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Asia Pacific Journal of Management
ISSN 0217-4561
Asia Pac J Manag
DOI 10.1007/s10490-019-09686-w
The double-edged sword effect of political
ties on performance in emerging markets:
The mediation of innovation capability and
legitimacy
Tao Wang, Ting Zhang & Zhigang Shou
1 23
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The double-edged sword effect of political ties
on performance in emerging markets: The mediation
of innovation capability and legitimacy
Tao Wang
1
&Ting Zhang
1
&Zhigang Shou
1
#Springer Science+Business Media, LLC, part of Springer Nature 2019
Abstract
To improve our understanding of the bright side and the dark side of political ties and
determine the processes linking political ties to firm performance in emerging markets,
we investigate the underlying mechanism of political ties’effects from the perspective
of dynamic capability theory and institutional theory. We posit that reduced market-
focused innovation capability and strengthened legitimacymediate the effect of political
ties on firm performance. In addition, to capture the nature of the relationship between
political ties and performance, we adopt a contingency perspective in our examination of
the moderating roles of legal enforceability and competitive intensity. Specifically, we
suggest that legal enforceability buffers the negative impact of political ties on market-
focused innovation capability but mitigates the positive impact of political ties on firm
legitimacy. Moreover, competitive intensity enhances the positive impact of market-
focused innovation capability and firm legitimacy on firm performance. We test our
hypotheses using a survey with 362 respondents in China. In conclusion, our findings
provide important insights into how Chinese firms effectively utilize political ties to
improve their performance.
Keywords Political ties .Performance .Market-focused innovation capability.
Legitimacy.Double-edged sword effect
Asia Pacific Journal of Management
https://doi.org/10.1007/s10490-019-09686-w
*Zhigang Shou
mkshou@whu.edu.cn
Tao Wang
Wangtao@whu.edu.cn
Ting Zhang
18809823534@163.com
1
Research Center of Organizational Marketing, Economics and Management School, Wuhan
University, Wuhan, China
Author's personal copy
Building political ties is a prevalent marketing strategy in emerging markets (Heirati &
O’Cass, 2016;IsmailJretal.,2013; Zhou et al., 2014). Many scholars have examined
the use and results of this strategy by testing the impact of political ties on firm
performance, and they have reached a consensus that political ties constitute a
double-edged sword with respect to firm performance. That is, political ties
have the potential to improve performance (Peng & Luo, 2000; Peng & Zhou,
2005;Zhouetal.,2014) but also run the risk of eroding performance (Chen &
Wu, 2011; Hadani & Schuler, 2013;Li&Sheng,2011; Li, Zhou, & Shao,
2009). To provide insights to help firms exploit political ties, scholars have
further examined the boundary conditions of the impacts of political ties on
firm performance. For example, Sheng, Zhou, and Li (2011) found that political
ties lead to greater performance when government support is weak and technological
turbulence is low, and Zhang, Tan, and Wong (2015) indicated that the effect of political
ties on firm performance is contingent upon firms’choice of innovation activities to
pursue.
Understanding how political ties are connected to performance can also help firms
effectively use these ties. With such an understanding, firms may use political ties more
effectively by keeping a watchful eye on the mediators of the political ties-
performance nexus. However, based on a comprehensive literature review (see
Tab le 1), we find that research on the underlying mechanism of the link
between political ties and performance is still nascent. Specifically, from the
perspective of dynamic capability theory and transaction costs economics,
research indicates that political ties facilitate performance by improving firms’
adaptive capability and reducing transaction costs (Gu, Hung, & Tse, 2008;Lu
et al., 2010; Zhu, Su, & Shou, 2017), but there is no research (with the
exception of Guo, Xu, & Jacobs, 2014) integrating institutional theory to test
the mediating effect of legitimacy on the political ties-performance nexus. More
importantly, most studies have focused on the mediators of the positive impact of
political ties on performance but neglected the mediators that can explain why political
ties erode firm performance.
To fill these research gaps, we investigate the underlying mechanism of both sides of
the effect of political ties by integrating dynamic capability theory and institutional
theory. Specifically, we simultaneously examine the mediating effects of market-
focused innovation capability and legitimacy on the impacts of political ties on
performance. We posit that on the one hand, political ties facilitate a firm’slegitimacy,
which in turn increases its performance; on the other hand, political ties inhibit a firm’s
market-focused innovation capability and erode its performance.
To fully map the dual effects of political ties, we also consider the moderating
mediation of institutional and market factors. In particular, we posit that legal enforce-
ability, which refers to the perceived legal protection of a company’s financial interests
in a business transaction (Cai, Jun, & Yang, 2010;Luo,2007; Zhou & Poppo, 2010;
Zhu, Su, & Shou, 2017), buffers the negative effect of political ties on innovation
capability but mitigates the positive effect of political ties on legitimacy. In addition,
competitive intensity enhances the positive impacts of market-focused innovation
capability and firm legitimacy on firm performance. Figure 1shows the conceptual
model. Based on a survey completed by 362 respondents in China, most of our
hypotheses are supported.
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Table 1 Empirical research on the political ties-performance nexus: a brief summary
Representative Publications Underlying Mechanism Major Findings
Hillman, Zardkoohi, and Bierman (1999) N/A When a link is established between a firm and the government through
personal service, firm performance will be positively affected.
Peng and Luo (2000) N/A The positive relationship between political ties and performance differs among
firms with different (1) ownership types, (2) business sectors, (3) sizes,
and(4)industrygrowthrates.
Peng and Zhou (2005) N/A The positive relationship between political ties and performance tends to
weaken over time.
Fan, Wong, and Zhang (2007) N/A Firms with politically connected CEOs underperform those without politically
connectedCEOsbyalmost18%basedonthree-year post-IPO stock returns
and have poorer three-year post-IPO earnings growth, sales growth, and
change in returns on sales.
Boubakri, Cosset, and Saffar (2008) N/A They find that politically connected privatized firms underperform their
non-connected counterparts by examining the impact of the political connections
of board directors on the accounting performance of newly privatized firms.
Gu, Hung, and Tse (2008) Channel and responsive
capability
Guanxi can enhance market performance through strengthening channel
capability and responsive capability.
Li, Zhou, and Shao (2009) N/A Political ties impede the positive effect of a differentiation position on foreign
firms’profitability. Moreover, foreign firms’profitability suffers when they
increasingly rely on the heavy use of political ties.
Lu et al. (2010) Information acquisition
and adaptive capability
The study combined the RBV with the capability-building perspective of rent
creation and found positive mediating effects of information acquisition
capability and adaptive capability on the impacts of managerial ties on performance.
Li and Zhou (2010) Resource acquisition
capability
Managerial ties improve performance through an institutional advantage
(i.e., superiority in securing scarce resources and institutional support).
Chung (2011) N/A The interaction between market orientation and political guanxi is proposed to be
negatively associated with financial and strategic performance.
Sheng, Zhou, and Li (2011) N/A Political ties lead to greater performance when general government support is weak
and technological turbulence is low.
