A Double-Edged Sword: The Two Faces of Political Connections in International Investments of Chinese Firms

Abstract

Political connections have been tested for correlation with outward foreign direct investment (OFDI). Both theoretical rationale and research evidence are mixed. To advance this debate, we conceptualize political connections as a dual-dimensional construct and hypothesize the differential effects of the breadth and the depth of political connections on OFDI. Employing a sample of 2,374 Chinese listed firms, encompassing 15,647 firm-year observations from 2008 to 2016, we find evidence supporting our hypotheses: (1) the breadth of political connections reduces the likelihood of a firm engaging in OFDI and (2) greater depth of political connections increases the likelihood of a firm engaging in the OFDI. Thus, we advise firms to exercise caution when adopting corporate political strategies for internationalization in general and OFDI in particular.