outcomes of CPCs—and discuss each group from both the firm and political actor angles. To complement our theoretical discussion, we also provide a discussion of common methodological approaches to CPCs (i.e., operationalization of CPCs).
Having synthesized the rich content of the prior CPC literature from multiple disciplines, we highlight directions for future research in each group of our review framework. For the nature of CPCs, there is a need to strengthen the theoretical links with other internal characteristics of firms and deepen existing empirical analyses on how the links work. For the antecedents, the heightened focus on complex CPCs’ performance outcomes call for more understanding on the motivation of connected political actors and firms’ top executives. For the outcomes, we list a few emerging key strategic outcomes of CPCs to be considered, such as firm innovation, and the conditioning factors of CPC effect, including the private politics, economic development, and institutional environments.
Our article contributes to the CPC literature in three ways. First, we provide a comprehensive review of research on CPCs published in top-tier journals of multiple disciplines over 30 years. Compared with previous reviews that included CPCs, this review is focused on CPCs (and thus offers more in-depth discussion) and features a multidisciplinary view of the topic. Second, we organize our review both by a topic-oriented framework and by categorization of theoretical perspectives. The framework enables us to develop a holistic view of critical components of CPCs, and the categorization allows us to contrast, compare, and connect different theoretical approaches. Finally, we identify major gaps in the management literature on CPCs, on which we base suggestions for future research. Our review works together with a companion review on CPA, published in this same issue, to offer a wholistic perspective on the boundary between corporations and political actors.
Review Method and Framework
We followed several key steps to conduct this review. The scope of our review includes 24 top-tier journals in management, economics and finance, political science, and sociology. We conducted a keyword search to identify relevant articles from 1990 to 2020 in the ProQuest database and extract them (our detailed literature search criteria are reported in Appendix A). We find a total of 269 articles that focus on CPCs as a key variable of interest. Management contributes the largest number of articles (133) on this topic, followed by economics and finance (95), political science (32), and sociology (9).
We organize our reviewed articles into three groups of topics based on their logic connections: the conceptualization of CPCs, the antecedents of CPCs, and the outcomes of CPCs. Within each group of topics, we distinguish two primary angles, which draw from different disciplines to examine CPCs. The first, which we label the “firm angle,” focuses on firms’ behaviors related to building and maintaining CPCs. The second, which we label the “political actor angle,” focuses on the behaviors of political actors when interacting with connected firms. The two angles, which have largely evolved separately in different fields, correspond to the two entities joined by CPCs and have also been identified in the literature as the demand and supply sides of the political market, respectively (Bonardi et al., 2005). Moreover, we highlight the articles about the conditions at the firm, industry, and institution levels that shape antecedents and outcomes of CPCs from the firm angle. Our framework is illustrated by Figure 1.
Mapping Research on Corporate Political Connections
Conceptualization of CPCs
CPCs have commonly been referred to as “political connections” (e.g., Fisman, 2001), “political ties” (e.g., H. Li & Atuahene-Gima, 2001; Zheng, Singh, & Mitchell, 2015), or “political embeddedness” (e.g., Haveman, Jia, Shi, & Wang, 2017; Zheng, Ni, & Crilly, 2019). These terms all refer to the relationships or ties between firms and political actors. In this section, by providing a brief overview of the key features of each side—of firms and political actors and of the connections between them—we illustrate the conceptualization of CPCs in the literature.
Basic Components: Firms and Political Actors
Research in management, economics, and finance has examined which individuals in those firms that build CPCs are in charge of or engaged in this task. Most studies have focused on the people at a firm's upper echelons, such as top executives and the board of directors (e.g., Hillman, 2005; Johnson & Mitton, 2003), whereas some explore the role of middle managers (Guo, Huy, & Xiao, 2017). Prior research has also noted activity in CPC development among firms that differ in ownership type, stock market status, and geographic focus. These include (a) ownership types: privately owned firms (e.g., Jia & Mayer, 2017) and state-owned enterprises (SOEs) (Inoue, 2020); (b) stock market status: publicly traded firms (Chizema, Liu, Lu, & Gao, 2015; Faccio, Masulis, & McConnell, 2006) and privately held firms (e.g., Jia, 2014); and (c) geographic focus: multinational firms (e.g., Darendeli & Hill, 2016) and domestic firms (e.g., H. Li & Zhang, 2007).
Typical political actors who participate in CPCs include politicians and bureaucrats who may occupy different positions in different political systems. In typical democratic regimes with separation of powers, studies have found political actors to include former or current legislators (i.e., members of Parliament or Congress), heads of state, ministers, directors of government agencies, election candidates, or members of the judicial system (e.g., Boubakri, Cosset, & Saffar, 2008; Boubakri, Mansi, & Saffar, 2013; Faccio, 2006; Faccio et al., 2006; Goldman, Rocholl, & So, 2009; Lester, Hillman, Zardkoohi, & Cannella, 2008; Unsal, Hassan, & Zirek, 2017). Members of the ruling and opposition parties have also been considered (e.g., Zhu & Chung, 2014). In authoritarian regimes, studies have examined former and current cadres and bureaucrats in governments (Q. Liu, Luo, & Tian, 2016; Q. Liu, Tang, & Tian, 2013), legislative authorities (e.g., Truex, 2014), judicial systems (Michelson, 2007), and members of the ruling party (e.g., Ferguson & Voth, 2008) or of party-affiliated organizations (e.g., Jia, 2014). Sometimes the term “political actors” refers to state apparatuses as a whole, such as governments (e.g., Bonardi, 2004; C. Chen, Li, Su, & Sun, 2011). The goals and incentives of political actors are conceptualized in different forms in different streams of literature, which we discuss in the next section.
Common Forms of CPCs
We examine several dimensions that are critical to understanding the concept of CPCs, including its common forms, key features (strengths, duration, and portfolios), and its distinction from other concepts of CPAs.
The existing CPC literature has developed various conceptual forms and associated empirical measures that can be broadly classified into two categories, relationship-based CPCs and equity-based CPCs (Cui et al., 2018; Hillman & Hitt, 1999).
Relationship-Based CPCs
This type of CPC generally refers to interpersonal or individual–organization connections between firms and political actors as a bridge facilitating the flow of resources. This is also the dominant type of CPC addressed in existing research. Relationship-based CPCs can be developed in several ways. At the individual–organization level, one method is through the employment of politicians by firms. Politicians who formerly or currently work in regulatory, legislative, or other political authorities develop personal ties with their colleagues; this allows firms to leverage the personal ties of former and current politicians as well as their knowledge of governments. They do so by appointing politicians to leadership roles, including to the board of directors or senior management (e.g., Calomiris, Fisman, & Wang, 2010; Duchin & Sosyura, 2012; Faccio, 2006; Fan, Wong, & Zhang, 2007; Hillman, 2005), or by recruiting them as professionals with the specific task of assisting firms with lobbying (Bertrand et al., 2014; Byun, Frake, & Agarwal, 2018; Byun, Raffiee, & Ganco, 2019). Sometimes, the employment of connected politicians’ family members may constitute CPCs as well (e.g., Gagliarducci & Manacorda, 2020; H. Li, Meng, Shi, & Wu, 2012).
Alternatively, to build CPCs for their firms, business leaders can choose to enter politics and run for public offices (e.g., Faccio, 2006; Szakonyi, 2018), to become political appointees (e.g., Hillman, Zardkoohi, & Bierman, 1999; Yan & Chang, 2018), or to serve as delegates of key political or quasipolitical entities (Jia, 2014; J. Zhang, Marquis, & Qiao, 2016; Zheng et al., 2019).
At the interpersonal level, relationship-based CPCs can be developed based on commonly shared social foci between individuals in firms and connected politicians. Such common social foci include shared locations (e.g., election districts) (Duchin & Sosyura, 2012; Faccio & Parsley, 2009; C. Kim, Pantzalis, & Park, 2012), kinship (e.g., Amore & Bennedsen, 2013; T. Chen & Kung, 2019; Y. Peng, 2004), marriage (Chung, Lee, & Zhu, 2021; Jeong & Siegel, 2018), friendship (Faccio, 2006), alumni or workplace networks (Acemoglu, Johnson, Kermani, Kwak, & Mitton, 2016; Brown & Huang, 2020; Schoenherr, 2019), or the political party affiliation of the firm's top executives (e.g., Faccio, 2006; H. Li, Meng, Wang, & Zhou, 2008). Other research holds that shared race, gender, tastes, and experiences are more likely to contribute to relationship-based CPCs (Hoang, 2018).