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Table 1 (continued)
Representative Publications Underlying Mechanism Major Findings
Li and Sheng (2011) N/A Ties with government officials are more salient with regard to enhancing performance
for more entrepreneurially oriented and younger firms. In addition, these ties fail
to provide performance benefits to firms when high demand uncertainty exists
or when the level of technological turbulence is high.
Wan g et a l. (2013) Resource acquisition capability The study argued that the role of external resource acquisition is a salient mediating
mechanism through which political ties influence firm performance.
Hadani and Schuler (2013)N/A Firms’political investments are negatively associated with market performance,
and cumulative political investments worsen both market and accounting performance.
Zhou et al. (2014) N/A The positive role of ties with the government (i.e., political ties) declines over time;
technology capability positively interacts with political ties in fostering performance.
Guo, Xu, and Jacobs (2014) Policy support &
opportunity recognition
These findings uncover two fundamental mediating mechanisms that can translate
political ties into firm performance: institutional support and institutional
entrepreneurial opportunity recognition.
Zheng, Singh, and Mitchell (2015) N/A Local political ties buffer firms from threats to their survival, particularly for firms
with weaker prior performance, and enable sales growth but only for stronger
performing firms; central political ties do not provide buffering or enabling benefits.
Zhang, Tan, and Wong (2015) N/A The positive effect of political ties on performance is enhanced when firms pursue a
higher level of exploratory innovation. In contrast, a higher level of time investment in
political ties could be wasteful and even harmful when firms pursue a higher level
of exploitative innovation.
Zhu, Su, and Shou (2017) Marketing capability
&partners’opportunism
The study integrated dynamic capabilities and relational governance theories to
indicate that increased firm adaptive capability and reduced opportunism mediate
the contribution of positive ties to firm performance.
YanandChang(2018)N/A Whileafirm’s political connections to a focal government with decision-making
authority enhance performance, connections to a rival government competing
with the focal government harm performance, particularly when the rivalry is
intense. Firms can neutralize the negative effect from this political rivalry by
using direct or indirect connections to a constraining government with power
over the focal government.
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Conceptual framework
Political ties refer to the extent to which managers cultivate interpersonal relations with
government officials at various levels of administration and regulatory organizations,
such as tax bureaus and commercial administration bureaus (Peng & Luo, 2000;Sheng,
Zhou, & Li, 2011). In emerging economies such as China, underdeveloped legal
frameworks and pervasive institutional transitions necessitate a strategy centered on
developing political ties (Guo, Xu, & Jacobs, 2014;IsmailJretal.,2013; Li, Zhou, &
Shao, 2009; Peng & Luo, 2000). However, in previous empirical works, the reported
effects of political ties on firm performance are contradictory (Li, Poppo, & Zhou,
2008; Wang et al., 2013). To reconcile the mixed results, some researchers have
suggested that the value of political ties may be contingent on important contextual
factors (Wang et al., 2013; Wu & Chen, 2012;Zhouetal.,2014). For example, Li,
Poppo, and Zhou (2008) found that political ties increase domestic firms’performance
but decrease the profitability of foreign firms in China. Peng and Luo (2000) pointed
out that the impact of political ties on firm performance is stronger for firms in low-
growth industries than for firms in high-growth industries. Sheng, Zhou, and Li (2011)
suggested that government support negatively moderates the relationship between
political ties and firm performance.
However, new advances in research on political ties suggest that political ties are not
very likely to convert directly into performance. Converting mechanisms for explaining
how managerial ties are materialized into performance have attracted increasing atten-
tion (Guo, Xu, & Jacobs, 2014; Wang et al., 2013; Zhu, Su, & Shou, 2017). For
example, recently examined mediators include firm capabilities (Gu, Hung, & Tse,
2008;Luetal.,2010;Zhu,Su,&Shou,2017), resource acquisition (Wang et al., 2013),
and institutional advantage (Li & Zhou, 2010). These reports enrich our understanding
of the underlying mechanisms of the relationship between political ties and perfor-
mance but merely focus on the bright side of political ties. In fact, an increasing number
of studies have pointed out that political ties are not always beneficial to firm perfor-
mance (Gu, Hung, & Tse, 2008; Li, Poppo, & Zhou, 2008). For instance, some studies
have indicated negative effects of political ties on innovation capability (Wu, 2011;Yu
et al., 2016), but the mediating effect of innovation capability on the relationship
Political Ties
Market-focused
Innovation Capability
Legitimacy
Performance
Legal
Enforceability
Competitive
Intensity
Fig. 1 Conceptual model
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between political ties and performance has seldom been examined in the extant
literature.
Further, using institutional theory, scholars have provided insights into how political
ties work to improve performance from the perspective of legitimacy (Guo, Xu, &
Jacobs, 2014; Peng & Luo, 2000; Sheng, Zhou, & Li, 2011; Zhu, Su, & Shou, 2017).
However, scant research examines the mediating effect of legitimacy on the political
ties-performance nexus. Thus, to fill these gaps in the literature, we integrate dynamic
capability theory and institutional theory to discuss the dual effect of political ties on
performance.
The mediating effects of market-focused innovation capability
Innovation capability refers to a firm’s ability to integrate key capabilities and resources
to successfully stimulate innovation, and it is a key driver of sustainable competitive
advantage (Zhou, Gao, & Zhao, 2017). Innovation capability enables firms to cope
with environmental changes and improve their performance during different phases of
the business cycle, especially in today’s fast-changing environment (Jiménez-Jiménez
&Sanz-Valle,2011; Zhou, Gao, & Zhao, 2017). The innovation literature finds that
innovation capability occurs in innovation processes, which include technique-focused
innovation capability and market-focused innovation capability (Damanpour, Walker,
& Avellaneda, 2009; Foroudi et al., 2016).
Market-focused innovation capability refers to the competence to apply collective
knowledge, skills, and resources to innovation activities to adapt to changes in cus-
tomer demand and create added value for customers (Hogan et al., 2011). Firms with
higher market-focused innovation capability can more easily address the changing
demands of their clients and are better able to exploit new market opportunities
(Jansen, Bosch, & Volberda, 2006; Sorensen & Stuart, 2000). Consequently,
market-focused innovation capability can help a firm attain superior performance by
obtaining a greater market share and/or customer loyalty (Hogan et al., 2011;Ngo&
O'Cass, 2013).
However, market-focused innovation capability may be negatively affected by
political ties. First, firms benefiting from political ties are likely to lack incentives to
develop market-focused innovation capability due to the path-dependence effect. For
these firms, previous benefits from political ties enhance managers’confidence in their
political ties and encourage them to reinvest in building and maintaining their relation-
ships with government officials rather than adapting to customers’changing demand
(Chen & Wu, 2011;Wu,2011). A historical path usually also fosters a vested interest
group that may include key firm managers (Greve & Seidel, 2015). They may block the
transformation of their profit model from political ties to market demand because it may
challenge the perceived benefits.
