Home Political Connections and Outward FDI of Emerging Market Firms

While political connections are a critical non-market strategy for emerging market firms (EMFs) to achieve success, how they affect EMFs’ outward foreign direct investment (OFDI) remains controversial. Building on the institution-based view, we examine how home-country political connections facilitate or impede EMFs’ OFDI. Using a panel dataset of listed private firms in China, we find that home political connections have an inverted U-shaped effect on firms’ OFDI level; the effect becomes flatter as pro-market reforms proceed in the home country, but becomes steeper for firms with strong technological capability. By revealing a nonlinear effect, our study helps reconcile inconsistencies regarding the role of home political connections in OFDI and has important implications for EMFs’ internationalization.