Measures of relationship-based CPCs focus primarily on individuals at the upper echelon level. These measures are traditionally operationalized either as a dummy variable to indicate if any executive or board director formerly or currently holds a position in government, legislative authorities, or the military (e.g., Cao, Lemmon, Pan, Qian, & Tian, 2019; D. Wang & Luo, 2019; H. Wang & Qian, 2011) or as a count or percentage of top executives with political connections among all business leaders of the firm (e.g., Schuler, Shi, Hoskisson, & Chen, 2017). As we discussed before, methodologically, some studies use firms’ campaign contributions to political candidates or parties (e.g., Butler, Fauver, & Mortal, 2009; Claessens et al., 2008; Cooper et al., 2010; Duchin & Sosyura, 2012) or lobbying (e.g., Lambert, 2019; Yu & Yu, 2011) to measure CPCs, usually based on the amount firms contribute to certain political candidates (Claessens et al., 2008) or on lobbying expenditures (Fidrmuc et al., 2018; Lambert, 2019).
Equity-Based CPCs
Equity-based CPCs refers to the connections established between firms and the state through state ownership in the firm (e.g., Chauvet & Ehrhart, 2018; Cui & Jiang, 2012; G. Gao, Wang, & Che, 2018) or to the share of a firm's ownership held by politicians (Faccio, 2006; Faccio et al., 2006; Tahoun, 2014). They are commonly measured by the percentage of firms’ equity ownership held by governments (Cui & Jiang, 2012; J. Zhang, Jiang, Wu, & Li, 2019) or by the connected politicians (e.g., Faccio et al., 2006). Doing business together with connected politicians’ family members, such as the creation of a joint venture, is an alternative form of equity-based CPCs (e.g., Darendeli & Hill, 2016).
There exists a vast literature on state ownerships in firms, and we highlight only a few points that are most pertinent to CPCs. When the state acts as an influential shareholder in a firm, it both provides the firm with state-controlled resources and interferes with the firm's operations by imposing its objectives, such as job creation, on the firm (e.g., Inoue, 2020). To examine the state's role, researchers have applied various theories—including that of political economy (Jia, Zhao, Zheng, & Lu, 2022), the corporate governance view of principal–principal conflict between the controlling and minority shareholders in reformed SOEs (J. Li & Qian, 2013), and the agency theory—to understand how state ownership control affects managerial opportunism and agency costs (Liang, Ren, & Sun, 2015).
Key Features of CPCs
Studies have also examined key features—including strength, duration, and portfolios—that characterize CPCs.
Strength
Strength is an important dimension of CPCs. Studies often suggest that stronger CPCs contribute to greater firm value. The strength of CPCs has been found to be related to the resources devoted by firms (e.g., Claessens et al., 2008; Xin & Pearce, 1996) and political actors (Tahoun, 2014) to the relationship, the political power of connected politicians (Tahoun, 2014), the closeness of the relationship (e.g., Boubakri, Guedhami, Mishra, & Saffar, 2012; Faccio, 2006; Leuz & Oberholzer-Gee, 2006), and the stage of investment in CPC building (Hoang, 2018). Thus, CPCs tend to be stronger if more resources are devoted to them, if more powerful politicians are connected, if the relationships are close, and if CPCs are built earlier. Firms’ stakeholders outside the relationship (e.g., media, social organizations) may also affect the strength of CPCs. Oppositional stakeholders may strengthen firms’ connections with political actors for uncertainty alleviation (Sutton, Devine, Lamont, & Holmes, 2021).
The strength of CPCs has been measured in different ways. First, some studies use surveys and construct a scale of CPC strength using a set of questions about resources such as the money, time, and effort devoted to cultivating and maintaining good relationships with officials in various government departments (H. Li & Zhang, 2007; Luo, 2001; Xin & Pearce, 1996). Some research focuses on the time span of CPCs (Arifin, Hasan, & Kabir, 2020; Macher & Mayo, 2015), and others count the number of individuals with personal political ties (e.g., Jiang, Jia, Bai, & Bruton, 2021; Ridge, Ingram, & Hill, 2017) as the measure of the strength. When CPCs are proxied by firms’ political contributions, a higher percentage of a firm's political contribution compared with the total contributions received by a candidate indicates strong CPCs (Claessens et al., 2008; Cooper et al., 2010). Third, CPCs are deemed strong when the relationship of a firm's executive or shareholder to a politician (or their family) is close (e.g., friends) (Boubakri et al., 2012; Faccio, 2006; Leuz & Oberholzer-Gee, 2006). Finally, the strength of equity-based CPCs is evaluated by the weight of firms’ share ownership held by connected political actors (Tahoun, 2014; J. Zhang et al., 2019).
Duration
The duration of CPCs is another key characteristic. In general, research suggests that the duration of CPCs hinges on the tenure of connected politicians (e.g., Bertrand et al., 2014). Bertrand et al. (2014) show that lobbyists follow legislators to whom they were initially connected, as long as those legislators remain on powerful committees. Studies have shown that the turnover of politicians can trigger the loss of CPCs and associated benefits (Piotroski & Zhang, 2014; Strickland, 2020), and thus the removal of firms’ active political ties once they become obsolete (Jiang et al., 2021). Studies also show that firms’ existing CPCs can be disrupted by the turnover of a political regime in which a rival regime comes to power through elections, a coup, or a revolution (Bucheli & Salvaj, 2018; Darendeli & Hill, 2016; Leuz & Oberholzer-Gee, 2006; Siegel, 2007) or by alteration of the power structure of the sitting political regime (Ang, 2020; Sun, Mellahi, & Thun, 2010).
Portfolios
Scholars have also considered the portfolios of CPCs and shown that firms can develop political connections via both personal and organizational linkages (J. Li, Meyer, Zhang, & Ding, 2018; Sun, Mellahi, Wright, & Xu, 2015). Firms can own connections to political actors in local and central governments (e.g., Yan & Chang, 2018; Zheng et al., 2015), in focal and rival governments (Yan & Chang, 2018), in ruling and opposition parties (e.g., Zhu & Chung, 2014), in winning and losing political camps (e.g., Akey, 2015), in administrative and legislative branches (Zheng, Singh, & Chung, 2017), in governments and SOEs (Okhmatovskiy, 2010), or in home-country and host-country governments (e.g., Hitt, Bierman, Uhlenbruck, & Shimizu, 2006; J. Li et al., 2018; J. Li, Zhou, & Shao, 2009).
Whereas most research focuses on CPCs at the upper echelon level, mid- or lower-level management, teams, and individual employees can also possess significant political connections that can help to increase firm value (e.g., Byun et al., 2018; Guo et al., 2017; Shaffer & Hillman, 2000).
Antecedents of CPCs
What determines CPCs? The literature has examined numerous reasons, which we categorize based on whether they pertain primarily to the firm's decisions (i.e., why the firm wants to connect with politicians) or to the decisions of political actors (i.e., why political actors agree to connect with firms). Appendix B summarizes the key theories in relation to our reviewed articles from the four disciplines.
Antecedents of CPCs: The Firm Angle
Prior literature draws on the following theoretical perspectives to study the antecedents of CPCs from the firm's perspective. The first is the new institutional economics (NIE) (North, 1986, 1990; Ostrom, 1990; Williamson, 2000). In this tradition, various literatures in management, economics, and finance focus on how firms can use CPCs to reduce uncertainties generated from deficiencies in formal institutions, which create substantial transaction costs (Williamson, 1975, 1981) for firms (Hassan, Hollander, Van Lent, & Tahoun, 2019; Henisz & Zelner, 2004; Pan et al., 2014; Zheng et al., 2017). In extreme cases, deficiencies in formal institutions can create an institutional void that allows CPCs to play an even greater role in defending firms against political risks (e.g., Brockman, Rui, & Zou, 2013; M. Peng & Luo, 2000; Xin & Pearce, 1996; Yang, 1994). The NIE perspective is also aligned with theories in the political science literature, which instead focuses on how formal political institutions allow politicians to distribute rents, thus motivating economic elites to build connections with these politicians to capture these rents (e.g., Roberts, 1990).
Second, prior research also draws on the theories developed in the tradition of neoinstitutionalism (DiMaggio & Powell, 1991; Meyer & Rowan, 1977) to argue that CPCs can increase firms’ legitimacy, because the appropriateness or alignment of organizations in a social system is critical to organizational survival and performance. This perspective has been widely adopted by the international business literature, which argues that firms build CPCs to establish their legitimacy in a foreign environment and to overcome the liability of foreignness (e.g., Boddewyn & Brewer, 1994; Bucheli & Salvaj, 2018; Hillman & Wan, 2005; Sojli & Tham, 2017).
