Skip to main content
SpringerLink
Log in

Foreign political connections

  • Published:
Journal of International Business Studies Aims and scope Submit manuscript

Abstract

Liability of foreignness, a firm’s social and economic costs of operating in a foreign market, is a major concern for multinational corporations and firms trying to enter new markets. To reduce the liability of foreignness, a firm may engage in strategic international political management via foreign political connections and thus lower barriers to entry. Faccio (Am Econ Rev 96(1):369–386, 2006) suggests that political connections can be established by having large shareholders, who are politicians or are politically connected. This paper investigates the value of such foreign political connections for publicly listed firms. We find that foreign political connections create large firm value and improve access to foreign markets. One of the main channels of value creation is government contracts awarded to firms with direct foreign political connections. Our findings provide evidence of the effectiveness of having large and active foreign politically connected shareholders as part of a firm’s international political corporate strategy.

Résumé

Les inconvénients de l’extranéité, les coûts sociaux et économiques d’une entreprise opérant dans un marché étranger, sont une préoccupation majeure pour les entreprises multinationales et les entreprises qui tentent de pénétrer de nouveaux marchés. Pour réduire les inconvénients de l’extranéité, une entreprise peut s’engager dans la gestion stratégique de la politique internationale via des connexions politiques étrangères, et ainsi réduire les barrières à l’entrée. Faccio (2006) suggère que les relations politiques peuvent reposer sur l’accueil de grands actionnaires politiques ou politiquement connectés. Cet article étudie la valeur de ces relations politiques étrangères pour des entreprises cotées. Nous constatons que les relations politiques étrangères créent de la valeur pour les grandes entreprises et améliorent l’accès aux marchés étrangers. L’un des principaux canaux de création de valeur sont les marchés publics attribués aux entreprises ayant des relations politiques étrangères directes. Nos résultats fournissent des preuves sur l’efficacité d’avoir des actionnaires étrangers importants et politiquement connectés dans le cadre de la stratégie de politique internationale de l’entreprise.

Resumen

La desventaja de extranjería, los costos sociales y económicos de una empresa al operar en un mercado extranjero, son una gran preocupación para las corporaciones multinacionales y las empresas que tratan de entrar a mercados nuevos. Para reducir las desventajas de ser extranjero, una empresa puede participar en la gestión política internacional estratégica mediante conexiones políticas extranjeras y con esto disminuir las barreras de entrada. Faccio (2006) sugiere que las conexiones políticas pueden ser establecidas teniendo grandes accionistas, quienes sean políticos o políticamente conectados. Este artículo investiga el valor de estas conexiones políticas internacionales para empresas listadas en bolsa. Encontramos que las relaciones políticas internacionales crean valor y mejoran el acceso a mercados internacionales. Uno de los principales canales de creación de valor es el otorgamiento de contratos públicos a empresas con conexiones políticas extranjeras directas. Nuestros hallazgos dan evidencia de la efectividad de tener accionistas extranjeros grandes y activos políticamente conectados como parte de la estrategia corporativa de la empresa.

Resumo

Desvantagem de ser estrangeiro, custos sociais e econômicos da empresa ao operar em um mercado externo é uma grande preocupação para empresas multinacionais e empresas que tentam entrar em novos mercados. Para reduzir a desvantagem de ser estrangeiro, uma empresa pode envolver-se em gestão política estratégica internacional via conexões políticas estrangeiras e, portanto, diminuir barreiras de entrada. Faccio (2006) sugere que as conexões políticas podem ser estabelecidas tendo grandes acionistas que são políticos ou estão politicamente conectados. Este artigo investiga o valor de tais conexões políticas estrangeiras para empresas listadas. Constatamos que as conexões políticas estrangeiras criam um grande valor para a firma e melhoram o acesso a mercados estrangeiros. Um dos principais canais de criação de valor são os contratos com o governo concedidos a firmas com conexões políticas diretas estrangeiras. Nossos resultados fornecem evidência da eficácia de ter acionistas grandes e politicamente ativos no estrangeiro como parte da estratégia corporativa política internacional de uma empresa.

概要

异国劣势,一个公司在国外市场运营的社会和经济成本,是跨国公司和企业试图进入新市场的一个主要问题。要减少异国劣势,企业可以通过外国政治关系进行战略国际政治管理,并从而降低进入门槛。Faccio(2006)认为,政治关系可以通过拥有是政客或有政治关系的大股东来建立。本文调查了上市企业这样的外国政治关系的价值。我们发现,外国政治关系产生大的企业价值并改善外国市场的进入。价值创造的主要渠道之一是对具有直接国外政治关系的公司给予政府合同。我们的研究结果为作为公司国际政治战略一部分的拥有雄厚而活跃的外国政治关系的股东的有效性提供了证据。

This is a preview of subscription content, log in via an institution to check access.

