Political instability, resources, and political networking of firms in transition economies

Abstract

Firms engaging in political networking is a widely witnessed phenomenon in transition states where the economy shifts from central planning to market mechanism. In this article, we integrate the institutional-based and resource-based perspectives to propose that firms located in transition countries with higher political instability tend to invest more in political networking; firms with substantial specific resources help enhance/devalue the political networking as political instability increases. This paper tests these arguments by using a sample of 24,959 firms in former communist countries. Our results reveal an inverted U-shaped influence of political instability on firm political networking. Specifically, with the political environments getting increasingly unstable, innovation investment and industrial experience motivate firms to maintain political networks, while financial capital demotivates firms’ investment in political networking. These findings shed light on deepening understandings of when and how political environments shape firms’ strategic behaviors in transition economies.