Second, firms relying on political ties are likely not to have an appropriate culture to
foster market-focused innovation capability. Market orientation refers to an organiza-
tional culture facilitating market-focused innovation capability (Zhou, Yim, & Tse,
2005). A firm with market orientation can obtain the necessary intelligence from its
target customers and competitors (which in turn leads to a better understanding of
customer preference changes and competitor strategic moves) and thus foster its
market-focused innovation capability (Laforet, 2008). However, firms relying on
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political ties prefer to accommodate or yield to the government’s goals. An orientation
towards the government instead of towards the market impedes a firm’sefficiencyin
responding to market change and in turn suppresses the firm’smarket-focusedinno-
vation capability.
Third, firms relying on political ties are likely to lack the necessary resources to
develop market-focused innovation capability. Building and maintaining political ties
likely consumes a firm’s internal resources. For example, a firm may spend time and
financial resources to engage in fulfilling politically oriented goals (e.g., increasing
employment levels) (Li, Zhou, & Shao, 2009; Sheng, Zhou, & Li, 2011). Even worse,
firms must offer money or other forms of compensation to obtain key resources and
favorable treatment from their government (Li, Zhou, & Shao, 2009;Wu,2011). Thus,
in a limited resource setting, efforts devoted to developing political ties compete with
time and resources devoted to tracking market demand (Zhang, Tan, & Wong, 2015)
and in turn impede the improvement of market-focused innovation capability.
We therefore propose that political ties have a negative effect on firm performance
by eroding market-focused innovation capability.
H1 Market-focused innovation capability has a negative mediating effect on the link
between political ties and firm performance.
The mediating effects of legitimacy
Legitimacy is “a generalized perception or assumption that the actions of an entity are
desirable, proper, or appropriate within some socially constructed system of norms,
values, beliefs, and definitions”(Suchman, 1995). There are two elements of legitimacy
that can influence the beholders’support for a firm, namely, pragmatic legitimacy and
moral legitimacy (Handelman & Arnold, 1999). Pragmatic legitimacy rests on the self-
interested calculations of a firm’s direct stakeholders (Suchman, 1995), such as cus-
tomers, suppliers, distributors, and shareholders. As long as firm stakeholders perceive
that the firm’s actions increase their own welfare, the firm obtains pragmatic legitimacy
(Handelman & Arnold, 1999). In return, a firm with pragmatic legitimacy has a greater
market share and revenue because of customer satisfaction and identification, and it
also has fewer financial, production and transaction costs since it obtains its partners’
trust and cooperation (Suchman, 1995;Wu,2011).
Moral legitimacy refers to beholders’positive normative evaluation of a firm based
on the firm’s actions taken to increase the welfare of the community and society
(Suchman, 1995), such as donations, environmental protection, and poverty relief.
Unlike pragmatic legitimacy, moral legitimacy rests on a judgment derived from
altruistic motivation, so a firm with moral legitimacy can obtain more word-of-mouth
references and suffer fewer boycotts in the case of a critical incident. In general,
legitimacy can improve firm performance by increasing revenue, cutting costs, and
avoiding risk.
In terms of the type of beholder, Dacin, Oliver, and Roy (2007) distinguish
legitimacy into four dimensions: relational legitimacy, social legitimacy, market legit-
imacy and investment legitimacy. “Firms that are perceived as attractive and capable
partners accrue relational legitimacy”(Dacin, Oliver, & Roy, 2007). This means that a
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firm with higher relational legitimacy is regarded as a high-quality partner by other
firms. Thus, relational legitimacy may improve firm performance by reducing transac-
tion costs with other firms. Social legitimacy is linked to corporate social responsibility.
Firms with social legitimacy are expected to conform to societal rules, such as
providing quality-assured and safe products and employing resource-
conserving and environmentally friendly strategies. Therefore, firms with social
legitimacy may perform well because of their high moral legitimacy. Market
legitimacy can be established through acquiring rights or qualifications to
operate in a specific market and by ensuring endorsement and receptiveness
from the government, customers, or suppliers (Dacin, Oliver, & Roy, 2007).
This implies that a firm with market legitimacy should have legitimate opera-
tion licenses and a wealth of business experience in a specific market. A firm
with higher market legitimacy is likely to enter more markets or to have the
ability to obtain more orders, which results in higher performance. Investment
legitimacy refers to “the worthiness of a firm’s business activities and strategic
decision in the eyes of corporate investors, such as the parent firms’board of
directors, executives, venture capitalists and shareholders”(Dacin, Oliver, &
Roy, 2007, P177, 3rd paragraph). With more confidence in a firm and its
business activities, investors are more likely to reinvest in working capital and/or fixed
assets; meanwhile, the recognition of strategic decisions by the board of directors and
executives reduces firmdecision costs. Lower financial costs and decision costs are both
important factors for firm performance.
A firm can acquire legitimacy by networking with the government (Li et al., 2014;
Peng & Luo, 2000) because political ties send beholders a signal that the firm has the
ability and the motivation to satisfy their pragmatic and moral expectations. First, as
mentioned, political ties can provide firms with access to scarce resources, information
and preferential treatment (Li et al., 2014; Zhou & Li, 2007). Firms with these
advantages are more likely to develop the ability to provide quality products and
services at reasonable prices, which is consistent with customer welfare and satisfies
customers’pragmatic expectations. Second, for a firm’s investors, suppliers and dis-
tributors, political ties imply that the focal firm will likely help them obtain a superior
return on their investment or avoid risk by means of key resources obtained from and
protection by the government. The signal of improved welfare meets the pragmatic
expectations of firm partners.
Third, improving the welfare of the community and society is an important
task of the government, and the government often needs the help of firms to
achieve these objectives. A firm with political ties usually has to accommodate
the government’s demands, so the firm is more likely to participate in activities
that benefit the public, thus satisfying its beholders’moral expectations. For
example, a firm with high levels of government ownership is expected to pursue
corporate social responsibility in accordance with government policy, such as
infrastructure development and the resolution of unemployment challenges (Li
&Zhang,2010).
In summary, due to the role the government plays in economic and social activities,
political ties can enhance firm legitimacy by sending authoritative signals to beholders
(including consumers, partners and the general public), which helps improve firm
performance. Thus, H2 states the following:
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H2 Legitimacy has a positive mediating effect on the link between political ties and
firm performance.
Political ties have both a negative effect and a positive effect on firm performance
through eroding innovation capability and fostering legitimacy, respectively;
however, these dual effects depend on institutional and market contexts
(Sheng, Zhou, & Li, 2011; Zhu, Su, & Shou, 2017).Thus,toenrichour
understanding of the political ties-performance nexus and the mediating effects
of innovation capability and legitimacy, we consider the contingent effects of institu-
tional and market factors on the mediation.
Moderating effects of legal enforceability
Legal enforceability, which refers to the perceived legal protection of a company’s
financial interests in a business transaction, is a reflection of the formality of
laws and regulations, independent law enforcement, and the public’scultural
tradition and attitudes towards laws (Child, Chung, & Davies, 2003; Zhu, Su,
&Shou,2017). The problem of uneven legal enforceability between different
regions is one of the most prominent features of emerging markets (Qian et al.,
2017). Specifically, in China, where legal institutions are inadequate, firms find
it difficult or expensive to follow normal legal processes to gain protection
against ineffective punishments and unlawful or unfair competitive behaviors;
thus, weak legal enforceability disrupts the economic order and fails to give
firms adequate legal protection (Sheng, Zhou, & Li, 2011; Zhu, Su, & Shou,
2017).
