This study examines how political connections and ownership structure shape the performance consequences of strategic change in China. Building on the Resource-Based View and dynamic capabilities, we theorise that political embeddedness (executive National People's Congress (NPC) membership) and state ownership condition firms' ability and incentives to reconfigure resources. We focus on performance divergence by distinguishing profitability (return on assets) from market positioning (market share), asking when strategic change yields trade-offs between these outcomes in China's hybrid institutional environment.
We analyse a large firm-level panel dataset from China's National Bureau of Statistics covering 2003–2013. Political connection is measured as a binary indicator of senior executives' NPC membership, and ownership is coded as state-owned versus privately owned. Strategic change is captured using a composite index based on shifts in advertising intensity, R&D intensity, non-production overheads, and inventory levels. We estimate two-way fixed-effects regression models with firm and year fixed effects and cluster standard errors at the firm level.
Strategic change yields systematically different outcomes across institutional positions. Politically connected private firms do not realise market-share gains after strategic change, but they exhibit weaker profitability improvements than private firms without political ties. State-owned enterprises (SOEs) show market-share gains following strategic change regardless of NPC ties; however, politically connected SOEs experience a pronounced decline in profitability, indicating a market-share–profitability trade-off. Overall, ownership structure and political embeddedness jointly shape whether strategic change translates into profitability, market expansion, or divergence between the two.
The study uses NPC membership as a single binary indicator of political connection and does not capture informal ties, intensity, or duration of political embeddedness. Ownership is operationalised dichotomously, which may obscure mixed-ownership variation. Although firm and year fixed effects reduce bias, endogeneity and selection into political positions may remain. Future research could employ quasi-experimental designs or instrumental variables, incorporate richer measures of political connectedness and ownership gradations, and test whether the observed strategic trade-offs persist in the post-2013 institutional context.
Managers should treat political ties as contingent resources that can enable strategic change but may impose obligations that dilute profitability outcomes. Private-firm leaders should weigh the legitimacy and access benefits of political embeddedness against pressures to pursue policy-aligned objectives that constrain profit maximisation. SOE leaders should recognise the risk that strategic change may be evaluated primarily through market expansion rather than financial efficiency; adopting balanced performance systems that incorporate profitability discipline may improve long-term competitiveness and resource allocation.
The findings suggest that political embeddedness can redirect strategic change towards objectives aligned with state priorities, potentially supporting employment stability, industrial positioning, and broader social goals even when financial performance weakens. In China's state-capitalist setting, strategic change may therefore contribute to societal outcomes through market expansion and policy alignment rather than shareholder returns alone. Recognising these trade-offs clarifies how institutional arrangements shape the distribution of benefits from strategic change across firms, markets, and social stakeholders.
This study advances research on strategic change in emerging economies by integrating political connections and ownership structure into a unified framework and by theorising performance divergence rather than a single outcome. By distinguishing market share from profitability, it reveals institutionally conditioned trade-offs that are obscured in unidimensional performance models. The analysis shows that state ownership constitutes a form of political embeddedness that can render formal political ties redundant for market outcomes, while intensifying profitability sacrifices, thereby extending RBV and dynamic capabilities with a contextualised, institution-sensitive account.