Access this article

Log in via an institution

Price excludes VAT (USA)
Tax calculation will be finalised during checkout.

Instant access to the full article PDF.

Institutional subscriptions

Figure 1

Similar content being viewed by others

References

  • Akey, P. 2015. Valuing changes in political networks: Evidence from campaign contributions to close congressional elections. Review of Financial Studies, 28(11): 3188–3223.

    Google Scholar 

  • Alcacer, J., & Chung, W. 2002. Knowledge seeking and location choices of foreign direct investment in the United States. Management Science, 48(12): 1534–1554.

    Google Scholar 

  • Baranson, J. 1970. Technology transfer through the international firm. American Economic Review, 60(2): 435–440.

    Google Scholar 

  • Barney, J. B. 1991. Firm resources and sustained competitive advantages. Journal of Management, 17(1): 99–112.

    Google Scholar 

  • Bertschek, I. 1995. Product and process innovation as a response to increasing imports and foreign direct investment. Journal of Industrial Economics, 63(4): 341–357.

    Google Scholar 

  • Chen, J., Cumming, D., Hou, W., & Lee, E. 2014. CEO accountability for corporate fraud: Evidence from the split share structure reform in China. Journal of Business Ethics, 1–20.

  • Correia, M. 2014. Political connections, SEC enforcement and accounting quality. Journal of Accounting and Economics, 57(2): 241–262.

    Google Scholar 

  • Dominguez, K. M., Chen, W., & Chari, A. 2012. Foreign ownership and firm performance: Emerging-market aquisitions in the United States. IMF Economic Review, 60(1): 1–42.

    Google Scholar 

  • Eden, L., & Peter Rodriguez, K. U. 2005. Government corruption and the entry strategies of multinationals. The Academy of Management Review, 30(2): 383–396.

    Google Scholar 

  • Faccio, M. 2006. Politically connected firms. American Economic Review, 96(1): 369–386.

    Google Scholar 

  • Fisman, R. 2001. Estimating the value of political connections. American Economic Review, 91(4): 1095–1102.

    Google Scholar 

  • Henisz, W. 2000. The institutional environment for multinational investment. Journal of Law, Economics, and Organization, 16(2): 334–364.

    Google Scholar 

  • Hitt, M. A., & Hillman, A. J. (1999). Corporate political strategy formulation: A model of approach, participation, and strategy decisions. The Academy of Management Review, 24(4): 825–842.

    Google Scholar 

  • Howitt, P., Griffith, R., Blundell, R., Bloom, N., & Aghion, P. 2005. Competition and innovation: An inverted U relationship. Quarterly Journal of Economics, 120(2): 701–728.

    Google Scholar 

  • Huber, P. J. 1973. Robust regression: Asymptotics, conjectures and Monte Carlo. The Annals of Statistics, 1(1): 799–821.

    Google Scholar 

  • Hymer, S. H. 1983. The International operations of nation firms: A study of foreign direct investment. Cambridge, MA: M.I.T. Press.

    Google Scholar 

  • Jayachandran, S. 2006. The Jeffords effect. The Journal of Law and Economics, 49: 397–425.

    Google Scholar 

  • Jiang, F., & Cui, L. 2012. State ownership effect on firms’ FDI ownership decisions under institutional pressure: a study of Chinese outward-investing firms. Journal of International Business Studies, 43(3): 264–284.

    Google Scholar 

  • Keller, W. 2004. International technology diffusion. Journal of Economic Literature, 42(3): 752–782.

    Google Scholar 

  • Kindleberger, C. P. 1969. American business abroad. The International Executive, 11(2): 11–12.

    Google Scholar 

  • Knoeber, C., & Agrawal, A. 2001. Do some outsider directors play a political role? Journal of Law and Economics, 44(1): 179–198.

    Google Scholar 

  • Kobrin, S. J. 1979. Political risk: A review and reconsideration. Journal of International Business Studies, 10(1): 67–80.

    Google Scholar 

  • Kobrin, S. J. 1991. An empirical analysis of the determinants of global integration. Strategic Management Journal, 12(S1): 17–31.

    Google Scholar 

  • Kramer, M. R., & Porter, M. E. 2011. Creating shared value. Harvard Business Review, 89(1): 62–67.

