Abstract/Summary

Companies are active in the political market to access valuable government resources, build legitimacy, and influence the policy in their favour. The main question in the political strategy literature is to understand which firms participate in the political market and how these political activities affect firm-level outcomes. The dissertation studies both aspects of political activities in three independent chapters. The first chapter, ”Politicians on Board! What Drives foreign firms to Build Political Connections” (co-authored with Davide Castellani, Stefano Elia, and Irina Surdu) studies the differences between foreign and domestic firms in their propensity to build political connections. The study examines the variation in firms’ political connections based on a comprehensive dataset of 22,672 firms from 41 countries (BEEPS). The findings show that foreign ownership is an important antecedent of a firm’s political connection status. Specifically, foreign-owned firms are 2.8 percentage points less likely to be politically connected than their domestic-owned counterparts. By integrating Liability of Outsidership (LoO) and Resource Dependency Theory (RDT), the results also document that the propensity of political connections for foreign firms increases with the degree of dependency on local market conditions. Foreign firms use political connections more when they (1) have higher local market commitment; (2) operate in industries with high informal regulation; or (3) operate in an autocratic political system. While the first chapter studies the antecedents of political connections, the second chapter (”With a Little Help from My Friend: Political Connections and Allocation of COVID-19 Aid”) focuses on the impact of political connections on the allocation of government support programs during the COVID-19 pandemic. Using Enterprise Survey (BEEPS) data and the corresponding COVID follow-up survey rounds covering 11,853 firms from 30 countries, the study shows that a firm’s political connection status does not affect the overall propensity of receiving government support. However, results are heterogeneous and depend on the program type. Politically connected firms have a higher propensity (3.6 percentage points) to obtain direct cash transfers than those without political connections; the effect is muted for other programs, such as credit payment deferral, access to new credit, fiscal exemption, and wage subsidy. Furthermore, political bias in distributing cash transfers was only observed during the first few months of the COVID-19 pandemic when the rules of government programs still needed to be set, and the eligibility criteria were not defined. The study also provides evidence that political bias may lead to resource misallocation. The results show that the value of political connections was much larger among firms that did not experience any negative shock during the pandemic; political connection compensates firms’ non-eligibility status and allows them to receive cash transfers. Lastly, the value of political connections does not vary much, and it is equally observed in different institutional contexts. The third chapter, ”Political Insurance. Lobbying Behaviour of UK-Listed Firms”, also focuses on the impact of political activities on firm-level outcomes. Specifically, the study investigates how firms’ lobbying activities affect their disclosed political risk. Beyond the traditional rent-seeking benefits, lobbying can also overcome information asymmetry between firms and policymakers, which enables them to mitigate their exposure to political risk. To test this relationship empirically, the study uses a novel dataset of the lobbying meetings between firms and UK government officials and combines it with firms’ disclosed political risk. The final sample, therefore, consists of 430 UK-based publicly listed firms from 2012 through 2020. The results show that lobbying reduces firms’ exposure to political risk. An additional meeting with government officials is associated with a 0.89% drop in firm-level political risk. To unlock the information advantage mechanism, the study argues that the benefits of lobbying depend on the type of firm-level risk. The results document that lobbying is not an effective tool to mitigate the risk coming from non-political sources. Also, lobbying can reduce firms’ exposure to political risk, but its effectiveness depends on the political risk type. The risk coming from economic policies, not fully controlled by the home government, is difficult to mitigate. Lastly, the value of lobbying is larger during periods of high economic policy uncertainty when the demand for policy information is high. Overall, the findings of the dissertation demonstrate that political strategy is an effective mechanism to obtain legitimacy in the host country market, receive financial support from the government, and acquire policy information to hedge against political uncertainty.