Managerial political ties and firm performance during institutional transitions: An analysis of mediating mechanisms

Journal of Business Research 67 (2014) 116–127

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Journal of Business Research

Managerial political ties and firm performance during institutional transitions: An analysis of mediating mechanisms☆ Hai Guo ⁎, Erming Xu, Mark Jacobs Renmin University of China, PR China

a r t i c l e

i n f o

Article history: Received 1 July 2011 Received in revised form 1 April 2012 Accepted 1 November 2012 Available online 5 December 2012 Keywords: Political ties Institutional support Regulatory legitimacy Opportunity recognition Performance

a b s t r a c t This study examines the role of mediating mechanisms impacting the relationship between managers' political ties and firm performance, with a focus on institutional transitions in China. Relying on both resource dependence and institutional theories, the analysis posits that three factors: organizational regulatory legitimacy building, institutional support, and institutional entrepreneurial opportunity recognition, mediate the relationship between managerial political ties and firm performance. Using survey data collected from 195 Chinese firms, the study concludes that institutional support and institutional entrepreneurial opportunity recognition represent two significant mediating mechanisms by which managerial political ties can result in improved firm performance. But, though a reliance on political utilization enhances organizational regulatory legitimacy, the results show that regulatory legitimacy does not directly contribute to firm performance. This study also discusses theoretical contributions, implications for managers, study limitations, and suggestions for future research. © 2012 Elsevier Inc. All rights reserved.

1. Introduction Pervasive institutional transitions characterize transition economies (Peng, 2003). During times of transitional change, firm managers frequently must rely on network-based strategies to substitute for missing formal institutions and to arrive at desired results. One such strategy is to form social ties to government officials (managerial political ties) (Peng & Luo, 2000). Reliance on such relations has been particularly evident in countries like China, where, throughout its transition process, business and the government have maintained close interaction (Tjosvold, Peng, Chen, & Su, 2008). The conventional wisdom suggests that, in transition economies, a positive link between political ties and firm performance exists (e.g. Li & Zhang, 2007; Peng & Luo, 2000; Zhang & Li, 2008). A core argument of related research is that political ties provide firms with various forms of institutional support by providing them with access to a variety of valuable resources and information (Li, Poppo, & Zhou, 2008). According to the resource-based view (Barney, 1991), such support is

☆ The authors thank the two anonymous reviewers for their constructive comments and suggestions and the Associate Editor, Lei-Yu Wu, for the valuable guidance throughout the review process. The authors also thank the support of the Project of the National Natural Science Foundation of China (71102105, 71232011, 70972127), and the Fundamental Research Funds for the Central Universities and the Research Funds of Renmin University of China (10XNK098). ⁎ Corresponding author at: School of Business, Renmin University of China, No. 59, Zhongguancun St., Haidian District, Beijing 100872, PR China. Tel.: + 86 10 8250 0499; fax: +86 10 8250 9169. E-mail addresses: [email protected] (H. Guo), [email protected] (E. Xu), [email protected] (M. Jacobs). 0148-2963/$ – see front matter © 2012 Elsevier Inc. All rights reserved. http://dx.doi.org/10.1016/j.jbusres.2012.11.009

able to potentially help firms create and sustain competitive advantage. Another assertion, deriving mainly from institutional theory, suggests that political ties can improve firm performance by providing firms with enhanced legitimacy (Baum & Oliver, 1991; Hillman, 2005). However, the relationship between political ties and firm performance is not always easy to observe. A literature review reveals that the benefits of political ties are contingent on a variety of factors, including firm ownership (Park & Luo, 2001), industrial growth (Peng & Luo, 2000), technological turbulence (Luo, 2003), and competitive strategy (Acquaah, 2007). Furthermore, a burgeoning stream of literature relating to transition economies has disclosed the “dark side” of political ties (e.g. Siegel, 2007; Sun, Wright, & Mellahi, 2010). For example, the political embeddedness perspective argues that political ties yield not only opportunities, but also act to constrain firms (Okhmatovskiy, 2010), in that deep political embeddedness will harm long-term firm performance (Li, Zhou, & Shao, 2009; Sun, Mellahi, & Thun, 2010). But, while an examination of the contingent effects of political ties has injected fresh insights into the existing literature (Sun, Mellahi, & Wright, 2012; Wu, Li, & Li, 2012), the impact of political ties on firm performance still remains unclear. Specifically, not enough is known about the foundational mechanisms that help firms convert political ties into firm performance. The goal of the present study is to explore the factors that mediate the relationship between political ties and firm performance in the context of transition economies. In addition, although scholars have demonstrated the importance of political ties to firms in transition economies, the political tie utilization theoretical framework requires improvement. Much research relating to political ties has focused on the context of institutional transitions. Here, scholars have generally explained the existence of

