Research On The Relationship Between The Entrepreneurial Political Connections And Firm's Performance:the Moderating Effects Of Entrepreneurial Discretion

In the early 1940s last century,Selznick who was a scholar on organization and management began to research the relationship between the organization and the government.He revealed that this kind of relationship can affect the business deal.Later in more than half a century,scholars from economics,finance,business,political science,public administration and other field involved in study this phenomina.However,whether theoretical or empirical researchs,the conclusions of different scholars are not totally consistent even opposite.There have three most fundamental reasons.The first one is that they didn't consider the political connections to be built and sustained need considerable inputs,and the inputs offset enterprise performance.The previous studies assumed or implicitly assumed that these political connections are free and may not be considered.Only a small amount of literatures considered this problem and they only engaged in theoretical analysis because they could not collect these data.The second one is that they mistakenly think the resources of entrepreneurial political connections can be used directly.In fact,the resources of the political connections is a kind of potential resources.If entrepreneurs want to turn these potential resources into actual resources the entrepreneurs need to mobilize/use political connections.The costs of mobilization are enormous,as a result they reduce business performance.So,when we consider the effects of political connections on business performance,we must also analyze these cost.The third one is that the previous researchs wrongly thnk or implicitly assume that the resources of entrepreneurial political conncetions can be fully utilized by the entrepreneur.In other words,if the utility of these actual resources is A the enterprises will get A benefits,and thus there will be A increase in performance.But the reality is often not satisfactory.There are not entirely without bounds on entrepreneurial action,and there are a variety of factors will hind entrepreneurial action.So these resources of entrepreneurial political connections are not fully utilized because of these stumbled factors,and the effectiveness of these resources is derogatory in the process of their work.So the utilization(or use,function)of the resources in the process is crucial in research.These three factors are taken into account in the current study,and this also makes up for the deficiencies of previous studies.This study uses the input-process-output(IPO)framework to analyse.Of which,input stands for the actual resources of entrepreneurial political connections,process denotes the transformation of these resources in the enterprise by the entrepreneurs,reffered as transformation process,output is the yielding of these resources,namely enterprise performance.Because the entrepreneurial action of the resources transformation cannot be watched,this study uses entrepreneurial discretion to indicate the transformation process.If the entrepreneurial discretion,namely the latitude of entrepreneurial action,is high,this transformation process will be smooth,and the resources conversion loss are smaller,or the conversion rate is relatively high.If entrepreneurial discretion is smaller,the conversion loss is high,or the conversion rate is lower.If we combine the input of the maintaining and mobilizing of the entrepreneurial political connections,we can use a more simplified expressions as follows:utility of the actual resources of entrepreneurial political connections*entrepreneurial conversion rate-cost of maintaining and mobilizing entrepreneurial political connections =business performance improvement.Because entrepreneurial conversion rate depends on entrepreneurial discretion,therefore the above expression can be amended as:utility of the actual resources of entrepreneurial political connections*entrepreneurial discretion-cost of maintaining and mobilizing entrepreneurial political connections =business performance improvement.According to theory of social capital,it is usually profitable that people build social capital,in other words,in the above expression the utility fo actual resources of the entrepreneurial political connections is larger than the cost of maintaining and mobilizing of the entrepreneurial political connections.According to the stewardship theory(the object of this research is private entrepreneurs,and they conform to the stewardship theory assumption),the entrepreneurs will endeavor for the enterprise's benefit not for the private benefit.So,the efficacy of the entrepreneurial political connections on firm's performance mainly depends on the entrepreneurial discretion.The higher the entrepreneurial discretion(i.e.conversion rate is higher)the more the firm's performance improve.In turn,the smaller the entrepreneurial discretion,the smaller the enterprise performance improve.Obviously,when the entrepreneurial discretion is over small,in the extreme that the entrepreneurs are puppets,these political connections cannot function,and the efficacy of the entrepreneurial political connections is negative,and the negative number is equal to the costs of Imaintenance and mobilization of the political connections.With a set of panel data of the Chimese private listed companies during 2003-2011,this study empirically examinates the relationship between entrepreneurial political connections and firm's performance.The entrepreneurial discretion to be analysed includes 7 categories:environment munificence,system environment,industry regulation,organizational slack,CEO duality,proportion of entrepreneurial controlling power,and entrepreneurial education.With factor analysis the indicators of entrepreneurial political connections are reduced to two factors including government official&CPPCC member(abbreviated official-member),and deputy to people's congress(abbreviated deputy).Considering the econometric common issues including extreme values,missing values,multicollinearity,endogenous,heteroscedasticity and autocorrelation,this study also conducts a robustness test,including the multiple dimensions of performance(ROE,ROA,ROS,revenue,net profit),multiphase performance(the performance of the current year,second year and the third year),entrepreneurial political connections and their square,controlling and not control ling contemporary performance.We draw the robust conclusions as follows.First,The Main Effects Of The Entrepreneurial Political Connections.Through regression analysis the effects of the political connection of official-member on