Third, the resource dependency theory (RDT) (Pfeffer & Salancik, 1978; Wry, Cobb, & Aldrich, 2013) is another commonly used theory to predict the formation of CPCs. The logic here is that firms that are dependent on the key resources (e.g., policy information, credits, subsidies, lands) controlled by political actors are more likely to develop connections with these political actors to gain unique information, secure access to critical resources, and buffer firms from environmental threats (e.g., Hillman, 2005; Hillman & Dalziel, 2003; Hillman, Withers, & Collins, 2009). In this tradition, building CPCs has been shown to be more important for multinational or local firms operating in emerging economies where formal institutions are less developed and the dependence on government-controlled resources is stronger (e.g., Dieleman & Boddewyn, 2012; Jiang et al., 2021; Zheng et al., 2015; Zhu & Yoshikawa, 2016).
Finally, at the individual level, building and maintaining CPCs is incentivized by career development and financial gains (e.g., Guo et al., 2017). For example, Guo et al. (2017) find that middle managers build and maintain connections with government officials to add value for their firms, because doing so may increase their own salary and promotion opportunities tied to firm performance.
Conditioning Factors That Shape Antecedents
Research has also considered various critical conditions that may affect CPC formation. We categorize them based on the level at which they function.
Firm Level
First, a majority of studies agree that firm ownership matters. Privately owned firms have a stronger desire to form and leverage CPCs than SOEs because privately owned firms face greater uncertainties in the institutional environment (e.g., Park & Luo, 2001; M. Peng & Luo, 2000; Jia, 2014; Jia & Mayer, 2017). Foreign-owned firms are less likely to engage in CPC-building activities than domestic-owned firms because they need to avoid the appearance of influencing another country's politics (Hansen & Mitchell, 2000; Mitchell, Hansen, & Jepsen, 1997). A second factor is firm size. While some studies have shown that CPCs are more widespread among larger firms (Agrawal & Knoeber, 2001; Faccio, 2006; Hansen & Mitchell, 2000; Hillman & Wan, 2005; Humphery-Jenner & Powell, 2014), others find smaller firms to have a greater tendency to build CPCs (K. Lin, Tan, Zhao, & Karim, 2015; Park & Luo, 2001). A third factor is firm age. Some studies find newer firms to be more likely to build CPCs to compensate for their lack of legitimacy and resources (Park & Luo, 2001), whereas others find the opposite as older firms may have more opportunities to build CPCs (Hillman & Wan, 2005). Another factor is firm capability. Firms with weaker capabilities may build connections with governments to overcome their competitive disadvantage (Park & Luo, 2001); this is consistent with the traditional rent-seeking view of political strategy (e.g., Bertrand et al., 2014). Relatedly, strong firm performance may help top executives to gain political appointments (X. Li & Liang, 2015; J. Zhang et al., 2016). Organizational credibility is a fifth critical factor in nurturing CPCs with governments (Luo, 2001). Finally, engagement in other nonmarket strategies, such as political contribution (e.g., Tahoun, 2014), lobbying (e.g., Correia, 2014), or participation in CSR activities (e.g., K. Lin et al., 2015; H. Wang & Qian, 2011), allows firms to build their CPCs. For subsidiaries of multinational firms, pressure from their parent companies to adapt to host countries may lead subsidiaries to build CPCs in their local environment (Hillman & Wan, 2005).
At the individual level, research shows that executives’ attributes may affect the formation of CPCs. One is individuals’ risk preference. Executives’ risk aversion may lead to fewer CPCs due to the uncertainty over expected returns from CPCs (Opper, Nee, & Holm, 2017). Another is political ideology. For instance, Republican CEOs have been found to be likely to make more generous efforts to engage with politicians via lobbying compared with their Democratic and apolitical rivals (Unsal et al., 2016).
Industry Level
Consistent with RDT, research finds that CPCs are more likely to be formed in more heavily regulated industries because firms are more dependent on governments for access to resources (Hillman, 2005). Research also finds that firms are more likely to build CPCs in industries when there is more intense competition over politically controlled resources (Agrawal & Knoeber, 2001).
Institution Level
In line with the NIE perspective, many studies have identified various institution-level factors that shape CPCs. Scholars argue that CPCs are more common in emerging markets because firms in these countries, which lack formal institutional protection of private property, have greater incentives to cultivate and exploit ties to politicians (e.g., Luo, 2006; M. Peng, 2003; Xin & Pearce, 1996). Strong formal institutions often feature stringent regulation of political conflicts of interest, quality legal systems, capable governments, and low levels of corruption (Faccio, 2006; Pearce et al., 2009). A related argument is that firms tend to build CPCs in countries with less liberalized economies and with more government discretion (C. Chen et al., 2011) where capital restrictions ensure connected firms’ access to domestic capital (Faccio, 2006). More liberalized economies reduce CPCs (Gan, Guo, & Xu, 2018). Furthermore, within democratic political institutions, CPCs focus more on targeting administrative branches within parliamentary systems and on legislative branches in U.S.-type congressional systems (Hillman & Keim, 1995). If parliaments can exert influence on regulations and budgets, businesspeople are more incentivized to occupy legislative seats themselves (Szakonyi, 2018).
Informal institutions also affect the formation of CPCs. One such informal institution is government corruption. Bribery can help firms to build CPCs (Martin, Cullen, Johnson, & Parboteeah, 2007), but governments with higher levels of corruption may reduce firms’ propensity to develop CPCs (Luo, 2006). Also, social values affect CPC formation. Research shows that CPCs are more likely to be formed in pluralist countries that value competition (Hillman & Wan, 2005). Prosocial norms that encourage successful individuals to devote their lives to public service for the greater good of society facilitate entrepreneurs’ efforts to gain political appointments (X. Li & Liang, 2015). Last, firms’ social evaluation matters. Firms facing employee lawsuits are more likely to build CPCs (e.g., to lobby) to change employment policies and mitigate disputes (Unsal et al., 2017). Politicians are less likely to establish public connections with firms that are boycotted by social movements because connections with those blacklisted firms could threaten their perception by the public and have electoral consequences (McDonnell & Werner, 2016).
Antecedents of CPCs: The Political Actor Angle
Why do politicians agree to participate in CPCs? Research on CPCs in political science, economics, and finance commonly takes the political exchange perspective offered by the theory of rent distribution, which suggests that the exchange of favors between political actors and their connected firms characterizes distributive politics (e.g., Roberts, 1990; Shleifer & Vishny, 1994). Instead of lopsidedly focusing on the “demand” side of how firms may gain from their CPCs, this perspective focuses on the incentives of political actors as willing to accept connections with firms. Politicians’ rent-seeking behaviors (e.g., C. Chen et al., 2011; Faccio & Hsu, 2017; Murphy, Shleifer, & Vishny, 1993) therefore often deepen our understanding of the “supply” side of CPCs (Bonardi et al., 2005; Laffont & Tirole, 1991).
Multiple forms of rents may incentivize political actors to form CPCs. First, politicians have incentives to connect with firms in exchange for financial gain, either in legal forms, such as receiving equity return (Tahoun, 2014) or compensation for serving on corporate boards (e.g., Palmer & Schneer, 2016), or in illegal forms, such as corruption and bribery (e.g., Ang, 2020; Mironov & Zhuravskaya, 2016). Second, politicians seek valuable resources from firms, including votes, financial support, and information, to gain or maintain their own political position and power (e.g., winning elections) (Bonardi et al., 2005). Third, politicians engage with firms to continue their careers in the private sector (Diermeier, Keane, & Merlo, 2005); this is usually called the “revolving door” phenomenon (Gormley, 1979), which refers to former politicians transitioning into high-paying private sector jobs, such as corporate directors or lobbyists, that heavily use their experiences and connections acquired in the public sector (e.g., Blanes i Vidal, Draca, & Fons-Rosen, 2012; Lester et al., 2008; Shepherd & You, 2020). Research has shown that politically connected congressional staffers with legislative skills are incentivized by their future career aspirations to work for lobbying firms (Shepherd & You, 2020). Conversely, congressional staffers are less likely to work in the lobbying industry when their connected politicians lose power (Blanes i Vidal et al., 2012).
Besides the aforementioned materialistic incentives, political ideology is another driver for political actors. Parties or politicians tend to attract firms that share their same views (e.g., McMenamin, 2013). More ideological politicians are less willing to engage in quid pro quo relationships so are less likely to build connections with firms or reduce the efficacy of existing CPCs (Aiken, Ellis, & Kang, 2020; D. Wang, Du, & Marquis, 2019).