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such ties by drawing on social capital theory or social network theory (e.g. Gao, Xu, & Yang, 2008; Peng & Luo, 2000), theories normally suit to more developed country contexts. While admitting that such analyses have significantly enhanced related research, various challenges exist due to the contextual differences between developed and transition economies (Tsui, 2006). Wright, Filatotchev, Hoskisson, and Peng (2005: 11) note that, for research conducted in transitional contexts, “an integrated approach that brings together various theories may be more fruitful”. In particular, some scholars argue that greater insights are obtainable from blending institutional theory with resource-based logics (Hoskisson, Eden, Lau, & Wright, 2000; Meyer, Estrin, Bhaumik, & Peng, 2009; Oliver, 1990). For firms operating in transition economies, the integration of insights arising from resource dependence theory (RDT) and institutional theory (IT) may help to understand better the mechanisms of how managerial political ties impact firm performance. Previous research has shown that firms might strategically use managerial political ties, a unique type of firm resource (Lu, Zhou, Bruton, & Li, 2010), to better cope with environmental uncertainties (Hillman, Withers, & Collins, 2009; Pfeffer & Salancik, 1978), thus helping the firms reduce their dependences on their external environments (Peng & Luo, 2000; Westphal, Boivie, & Chng, 2006). In transition economies, which involve significant institutional changes, managerial political ties also represent an informal institutional arrangement that can substitute for weak or missing formal institutions (Peng & Heath, 1996; Xin & Pearce, 1996). Relying on these insights, this study aims to more fully determine the mediating mechanisms that act to transform managerial political ties into firm performance during institutional transitions. This study does so via an integration of RDT and IT approaches. To carry out its purpose, the study relies on a formulation and testing of specific hypotheses based on data collected from 195 Chinese firms. Test results show that institutional support and institutional entrepreneurial-opportunity recognition play important mediating roles in the relationship between political ties and firm performance. However, although political-tie utilization significantly enhances organizational regulatory legitimacy, the study finds that this boost in organizational legitimacy contributes little to improved firm performance. 2. Theoretical background 2.1. Managerial political ties during institutional transitions In line with previous research, this study refers to managerial ties as “executives' boundary-spanning activities and their associated interactions with external entities” (Geletkanycz & Hambrick, 1997: 654). More specifically, managerial political ties are the extent to which managers cultivate interpersonal relations with government officials (Li & Atuahene-Gima, 2001). The social capital embedded in political ties represents an important source of firm competitive advantage (Peng & Luo, 2000; Tsang, 1998). Past researchers have asserted that institutional transitions, or “fundamental and comprehensive changes introduced to the formal and informal rules of the game that affect organizations as players” (Peng, 2003: 275), result in the increased importance of political ties (Li et al., 2008). The reason is, in the midst of institutional transitions, the formal institutional environment is immature, and firms have to rely more on informal institution-based strategies, such as the role of managerial political ties, to help them to achieve their goals (Peng & Luo, 2000; Zhang & Li, 2008). In China, political ties have resulted in a unique type of relational outcome, referred to as guanxi, which involves the “drawing on a web of connections to secure favors in personal and organizational relations” (Park & Luo, 2001: 455), In fact, in many ways, guanxi has become the lifeblood of business exchange in the nation. Some scholars argue that the hallmark of institutional transitions is the transition from government control to market competition