We posit that weak legal enforceability increases the restraining effect of political
ties on market-focused innovation capability for the following reasons. First, weak
legal enforceability leads to an increase in government power in protecting a firm’s
activities (Li, Zhou, & Shao, 2009; Zhou & Poppo, 2010). Under these circumstances,
the pivotal role of political ties in helping firms attain adequate support, favorable
policies and privileges that shelter them from unlawful behavior is strengthened
(Peng & Luo, 2000; Zhu, Su, & Shou, 2017), which in turn reassures managers
of their political ties. As a result, firms prefer to (re)invest more money or
other resources in building and maintaining their relationship with the govern-
ment rather than developing their market-focused innovation capability (Wu,
2011). At the same time, leveraging the political power of government officials
enables firms to more easily safeguard potential victims of unlawful and
unethical behaviors (Li et al., 2012), again reinforcing managers’commitment to the
status quo (Geletkanycz & Black, 2001). Thus, decision makers are more willing to
forego investing in market-focused innovation capability in favor of strengthening their
political ties with the government.
Second, government interventions in a business’s operations may decrease the costs
of legal actions against unlawful behaviors in an environment with weak legal enforce-
ability (Zhou, Gao, & Zhao, 2017;Zhou&Poppo,2010). Thus, the greater their
dependency on the government to gain access to supporting transactions and preventing
unlawful competition, the more pressure firms face from the government (Chen & Wu,
2011; Warren, Dunfee, & Li, 2004). As a result, firms’strategies are more likely to
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follow the commands and goals of the government, such as increased employment,
fiscal health, regional development, and social stability. When political orientation
rather than market orientation is likely to become a dominant culture, firms are
challenged in developing their market-focused innovation capability. Consequently,
we posit H3 as follows:
H3 The greater the degree of legal enforceability is, the weaker the negative effect of
political ties on innovation capability.
Legal enforceability also decreases the positive impact of political ties on a firm’s
legitimacy. Logically, legal enforceability relates to the degree to which the legal
system can protect individual and organizational rights and how well it supports the
effectiveness of contract enforcement (Peng & Zhou, 2005;Qianetal.,2017). When
legal enforceability is high, it is not necessary for firms to obtain government protection
with the aid of political ties. In general, legal enforceability depreciates political ties.
Thus, in an environment with a high degree of legal enforceability, a firm’s
direct stakeholders are less likely to believe that a firm with political ties is
more competent in increasing their welfare; thus, political ties are not a major
cause of pragmatic legitimacy.
In addition, efficient formal institutions limit government intervention in firm
operations, even in a firm with political ties (Zhou, Gao, & Zhao, 2017). In deciding
whether to engage in activities that benefit the public, a firm operating in an efficient
formal institutional environment is likely to act based on its own judgment rather than
based on pressure from the government (Peng, 2003). Thus, if formal institutions are
well developed, political ties no longer positively influence the normative evaluation of
a firm by beholders, and a firm does not obtain moral legitimacy due to its relationship
with the government.
In contrast, if formal institutions are not well developed, beholders (including
customers, investors, partners, and the public) value political ties and in turn
endow firms that have political ties with more legitimacy. Thus, we offer the
following hypothesis:
H4 The greater the degree of legal enforceability is, the weaker the positive effect of
political ties on legitimacy.
Moderating effects of competitive intensity
Competitive intensity refers to the degree to which customers have alternative
supply sources, which in turn influences whether they are less dependent on a
particular supplier (Cannon & Perreault, 1999). Emerging markets usually
experience an increase in private enterprises during an economic transition from
a centrally planned economy to a market economy, which renders competitive
intensity one of most fundamental variables reflecting the task environment.
Consequently, we consider competitive intensity a moderator and argue that it can
enhance the impact of market-focused innovation capability and firm legitimacy on
firm performance.
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As one of the most important dynamic capabilities, market-focused innovation
capability represents the extent to which a firm introduces new products, new process-
es, and new systems required for adapting to changing markets, technologies and
modes of competition (Dougherty & Hardy, 1996). Intense competition elevates
consumers’power in the market, which implies that customer satisfaction
becomes imperative for improving performance (Jaworski & Kohli, 1993;
Murray, Gao, & Kotabe, 2011). Market-focused innovation capability enables
firms to better satisfy customers’changing needs, so the importance of market-
focused innovation capability is more salient in highly competitive markets than
in minimally competitive markets. Intense competition erodes firm performance
due to greater rivalry, which often leads to imitation (Chen, Lin, & Michel,
2010), price wars, promotion competition, and higher advertising costs (Auh &
Menguc, 2005; Cui, Griffith, & Cavusgil, 2005). Market-focused innovation
capability enables firms to build differentiation advantages through product
and service innovation and reduce the cost of operations through process and
management innovation, which in turn protects firm performance from aggres-
sive competition.
In addition, competitive intensity accelerates market dynamism, which often results
in market performance becoming nonlinear and less predictable (Eisenhardt, 1989). In
such a market environment, firm performance relies much less on existing knowledge
and much more on rapidly creating situation-specific new knowledge. Existing knowl-
edge can even be a disadvantage if managers overgeneralize from past situations
(Argote, 1999). A firm with greater market-focused innovation capability is likely to
acquire and exploit new technology and knowledge to improve its performance in a
dynamic market.
In sum, firms with high market-focused innovation capability can better translate
competitive threats into beneficial opportunities; thus, intense competition in markets
often results in firms placing a premium on innovation (Sirmon, Hitt, & Ireland, 2007).
We therefore predict the following:
H5 The greater the level of competitive intensity is, the stronger the positive effect of
market-focused innovation capability on performance.
As mentioned, legitimacy brings more revenue and lower costs to a firm
through customer satisfaction, partner trust and cooperation, and public word-
of-mouth. However, when competitive intensity is low in the industry, a firm
that lacks sufficient legitimacy may perform well if its customers have no
alternative options to satisfy their needs and wants, i.e., “customers are stuck
with the organization’s products and services”(Jaworski & Kohli, 1993).
Competitive intensity not only reduces customer dependence on a particular supplier
but also leads to perceived equalization regarding the quality of the products and
services of different suppliers. This equalization then complicates differentiation based
on aspects related to a firm’s core offering. In such cases, legitimacy, especially moral
legitimacy, may be a useful tool to differentiate a firm from its rivals (Ven & Jeurissen,
2005), and a firm with more legitimacy has a competitive advantage. We therefore
predict the following:
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H6 The greater the level of competitive intensity is, the stronger the positive effect of
legitimacy on performance.