For regimes, connecting with firms serves their political goals. Research shows that multinational firms are able to develop CPCs with governments in emerging economies because the firms can accommodate host governments’ political and social goals (e.g., employment creation, local infrastructure; G. Gao et al., 2018; Luo, 2001; Sun et al., 2010). Also, recruiting business elites to the regime and offering them returns, which is a form of rent distribution, helps to achieve regime stability (e.g., Truex, 2014).
Features of CPCs and Antecedents
Studies, though limited, look at what antecedents from both firm and political actor angles shape the key features of CPCs, including strength and duration. From the firm's angle, increasing environmental uncertainty may drive firms to strengthen CPCs. For instance, Sutton et al. (2021) find that firms receiving negative media coverage and opposition from social movement organizations are likely to strengthen their connections with local governments. Moreover, the access to more resources motivates firms to form stronger CPCs. Research has found that smaller firms tend to build stronger CPCs since politicians are more able to provide benefits to relatively small firms (Agrawal & Knoeber, 2001; Tahoun, 2014). As for duration, the need for resources helps maintain CPCs (e.g., Bertrand et al., 2014). On the other hand, the legitimacy concern may drive firms to cut CPCs. Jiang et al. (2021) show that firms remove their existing connections with ousted officials after an anticorruption campaign to restore their endangered legitimacy.
From the political actor's angle, their financial incentives and power are found to be related to the strength of CPCs. Politicians who are financially more committed to the connected firms and hold more powerful positions will make CPCs stronger as their interests are more tied to the firms and their ability to help firms increases (Tahoun, 2014). Politicians’ career concerns may affect the duration of CPCs. Politicians keep connections with firms in order to make firms invest in the local economy and achieve their political performance (Shi, Xi, Zhang, & Zhang, 2021).
Outcomes of CPCs
CPCs produce a range of consequences for firms, their connected political actors, and the institutional environment. Research from the firm angle has focused primarily on consequences on firm performance together with a wide span of other benefits and cost consequences, while studies from the political actor angle have examined outcomes for political actors, from financial returns to career development. Theoretical perspectives of CPC antecedents from the firm angle, including NIE, institutional theory, RDT, and personal incentives, and the political exchange perspective of CPC antecedents from a political actor angle also apply to the accounts for the outcomes of CPCs from firm or political actor angles. Therefore, we just highlight these theoretical perspectives where necessary.
Outcomes of CPCs: The Firm Angle
Firm Performance Outcomes
Most studies of CPCs in management, economics, and finance focus on the effect of CPCs on firms’ financial performance. The overarching thesis in management literature based on NIE and RDT is that CPCs improve firm performance by reducing uncertainty and offering firms key resources and benefits (e.g., policy information, credits, legitimacy) (e.g., Hadani & Schuler, 2013; Hillman, 2005; Hillman et al., 1999, 2009; Zheng et al., 2017). Performance increases are commonly captured by market-based measures (e.g., market value, stock prices) or accounting-based measures (e.g., return on assets, return on sales; Cooper et al., 2010; Hadani & Schuler, 2013; L. Liu, Shu, & Wei, 2017; M. Peng & Luo, 2000). Such effects of CPCs on firm performance not only are found in those firms in developed economies like the United States (Carboni, 2017; Hillman, 2005) but is also shown to be evident in developing economies where formal market-supporting institutions are underdeveloped and firms have to rely on CPCs to access key resources (e.g., Chizema et al., 2015; Haveman et al., 2017; Kotabe, Jiang, & Murray, 2017; H. Li et al., 2008; H. Li & Zhang, 2007; M. Peng & Luo, 2000; Zheng et al., 2015).
Studies in economics and finance literature treat CPCs as a form of rent-seeking behavior and show similar evidence on the firm value derived from CPCs. The majority of the research has shown that CPCs usually yield higher stock returns for connected firms (e.g., Amore & Bennedsen, 2013; Faccio, 2006; Ferguson & Voth, 2008; Fisman, 2001; Goldman et al., 2009). CPCs with powerful politicians are particularly valuable (e.g., Akey, 2015). Conversely, firm value depreciates as existing CPCs are severed (e.g., Faccio & Parsley, 2009; Fisman, 2001; Jayachandran, 2006). In one of the first studies to document the value of CPCs, Fisman (2001) shows that stock prices of firms that were closely connected to former Indonesian President Suharto dropped more than the prices of less connected firms at the time of rumors of Suharto's worsening health. Similarly, Faccio and Parsley (2009) find that the unexpected death of a politician leads to a drop in firm value and a subsequent loss of sales for firms connected to that politician. Similar evidence of the positive effect of CPCs on firm value have also been noted in studies in political science (Szakonyi, 2018; Truex, 2014).
A few notable exceptions to this positive effect of CPCs on firm performance include works by Faccio (2006), Fan et al. (2007), Hitt et al. (2006), J. Li et al. (2009), and Schweizer, Walker, and Zhang (2019). Faccio (2006) differentiates between business leaders entering politics and the appointment of politicians to corporate boards and finds the latter to have no significant effect on firms’ stock prices. Fan et al. (2007) find that politically connected firms underperform compared with unconnected ones in the post-IPO period because politically connected CEOs’ political rent-seeking behavior expropriates the value of minority shareholders. Similarly, Schweizer et al. (2019) find the negative effect of CPCs on postmerger performance, given the same reason. In addition, both Hitt et al. (2006) and J. Li et al. (2009) find that CPCs with host-country government officials alone have a negative effect on firm performance because reliance on CPCs may induce government intervention and disrupt firm operation.
Firm Strategy Outcomes
CPCs also shape firm strategies, which arguably mediate the positive effect of CPCs on firm performance (e.g., Tihanyi et al., 2019). Common strategies studied in the existing research include internationalization, financing, strategies to compete in markets, and manipulation of other nonmarket strategies.
Internationalization
The international business literature pays particular attention to firms’ internationalization strategy (e.g., Frynas, Mellahi, & Pigman, 2006; Hitt et al., 2006; J. Li et al., 2009; Liang et al., 2015; Sojli & Tham, 2017). Most research focuses on the role of CPCs with foreign government officials in offsetting risk and entry into foreign markets. For example, Sojli and Tham (2017) find multinational corporations’ connections with host-country politicians facilitate their entry into host markets, which increases the firms’ value. Hitt et al. (2006) show a similar positive effect of foreign CPCs on the internationalization of U.S.-based law firms. Some studies examine firms’ domestic political connections and find that they play a more prominent role in determining their internationalization strategy when the market institutions in the firm's home country are underdeveloped (Liang et al., 2015) and can protect their interests in foreign locations (Albino–Pimentel, Dussauge, & Shaver, 2018; J. Li et al., 2018).
Financing strategy outcomes
Studies have shown that CPCs can help firms gain preferential access to domestic debt financing (Claessens et al., 2008; Cull & Xu, 2005; Haveman et al., 2017; Infante & Piazza, 2014; Khwaja & Mian, 2005; J. Li et al., 2008; Sapienza, 2004), enjoy lower costs of equity financing (e.g., Boubakri et al., 2012; Boubakri, Guedhami, & Mishra, 2010; Pham, 2019), or obtain direct government funding (Armanios, Eesley, Li, & Eisenhardt, 2017; Duchin & Sosyura, 2012; Faccio et al., 2006). Conversely, a loss of CPCs leads to a decrease in the bank loans and government subsidies previously enjoyed by connected firms (Z. Li & Cheng, 2020). However, firms that have close connections only with domestic politicians are less likely to be able to access publicly traded securities abroad, especially in a more developed financial market (Leuz & Oberholzer-Gee, 2006).
Market strategy outcomes
Besides internationalization and financing, CPCs also facilitate firms’ survival (Hiatt, Carlos, & Sine, 2018; Zheng et al., 2015), purchase of key production factors at discounted rates (T. Chen & Kung, 2019), consolidation of first-mover advantage (Frynas et al., 2006), mergers and acquisitions (M&As; Brockman et al., 2013; Croci, Pantzalis, Park, & Petmezas, 2017; Ferris, Houston, & Javakhadze, 2016; Fidrmuc et al., 2018; Holburn & Vanden Bergh, 2014), formation of strategic alliances (Siegel, 2007), initial public offerings (Q. Liu et al., 2013; Piotroski & Zhang, 2014), expansion into new industries (Zhu & Chung, 2014), and divestment of operations or exits from industries through sell-offs (Zheng et al., 2017). The financial resources obtained through CPCs can also boost firms’ capabilities in innovation (Kotabe et al., 2017) or substitute the knowledge and skill sets shared by research-and-development alliance partners (J. Zhang et al., 2019).3 CPCs also reduce the potential risk of knowledge leakage and misappropriation by competitors (J. Zhang et al., 2019) and protect connected top executives from litigation risks (Jia, Mao, & Yuan, 2019).