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(Peng, 2003), during which time the role of market forces becomes stronger (Wright et al., 2005). However, the trajectories of institutional changes in transition economies like China suggest that, although market forces have undoubtedly become more important, government influences have not necessarily declined (Walder, 1995). In fact, the Chinese government has remained an active economic player, even when gradually withdrawing from direct economic involvement. Hence, the interdependence between business organizations and government agencies has remained very high (Tjosvold et al., 2008). This fact suggests that in order to obtain more resources and opportunities, firms in China's transition economy need to make more adequate use of their managers' ties with political actors. 2.2. Managerial political ties and firm performance With respect to the context of transition economies, the impact of managerial political ties on firm performance is a controversial issue. Actually, a large body of literature has determined a positive link between political ties and firm performance (e.g., Li & Zhang, 2007; Luo & Chen, 1997; Peng & Luo, 2000; Zhang & Li, 2008). For example, drawing on social network theory, Peng and Luo (2000) find that firm performance associates positively to ties between managers and government officials in China. Applying social capital theory, Acquaah (2007) finds that political ties contribute positively to organizational performance, with this impact that differs among firms based on the types of competitive strategies they pursue. Another stream of research, however, argues that the effect of political ties is context specific (Sun et al., 2012; Wu et al., 2012). That is, under certain circumstances, political ties add no value, and in some cases even subtract value, to firms in transition economies (Li et al., 2008; Li et al., 2009; Okhmatovskiy, 2010; Sheng, Zhou, & Li, 2011; Siegel, 2007; Sun et al., 2010a, 2010b). Li et al. (2009) find that foreign firm managers in China are unable to use political ties to create synergies with product differentiation strategies to improve firm performance. Adopting the political embeddedness perspective, Sun et al. (2010) determine that the value of political ties changes over time. That is, extremely strong political ties can result in “overembeddedness” (Uzzi, 1997), conferring little or even negative value for the firms possessing them (Okhmatovskiy, 2010). While scholars have devoted great efforts to exploring the contingent value of political ties on firm performance, existing studies by and large have left unexamined the specific mediating variables that help to translate political ties into improved firm performance. Further, most existing studies examining the performance implications of political ties have drawn on developed economy-based theories such as social capital theory (Gao et al., 2008; Luo, 2003), social network theory (Peng & Luo, 2000), and/or the resource-based view (Lu et al., 2010) to develop their arguments. However, given the heterogeneity of emerging economies, the wholesale adoption of these theories to such contexts is becoming ever more problematic (Wright et al., 2005). Hoskisson et al. (2000) suggest that, in emerging economies such as China, the impact of the speed and nature of institutional change requires greater consideration. In fact, IT has increasingly become a leading perspective on strategy in emerging economies (Peng, Sun, Pinkham, & Chen, 2009; Wright et al., 2005). Recognizing the rising importance of IT, while also acknowledging the continuing utility of western mainstream theories in the framing of strategy research in transition economies, Wright et al. (2005) suggest to integrate IT with other mainstream conceptual perspectives, garnering benefits from their union (Meyer et al., 2009). In turn, to further address the relationship between political ties and firm performance, an integrated analysis incorporating both IT and RDT seems reasonable. Several reasons exist. First, research suggests that IT may serve to clarify the utility of political ties within the context of institutional transitions (Peng, 2003; Sheng et al., 2011). Playing as “the rules of the game in a society” (North, 1990: 3), institutions

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help to spell out what actions are appropriate and what actions are unacceptable or even beyond consideration (DiMaggio & Powell, 1991). In transition economies, “institutional voids” force managers to rely more heavily on political ties as a substitute for imperfect formal institutional frameworks (Peng & Heath, 1996; Xin & Pearce, 1996). Such a strategy greatly influences the nature of firm performance. Second, RDT views political ties as an effective way to manage environmental uncertainties. Characterizing the firm as an open system, RDT argues that firm behaviors are dependent on contingencies in the external resource environment (Grewal & Dharwadkar, 2002; Pfeffer & Salancik, 1978). Thus, managers need to take various actions to reduce the uncertainty and interdependence on the larger social system of their firms. As a major force in the external environment of business (Hillman, Zardkoohi, & Bierman, 1999), the government represents a critical basis of external interdependency as well as a source of uncertainty (Hillman, 2005). This fact is particularly true in transition economies (Okhmatovskiy, 2010; Tjosvold et al., 2008). RDT argues that, in order to reduce dependencies on scarce resources controlled by external entities, firms will form ties with government actors (Pfeffer & Salancik, 1978). Both IT and RDT imply that managerial political ties possess the ability to influence firm performance via different mechanisms. As a kind of political strategy, managerial political ties should contribute not only to value maintenance, but also to value creation (Oliver & Holzinger, 2008). Traditionally, the primary focus of institutional theory has been on how organizations better secure their positions and legitimacy by complying with the rules and norms of the institutional environment (DiMaggio & Powell, 1983; Meyer & Rowan, 1991), which is a primary goal of political tie utilization (Ahlstrom, Bruton, & Yeh, 2008). A newer view, mainly related to institutional entrepreneurship research argues that, in addition to shaping an organization's institutional constraints, institutions can also play additional, more active roles (Bruton & Ahlstrom, 2003). Specifically, political ties may help to enable organizational actions in at least two ways. First, political ties can help firms build institutional advantages and support (Li & Zhou, 2010), such as through the provision of resources (i.e., land, capital, permission to operate and/or technical training), a more active function of political ties. Second, political ties may also be helpful to actors in helping them to better recognize entrepreneurial opportunities by making sense of and shaping government regulations (Bruton, Ahlstrom, & Li, 2010; Rao, Morrill, & Zald, 2000), a most proactive role of political ties. The aforementioned mechanisms also have their roots in RDT. First, regulatory legitimacy, arising via adherence to the constraints of the institutional framework, represents a primary means to reduce environmental uncertainties (Baum & Oliver, 1991). Second, institutional support gained from political tie utilization often succeeds in indicating that the government will be more inclined to enable, rather than constrain organizational activities, thus greatly reducing resource dependence on the institutional environment. Finally, firms may even use political ties in becoming aware of entrepreneurial opportunities stemming from proposed institutional changes, a proactive method to take advantage of environmental uncertainties. The central premise of this study is to focus on and to explore the mediating mechanisms by which firms translate the potential benefits of managerial political ties into improved firm performance. Based on the above discussion, the article focuses on three such key mediating mechanisms: organizational regulatory legitimacy building, institutional support, and institutional entrepreneurial opportunity recognition (see Fig. 1). 3. Hypotheses development While acknowledging that a variety of research perspectives relating to the contingent value of political ties greatly advances the level of analysis in this realm, the present study asserts that the general