Methods
Sample and data collection procedures
We obtained data for this study through a survey in central-western China and
southeastern China. An English-language version of the questionnaire was prepared
first and then translated into Chinese through a double back-translation process
(Hoskisson et al., 2000; Li, Poppo, & Zhou, 2008). We controlled survey quality in
the following ways. First, we promised each respondent about USD $1.5 for each valid
questionnaire as an incentive. Second, to ensure that respondents were qualified, they
were required to report their job position (e.g., general staff, junior manager, middle
manager, and senior manager) in the firm. Since our questionnaire was related to the
firm’s strategic activities, we excluded general staff from the sample. Furthermore,
some respondents were excluded based on their answer to the question “Which
business activities are you familiar with in the company?”
Since all questionnaire measures except the scales for legitimacy were drawn from
previous studies, data were collected in two phases. The data from first phase was used
to conduct exploratory factor analysis (EFA) for legitimacy and the data from second
phase was used to conduct confirmatory factor analysis (CFA) for all reflective scales
and hypotheses testing. During the first phase, in-depth interviews were used to
generate an initial item pool. With the help of the alumni association of a large
university in China, we received 58 valid questionnaires from top managers. In the
second phase, a formal questionnaire including legitimacy (13 items) and other con-
structs in our research were sent to the MBA Alumni Community of a university in
China, and we asked alumni working in company managerial positions to provide
information. Ultimately, 362 valid questionnaires were collected. Table 2shows the
characteristics of the samples.
Measures
Legitimacy Following rigorous methods (Gerbing & Anderson, 1988), we developed a
measurement for legitimacy. In the first stage, in-depth interviews with five experienced
entrepreneurs and three professors in marketing were used to generate an initial pool of
22 items and an assessment of content validity. After that, we asked 80 top managers to
evaluate their companies by completing the 22-item questionnaire. Based on 58 valid
questionnaires, the Kaiser–Meyer–Olkin measure of sampling adequacy was .797,
suggesting that factor analysis was appropriate. In the third step, an EFA was under-
taken, and the analysis generated five factors with eigenvalues greater than one
(together explaining 73.306% of the total variance; see Table 3). The items in the first
four factors had a clear meaning, so according to the legitimacy definition of Dacin,
Oliver, and Roy (2007), we could easily categorize them as relational legitimacy, social
legitimacy, market legitimacy, and investment legitimacy. However, three items
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belonging to the last factor had different meanings, which meant that it was difficult to
categorize the last factor. Given that this factor explained only 5.928% of the
total variance, we deleted the unnamed factor from the formal scale. In addi-
tion, we removed six items from the measurement model due to weak loading
or cross loading (Hogan et al., 2011). Table 3shows the formal scale including
the 13 items.
To further assess the factor structure of the legitimacy scale, a CFA was conducted.
Specifically, the second-order construct operationalization with four first-order factors
(relational legitimacy, investment legitimacy, social legitimacy and market legitimacy)
was tested using 13 items of legitimacy. Table 4shows that the measurement model fit
the data satisfactorily.
Political ties and performance The measures of political ties and performance are both
four-item structures and adopted from Sheng, Zhou, and Li (2011). The measure of
political ties captures the interpersonal relationship between managers and officials at
various levels of government and regulatory organizations, such as tax bureaus, state
banks, and commercial administration bureaus, and the scale also reflects substantial
resources invested by firms in building relationships with government officials. The
scales of performance consist of four items: sales growth rate, market share growth,
profit growth rate, and return on investment compared to major firm competitors over
the past year.
Table 2 Profiles of the sample companies
Sample Characteristics The First Phase (N= 58) The Second Phase (N= 362)
Percentage Percentage
Industry
Finance and insurance 36.3% 27.3%
Manufacturing 17.2% 24.3%
Wholesale and retail trade 8.6% 8.8%
IT 6.78% 10.76%
Comprehensive 5.08% 3.18%
Real estate 3.4% 5.38%
Other 22.64% 20.28%
Number of Employees
<200 51.85% 32%
200–1000 20.37% 28.8%
1000–5000 16.67% 17.3%
>5000 11.11% 21.9%
Ownership
State owned 37.9% 30.1%
International joint venture 8.6% 5.2%
Private 27.6% 39.0%
Foreign wholly owned enterprises 17.2% 18.0%
Other 8.7% 7.7%
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Table 3 Exploratory factor analysis for legitimacy
Scale items Validation sample (N = 58)
Factor loadings
12345
Relational legitimacy
Our firm is well recognized by partners. .784
Our firm has been rated as a high-quality partner by
other firms.
.768
Compared with other firms, it is easier for our firm to
establish further cooperation with high-quality partners.
.735
Our firm has more successful collaborative experiences
than other firms.
.563 .511
Our firm has established alliances with other firms
perceived to be socially responsible.
.554
Our firm enjoys greater discretion and a wider set of partner
choices in making partner selection decisions in alliances.
.535 .528
Our firm exhibits norms of equity, trust, and an orientation
toward mutual gain in prior cooperation experiences.
.524
Social legitimacy
Our firm has been considered in compliance with social
rules and expectations by public interest groups, local
communities and consumers.
.903
Our firm is well recognized by the public. .884
Our firm has formed a socially responsible image in the
eyes of public interest groups, local communities
and consumers.
.857
Compared with other firms, our firm has more experience
in cooperation with high-quality firms.
.570 .575
Market legitimacy
Our firm has a wealth of business experiences in the market. .860
Our firm’s activities in the market are generally recognized
by customers.
.845
Our firm has the right to conduct business freely in the
current market owing to our qualification-related
permits issued by the government.
.740
Our firm has a positive reputation and is highly
recognized by consumers.
.576
Investment legitimacy
Our firm’s business activities receive lengthy and intense
resource investment from internal proponents.
.842
The board of directors, corporate executives, venture
capitalists, and/or shareholders of our firm have sufficient
confidence in our firm’s business activities.
.752
Our firm’s business activities are worthwhile in the eyes
of corporate insiders, such as the parent firm’sboard
of directors, executives, venture capitalists and shareholders.
.739
Our firm’s business activities have received internal
endorsement.
.702
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Legal enforceability and competitive intensity Legal enforceability, reflecting the
extent to which the legal system can protect firms’business interests, was assessed
based on a four-item scale from Zhou et al. (2010). Competitive intensity, as a
traditional environmental factor, was captured by a mature five-item scale from
Jaworski and Kohli (1993).
Market-focused innovation capability Market-focused innovation capability refers to
the ability to satisfy a market’s changing demand (Damanpour, Walker, & Avellaneda,
2009), which includes the ability to provide clients with new services and products (or
the ability to solve clients’problems in innovative ways) and the ability to implement
innovative marketing programs. Drawing on Hogan et al., (2011), we used a nine-item
scale to capture the extent of firms’ability in client-based innovation activities and
marketing-based innovation activities.