    Google Scholar 

  • Laeven, L., Feijen, E., & Claessens, S. 2008. Political connections and preferential access to finance: The role of campaign contributions. Journal of Financial Economics, 88(3): 554–580.

    Google Scholar 

  • Lel, U., & Kotter, J. 2011. Friends or foes? Target selection decisions of Sovereign Wealth Funds and their consequences. Journal of Financial Economics, 101(2): 360–381.

    Google Scholar 

  • Li, J., Gala, V. D., & Belo, F. 2013. Government spending, political cycles, and the cross section of stock returns. Journal of Financial Economics, 107(2): 305–324.

    Google Scholar 

  • Li, K., Harford, J., & Chen, X. 2007. Monitoring: Which institutions matter? Journal of Financial Economics, 86(2): 279–305.

    Google Scholar 

  • Liao, R. C., & Karolyi, G. A. 2016. State capitalism’s global reach: Evidence from foreign acquisitions by state-owned companies. Journal of Corporate Finance, Forthcoming.

  • Lu, J., Jia, N., & Choi, S.-J. 2015. The structure of political institutions and effectiveness of corporate political lobbying. Organization Science, 26(1): 158–179.

    Google Scholar 

  • Luo, Y. 2001. Toward a cooperative view of MNC-host government relations: Building blocks and performance implications. Journal of International Business Studies, 32(3): 401–419.

    Google Scholar 

  • Malatesta, P. H., & Dewenter, K. L. (2001). State-owned and privately owned firms: An empirical analysis of profitability, leverage, and labor intensity. American Economic Review, 91(1): 320–334.

    Google Scholar 

  • Malatesta, P. H., Han, X., & Dewenter, K. L. 2010. Firm values and Sovereign Wealth Fund investments. Journal of Financial Economics, 98(2): 256–278.

    Google Scholar 

  • Malloy, C., Frazzini, A., & Cohen, L. 2008. The small world of investing: Board connections and mutual funds returns. Journal of Political Economy, 116(5): 951–979.

    Google Scholar 

  • Markusen, J. R. 1984. Multinationals, multi-plant economies and the gains from trade. Journal of International Economics, 16(3–4): 205–226.

    Google Scholar 

  • Matos, P., & Ferreira, M. A. 2008. The colors of investors’ money: The role of institutional investors around the world. Journal of Financial Economics, 88(3): 499–533.

    Google Scholar 

  • Mauck, N., Knill, A. M., & Johan, S. 2013. Determinants of Sovereign Wealth Fund investment in private equity versus public equity. Journal of International Business Studies, 44(1): 155–172.

    Google Scholar 

  • Mauck, N., Lee, B. S., & Knill, A. M. 2012a. Bilateral political relations and the impact of Sovereign Wealth Fund investment. Journal of Corporate Finance, 18(1): 108–123.

    Google Scholar 

  • Mauck, N., Lee, B. S., & Knill, A. M. 2012b. Sovereign wealth fund investment and the return-to-risk relationship of their target firms. Journal of Financial Intermediation, 21(2): 315–340.

    Google Scholar 

  • Metrick, A., Ishii, J., & Gompers, P. 2003. Corporate governance and equity prices. Quarterly Journal of Economics, 118(1): 107–155.

    Google Scholar 

  • Mian, A., & Khwaja, A. 2005. Do lenders favor politically connected firms? Rent provision in an emerging financial market. Quarterly Journal of Economics, 120(4): 1371–1411.

    Google Scholar 

  • Miller, S. R., & Eden, L. 2004. Advances in international management, chap. Distance matters: Liability of foreignness, institutional distance and ownership strategy, 187–221. New York: Emerald Group Publishing Limited.

  • Miracky, W., Megginson, W., Fotak, V., & Bortolotti, B. 2015. Sovereign Wealth Fund investment patterns and performance. Review of Financial Studies, 28(11): 2993–3035.

    Google Scholar 

  • Mitton, T., & Johnson, S. H. 2003. Cronyism and capital controls: Evidence from Malaysia. Journal of Financial Economics, 67(2): 351–382.

    Google Scholar 

  • Netter, J., & Megginson, W. 2001. From state to market: A survey of empirical studies on privatization. Journal of Economic Literature, 39(2): 321–389.

    Google Scholar 

  • Nguyen, B. D. 2012. Does the rolodex matter? Corporate elite’s small world and the effectiveness of boards of directors. Management Science, 58(2): 236–252.