value of political connections needs recognition (Sun et al., 2010a). The assertion is that this is especially the case for firms operating in transition economies. Take China, for example. The Chinese government has maintained a central role over three decades of economic transition in the nation, and government officials have had considerable power to make policies, allocate resources, and approve projects (Peng & Luo, 2000). Further, nurtured by Confucian culture, personal ties (guanxi in Chinese) have been the lifeblood of business exchanges in Chinese society (Xin & Pearce, 1996). Chinese firms have relied on managerial political ties to moderate institutional uncertainties, and to build institutional advantage. Consistent with the findings of many existing studies conducted in the context of transition economies (e.g. Li & Zhang, 2007; Peng & Luo, 2000; Wang, Jiang, Yuan, & Yi, 2011), H1 states the following: H1. Overall, managerial political ties are positively related to firm performance in transition economies. 3.1. Mediating role of organizational regulatory legitimacy Legitimacy refers to “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: 574). An organization attains legitimacy by adherence to some socially constructed framework of social norms, values, and rules (Deephouse & Carter, 2005). Scholars identify institutional and resource-dependence perspectives as two of the most important foundations of organizational legitimacy (Suchman, 1995). The core insight of IT is that organizations endeavor to achieve legitimacy by complying with their institutional environments (DiMaggio & Powell, 1991; Suchman, 1995). In accord with Scott's (2008) three institutional pillar framework, some scholars have referred to organizational legitimacy as the social acceptance arising as a result of adherence to regulative, normative, or cognitive norms and expectations (Deephouse & Carter, 2005; Ruef & Scott, 1998). From another perspective, RDT argues that organizational legitimacy derives from transactional relationships between a focal firm and its external stakeholders (Pfeffer & Salancik, 1978; Rao, Chandy, & Prabhu, 2008). As a kind of manipulated resource, organizational legitimacy can help a firm secure resources and support from stakeholders and society, consequently helping to mitigate a firm's dependence on its external environments. Legitimacy building can also improve firm performance by reducing the liability of newness (Aldrich & Fiol, 1994; Delmar & Shane, 2004; Singh, Tucker, & House, 1986) and/or through improved access to needed resources (He & Baruch, 2010; Zimmerman & Zeitz, 2002; Zott & Huy, 2007). A firm must prove its value by engaging in legitimate activities. This is particularly the case in transition economies wherein, due to weak institutional environments, firms usually lack the legitimacy they need (Ahlstrom & Bruton, 2001; Ahlstrom et al., 2008; Tsang, 1996). Due to the weak formal institutional framework, and the centralized power of resource allocation controlled by various levels of governments (Li & Zhang, 2007; Peng & Luo, 2000), firms operating in China's transitional environment face strong pressure to develop regulatory legitimacy. Thus, this study focuses attention on organizational regulatory legitimacy and defines this concept as the consistency of firm behavior with relevant laws, regulations, rules, standards and expectations set forth by governments (Zimmerman & Zeitz, 2002). Managerial political ties can improve firm performance through the promotion of organizational regulatory legitimacy building. In fact, scholars have long considered the enhancement of legitimacy as a key benefit associated with the establishment of political ties (Baum & Oliver, 1991; Hillman et al., 1999; Okhmatovskiy, 2010). Drawing on RDT, Hillman (2005) finds that former government officials who go on to serve as board members provide a strong source of firm legitimacy. Although seldom empirically examined, such logic should also apply to transition economies as well. Existing theory asserts that political ties

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Institutional Support

Managerial Political Ties

Regulatory Legitimacy Building

Firm Performance

Opportunity Recognition

Fig. 1. Conceptual model.

