Gets and Gives: The Double-Edged Role of Political Ties in Firm Innovation

This study theoretically and empirically analyzes the following unresolved question in the innovation literature: How do political ties with the government affect firm innovation? Theoretically, drawing upon the key tenets of social exchange theory, we posit that we need to investigate both a firm’s “gets†from the government and its “gives†to the government in examining the role of political ties in firm innovation. We thereby conceptualize political ties as a double-edged resource. Specifically, we suggest firstly that political ties serve as a positive resource, enabling firms to obtain governmental resources useful for beginning the innovation process. However, we also content that political ties serve subsequently as a negative resource, with political interference and managerial slack that breed inefficiency in firms’ transforming their innovation input into output. Empirically, we focus on political ownership ties in the largest emerging economy, China, and test their doubled-edged effect on innovation. We further investigate how three ownership factors (local government, foreign, and domestic non-governmental block ownership) may alleviate the negative effect of political ownership ties. Using survey data on Chinese firms across 6 sectors conducted jointly by World Bank and the National Bureau of Statistics of China, we find strong support for our theory. We conclude with the discussion of the strategic implications of our findings.