Control variables To isolate potential confounding effects, we controlled for the follow-
ing variables. 1) Firm age, which has an effect on the relationship between innovation
and performance (Chen et al., 2014). We used the logarithm of the number of years the
firm has been in operation to run a regression model. 2) Firm size, as measured by the
natural logarithm of the number of firm employees (Sheng, Zhou, & Li, 2011). 3)
Subsidiary, as defined by the answer to the question “Is the firm part of a larger firm?”
because a subsidiary is likely to suffer interference from firm headquarters, which may
affect firm performance (Birkinshaw, Hood, & Young, 2005). 4) The amount spent by
the firm on research and development activities in the last three years, which affects
future firm performance (Wu, 2011). 5) Export intensity (the percentage of export
business to total sales) because firms with high levels of export intensity are more likely
to attain legitimacy by adopting positive environmental strategies (Wu & Ma, 2016)and
achieve better performance by improving their innovation capability (Smith, 2014).
Construct reliability and validity
We conducted a CFA to assess the reliability and validity of the reflective measure.
Given the limited sample size, we divided the set of scales into two subgroups (Hewett
Table 3 (continued)
Scale items Validation sample (N = 58)
Factor loadings
Unnamed factor
Our firm has used environmental actions and policies to
produce and operate.
.643
Our firm has secured government contracts. .533
Our firm’s business activities have been recognized by stakeholders. .526
A set of 13 items was retained after exploratory factor analysis for the next step of the scale development
process. The unnamed factor was deleted because of its lower explained variance and ambiguous meaning.
Other items in italics were deleted due to cross-factor loading or lower factor loading
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&Bearden,2001). The first measurement model included only legitimacy. The second
measurement model included the remaining five factors: political ties, market-focused
innovation capability, legal enforceability, competitive intensity, and firm performance.
The first measurement models fit the data satisfactorily (χ2(61) =182.966, p<.01;
TLI = .964; CFI = .972; SRMR = .038; RMSEA = .074). The second measurement
models also fit the data satisfactorily (χ2(290) =564.221, p< .01; CFI = .969;
Table 4 Measurement properties of the legitimacy scale
Scale items Validation sample (N = 362)
Factor
loadings
Cronbach’sαCR AVE
Legitimacy .947
Relational legitimacy .933 .912 .780
Our firm is well recognized by partners. .901
Our firm has been rated as a high-quality partner by other firms .923
Compared with other firms, it is easier for our firm to
establish further cooperation with high-quality partners
.816
Investment legitimacy .927 .928 .763
Our firm’s business activities obtain lengthy and
intense resource investment from internal proponents
.882
The board of directors, corporate executives, venture
capitalists, and/or shareholders of our firm have
sufficient confidence in our firm’s business activities.
.914
Our firm’s business activities are worthwhile in the eyes
of corporate insiders, such as the parent firm’sboard
of directors, executives, venture capitalists and shareholders.
.914
Our firm’s business activities have received internal endorsement .776
Social le gitimacy .908 .931 .818
Our firm is well recognized by the public. .931
Our firm has formed a socially responsible image in the
eyes of public interest groups, local communities
and consumers.
.901
Our firm has been considered in compliance with social
rules and expectations by public interest groups, local
communities and consumers.
.880
Market legitimacy .850 .861 .675
Our firm has a wealth of business experience in the market .894
Our firm’s activities in the market are generally
recognized by customers.
.844
Our firm has the right to conduct business freely in the
current market owing to our qualification-related
permits issued by government
.717
Overall fit: χ2= 182.966, normed χ2= 2.999, TLI = .964, CFI = .972, RMSEA = .074; SRMR = .038
All factor loa dings are significant (p < .05)
AVE average variance extracted; df 61; χ2chi-square; normed χ2χ2/df; TLI Tucker–Lewis index; CFI
comparative fit index; RMSEA root-mean-square error of approximation; SRMR standardized root mean
residual; factor loadings the completely standardized parameter estimates
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TLI = .965; SRMR = .033; RMSEA = .051). All factor loadings for each construct were
significant (p< .01). The composite reliability and AVE from all focal constructs (see
Table 3and Appendix) exceeded the .70 and .50 benchmarks, respectively. Thus, the
measures demonstrated adequate reliability and convergent validity.
We assessed the discriminant validity of the measures in two ways. First, the AVE of
each construct exceeded the squared correlation between construct pairs, demonstrating
discriminant validity between the latent factors (Fornell & Larcker, 1981). Second,
according to chi-square difference tests for all paired constructs, the restricted model
(correlation fixed at 1) was significantly worse than the freely estimated model
(correlation estimated freely). Specifically, minimum Δχ2(1) =8.30, p=.00,insupport
of discriminant validity.
Common method bias
In addition to implementing procedural controls for the survey, such as anonymous
submission and minimization of the ambiguity of the measurement items, we conduct-
ed a test of common method variance by using the marker variable assessment
technique approach recommended by Lindell and Whitney (2001). We added a variable
regarding the geographical distance between the company and the province capital as
the MV marker, which had no significant relation with the variables in our study
(Lindell & Whitney, 2001). None of the significant correlations became insignificant
after adjustment among the important constructs (see Table 5). Therefore, common
method bias was unlikely to be a serious concern.
Results
We used bias-corrected bootstrapping (5000 samples taken from the data set) to
test the mediating effects of innovation capability and legitimacy (Preacher &
Hayes, 2008)(Table6). We found that the indirect effect of political ties on
performance via market-focused innovation capability was significant (supporting H1),
Table 5 Descriptive statistics and correlations
Variable MeanS.D.123 4 56
1. Legal enforceability 3.838 2.111 .165** .060 .201** .435** .247**
2. Competition intensity 3.997 2.149 .168** .041 .280** .302** .193**
3. Political ties 4.461 1.856 .066 .053 −.138** .117* .024
4. Market-focused innovation
capability
4.299 1.804 .201** .278** −.138** .448** .497**
5. Legitimacy 5.234 .979 .435** .318** .132* .444** .432**
6. Performance 4.065 1.960 .250** .206** .037 .495** .443**
7. Geographical distance 336.0 128.3 .007 .110* .046 −.002 .129* .078
*p < .05; **p < .01 (two-tailed)
N= 362. Zero-order correlations are below the diagonal; adjusted correlations for potential common method
variance (Lindell & Whitney, 2001) are above the diagonal
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with a point estimate of −.051 and a 95% confidence interval (CI) of (−.096, −.015),
which excludes zero. Likewise, the indirect effect of political ties on firm performance
via legitimacy was significant (providing support for H2), with a point estimate of .030,
95% CI (.007 to .066).
In H3, we predicted that the direct effect of political ties on market-focused
innovation capability would be moderated by legal enforceability. We found that the
indirect effect of political ties on performance via market-focused innovation capability
was significantly moderated by legal enforceability: the index of moderated
mediation was .020, with a 95% CI (.001 to .043), which excluded zero
(Table 7). Meanwhile, the results of Model 3 (Table 8) indicate that the
coefficient of political ties × legal enforceability was significant and positive
(β= .051, p< .05), and as indicated by the results of Model 2 (Table 8), the
coefficient of political ties was significant and negative (β=−.320, p<.01).