can facilitate regulatory legitimacy building in at least one of two ways. First, interactions between managers and government officials enable firms to better understand the institutional environment, and thus may guide firms in operating within the scope of institutional constraints, an indication of high regulatory legitimacy. Second, managers can use political ties to persuade the government to accept a firm's ways of doing things, another method for regulatory legitimacy building. For example, by frequently inviting China's governmental officials to visit its workshops or exhibition rooms, the Haier Group, a world famous Chinese producer of household appliances, persuades the government to accept and support its strategy and management practices, thus achieving high regulatory legitimacy (Tian, He, & Gao, 2005).

firm both tangible (resources) and intangible (information and/or policy) benefits. Given the underdeveloped market mechanisms that exist in transition economies, for example the situation of strategic factor markets (Peng & Heath, 1996), institutional support plays a particularly significant role for firms operating in such contexts. One form of this type of assistance is the help derived from government policies, which intends to expand the range of a firm's strategic choices. This situation occurs through such means as the granting of loans, or the granting of certain rights, like permission for an import license. Such actions have the potential to improve firm performance (Li & Atuahene-Gima, 2001).

H2. Organizational regulatory legitimacy mediates the relationship between managerial political ties and firm performance.

H3. Institutional support mediates the relationship between managerial political ties and firm performance.

3.2. Mediating role of institutional support

3.3. The mediating role of institutional entrepreneurial opportunity recognition

As Li and Atuahene-Gima (2001: 1125) note, institutional support “reflects the extent to which administrative institutions provide [backing] for firms”. Institutional support is different from organizational regulatory legitimacy. Regulatory legitimacy reflects the degree to which a firm complies with governmental rules or policies, but institutional support indicates to what degree the government favors a firm. While the former mainly aims to reduce uncertainties induced by institutional changes, the latter can more actively take advantage of environmental uncertainties. The assertion here is that as a bridge linking firms with the government, managerial political ties provide good opportunities for enhancing extant institutional support. Previous research reveals that political ties offer firms at least three kinds of support. First, political ties provide information support. Managers connected to government officials can more easily gain valuable information regarding industrial regulations and policies (Lester, Hillman, Zardkoohi, & Cannella, 2008), thus allowing them to better understand the institutional environment. A second source relates to resource support. Political ties facilitate access to scarce resources controlled by the government (Xin & Pearce, 1996), thus helping to build organizational capabilities. Finally, political ties represent a source of policy support. This case exists because political ties offer firms the ability to influence regulatory policies (Hillman, Keim, & Schuler, 2004), via the attainment of favorable policies or preferential treatment (Fisman, 2001; Johnson & Mitton, 2003). In sum, political ties have the potential to bring a

Entrepreneurship scholars link superior firm performance to an entrepreneur's ability to explore for and exploit business opportunities (Brown, Davidsson, & Wiklund, 2001). As Shane and Venkataraman (2000) note, entrepreneurial opportunity reflects a situation “in which new goods, services, raw materials, and organizing methods can be introduced and sold at greater than their cost of production”. Opportunity recognition results in the ability to create a new fit between distinct market demands and resources (Ardichvili, Cardozo, & Ray, 2003). Opportunity recognition is a central issue in the field of entrepreneurship (Eckhardt & Shane, 2003; Short, Ketchen, Shook, & Ireland, 2010). In contrast, institutional entrepreneurship scholars characterize the entrepreneur as an institutional innovator and/or an agent of institutional change (Dacin, Goodstein, & Scott, 2002). Institutional entrepreneurship research suggests that entrepreneurs need to not only conform to existing institutional constraints, but that they also can shape for themselves a favorable institutional context (Bruton & Ahlstrom, 2003). That is, institutional entrepreneurs frequently act to transform their institutional environment by aligning the environment with their particular goals in the pursuit of self-interest (DiMaggio, 1988). However, the institutional entrepreneurship literature has “mostly overlooked entrepreneurship research” (Pacheco, York, Dean, & Sarasvathy, 2010: 997). In particular, the highlighted concept of opportunity recognition in entrepreneurship literature is not a feature in institutional entrepreneurship research. Applying the opportunitybased view of entrepreneurship to institutional entrepreneurship, a