    Google Scholar 

  • Orhan, M., Rousseeuw, P. J., & Zaman, A. 2001. Econometric applications of high-breakdown robust regression techniques. Econometrics Letters, 71(1): 1–8.

    Google Scholar 

  • Ovtchinnikov, A., Gulen, H., & Cooper, M. (2009). Corporate political contributions and stock returns. Journal of Finance, 65(2): 687–724.

    Google Scholar 

  • Pantaleoni, E., & Ovtchinnikov, A. 2012. Individual political contributions and firm performance. Journal of Financial Economics, 105(2): 367–392.

    Google Scholar 

  • Parsley, D., & Faccio, M. 2009. Sudden deaths: Taking stock of geographic ties. Journal of Financial and Quantitative Analysis, 33(3): 683–718.

    Google Scholar 

  • Petersen, M. A. 2009. Estimating standard errors in finance panel data sets: Comparing approaches. Review of Financial Studies, 22(1): 435–480.

    Google Scholar 

  • Porter, M. E. 1990. The competitive advantage of nations. New York: The Free Press.

    Google Scholar 

  • Pruitt, S. W., & Chung, K. H. 1994. A simple approximation of Tobin’s q. Financial Management, 23(3): 70–74.

    Google Scholar 

  • Roberts, B. (1990). A dead Senator tells no lies: Seniority and the distribution of federal benefits. American Journal of Political Science, 34(1): 31–58.

    Google Scholar 

  • Rubin, D. B., & Imbens, G. W. 2015. Causal inference for statistics, social, and biomedical sciences: An introduction. Cambridge: Cambridge University Press.

  • Rubin, D. B., & Rosenbaum, P. R. 1983. The central role of the propensity score in observational studies for causal effects. Biometrika, 70(1): 41–55.

    Google Scholar 

  • Rui, O. M., Johan, S. A., & Wu, W. 2016. Institutional investors, political connections, and the incidence of regulatory enforcement against corporate fraud. Journal of Business Ethics, 134(4): 709–726.

    Google Scholar 

  • Schmukler, S. L., Levine, R., & Gozzi, J. C. 2008. Internationalization and the evolution of corporate valuation. Journal of Financial Economics, 88(3): 607–632.

    Google Scholar 

  • Schoar, A., Lerner, J., & Bernstein, S. 2013. The investment strategies of Sovereign Wealth Funds. Journal of Economic Perspectives, 72(2): 219–238.

    Google Scholar 

  • Schoemaker, P. J., & Amit, R. 1993. Strategic assets and organisational rent. Strategic Management Journal, 14(1): 33–46.

    Google Scholar 

  • Shuen, A., Pisano, G., & Teece, D. 1997. Dynamic capabilities and strategic management. Strategic Management Journal, 18(7): 509–533.

    Google Scholar 

  • Siegel, D., & McWilliams, A. 1997. Event studies in management research: Theoretical and empirical issues. Academy of Management Journal, 40(3): 626–657.

    Google Scholar 

  • So, J., Rocholl, J., & Goldman, E. 2009. Do politically connected boards add firm value? Review of Financial Studies, 22(6): 2331–2360.

    Google Scholar 

  • So, J., Rocholl, J., & Goldman, E. 2013. Politically connected boards and the allocation of procurement contracts. Review of Finance, 17(5): 1617–1648.

    Google Scholar 

  • Stratmann, T. 1991. What do campaign contributions buy? Deciphering causal effects of money and votes. Southern Economic Journal, 57(3): 606–620.

    Google Scholar 

  • Stratmann, T., & Kroszner, R. S. 1998. Interest-group competition and the organization of congress: Theory and evidence from financial services’ political action committees. American Economic Review, 88(5): 1163–1187.

    Google Scholar 

  • Sullivan, D. 1994. Measuring the degree of internationalization of a firm. Journal of International Business Studies, 25(2): 325–342.

    Google Scholar 

  • Tatiana Kostova, S. Z. (1999). Organizational legitimacy under conditions of complexity: The case of the multinational enterprise. The Academy of Management Review, 24(1): 64–81.

    Google Scholar 

  • Thesmar, D., Schoar, A., Kramarz, F., & Bertrand, M. 2008. Politicians, firms and the political business cycle: Evidence from France. Working Paper, University of Chicago.

  • Thomas, R., Partnoy, F., Jiang, W., & Brav, A. 2008. Hedge fund activism, corporate governance, and firm performance. Journal of Finance, 63(4): 1729–1775.

