In emerging markets, political connections are a common non-market strategy, yet their potential “innovation paradox” remains insufficiently understood. Existing research offers limited empirical evidence on the mechanisms underlying this paradox and its variation across governance and organizational contexts. Therefore, this study aims to examine the impact of political connections on corporate innovation performance and its channel mechanisms, while identifying key factors that moderate this relationship, thereby providing new insights into the “innovation paradox”.
Drawing on dynamic capability theory and the non-market perspective, this study uses a regression analysis approach to empirically test hypotheses with panel data from 5,549 Chinese listed companies from 2008 to 2021.
Our findings show that a firm's political connections have a negative influence on its innovation. R&D investment intensity acts as the channel through which political connections affect innovation. In addition, we identify dynamic capabilities and board independence as mechanisms that mitigate the negative effect. Heterogeneity results indicate that the negative impact of political connections on innovation is especially prominent in state-owned and technology-intensive enterprises comparing to non-state-owned and non-technology-intensive enterprises.
This study confirms the “innovation paradox” of political ties and clarifies its formation mechanism. We originally identify dynamic capabilities and board independence as crucial mitigating factors, offering new micro-level governance evidence. The findings advise regulators to focus on minimizing rent-seeking and firm management to strategically use these two mechanisms to overcome the innovation costs associated with political connections.