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realization must exist that entrepreneurs need to recognize or create opportunities that may arise through institutional change (Beckert, 1999; Rao et al., 2000). Institutions are closely inter-related with entrepreneurship in transition economies (Puffer, McCarthy, & Boisot, 2009). During China's transitional period, the pervasive institutional transitions that have occurred have yielded a variety of entrepreneurial opportunities (Yang & Li, 2008). To illustrate the notion that opportunities stem from changes in the institutional environment, this study proposes the concept of institutional entrepreneurial opportunity. By incorporating the insights of entrepreneurship research into the study of institutional entrepreneurship (Pacheco et al., 2010), the study defines institutional entrepreneurial opportunity as business opportunities either discovered or created by a firm based on the firm's efforts at understanding and/or enabling changes in its institutional environment that directly relate to its strategic interests. Further, institutional entrepreneurial opportunity recognition reflects the degree to which a firm recognizes an opportunity resulting from changes that the government makes to its existing industrial-related policies or as a result of efforts made by brokers to convince the government to make favorable policy changes. Political ties can improve firm performance by improving the firm's recognition of its institutional entrepreneurial opportunities. This situation takes place in various ways. First, political ties can result in new information for the firm relating to unperceived market needs (Li & Zhou, 2010). Close ties with government officials can also help entrepreneurs gain access to information about institutional changes that they might not otherwise have, such as intended industrial policy transformations or new policy implementations, all of which may result in new business opportunities. Further, entrepreneurs also possess the ability to use political ties to encourage particular institutional arrangements (Rao et al., 2000). For example, by lobbying governments for new technical or service standards, firms can create unique opportunities for themselves (Hillman & Hitt, 1999). Second, political ties help firms gain access to unemployed or underemployed resources. Undeveloped strategic factor markets in China have given rise to processes of market resource acquisition that are frequently inefficient and costly (Peng & Heath, 1996). To solve these problems, entrepreneurs often rely on political ties to gain access to the resources they need. In possession of such underutilized resources, entrepreneurs can then translate creative ideas or even “dreams” into viable business undertakings (Ardichvili et al., 2003). H4. Institutional entrepreneurial opportunity recognition mediates the relationship between managerial political ties and firm performance.

4. Method 4.1. Sample and data Data for this study comes from a questionnaire survey. This study initially developed a questionnaire in English and then, after going through a double back-translation process (Brislin, 1980), translated the questionnaire into Chinese. To ensure content validity, this study carried out extensive discussions with three experienced entrepreneurs, asking these individuals to provide suggestions and advice for the questionnaire. Based on their suggestions, the study modified questionnaire items to reflect best the conditions faced by Chinese firms. Then, a pilot test involving ten executives from six companies was launched. Involved processes depended on in-depth interviews. All of the interviewers were PhD students or professors in relevant research areas who had the knowledge and capabilities relating to both survey processes and research methods. To reduce the social desirability bias, the study phrased all the questions with neutral words, and informed

all respondents about the academic purpose of the project, as well as the confidentiality of their responses. The study distributed surveys in China, the largest transition economy in the world. More specifically, the study conducted surveys in two provinces of China: Shandong and Shaanxi, which respectively are among the most developed provinces in eastern and western China. Both areas boast long histories and rich business cultures. They are therefore two ideal sampling locales in which to examine the impacts of managerial political ties for firms operating in China. The study drew a random sample of 500 enterprises from the Economic Commerce Committee (ECC) of the two provinces. The ECC is a special administrative body in charge of overseeing business firms, and the agency was willing to cooperate because this research has the potential to enhance ECC's understanding of local firms, and is thus useful for policy making. Before each actual interview, interviewers explained how to complete the questionnaire to minimize the possibility of misinterpretation of the questions. By the end of September 2009, 262 enterprises had provided information and, of these, 67 were ineligible due to various reasons, such as inadequate completion of the survey questions. In the end, 195 firms provided acceptable data, resulting in an effective response rate of 39.0% (195/500). Respondents were primarily top managers, or the heads of key departments, such as the Director of Strategic Development. Of these respondents, 67.6% had worked in their companies for more than 5 years. Overall, respondents possessed an average of 7.79 years of employment duration within the firm that they were working in at the time of the study. This result suggests that respondents were knowledgeable regarding, and possessed accurate information concerning their firms' management and entrepreneurship practices. Small and medium enterprises were the principal employers of survey respondents, with nearly 75.7% of respondents employed by firms having fewer than 200 employees. In line with existing theory regarding the liability of smallness (Aldrich & Auster, 1986), the comparatively small size of the firms involved in the study probably helped to ensure that they actually relied on political ties to help them overcome business difficulties. In terms of the types of firm ownership represented, the proportions of the companies represented were: 14.9% state-owned enterprises, 42.8% limited companies, 35.1% private companies, and 7.2% others, such as joint ventures, collective firms, and village firms. The distribution of sales volumes of respondent companies were: 16.4% possessed sales revenue (in RMB Yuan) of less than 1 million; 32.1% with amounts between 1 and 10 million; 35.7% between 10 and 100 million; and, 15.8% with sales revenue of more than 100 million. This study performed t-tests to check for possible non-response bias (Armstrong & Overton, 1977). After splitting the final sample into two groups according to the withdrawal dates, this study compared the two subsamples along major firm attributes (i.e., firm size, age, sales and ownership status) using the t-tests. The results showed that the t-statistics for all of the demographic characteristics were insignificant. Thus, no evidence of systematic non-response bias exists. 4.2. Measures 4.2.1. Dependent variable As suggested by Acquaah (2007) and Li and Zhang (2007), the study measures the variable, firm performance, relative to competitors, by relying on six self-reported factors, which include both financial (i.e., sales growth, return on assets) and nonfinancial (i.e., market share growth, productivity) indicators. 4.2.2. Independent variable Based on previous studies (Li et al., 2008; Luo & Junkunc, 2008; Peng & Luo, 2000), the study develops a four-item scale for managerial political ties. The measures assess the strength of firm managers' political ties, by embodying the executives' perceived importance of building