    Google Scholar 

  • Thompson, S. 2011. Simple formulas for standard errors that cluster by both firm and time. Journal of Financial Economics, 99(1): 1–10.

    Google Scholar 

  • Todd, P., Ichimura, H., & Heckman, J. J. 1998. Matching as an econometric evaluation estimator. The Review of Economic Studies, 65(4): 261–294.

    Google Scholar 

  • Tse, D. K., Li, S., & Zhou, D. 2002. The impact of FDI on the productivity of domestic firms: The case of China. International Business Review, 11(4): 465–484.

    Google Scholar 

  • Vishny, R. W., & Shleifer, A. 1994. Politicians and firms. Quarterly Journal of Economics, 104(4): 995–1025.

    Google Scholar 

  • Vishny, R. W., Shleifer, A., & Morck, R. 1988. Management ownership and market valuation: An empirical analysis. Journal of Financial Economics, 20(1): 293–315.

    Google Scholar 

  • Wang, T., Meschke, F., & Aggarwal, R. 2012. Corporate political donations: Investment or agency. Business and Politics, 14(1): 1–40.

    Google Scholar 

  • Warner, J. B., & Brown, S. J. 1985. Using daily stock returns: The case of event studies. Journal of Financial Economics, 14(1): 3–31.

    Google Scholar 

  • Welsch, R. E., Kuh, E., & Belsley, D. A. 1980. Regression diagnostics: Identifying influential data and sources of collinearity. Hoboken, NJ: Wiley.

  • Wesson, T. J. 2004. Foreign direct investment and competitive advantage. Cheltenham: Edward Elgar Publishing.

    Google Scholar 

  • Wu, Y., & Cumming, D. 2016. Political instability, access to private debt, and innovation investment in China. Emerging Markets Review, forthcoming.

  • Young, M., Wongchoti, U., & Civilize, S. 2015. Political connection and stock returns: A longitudinal study. Financial Review, 1: 89–119.

    Google Scholar 

  • Yu, X. Y., & Yu, F. 2011. Corporate lobbying and fraud detection. Journal of Financial and Quantitative Analysis, 46(6): 1865–1891.

    Google Scholar 

  • Yu, X., Knill, A., & Fulmer, S. 2012. Political contributions and the severity of government enforcement. Working Paper, Florida State University.

  • Zaheer, S. 1995. Overcoming the liability of foreignness. Academy of Management Journal, 38(2): 341–363.

    Google Scholar 

  • Zaheer, S. 2002. The liability of foreignness, redux: A commentary. Journal of International Management, 8(3): 351–358.

    Google Scholar 

  • Zhang, T., Wong, T., & Fan, J. 2007. Politically connected CEOs, corporate governance and post-IPO performance of China’s newly partially privatized firms. Journal of Financial Economics, 84(2): 330–357.

    Google Scholar 

Download references

Acknowledgements

We thank the editor, Douglas Cumming, and three anonymous referees for very useful comments. We are grateful to Igor Filatotchev, April Knill, Stefan Lewellen, Ron Masulis, David Reeb, and participants at the JIBS Paper Development Conference, London 2016 and University of New South Wales for helpful comments.

Author information

Authors and Affiliations

  1. School of Banking and Finance, UNSW Business School, University of New South Wales, Gate 2 High Street Kensington, 2052, Sydney, Australia

    Elvira Sojli & Wing Wah Tham

Authors
  1. Elvira Sojli
    View author publications

    You can also search for this author in PubMed Google Scholar

  2. Wing Wah Tham
    View author publications

    You can also search for this author in PubMed Google Scholar

Corresponding author

Correspondence to Elvira Sojli.

Additional information

Accepted by Douglas Cumming, Guest Editor, on 14 November 2016. This article has been with the authors for four revisions.

Electronic supplementary material

Below is the link to the electronic supplementary material.

Supplementary material 1 (PDF 165 kb)

Appendix

Appendix

Tables A1, A2 and A3

Table A1 Variable definitions
Full size table
Table A2 Investment characteristics
Full size table
Table A3 Target firm performance
Full size table

Rights and permissions

Reprints and permissions

About this article

Check for updates. Verify currency and authenticity via CrossMark

Cite this article

Sojli, E., Tham, W.W. Foreign political connections. J Int Bus Stud 48, 244–266 (2017). https://doi.org/10.1057/s41267-016-0059-3

Download citation

  • Received:

  • Revised:

  • Accepted:

  • Published:

  • Issue Date:

  • DOI: https://doi.org/10.1057/s41267-016-0059-3

Keywords

Search

Navigation