Figure 2indicates that political ties were less negatively related to market-focused
innovation capability with high legal enforceability (“high”defined as one standard
Table 6 Mediating effects of innovation capability and legitimacy
Sample size Model Political ties→firm performance
Product of coefficients Bootstrapping
95% CI
Point estimate SE Lower Higher
Full sample
(N= 362)
Indirect effects
Tot al −.021 .029 −.083 .033
Market-focused innovation capability (MIC) −.051 .021 −.096 −.015
Legitimacy (LE) .030 .015 .007 .066
5000 bootstrap samples
Table 7 The results of moderated mediation tests
Sample size Moderator Mediator Political ties→firm performance
Product of coefficients Bootstrapping
95% CI
Index SE Lower Higher
Full sample
(N = 362)
Legal enforceability Indirect effects
Market-focused innovation
capability (MIC)
.020 .011 .001 .043
Legitimacy (LE) −.017 .008 −.035 −.005
Competitive intensity Indirect effects
Market-focused innovation
capability (MIC)
−.007 .004 −.018 −.001
Legitimacy (LE) .001 .003 −.005 .009
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deviation (s.d.) above the mean) than with low legal enforceability (defined as one s.d.
below the mean). Thus, we found support for H3.
H4 predicted that the direct effect of political ties on legitimacy would be moderated
by legal enforceability. As shown in Table 7, we found that the indirect effect of
political ties on performance via firm legitimacy was significantly moderated by legal
enforceability, with a moderated mediation index value of −.017 and a 95% CI (−.035
to −.005), which excluded zero. We also found (Model 6 in Table 8) that the coefficient
of political ties × legal enforceability was significant and negative (β=−.039, p < .05)
and that the coefficient of political ties was significant and positive (Model 5 in Table 8;
β= .194, p < .01), thus supporting H4. This result is confirmed in Fig. 3: political ties
were less positively related to legitimacy when legal enforceability was high (1 s.d.
above the mean) than when legal enforceability was low (1 s.d. below the mean).
H5 predicted that the impact of market-focused innovation capability on firm
performance would be moderated by competitive intensity. We found that the indirect
effect of political ties on performance via market-focused innovation capability was
significantly moderated by competitive intensity (Table 7), with a moderated mediation
index value of −.007, 95% CI (−.018 to −.001), which excludes zero. As indicated by
our results for Model 6 in Table 9, the coefficients of market-focused innovation
capability × competitive intensity were significant and positive (β= .054, p < .01).
Figure 4shows the moderated effect of competitive intensity on the market-focused
innovation capability-performance nexus; specifically, market-focused innovation
Table 8 Regression results
Variables Innovation capability Legitimacy
Model 1 Model 2 Model 3 Model 4 Model 5 Model 6
Intercept 4.296***
(.087)
4.356***
(.265)
5.275***
(.517)
5.234***
(.047)
4.304***
(.132)
3.599***
(.254)
Firm age .148
(.091)
.159*
(.089)
.157*
(.089)
−.096*
(.050)
−.076*
(.045)
−.074*
(.044)
Firm size .110
(.088)
.121
(.086)
.100
(.086)
.110**
(.048)
.108**
(.043)
.124***
(.043)
Subsidiary .075
(.090)
.084
(.088)
.079
(.087)
.066
(.049)
.058
(.044)
.061
(.043)
R&D input over the last three years .622***
(.096)
.571***
(.095)
.555***
(.095)
.327***
(.052)
.275***
(.047)
.287***
(.047)
Export intensity .209**
(.096)
.224**
(.094)
.223**
(.094)
0041
(.052)
.058
(.047)
.059
(.046)
Political ties (PT) −.140***
(.046)
−.320***
(.099)
.055**
(.023)
.194***
(.048)
Legal enforceability (LE) .147***(.041) −.113
(.132)
.178***
(.020)
.379***
(.065)
PTxLE .051**
(.025)
−.039**
(.012)
R2.169 .215 .225 .170 .330 .350
ΔR2.047*** .009** .160*** .019**
N=362. *p< .1, ** p < .05, *** p < .01 (two-tailed tests)
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capability was more positively related to performance when competitive intensity was
high (1 s.d. above the mean) than when competitive intensity was low (1 s.d. below the
mean). Hence, we found support for H5.
3
3.5
4
4.5
5
5.5
6
6.5
7
Low High
Legitimacy
Political Ties
Low Legal Enforceability
High Legal Enforceability
Fig. 3 The interactive effect of political ties and institutional development on legitimacy
3
3.5
4
4.5
5
5.5
6
6.5
7
Low High
Market-focused Innovation Capability
Political Ties
Low Legal Enforceability
High Legal Enforceability
Fig. 2 The interactive effect of political ties and institutional development on market-focused innovation
capability
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H6 predicted that the impact of legitimacy on firm performance would be moderated
by competitive intensity. As shown in Table 7, we found that the indirect effect of
political ties on performance via legitimacy was not significantly moderated by com-
petitive intensity, with a moderated mediation index of .001 and a 95% CI (−.005 to
.009), which included zero. We also found (Model 6 in Table 9) that the coefficient of
legitimacy × competitive intensity was not significant (β=.008,p> .100); thus, we did
not find support for H6. This may be because competitive intensity has opposite
impacts on the implied performance of customer satisfaction and customer identifica-
tion as induced by firm legitimacy. Specifically, intense competition exposes customers
more frequently to more competitive offerings, which may result in customers revising
their expectations (Mehta, Chen, & Narasimhan, 2008). Thus, satisfied customers in a
Table 9 Regression results
Variables Performance
Model 1 Model 2 Model 3 Model 4 Model 5 Model 6
Intercept 4.070***
(.097)
3.920***
(.255)
−.213
(.538)
1.686**
(.694)
.949
(1.113)
.829
(1.073)
Firm age −.071
(.102)
−.070
(.102)
−.084
(.091)
−.109
(.092)
.002
(.096)
−.072
(.091)
Firm size .107
(.099)
.105
(.099)
.011
(.088)
.068
(.089)
.023
(.094)
.024
(.089)
Subsidiary .127
(.100)
.125
(.100)
.066
(.089)
.097
(.090)
.086
(.094)
.080
(.089)
R&D input over the last three years .552***
(.108)
.554***
(.108)
.167***
(.103)
.239**
(.102)
.300***
(.107)
.165
(.103)
Export intensity .162
(.107)
.162
(.108)
.064
(.096)
.067
(.097)
.137
(.101
.064
(.096)
Market-focused innovation capability (MIC) .390***
(.057)
.263**
(.103)
.195*
(.117)
Competition intensity (CIT) −.197*
(.112)
.017
(.259)
−.270
(.250)
MIC x CIT .052**
(.024)
.054**
(.027)
Legitimacy (LG) .452***
(.105)
.633***
(.202)
.372*
(.221)
LG x CIT .005
(.047)
.008
(.051)
Political ties (PT) .033
(.053)
.054
(.048)
.130
(.103)
−.130
(.108)
.033
(.105)
Legal enforceability (LE) .203
(.136)
−.093
(.148)
.048
(.142)
PT x LE −.016
(.025)
.033
(.027)
.003
(.026)
R2.120 .121 .318 .311 .245 .333
ΔR2.001 . 198*** .191*** .121*** .213***
N= 362. * p < .1, ** p < .05, *** p < .01 (two-tailed tests)
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more competitive market are less willing to pay than customers in a less competitive
market. In contrast, competitive intensity may enhance the impact of customers’
identification on their willingness to pay. Previous research has offered support
for this suggestion. For example, Haumann et al. (2014) found that customer
identification reflects the extent to which a customer perceives overlap between
his or her identity and that of an organization (Bhattacharya & Sen, 2003);
thus, highly identified customers confronted with a high level of competitive
advertising, to maintain self-consistency, are likely to accentuate the advantages
of the offerings of the focal company with which they identify and devalue the
competitive offerings.