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political ties, the efforts they make to nurture strong political ties, and the perceived quality of the political ties they have established. Among the mediators proposed, institutional support describes the extent to which central and other levels of local government support firms by providing information, resources, permission for business action, etc. Adapted from Li and Atuahene-Gima (2001), the study measures institutional support using five items. Another mediator, institutional entrepreneurial opportunity recognition, reflects the degree to which a firm recognizes entrepreneurial opportunities, based primarily on scanning and prediction of changes in the institutional environment faced by the firms. Relying on a notion developed in McMullen and Shepherd (2006), the study develops four items to measure entrepreneurial opportunity recognition within the context of China's institutional transitions. Organizational regulatory legitimacy, the final mediator, reflects the extent to which organizational activities are accepted, approved, or even encouraged by the government. Following Suchman (1995) and Zimmerman and Zeitz's (2002) discussions, this study develop a four-item scale for regulatory legitimacy. 4.2.3. Control variables The study introduces six control variables. Since firm size can be highly related to sales growth (Li et al., 2008), the analysis controls for and depicts firm size as the logarithm of the number of employees in the firm. The study also controls for firm age because mature firms are likely to have greater market shares and lower rates of growth (Li & Zhang, 2007). As compared to other firms, state-owned enterprises (SOEs) in China are able to secure more resources and legitimacy from the government (Xin & Pearce, 1996). To capture this difference, the study likewise controls for firm ownership, with firms classified into five groups: 1 = SOEs; 2 = foreign invested enterprises or joint ventures; 3 = limited companies; 4 = private firms; and 5 = others. The study accounts for three environmental variables as well. First, the study considers demand uncertainty by asking respondents whether or not they agreed with the following statement: “it is very difficult to predict any demand changes taking place in the market place.” Second, the study assesses technological change by evaluating degree of agreement to the following question: “the technology in our industry is changing rapidly.” Finally, the study controls for competitive intensity by garnering responses to the following question: “competition in our industry is cutthroat.” The study measures these three control variables on a 5-point Likert scale, ranging from 1 (strongly disagree) to 5 (strongly agree). 4.3. Reliability and validity The study implements several tests for the validity of the above measures. First, this study estimates internal consistency reliability using Cronbach's alpha. Typically, reliability coefficients of 0.70 or higher are adequate (Nunnally, 1978). Appendix A shows that the Cronbach's alpha values for all constructs are well above this benchmark of 0.70. Second, convergent validity is qualified when the factor loading value is 0.7 or higher (Fornell & Larcker, 1981). Convincingly, 22 out of 23 loading values are above this threshold. The only exception is the third item measuring political ties. This loading value is 0.62, still acceptable. In addition, an average variance extracted (AVE) of 0.50 or greater for each construct also ensures convergent validity. Results show that all AVE values surpass the recommended threshold of 0.50. Finally, the study estimates discriminant validity in two ways. First, the AVE of each construct exceeds the squared correlation between construct pairs, demonstrating discriminant validity between the latent factors (Fornell & Larcker, 1981). Second, this study conducts chi-squared difference tests using confirmatory factor analysis (CFA) (Bagozzi, 1980). A means by which this test occurs is first to allow for correlation between regulatory legitimacy and political ties and then to disallow such correlation by fixing the correlation at 1.0. A significant difference in chi-square values indicates the

