Using Pest Analysis as a Tool for Refining and Focusing

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Shibin Sheng, Kevin Zheng Zhou, & Julie Juan Li

The Effects of Business and Political
Ties on Firm Performance: Evidence
from China
Despite increasing attention to the role of social ties in emerging economies, few studies have explicitly distinguished the differential roles of business versus political ties. Drawing on relational governance and institutional theories, this study offers a contingent view of business and political ties in China. The findings from a survey of 241 Chinese firms indicate that business ties have a stronger positive effect on performance than political ties, and both effects depend on institutional and market environments. Business ties are more beneficial when legal enforcement is inefficient and technology is changing rapidly, whereas political ties lead to greater performance when general government support is weak and technological turbulence is low. These findings indicate that firms operating in China should be cautious in their use of business and political ties and adapt their tie utilization to changing institutional and market environments. Keywords: social ties, emerging economy, relational governance, institutional theory, institutional environment, guanxi


Despite increasing interest in this topic, several aspects
of social ties in emerging economies remain underdeveloped. First, extant research from a relational governance perspective (Granovetter 1985; Heide 1994; Uzzi 1997) recognizes the benefits of business ties, including relational connections with buyers (Heide and John 1992), suppliers

(Jap and Ganesan 2000), and collaborators (Rindfleisch and
Moorman 2001). Yet few studies in marketing explicitly
consider political ties or distinguish the effects of business and political ties. Because of the lack of market-supporting institutions, governments in emerging economies are active
in regulating industry development, guiding business policies, and influencing corporate operations (Hoskisson et al. 2000). Thus, building relationships with various government agencies (i.e., political ties) is imperative for firm survival (Ambler and Witzel 2004; Hillman, Zardkoohi, and Bierman 1999). However, previous studies have tended to

treat business and political ties as the same (Peng and Luo
2000) or have captured ties with one dimension (Gu, Hung,
and Tse 2008; Li, Poppo, and Zhou 2008), so it is still
unclear whether business or political ties play more salient roles in emerging economies.
Second, according to institutional theory, social ties as
informal governance become less important when legal and
regulatory institutions improve and market-supporting systems develop (North 1990; Peng 2003). Market transitions in emerging economies foster dramatic changes in both formal (e.g., laws, rules, regulations) and informal (e.g., cultures, ethics, norms) institutions, which diverge across regions and industries (Hoskisson et al. 2000). For example, despite the continued efforts of China’s central government to develop a unified legal framework, it has not established a stable legal institution for enforcing contract law nation-

n recent years, strategic issues in emerging economies
have attracted increasing attention in marketing strategy
and relationship marketing literature (Ambler and Witzel
2004; Gu, Hung, and Tse 2008; Johnson and Tellis 2008;
Walters and Samiee 2003). As a consequence of their economic liberalization and transition toward market systems, emerging economies experience rapid changes in their economic, social, and legal institutions, which create severe challenges for marketers (Zhou and Poppo 2010). In such

turbulent circumstances, social ties emerge as an important
strategic option that may enable firms to secure resources
and deal with uncertain environments (Ambler and Witzel
2004; Peng 2003). Because social ties coordinate exchanges
through informal, interpersonal social mechanisms (Granovetter 1985), they help overcome the limits...
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