Nonmarket strategy outcomes
CPCs can help firms obtain government contracts (e.g., Goldman, Rocholl, & So, 2013; Ridge et al., 2017; Sojli & Tham, 2017; Tahoun, 2014), increase their bargaining power vis-à-vis local governments (Jia & Mayer, 2017), influence policymaking (Macher & Mayo, 2015), reduce the intensity of regulatory scrutiny and penalties (Chaney, Faccio, & Parsley, 2011; Correia, 2014; Fisman & Wang, 2015; Lambert, 2019), and shape how they undertake other nonmarket activities, such as CSR (S. Li & Lu, 2020; Marquis & Qian, 2014; J. Zhang et al., 2016) or alternative political strategies (e.g., Bonardi et al., 2006; C. Zhang & Greve, 2019). Research also finds that politically connected founders of family firms are more likely to appoint a second-generation family member as the firm's top executive than to hire an outside professional manager (Xu, Yuan, Jiang, & Chan, 2015).
Dark Side of CPCs
CPCs do not always buy political favors and generate benefits for firms (Fowler, Garro, & Spenkuch, 2020). In addition to the aforementioned studies on the general negative effect of CPCs on firm performance, research also shows that CPCs can produce other immediate negative consequences for both firms and executives that eventually contribute to the underperformance of politically connected firms (e.g., J. Li et al., 2009).
Financially, building CPCs requires that firms incur high costs, such as paying remuneration and other benefits to connected political actors (Banerji, Duygun, & Shaban, 2018) or financial reporting costs (Baloria & Klassen, 2018). Such costs may drain the finances of firms and hamper the effectiveness of their strategies (H. Li & Atuahene-Gima, 2001). Besides, CPCs may not be able to buffer connected firms from government pressure (J. Zhang et al., 2016) but induce government intervention that distorts firm decision-making, reducing investment efficiency (S. Chen, Sun, Tang, & Wu, 2011).
Politically connected firms are also prone to engage in risk-taking behaviors (Boubakri et al., 2013), such as accepting high leverage and volatility (Kostovetsky, 2015; Tihanyi et al., 2019), or opportunistic behaviors, including fraudulent financial reporting (Stuart & Wang, 2016; Yu & Yu, 2011), insider trading (Jagolinzer, Larcker, Ormazabal, & Taylor, 2020), lower-quality accounting information disclosure (Chaney et al., 2011), or a lower level of voluntary disclosure of managerial forecasts (Hung, Kim, & Li, 2018). Further, CPCs may raise concerns over corporate governance issues, including decreased performance-based pay of connected top executives (Chizema et al., 2015), increased severity of blockholders’ rent misappropriation at the expense of minority shareholders (Berkman, Cole, & Fu, 2010; W. Peng, Wei, & Yang, 2011; Sun, Hu, & Hillman, 2016), reduced effectiveness of mechanisms that monitor managerial behavior (Cao, Pan, Qian, & Tian, 2017), a lower degree of board professionalism (Fan et al., 2007), or harm to the interests of controlling shareholders (J. Li & Qian, 2013). Finally, CPCs may turn into a political liability in the aftermath of a radical shift in political institutions (e.g., Ang, 2020; Darendeli & Hill, 2016; Jiang et al., 2021; Leuz & Oberholzer-Gee, 2006; Siegel, 2007).
Conditioning Factors That Shape Outcomes
The ways in which CPCs produce the aforementioned consequences are contingent on a range of conditions at the levels of the firm, the industry, and the broader institutional environment (Sun, Mellahi, & Wright, 2012). Such multilevel variation has created profound ramifications for CPCs.
Firm Level
First, firm ownership shapes the performance effect of CPCs, with greater performance outcomes produced in non-state-owned firms than in state-owned firms due to the moral hazards particularly prevalent in emerging economies (e.g., H. Li & Zhang, 2007). A second condition is firms’ market capability. Research has shown that firms with more internal resources or market-entry experience rely less on CPCs to secure external resources (e.g., bank loans), and therefore the positive value of CPCs is mitigated (e.g., Zhu & Chung, 2014). In addition, firms with weak prior performance benefit more from CPCs for survival since they face higher risks of dissolution, and strong prior performance may amplify the positive effect of CPCs on firm growth because they are more capable of leveraging CPCs to explore additional resources (Zheng et al., 2015). The third condition is firms’ nonmarket capability. Firms with strong corporate governance (Fidrmuc et al., 2018) or CSR (Borisov, Goldman, & Gupta, 2016) enhance the positive effect of CPCs on performance since good governance prevents managers from abusing CPCs for private benefits. Prior experiences with governments also strengthen the positive performance of CPCs because they enable firms to better understand preferences and behavioral patterns of politicians (e.g., Bonardi et al., 2006). The fourth condition is that firms’ importance to connected politicians matters. Firms that are more important to their connected politicians can strengthen the value of their CPCs (Halford & Li, 2020; Heitz, Wang, & Wang, 2021). Finally, the individuals who own CPCs in the firm also matters. For example, CPCs formed through a large shareholder are found to be more valuable than those formed through top executives because they have more vested interests in the firm (Faccio, 2006).
Industry Level
Several studies have shown that politically connected firms from heavily regulated industries outperform those from less heavily regulated industries as the former group of firms is more dependent on government policy and resources (e.g., Boubakri et al., 2008; Fan et al., 2007; García-Canal & Guillén, 2008; Hadani & Schuler, 2013; Hillman, 2005; Rijkers, Freund, & Nucifora, 2017; J. Zhang et al., 2016). Another industry-level factor is the development stage of an industry. CPCs are more valuable during the early formation of industry structure as CPCs help reduce environmental uncertainties and boost the confidence of firms (Frynas et al., 2006). Besides, litigation risk may condition the functioning of CPCs, and the negative effect of CPCs on the level of management-forecast disclosure is found to be more pronounced in more litigious industries as politically connected firms enjoy political protection (Hung et al., 2018).
Institution Level
The first set of factors revolves around market institutions (e.g., contract enforcements and property rights protection), which is aligned with the NIE perspective. Despite the aforementioned studies on institutional variations across countries (e.g., Dieleman & Boddewyn, 2012), several studies have examined the regional variation in market institution development in emerging economies and generally agree that when local market institutions are relatively underdeveloped, CPCs produce more positive outcomes for firms because CPCs can substitute for inadequate institutional infrastructure (e.g., Jia, 2014; H. Li & Zhang, 2007; M. Peng & Heath, 1996; J. Zhang et al., 2016). The economic importance of CPCs may diminish as the economy becomes more liberalized (Siegel, 2009) and market institutions evolve over time (e.g., Berkowitz, Lin, & Ma, 2015; Liang et al., 2015; Sun et al., 2010). More specifically, research has examined the capital market as a condition and found that CPCs generate greater benefits for firms in the presence of capital control (Johnson & Mitton, 2003), whereas the value of CPCs declines as the capital market becomes more developed (Hung et al., 2018; Zheng et al., 2017). Moreover, other market actors play a role. For example, rivalry from competing interest groups may curb the positive performance produced by the focal firm's CPCs (Bonardi et al., 2006).
Political and legal institutions also affect the consequences CPCs produce for firms. The first consequence is the power and position of political actors within the political system. CPCs with powerful politicians are particularly valuable (e.g., Akey, 2015; Faccio, 2006; Heitz et al., 2021). For instance, research shows that as connected politicians gain power, lobbyists can gain revenue (Bertrand et al., 2014; Byun et al., 2018) or move to established firms or entrepreneurship to appropriate the increased value of their political connections (Byun et al., 2019). Conversely, those lobbyists lose revenues once their connected politicians depart (Strickland, 2020) and suffer a more substantial loss of revenue when the connected politicians who have more political power leave office (Blanes i Vidal et al., 2012). Relatedly, CPCs with higher-level governments (e.g., the central government) strengthen positive performance since higher-level governments have more power to mobilize resources for firms (J. Li et al., 2018; Yan & Chang, 2018).4 The second is corruption. While research has produced evidence of the value of CPCs in countries with various levels of corruption (e.g., Amore & Bennedsen, 2013; Fisman, 2001), CPCs are likely to be of more benefit to firms in countries with higher levels of corruption (e.g., C. Chen, Ding, & Kim, 2010). Third, the positive role of CPCs in hedging against uncertainty is more evident when the policy environment is uncertain (e.g., Bradley, Pantzalis, & Yuan, 2016; Pham, 2019). Next, government discretionary power may amplify the positive effect of CPCs on firm performance since governments enjoy considerable freedom to provide preferential treatment (Calomiris et al., 2010). Last, CPCs tend to produce more positive outcomes for firms when rivalry exists between politicians (Bonardi et al., 2006) or between political parties (Pham, 2019) or in the presence of a divided government (Zhu & Chung, 2014). Under a united government, only the CPCs with the ruling party—not with other parties—benefit connected firms (Zhu & Chung, 2014). As for legal systems, research has shown that, surprisingly, the development of legal systems in emerging economies tends to increase the value of CPCs; scholars explain this result on the basis that legal systems are commonly deeply embedded in political regimes such that they facilitate political connections (Michelson, 2007; Zheng et al., 2017).
