The impact of political ties on firms’ innovation capability: Evidence from China

Though the benefits of political ties in emerging markets are well-documented, their potential negative impact on firms' innovation capabilities (i.e., the efficiency of transforming resource inputs into innovative outputs) has not been thoroughly explored. Building on the upper echelons theory, we propose that political ties hinder innovation capabilities by diverting executives’ focus away from innovation transformation. We also suggest that the detrimental effect of political ties is weakened for firms with executives having R&D backgrounds or overseas experience. Our findings based on publicly listed private manufacturing firms in China from 2008 to 2017 confirm our predictions, after correcting for endogeneity. These findings offer a new theoretical lens to explain political ties’ dark side and a nuanced understanding on how to leverage political ties effectively in emerging markets.