Political connection heterogeneity and firm innovation: An investigation of privately controlled, publicly listed firms in China

Abstract

This study investigates the influence of ascribed and achieved political connections on corporate strategies of incremental versus radical innovation. The corporate political strategy literature maintains that while politically connected firms have access to resources controlled by the government, they also have an obligation to reciprocate for this access by fulfilling government expectations. We integrate an institutional perspective with the political strategy literature to develop the argument that ascribed political connections enhance incremental innovation because firms with these connections will tend to innovate just enough to meet government expectations. In contrast, firms with achieved political connections will tend to prefer radical innovation because these innovations help them to maintain their relationships with the government and expand their competitive advantage in the market. Furthermore, we propose that these effects depend on firms' innovation orientation, captured by the firms' technological capability, industry characteristics, and the innovation context of their geographical region. Our predictions are largely supported by analysis of a panel dataset of privately controlled, publicly listed Chinese firms during the period 2008 to 2018. Our findings reveal that the positive effect of ascribed political connections on incremental innovation is less salient when a firm has stronger technological capability, or when a firm operates in a high-tech industry or a region with a strong innovative climate. Conversely, the positive influence of achieved political connections on radical innovation is stronger when a firm has stronger technological capability, or when a firm competes in a high-tech industry or is located in a region with a strong innovative climate. We also discuss the important implications for firms and the government.