the firm's performance are all positive but not significantly.This suggests that the benefit of this kind of political connection is almost equal to the cost of maintaining and mobilizing of this political connection.The net effects are zero after the benefit and cost offset.On the other hand,the effects of the political connection of deputy on the ROE,ROA,ROS and net profit are all significantly negative,and its effect on revenue is positive but not significantly.These imply that the efficacy of entrepreneurial deputy identity to the enterprise is smaller than the expenditure from the enterprise to it.Second,The Interaction Effects Of Entrepreneurial Political Connections.The interaction effects of official-member.System environment.The interactive item of system environment and official-member is significantly positive when the dependent variable is revenue,and they are not significant when the dependent variables are efficiency performance and net profit.These show that more perfect system environment the building and maintaining of political connections are more difficulty(as the procedure is more open,the legal system is more perfect),so as to the more input needed to building and maintaining the political connections.On the other hand,the government intervenes less in the area with more perfect system environment,and the entrepreneurs are less constrained so as to the entrepreneurs more freely take(utilize)the actual resources of the political connections.So the effect on revenue is significantly positive,but the effect on net profit is not significant because of the over input.Industry regulation.The interactive item of industry regulation and official-member is very significantly negative when dependent variable is ROE,ROA,ROS and net profit,and the interactive item is also negative but not significantly when dependent variable is revenue.The not significant effect on revenue suggests that the conversion loss of this kind of political connections mainly lies in the resources of political connections wasted or idled.In fact,the industry regulation is on kind of government intervention,and its forms and its impact ways are various.These interventions have no impacts on frim's sales revenue because they don't impact the firm's market behavior.These interventions have impact on profit because the firms expenditure is too much.In other words,the government interventions suppress entrepreneurial discretion so as to the resources of political connections cannot be fully utilized.On the other hand,the maintaining of political connections is over costly(such as to achieve some government objective,etc).Their negative effect on profit is natural after the efficacy and cost offset each other.CEO duallity.The interactive item of political connections of official-member and CEO duality is all significantly positive when dependent variables are ROE,ROA,ROS,revenue and net profit.This suggest that when the entrepreneurial discretion is large the effects of political connections of official-mem ber on firm's performance are larger.Portion of entrepreneurial controlling power.The interactive item of political connections of official-member and portion of entrepreneurial controlling power is significantly positive only when the dependent variable is ROE,and the interactive items are all positive but not significant for all other performance dimensions.These imply that portion of entrepreneurial controlling power has weak moderating effect when it serves as the proxy of entrepreneurial discretion.The interactive effect of deputy.Industry regulation.The interactive items of deputy and industry regulation are all not significant when the dependent variables are performance of the second year,but they are significant when the dependent variables are performance of the third year,and only for the ROE,ROA,ROS and net profit,and they are negative but not significantly for the revenue performance.This implies that the efficacy of entrepreneurial political connections of duputy are worse to the longer term performance in regulated industry than in unregulated industry.They are not significant for shorter term performance,and they are also not significant for short and long term revenue performance.These suggest that the negative effects of deputy in regulated industry are through the cost(expenditure),and through the long term cost not the short tenn cost.Organizational slack.The effect of political connections of deputy is worse on enterprise performance when the enterprise has plenty resources and the dependent variable is revenue,and they have negative and not significant effects on all other performance dimensions.This implies that the reduction of revenue is mainly due to the expenditure for the maintaining of political connections used for the other purpose(such as entrepreneur seeking the political honor)not for the market strategy.The consequence is the reduction of revenue.They have not significant negative effects on profit varialbes because the utility of political resources offsets the expenditure of maintaining political connections when the entrepreneurial discretion is higher(when the organization is slack).CEO duality.The interactive items are significantly negative when the perfomance indicators are ROE,ROA,ROS and net profit,and they are not significant when dependent variable is revenue.As the agent role of deputy,the latitude of entrepreneurial action is larger when the CEO is dual,and the entrepreneur can manipulate the enterprise more easily for their self interest at the cost of the enterprise.Because they have no impacts on the market strategy,they have no siginificant effects on revenue.Propotion of entrepreneurial controlling power.As entrepreneur has deputy identity the moderating effects of propotion of entrepreneurial controlling power is the same as the CEO duality.It has siginificantly negative effects on ROE,ROA,ROS and net profit,but has no effect on revenue.Third,The Stewd Role And Agent Role Of Entrepreneur.Through the analysis of main effects of political connections we can find that the effects of official-member and deputy are different especially on the performance about profit,the fomer are not significantly positive and the latter are significantly negative.Through the moderating effects analysis we find that the official-member has significant effects on enterprise performance when entrepreneurial discretion is large(namely the latitude of entrepreneurial action is large),and deputy has negative effects on ROE,ROA,ROS and net profit,and it has no siginificant effect on revenue when entrepreneurial discretion is large.So,the negative effects of deputy are actualized through the cost or