A Study On The Relationship Among Private Firms’ Political Connection, Diversification And Performance

Chinese private companies and China’s modern history alike witnessed many upheavals,such as westernized movement, rise of national industrialization and socialist transformation.Since the economy reform beginning at1978, the newly born Chinese private companiesbuild their business from scratch and play an increasingly important role in Chinese economicand social development; meanwhile, the industrial and geographic diversifications areinevitable in their growth path. Facing the challenge and opportunity along with the entry ofWTO, Chinese private companies need strategically plan the industrial or geographicdiversifications, which are decisive for enhancing their firm-specific advantage and globalcompetitiveness on the basis of country-specific advantage. However, Chinese privatecompanies still heavily rely on relation-based means to make the decision because informalinstitutions complement the formal institutional voids. Among all the external stakeholders,the relation between the private company and governments of all levels is the most influentialfactor within informal institutions. On the other hand, given the two distinct periods ofmarket-oriented institutional change, from institutional friction to institutional convergence, itis indicated that the two-dimensions of diversification strategy cannot be argued to be eitheruniformly beneficial or uniformly costly without a specification of the institutionalcontingencies over time. Therefore, based on the “institution–conduct–strategy” researchparadigm, this paper discussed the antecedents and outcomes of diversification of Chineseprivate companies. Specifically, three questions were examined:(1) Does political connectionaffect geographic and industrial diversification?(2) Given the complexity of Chineseinstitutional context, do the regional institution variances and administration tiers moderatethe first main effect of political connection and geographic and industrial scope?(3) Given theinstitutional change over time, do the geographic and industrial diversifications add or destroyvalue in terms of short-run and long-run effect?Based on the extant literatures, this paper proposed a research framework of politicalconnection, diversifications and performance and specified each hypothesis. Then, we collectsecondary data of1208Chinese private companies listed in Shanghai and Shenzhen stock exchanges during2004and2009, and use regression analysis to test hypotheses. Allsignificantly supported conclusions are stated as below:Firstly, in the context of institutional transition, informal rules have complementary effectfor the malfunction of formal institutions. Chinese private companies’ political connectionspositively affect their level of geographic and industrial diversifications. Secondly, regionalvariances of institutions negatively moderate the relation between political connection andindustrial diversification; and administrative tiers positively moderate the relation betweenpolitical connection and geographic diversification. Thirdly, the level of geographicdiversification negatively related to short-term performance, but positively related tolong-term growth value; whilst the level of industrial diversification negatively related toshort-term performance and has nothing to do with the growth value.The unique institutional transition context provided us a platform to conduct empiricalstudy of Chinese private companies’ political connection, diversification strategy andcomprehensive performance. This paper contributes to theoretical literature and managerialpractice in terms of three aspects:(1) enriched the institution-based theory of corporatediversification, as well as expanded the resources-based view and industry-based view ofstrategy research. Political connection serves as an important form of informal institution;private companies can convert it into a sort of institutional resource or competence and thenpromote the leverage of its firm-specific advantage and gain protection across regions andindustries.(2) used regional variances of institutions and administrative tiers as moderatingvariables, this study answered the contingent boundary of the effect of political connectionand deepened the understanding of its changing trend and applied range in the institutiontransition process and hierarchical bureaucratic establishments.(3) used the growth optionvalue as measurement of long-term performance to assess the outcomes of diversificationstrategy, it can present a clearer and more comprehensive judgment forecast to guidemanagers’ diversification decision. At last, this paper also pointed out the limitation the futureresearch direction.