Outcomes of CPCs: The Political Actor Angle
CPCs influence connected political actors as well. The theoretical perspective used in explaining the CPC outcomes from a political actor angle is consistent with that for the antecedents, which is the political exchange theory. One outcome concerns financial returns. For example, Eggers and Hainmueller (2009) have shown that winning a seat in the British Parliament can triple the probability of gaining a corporate nonexecutive directorship, thus resulting in a nontrivial increase in the personal wealth of the winning politicians. A second outcome, bribery, constitutes another major form of direct financial gain (e.g., Pei, 2016). Pei (2016) has documented many reported corruption cases in China, such as asset stripping, where, during privatization, politicians amassed huge personal fortunes by selling state assets to connected business elites.
CPCs also affect connected politicians’ career development, both within and outside the political arena. Politicians can obtain and maintain political power (e.g., winning elections) by exchanging policy favors for valuable resources from connected firms (e.g., Markgraf & Rosas, 2019). CPCs also allow politicians to continue their careers in the private sector as lobbyists (McCrain, 2018; Palmer & Schneer, 2019) or corporate directors (e.g., Eggers & Hainmueller, 2009; Lester et al., 2008) using the experience and connections they accrued from working in the public sector. For example, McCrain (2018) has shown that connections with Capitol Hill colleagues are a unique human capital asset for congressional staffers-turned-lobbyists and help them perform better than their competitors who lack Capitol Hill experience. Not only do politicians’ careers benefit from CPCs; so do those of their family members, in being hired or promoted by connected firms (Gagliarducci & Manacorda, 2020; H. Li et al., 2012). Despite the aforementioned benefits, there is also a dark side of CPCs for political actors. CPCs may expose connected politicians to a higher risk of anticorruption prosecution (Shi et al., 2021) and lower prospects of promotion (T. Chen & Kung, 2019).
Governments use CPCs to achieve their political goals. Dinç (2005) provides cross-country evidence that national governments leverage politically connected banks to finance themselves by increasing bank lending in election years for maintaining their power.
Features of CPCs and Outcomes
Studies have examined what different consequences the strength, duration, or portfolios of CPCs can lead to. From the firm angle, the strength of CPCs leads to differences in firm performance and strategy. Research has shown that closer or stronger CPCs are found to be more valuable and generate more positive performance (e.g., Akey, 2015; Faccio, 2006; Fisman, 2001; Hillman, 2005). On the other hand, firms with stronger CPCs to the old government may suffer in times of changing political regimes as they are unable to update connections with the new government in power (e.g., Jiang et al., 2021; Leuz & Oberholzer-Gee, 2006). Stronger CPCs also help firms to obtain more government contracts (e.g., Ridge et al., 2017) and to better safeguard their foreign investments (e.g., J. Li et al., 2018). For duration, research shows that long-term CPCs are more valuable only when the connected political actors remain in power (e.g., Bertrand et al., 2014; Darendeli & Hill, 2016); otherwise, short-term CPCs are more beneficial for firms in turbulent times (Arifin et al., 2020). Firms’ CPC portfolios also affect firm strategy. Zhu and Chung (2014) find that firms connected with both ruling and opposition parties impose obstacles to their market entry under a united government by reducing the resources derived from the connections to the ruling party, but such portfolios turn out to be an asset under a divided government as portfolios enhance firms’ leverage on both parties. Zheng et al. (2017) find that firms’ connections with the executive branch are more valuable than their connections with the legislative branch in helping firms exit, but such value declines with capital market development.
From a political actor angle, stronger CPCs as a result of politicians’ gaining more power significantly increase the probability of their becoming corporate directors later on as well as increase connected politicians’ wealth (Eggers & Hainmueller, 2009; Palmer & Schneer, 2016).
Institutional Outcomes of CPCs
In addition to affecting firms and political actors who are connected by CPCs, a few studies show that CPCs can shape the broader institutional environment, thus raising major questions about social welfare, distribution of wealth, and abuse of power (Zingales, 2017).
Economic Systems
Research in economics and finance has investigated the outcomes produced by CPCs on the economic system (Wedeman, 2012). On one hand, CPCs are found to benefit certain aspects of the economy and may facilitate job creation and employment. Faccio and Hsu (2017) find that following private equity buyouts, employment at establishments operated by targets of politically connected private equity firms is significantly higher than at establishments operated by targets of nonconnected private equity firms. Disruption of CPCs may result in an increase in labor costs (Wei, Hu, & Chen, 2020). In addition, CPCs may shape business networks so that firms affiliated with the same political camp tend to partner with each other (Stark & Vedres, 2012). In rural areas, connections with politicians can strengthen de facto land property rights (Markussen & Tarp, 2014) and allow people to invest more in land fertility for higher output (Goldstein & Udry, 2008).
On the other hand, CPCs may generate significant, broader costs for the economy and may threaten economic efficiency (Schoenherr, 2019). Studies show that CPCs reduce banks’ incentives to monitor borrowing firms (Banerji et al., 2018) and lead to defaulting on government bank loans, to deadweight loss of taxation, and to investment distortion (Khwaja & Mian, 2005). For the financial market, C. Chen et al. (2010) find that financial analysts experience greater difficulty in predicting the earnings of firms with CPCs; this weakens the ability of financial intermediaries to reduce the risk of information asymmetry. Butler et al. (2009) also find services rendered by financial intermediaries are affected by CPCs, particularly when politically connected investment banks charge high underwriting fees to municipal bond issuers as the return of their political investment. CPCs can also impede daily trade because buyers tend to avoid sellers who are politically connected, since those sellers receive more favorable treatment in the enforcement of contracts, thus placing the buyers in a less advantageous position in their trading relationships (Bhandari, 2021). Last, public policies that are implemented by business owners holding top offices may be favorable to their own firms but hinder both domestic competition and foreign investment (Bunkanwanicha & Wiwattanakantang, 2009).
Political and Legal Systems
Research in political science has also considered CPC outcomes on political and legal systems. Economic elites—by seeking to directly occupy critical political positions, such as public offices, in return for private benefits—can help legitimize formal political institutions (e.g., Truex, 2014). However, CPCs can exacerbate “money in politics” and corruption (Ang, 2020; Kuhner, 2014; Mironov & Zhuravskaya, 2016) and contribute to cronyism in political institutions (e.g., T. Chen & Kung, 2019; Dieleman & Sachs, 2008; Pei, 2016). Alarmingly, researchers show that these concerns are salient in both liberal market economies, where competitive political institutions allow firms to adopt pragmatic approaches to connect with politicians (McMenamin, 2013), and in developing economies, where CPCs can substitute for weak formal institutions (e.g., Zheng et al., 2017).
For outcomes on legal systems, Ang and Jia (2014: 329) show that politically connected firms are more likely to resort to courts over informal means for dispute resolution, creating a fusion of “legality with politics.”
Civil Society
CPCs have important implications for the welfare of civil societies as well. Research finds that politically connected executives in SOEs are more willing to carry out government policies to limit layoffs and maintain social stability for the purpose of their political careers and to make SOEs’ labor costs more stable relative to non-SOEs (Gu, Tang, & Wu, 2020). On the other hand, CPCs render connected firms less compliant with government regulations that may protect society from negative externalities of firms’ operations (Malesky & Taussig, 2017). This noncompliance produces significant social costs, such as a higher rate of workplace fatalities due to relaxed enforcement of safety rules (Fisman & Wang, 2015). Also, state funds or contracts tend to favor politically connected but unproductive firms (Mironov & Zhuravskaya, 2016), and this political bias is likely costly to taxpayers and detrimental to the welfare of beneficiaries (Bradley et al., 2016; Lehne, Shapiro, & Eynde, 2018). Last, income inequality increases when former politicians use their political connections to gain wealth in the private sector (Róna-Tas, 1994) and connected businessmen become super rich (Ang, 2020).