expenditure of the enterprise.Through regression deputy and official-member to the cost(financial cost,administrative cost,sales cost and general cost)we find that the regression coefficient is not significantly negative when the dependent variable is official-member,and the regression coefficient is significantly positive when the dependent variable is deputy.The results are the same when we square the official-member and deputy.These suggest that it is not cost-effective for entrepreneur to building and maintaining the political connections of deputy,and it is unnecessary,and the entrepreneur has no impulse.On the contrary,the entrepreneur has large impulse to building and maintaining the identity or honor of deputy with large input.When the entrepreneurial discretion is higher(especial CEO is dual and the proportion of entrepreneurial controlling power is higher),the deputy is more disadvantageous to firm's performance.This indicates that entrepreneur is willing to invest large to building and maintaining this honor.The spending gos over the benefit from deputy to enterprise.So the entrepreneur with the identity of official-member is firm's stewd,and the entrepreneur with the identity of deputy is firm's agent.The Theoretical Contributions Of This Research Are Discribed As Follows.First,this is the first research that dissects the effects of entrepreneurial political connections on firm's performance from contingency perspective of entrepreneurial discretion,and it can make up for the deficiencies of previous researchs that only focus on the direct effects not on the moderating effects,so as to reconcile the inconsistency of previous researchs.The current research provides a fine-grained understanding about the entrepreneurial political connections.Second,this research firstly considers the process which entrepreneurial political connections impact firm's performance.With the analysis frame of input-process-output the current research examines the relationship between the entrepreneurial political connections and firm's performance.However the previous researchs take the process as a black box so as to their results are full of contradiction.The current research explores the process which firm's performance is impacted,from entrepreneurial discretion combining the analy'sis frame of input-process-output.The resources of entrepreneurial political connections are the input,entrepreneurial discretion is an important factor impacting the process,and the firm's performance is output.We cannot observe the entrepreneurial action(conversion)process in the firm,but this cannot prevent us from examining the process.The current research ingeniously analyzes the invisible conversion process from entrepreneurial discretion which makes an enomous impact on the process.This is a unique innovation in research perspective.Third,the previous researchs about entrepreneurial political connections(social capital)mainly focus on the access of political connections,and few researchs consider the mobilization(or use),and building and mantaining of political connections.The resources of entrepreneurial political connections are invaluable to enterprise and conducive to increase the firm's performiance.But,these resources are not free and costly.So,we must combine the benefit and cost of political connections to examine their effects on performance.Forth,the entrepreneurial agency theory and stewdship theory are not either-or thing.This research analyzes the private entrepreneur from the perspective of stewdship theory,but has never forsaken the assumption of agency theory.The previous researchs about entrepreneurial social capital(political connections)only considered one theory assumption or implicitly considered one theory assumption.They argue the agency theory works when the entrepreneurial political connections are against the firm's performance.They consider or implicitly consider the stewdship assumption when the entrepreneurial political connections are conducive to firm's performance.In fact,entrepreneurial political connections may not be favorable to the firm's performance as they are the stewd of the firm.The Practical Contributions Of This Research Are Discribed As Follows.First,the building of political connections.Entrepreneurial political connections are not all beneficial to firm's performance.The empirical examination shows that the entrepreneurial political connections of deputy are unfavourable to firm's performance.The main reseaon is that the spending on the political honor which entrepreneur seeks is too much,and the entrepreneur realizes their own interest at the cost of the enterprise.The entrepreneur who are ex-official and current and past member of the CPPC is conducive to firm's performance,and they may not persuit their own political honor at the cost of the enterprise(empirical analysis indicates that it is not cost-effective and not necessary to do so).So,the building of political connections needs to balance the benefit and the cost.Second,the corporate governance.There are no final conclusions about agency theory and stewdship theory in corporate governance.In fact,the two theories are all correct in practice and are contingent.The current research provides a selective basis:the entrepreneur who is ex-official and current and past member of the CPPC is a stewd of the enterprise and the structure of governance should be desiged from the assumption of stewdship theory,such as the CEO duality is beneficial to enterprise,and the high proportion of entrepreneurial controlling power is not bad to enterprise.So for this kind of entrepreneur we should try to make them free,and don't strengthen the constraints and restrictions to them.The entrepreneurs who are and were deputy should be monitored and controlled as they are the agents of the enterprise.So the position of chairman and CEO should be set apart,and the proportion of the entrepreneurial controlling power should be confined,or this kind of entrepreneur may realize their own interest at the cost of enterprise.Third,the entrepreneurial identification.The higher entrepreneurial education is not the better.Through statistical analysis of this research we can find that the entrepreneurial higher degree is not beneficial to firm's performance for the listed private firms in China.The practical implication is that we cannot overestimate the importance of entrepreneurial degree to enterprise.In return,we cannot underestimate the administrative ability of the entrepreneur whose degree is lower.This conclusion makes us to be cautious about entrepreneurial degree.At least,the degree is not a precise proxy of comprehensive management ability of the entrepreneur.