Are Political Ties and Market Capabilities Complements or Substitutes for Firm Performance? Evidence from China

Abstract

While the conventional wisdom advocates a complementary view between political ties and market capabilities, we challenge it by proposing that they function as substitutes in affecting firm performance. We argue that the simultaneous use of political ties and market capabilities yields strong tensions: Internally, the incompatibility of their focuses and routines produces a crowding-out effect; externally, government interference arising from political ties invites a grabbing-hand effect. Results based on publicly listed firms in China from 2001 to 2014 provide strong support to our propositions. Political ties and marketing/operations capabilities have a negative joint effect on a firm’s future financial performance. Moreover, this substitution effect is stronger when market institutional development is high and for private firms (versus state-owned enterprises).