Directions for Research
So far in this article, we have covered research on CPCs across multiple disciplines with the aim of providing as accurate a picture as possible of what we know about how certain firms are connected to government officials. In what follows, we discuss how this research could be pushed further, but mostly from the perspective of the management literature (although a similar analysis could be conducted from the perspectives of other disciplines and fields).
Our analysis of the literature in this article is built on three main parts: (a) the nature of CPCs, (b) their antecedents, and (c) their outcomes. Next, we keep these three areas as a structure for our discussion and explore avenues in each of them.
Nature of CPCs and Empirical Issues
Our review of the literature highlighted the basic components and features of CPCs. Our next sections, however, strengthen the theoretical links with other internal characteristics of firms, such as political capabilities, and extend/deepen existing empirical analyses. We consider these aspects in turn.
CPCs and Political Capability
CPCs are sometimes equated with an organizational capability that helps firms deal with political actors. Relevant concepts include “political capital” (Jia & Mayer, 2016, 2017; J. Kim, 2019; Siegel, 2007) and “political capability” (e.g., Holburn & Zelner, 2010; Oliver & Holzinger, 2008). The notion of political capability is potentially powerful and deserves further development, as do the specific skill sets and the fit with the context—including the firm, the industry, and the political system—and how they can be built and lost (Bonardi, 2011). There is a clear point of contact between the two, as both have to do with experience accumulated over time: for political connections, as Hillman (2005) suggests, and for political capabilities, as suggested by Bonardi et al. (2006). However, CPCs are conceptually different from political capabilities.
Whether and how CPCs might translate into an organizational capability is something that is currently unknown. This is clearly an area where more research is needed. One could argue, for instance, that political capabilities and CPCs are complementary, as the hiring of politicians might translate into more intense accumulation of collective political knowledge and skills at the firm level. But, on the other hand, the opposite is conceivable: Hiring politicians as top managers or board members could imply that these individuals will mostly use their own experience with less effort deployed at the firm level to develop political capabilities. In that case, political connections and political capabilities might be substitutes. More theoretical and empirical research is warranted to explore which of these two effects holds true, and in which types of firms.
Causality Issues
A large part of the literature on CPCs is empirical and looks at the impact of these connections on various dependent variables, such as some forms of financing or regulatory advantage, or on overall financial performance. Despite the large number of papers on the topic, however, causality remains an issue. Omitted variables, reverse causality, or selection bias commonly influences estimates of the effect of CPCs (Preuss & Königsgruber, 2021).
On this question of identification and causality, this issue is akin to identifying causal effects of CEO impact on firm performance. On the latter topic, Bertrand and Schoar (2003) tracked corporate leaders over time (between 1969 and 1999) and across firms, which helped them isolate individual effects; Bennedsen, Perez-Gonzalez, and Wolfenzon (2006) took another approach and studied the deaths of CEOs and of their direct family members, such as their spouse or parents, as exogenous shocks to top managers’ focus on their business. This type of approach could inform our study of the performance effect of current or former politicians on companies’ boards. Faccio and Parsley (2009) is the closest to this approach as they use the sudden death of politicians as an exogenous shock and thus as a key aspect of their identification strategy. But much more should be done along those lines and with clear implications for firm strategy.
The Need for More In-Depth Case Studies
Research on CPCs can benefit tremendously from in-depth case studies that truly open the black box and refine the theoretical approaches mentioned earlier. To really bring value, these case studies should be longitudinal, that is, following either the trajectory of a politician over time or the trajectory of a firm employing one or various former politicians over time. A relatively recent literature could help on that topic: the economics and political science literature on revolving doors, which has been growing in the aftermath of the 2008 crisis (Johnson & Kwak, 2010). Network analysis, aimed at identifying the web of connections established by individual politicians over time, could also be helpful (Bussolo, Commander, & Poupakis, 2018; Young, Marple, & Heilman, 2017), in the spirit of the work done on the Federal Communication Commission carried out by Cohen (1986), for instance.
Another theme that should be explored through qualitative methods is the integration of CPCs with market activities. The integration of market and nonmarket activities has been a topic in the management literature since the term was coined in a seminal paper by Baron (1995). Despite this, few significant advances have been made on the topic, in particular, on the empirical side (Bonardi, 2008). The problem may be related in part to the difficulty in identifying the precise links within firms where this market–nonmarket integration occurs, making it difficult to study. Focusing on CPCs may be informative. In-depth case studies—ideally with a longitudinal perspective, with coverage of several nonmarket issues, and possibly even across several companies—would certainly bring rich data that could advance our understanding of how firms integrate their market and nonmarket activities.
By the same token, and for two reasons, case studies could provide relevant new knowledge about a topic mentioned earlier: links between CPCs and firm performance. First, revealing links between CPCs and firm financial performance requires a better understanding of how these CPCs are related to firms’ market activities in the first place, as market activities directly create value and profits for firms. Second, a qualitative approach might also help identify whether CPCs are truly established and used to support firms’ market strategies or whether these connections relate more to private objectives of CEOs or top managers (Faccio et al., 2006), as discussed earlier.
Antecedents
One important finding of our review of the literature is that in spite of the wide literature on the financial impact of CPCs, the underlying elements driving the value of these CPCs remain mostly a black box. They have been found to matter for firm performance—sometimes positively and sometimes negatively—but little is known about the true mechanisms behind this. A fresh look is particularly needed on this matter. In what follows, we provide some ideas about how this could be done.
The Need for Understanding Antecedents
Research on CPCs in management has focused predominantly on firm-level outcomes, possibly because of management scholars’ inherent interest in firm performance. However, there exists much less work on understanding the antecedents of CPCs, and conceptualization of CPCs, including elaboration on appropriate empirical measures. Of 133 articles in management identified by our literature search, 76 focus on firm performance and strategic outcomes, but only 17 articles explicitly examine the antecedents of CPCs. When much is taken for granted on the origin and function of CPCs, important theoretical processes are ignored and the interpretation of CPC outcomes can be incomplete or biased. For example, debates exist on CPCs’ effect on firm performance as scholars have found positive, negative, or no relationships (for a review, see Hadani, Bonardi, & Dahan, 2017).
While these contradictory results may seem confusing when CPCs are viewed as generating benefits to firms, there are multiple explanations for them when we consider how CPCs are formed and how they function. For example, firms with higher or lower performance potentials may actively build CPCs (albeit for different reasons); establishment and maintenance of CPCs may be costly; due to cost considerations, firms may use certain CPCs only when they are in greater need, such as when they are hitting (or anticipate hitting) performance dips; or using CPCs may alter operations and conventions in firms in ways that increase or reduce firm value (for example, hiring politically connected but less competent employees may change workplace dynamics). Or managers may engage in CPCs for private or social reasons unrelated to performance, such as joining social or political networks that will generate future career opportunities. Therefore, a more extensive and in-depth understanding of the antecedents and nature of CPCs will help scholars conceptualize the complex outcomes that CPCs produce for firms.
Political Actor Angle
Why do politicians engage in CPCs? As suggested in our review, research on CPCs has predominantly taken a firm perspective, with a particular emphasis on analyzing what firms aim to obtain from building and maintaining CPCs. Only 2 of 133 management articles identified by our literature search simultaneously examined CPCs from the political actor perspective. It is understandable that management research would place firms at center stage, but inadequate considerations of the other side of the connection—political actors—is a significant weakness because the function of a relationship is determined by both sides, not solely by one side. This is akin to studying interfirm alliances, where understanding the goals and capabilities of both/all firms involved in the alliance—and not just those of one member—has been proven to be important (Mowery, Oxley, & Silverman, 1996; L. Wang & Zajac, 2007).
Focusing only on firms and not on political actors may render the theory incomplete or even biased. For example, the common conceptualization of CPCs as a “resource” for a firm (e.g., Frynas et al., 2006) assumes that CPCs create value whenever firms decide to use them, as does the use of a piece of manufacturing equipment. Whether a CPC generates value as the focal firm intends is critically determined by the willingness and abilities of connected political actors to carry out the activities desired by the focal firm. For example, Jia et al. (2019) show that what political actors desire to gain from their connections with firms may actually increase the cost of the CPC for those firms. Thus, in order to understand how firms build, use, and terminate CPCs, we need a better understanding of why political actors engage in CPCs.