Discussion and conclusion
Drawing on dynamic capability theory and institutional theory, we investigated how
political ties play dual roles in an emerging market. Our results suggest that political
ties have a metaphorical double-edged sword effect on firm performance in emerging
economies; political ties can erode performance by inhibiting market-focused innova-
tion capability, but they can also facilitate performance by enhancing firm legitimacy.
In addition, we found that this dual effect is conditional on the institutional environment
(legal enforceability buffers the negative impact of political ties on market-focused
innovation capability but mitigates the positive impact of political ties on firm
legitimacy), and the market environment, i.e., competitive intensity, is an
important market factor that enhances the impact of market-focused innovation
capability on firm performance.
3
3.5
4
4.5
5
5.5
6
6.5
7
Low High
Performance
Market-focused Innovation Capability
Low Competitive Intensity
High Competitive Intensity
Fig. 4 The interactive effect of market-focused innovation capability and competitive intensity on
performance
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Theoretical contributions
Our results contribute to the existing scholarly literature on political ties in the
following ways. First, our study explored the political ties-performance nexus by
examining the intermediate role of market-focused innovation capability and legitima-
cy. Unlike studies that shed light on only the positive underlying mechanism of the
political ties-performance nexus (Guo, Xu, & Jacobs, 2014; Zhu, Su, & Shou, 2017),
we provide insight into the bright side and the dark side of political ties simultaneously.
Second, we provide information on fundamental mediating mechanisms by testing
the mediating effect of legitimacy in the relationship between political ties and perfor-
mance. Extant research has provided insights into how political ties work to improve
performance from the perspective of legitimacy (Peng & Luo, 2000; Sheng, Zhou, &
Li, 2011). However, little if any research has examined the mediating effect of
legitimacy on the political ties-performance nexus. We found that political ties can
facilitate firm performance by sending beholders a signal that the firm has the ability
and motivation to satisfy their pragmatic and moral expectations; consequently, our
work constitutes a meaningful attempt to explain how political ties translate into firm
performance from the perspective of institutional theory.
Third, our results suggest that the mediating effect of market-focused innovation
capability and legitimacy depends on the institutional and market contexts. Thus, from
a process-based perspective, our findings contribute to an enriched understanding of the
relationship between political ties and performance. For example, we can explain why
the impact of political ties on firm performance decreases with the improvement of
legal enforceability; our results suggest that this occurs because legal enforce-
ability buffers the erosion of political ties on innovation capability but mitigates
the positive impact of political ties on legitimacy. In addition, we found that the
impact of market-focused innovation capability on performance is positively
associated with competitive intensity, which also explains why the positive
impact of political ties on firm performance is not salient in a highly competitive market
(Li, Poppo, & Zhou, 2008).
Furthermore, we developed a multi-dimensional measurement for legitimacy based
on the insight of Dacin, Oliver, and Roy (2007). Specifically, we measured legitimacy
from four dimensions: relational legitimacy, social legitimacy, market legitimacy
and investment legitimacy. Compared with previous literature, the scale of
legitimacy in our study provided a more detailed and insightful reconceptuali-
zation of the legitimacy construct.
Managerial implications
Our work has important implications for managers conducting business in emerging
economies. First, we found that while political ties increase firm performance by
fostering firm legitimacy, they erode firm performance by limiting market-focused
innovation capability. This finding suggests that managers should be cautious in
building political ties; specifically, seeking political ties would be an appropriate
strategy for a firm without enough legitimacy (e.g., a foreign firm) but not a good
choice for a firm that operates in an intensive competitive market because competitive
intensity values market-focused innovation capability.
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Second, we showed that legal enforceability decreases the negative influence of
political ties on market-focused innovation capability but mitigates the positive impact
of political ties on legitimacy. This result suggests that when formal institutions exist, a
firm hoping to exploit political ties should keep an eye on its market-focused innova-
tion capability in order to prevent those political ties from eroding its market-focused
innovation capability.
Limitations and future research
Our results are subject to certain limitations that also suggest directions for further
research. First, our results are context specific; thus, a natural extension would be to
examine the roles of political ties in other transition economies. Second, we examined
only legal enforceability and competitive intensity to determine the dominant mediator
between political ties and performance. Additional studies should be conducted exam-
ining other factors, such as information verifiability, market uncertainty and organiza-
tional learning.
Acknowledgements The authors would like to thank the editors and the reviewers for their insightful
comments on the earlier versions of this manuscript. The authors also acknowledge the financial support from
the National Natural Science Foundation of China (Grants No.71532011 and 71872133) and the support from
Philosophy and Social Sciences Research, Ministry of Education of P. R. China (Grants No. 14JZD017 and
18YJA630093).
Appendix
Table 10 Construct validity and item description
Construct and source Description Factor
loadings
Performance
(Sheng, Zhou, & Li, 2011)
Cronbach α=.910;
CR = .910; AVE = .718
Our firm’s overall performance compared
with major competitors over the past year on
1. Sales growth rate .753
2. Market share growth .823
3. The growth rate of profit .916
4. Return on investment .889
(1 = “far below competitors,”and 7 = “far above
competitors”)
Political ties
(Sheng, Zhou, & Li, 2011)
Cronbach α=.944;
CR = .943; AVE = .804
1. Top managers at our firm have maintained
good personal relationships with officials
in various levels of government.
.834
2. Top managers at our firm have developed
good connections with officials in regulatory
and supporting organizations such as tax
bureaus, state banks, and commercial
administration bureaus.
.917
3. So far, our firm’s relationship with regional
government officials has been good.
.890
T. Wang et al.
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Table 10 (continued)
Construct and source Description Factor
loadings
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.943
Legal enforceability
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2. Solve clients’problems in very innovative ways .793
3. Provide innovative ideas and solutions to clients .784
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marketing programs for our services/products
.896
7. Adopt novel ways to market our firm .796
8. Innovate with our marketing programs to
keep ahead of the market
.868
9. Implement innovative marketing programs .892
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Tao W an g research interesting includes marketing strategy and International Brand. He has published paper in
Journal Business Research, Industries Management Research, etc.
Ting Zhang is a PHD student of E&M school in Wuhan University. Her research interesting includes inter-
organizational governance and marketing strategy.
Zhigang Shou research interesting includes inter-organizational governance and marketing strategy. He has
published paper in Journal of Operations Management, Journal Business Research, Industries Management
Research, Asia Pacific Journal of Management, etc.
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