What could such a theory look like? Two perspectives are possible. From an economic perspective, one could model the trade-offs faced by politicians at certain points in their careers. Part of their payoff could involve leveraging their political experience and being hired by a firm, therefore giving birth to a political connection. However, political career prospects might still be driven by actions of the former politician, so the level of effort the politician puts into the political connection could vary. This approach may provide new ideas about how CPCs work, about their strength, and about whether they would constitute a problem for democracy. A similar theoretical approach could examine the trade-offs faced by a political decision maker who is contacted by a firm trying to influence a policy. Why would it make a difference for this policy maker if a political connection is involved?
A different perspective would be to apply a sociological lens (Bian, 2018), for instance, by examining the network to which a former politician belongs. Such an approach has been mentioned in the literature but never fully developed. From this perspective, political connections among politicians preexist any involvement with a firm and are part of a network of reciprocal exchanges that either have been built by individuals in the course of their careers or have come from their families or social groups. A former politician, if appointed to a firm, could, of course, use this social network for advantages. However, such appointments also come with reciprocal duties, which must be considered; these might explain some of the negative performance effects noted in the literature (Faccio et al., 2006). It would be important to fully elaborate this approach and its implications.
Firm Executive Angle
The other part of the question requires us to look at this from the perspective of CEOs or top managers: Why do they decide to hire former politicians and engage in political connections? And what are the trade-offs that they face while doing so? Interestingly, this is something that has not really been studied yet. Beyond the firm-level advantages of political connections that have been discussed earlier in this article, this decision might also depend on top managers’ aspirations and attributes. There are indeed possible advantages for CEOs who want to take political stances and participate in policy-oriented debates, as they get access to venues and networks they would not have been able to otherwise. A literature has started looking into CEOs behaving that way (Wowak, Busenbark, & Hambrick, 2022), and it would be interesting to link it to the question of why former politicians get hired in corporations. Interestingly, this trend might also imply that CEOs could become even more political than they were originally, leading to potentially negative outcomes for firms. More research is certainly warranted on this point, which could shed some new light on the antecedents of CPCs.
Outcomes
There are many empirical papers focusing on one question: Do CPCs have an impact on favorable treatment firms might receive from political authorities, and do CPCs therefore impact firms’ financial performance? In that context, great attention has been paid to the measurement of CPCs and how these measures could be compared across countries as well as to discussions about whether they weigh negatively on democratic processes (Luechinger & Moser, 2014). Beyond financial performance, however, more could be done on several types of firm outcomes. There are clearly many opportunities there. While we do not have the space to cover all examined in the field, we list a few key strategic outcomes next because they have only recently started to emerge in the literature and are quite novel in the CPC literature.
CPCs and Corporate Strategies
Some papers have started investigating how CPCs can help firms succeed in M&As (Brockman et al., 2013). However, more can certainly be done in this area. For instance, further lines of inquiry could be traced regarding other organizational forms, such as joint ventures or alliances. If CPCs matter for M&As, they should probably play a role as well in the context of these collaborative strategies. Similarly, the links between sustainability strategies should be investigated. Are sustainability strategies and the development of CPCs complementary, or are they substitutes? This question requires careful investigation. On one hand, one could imagine that CPCs are a way by which firms can leverage their sustainable activities in political settings and get a fair degree of sympathy and support from politicians. On the other hand, firms investing in sustainable strategies might become less inclined to develop CPCs. Investigating this might help us to know more about the complementarities between CPCs and market activities in general.
CPCs and Firm Innovation
Another interesting firm outcome related to CPCs might be innovation, in relationship with the debate over whether CPCs are rent-seeking or value-creating activities. While some suggest that politically connected firms seem to innovate more (Faleye, Kovacs, & Venkateswaran, 2014; Ovtchinnikov, Reza, & Wu, 2020; Tsai, Zhang, & Zhao, 2019), others find the opposite (Díaz-Díaz, López-Iturriaga, & Santana-Martín, 2022). There indeed exists theoretical tension. While CPCs generate financial resources that are needed for innovation (K. Zhou, Gao, & Zhao, 2017), the rent-seeking view of CPCs suggests that political protection reduces firms’ incentives to innovate (Lenway, Morck, & Yeung, 1996) and that closer connections with the state also undermine the efficiency of innovation (K. Zhou et al., 2017). Therefore, our understanding of CPCs and firm innovation remains in its infancy and needs to be extended.
CPCs and Competitive Dynamics
In a similar manner, it is surprising that very few papers currently investigate the relationships between CPCs and competitive dynamics, or multimarket competition. On one hand, CPCs might reduce market competition among firms and thus negatively impact the likelihood that competitors react negatively to the actions undertaken by the focal firm. On the other hand, and for similar reasons, CPCs might facilitate mutual forbearance in the context of multimarket competition, leading again to lower levels of rivalry. This type of relationship should be studied empirically, and should be of importance, at least in countries where relational aspects play an important role.
Conditioning Factors
CPCs and Private Politics
So far, the literature has focused on the role of CPCs in the context of public politics, that is, when firms try to influence public policies. More and more, however, the most difficult challenges faced by firms tend to take place in the context of private politics, in which environmental or social activists engage against firms—for instance, through boycotts or media and internet campaigns—to push them to self-regulate (Baron & Diermeier, 2007). This could have two impacts on CPCs. On the one hand, the increasing importance of private politics might reduce the importance of CPCs for many firms, as the nonmarket landscape could move from the political arena to the media arena. Similarly, as activist challenges attract visibility and public attention, they tend to reduce politicians’ ability to provide favorable treatments to firms (Bonardi & Keim, 2005), therefore making CPCs less valuable to firms.
On the other hand, there could exist contexts in which the links between political power and the media are tight enough that CPCs become more important, even in the context of private politics. Moreover, Jia, Shi, and Wang (2018) demonstrate that the scrutiny and pressure exerted by communities may be greater for politically connected firms than for unconnected ones. More work is needed on the links between CPCs and other corporate activities, in particular, CSR activities, in the context of private politics (McDonnell & Werner, 2016).
CPCs, Economic Development, and Institutional Environment
One interesting and understudied area of CPC research pertains to the level of economic development at the country level and the nature of the institutional environment. It is plausible to argue that CPCs need to fit the institutional environment (Strickland, 2020). Thus, institutional differences across countries should affect CPCs (L. Chen, Li, & Fan, 2018). So far, the literature has considered these connections to be relatively homogenous, beyond differences regarding their measurement (Faccio, 2006). However, for reasons mentioned earlier, the nature and value of these CPCs for firms might be determined by the formal and informal institutions of the country in which they are embedded. Countries with more decentralized decision-making processes, for instance, may require combining various types of CPCs, whereas a single type of connection may be less valuable. In more centralized countries, the opposite conclusion might be drawn. Few comparative studies of this kind exist in the literature to date, and more work in this area is certainly warranted. This idea also suggests that firms might have an interest in hiring foreign politicians in the context of international expansion or international strategies. Again, this topic has had little study thus far.
Similarly, the relationship between the development of a country's institutional environment (North, 1990) and the value of CPCs might be worth further exploration. Conventional wisdom suggests as institutions in a country function more efficiently, institutional voids disappear (Khanna & Palepu, 2000), and firms might rely less on CPCs and more on traditional market mechanisms. However, Haveman et al. (2017) show that in China, CPCs become even more important to firm value as markets expand; Acemoglu et al. (2016) demonstrates that CPCs matter greatly even in a country with strong overall institutions. This tension needs to be addressed.
Conclusion
In this article, we conduct a comprehensive review of research on CPCs that has been published in the top journals of multiple disciplines, including management, economics and finance, political science, and sociology. Despite the extensive knowledge developed on CPCs, which occurs at an increasing speed particularly in management, we lack understanding of multiple critical issues and the connections among what appear to be a disparate array of studies that examine different aspects of CPCs. First, we develop an integrative framework to demonstrate the logical connections among common topics in the literature by unpacking the connotations and key features of CPCs, distinguishing antecedents of CPCs at the levels of the firm and political actors, and the consequences of CPCs at the levels of the firm, political actors, and the institutional environment. We overlay this framework with the map of common theoretical perspectives used to study CPCs to provide a stronger theoretical foundation of our review. Second, we use this framework to identify key gaps in the literature and discuss several directions to open up avenues for future research. We believe that the rapidly growing literature of CPCs has reached a stage at which researchers need to take stock of existing knowledge and “connect the dots” by comparing, contrasting, and connecting both the theoretical perspectives employed and the phenomena studied by the existing work in order to more accurately identify valuable future directions and more effectively push the literature further. We hope our review achieves this goal.
Footnotes
Acknowledgments
This research was funded, in part, by the research start-up funds provided by the Asper School of Business, University of Manitoba.
Declaration of Conflicting Interests
The authors declared no potential conflicts of interest with respect to the research, authorship, and /or publication of this article.