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distinctiveness of the two constructs (Δχ 2(Δdf = 1, n = 195) = 45.9, p b 0.001). 4.4. Assessing common method bias As this study measures all constructs using items in a questionnaire completed by a single respondent, common method bias (CMB) might possibly be a serious issue. To deal with this issue, the study first employs Harman's single-factor test method (Podsakoff, MacKenzie, Lee, & Podsakoff, 2003). According to this method, if CMB exists, a factor analysis that includes all the items should yield a single factor. The analysis extracts seven distinct factors that account for 71% of the total variance, with the first factor explaining about 29%. Thus, no single factor emerges, nor does any one factor account for most of the variance. Second, the study applies a CFA approach to test for CMB. The study does this analysis by testing a model loading all items onto a common method factor, and a model loading the items onto their theoretical constructs. Pairwise tests for all factors show that, in all cases, a two-factor model fits the data better. For example, comparing a two-factor model involving managerial political ties and regulatory legitimacy to a onefactor model yields a significant change in chi-square (Δχ2(Δdf = 1, n = 195)= 40.1, p b 0.001). Overall, these results indicate that CMB is unlikely a threat to the findings of this study. 5. Results Table 1 presents the descriptive statistics and Pearson correlation matrix for all variables used in this study. 5.1. Tests of hypotheses To investigate mediation effects, the study utilizes a standard mediation regression in line with the procedures described by Baron and Kenny (1986) (Table 1). As Model 1 shows, the variable, political ties, is significantly and positively related to firm performance (β =0.19, pb 0.05), thus supporting H1. Model 2 to Model 4 show that the political ties variable is significantly associated with each mediator, namely organizational regulatory legitimacy (β =0.51, p b 0.001), institutional support (β= 0.37, p b 0.001), and institutional entrepreneurial opportunity recognition (β =0.13, pb 0.05). Table 2 also details whether the positive effect of political ties on firm performance significantly drops or disappears with the addition of various mediating variables. The results of Model 6 and Model 7 show that the positive relationship between political ties and firm performance becomes insignificant when adding in institutional support and institutional entrepreneurial opportunity recognition, respectively (β = 0.06, p = 0.49; β = 0.15, p = 0.12). This result is consistent with the statements of H3 and H4. Similarly, the results of Model 5 indicate that the link between political ties and firm performance becomes insignificant when including organizational regulatory legitimacy (β = 0.08, p = 0.62). However, the regression results obtained after inclusion of all the three potential mediators (Model 8) show that the impact of organizational regulatory legitimacy on firm performance is not significant (β = 0.07, p = 0.50). Therefore, H2 receives no support from the data. To check on the robustness of the above findings, the study also applies a structural equation modeling (SEM) analysis (Table 3). As the base model shows, the paths from political ties to the three mediators and from these mediators to firm performance are significant, with the exception of the path from organizational regulatory legitimacy to firm performance (β = 0.10, p = 0.39). The indexes show a moderately good fit for the base model (χ2 = 962.70; df= 371; RMSEA= 0.09; NFI= 0.85; CFI = 0.92). Second, the direct effect model reveals a significant association between political ties and firm performance with an acceptable fit index (χ2 = 359.13; df= 103; RMSEA = 0.10; NFI = 0.87; CFI = 0.92). Finally, the partial mediation model indicates that paths

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Table 1 Descriptive statistics and correlation matrix. Variable

Mean

S. D.

1

1. Firm size 2. Firm age 3. Firm ownership 4. Demand uncertainty 5. Technological turbulence 6. Competitive intensity 7. Political ties 8. Opportunity recognition 9. Institutional support 10. Regulatory legitimacy 11. Firm performance

1.79 11.95 3.10 3.08 3.19 3.94 3.50 3.44 3.16 3.71 2.73

0.70 11.68 1.07 0.94 0.93 0.89 0.72 0.80 0.91 0.73 0.89

1 0.25⁎⁎ −0.06 −0.16⁎ 0.04 0.06 0.14⁎ −0.01 0.12 0.07 0.44⁎⁎

2

3

1 −0.27⁎⁎ 0.07 0.11 0.18⁎ 0.22⁎⁎ 0.17⁎ 0.09 0.25⁎⁎ 0.13

4

1 −0.11 −0.11 0.01 −0.16⁎ −0.02 −0.02 −0.22⁎⁎ −0.05

1 0.37⁎⁎ 0.37⁎⁎ −0.05 0.23⁎⁎ 0.18⁎ 0.09 −0.12

5

1 0.35⁎⁎ 0.16⁎ 0.37⁎ 0.29⁎⁎ 0.27⁎⁎ 0.12

6

7

8

9

10

11

1 0.11 0.23⁎⁎ 0.06 0.20⁎⁎ 0.19⁎⁎

1 0.18⁎ 0.32⁎ 0.57⁎⁎ 0.23⁎⁎

1 0.45⁎⁎ 0.35⁎⁎ 0.24⁎⁎

1 0.51⁎⁎ 0.28⁎⁎

1 0.25⁎⁎

1

⁎ p b 0.05. ⁎⁎ p b 0.01.

from political ties to the three mediators and from these mediators to firm performance are significant, except for the path from organizational regulatory legitimacy to firm performance (β = 0.11, p = 0.67). In addition, the path from political ties to firm performance becomes insignificant after adding in the three mediators (β = 0.01, p = 0.97). The model statistics reveal acceptable fit indexes for the partial mediation model (χ2 = 953.88; df= 370; RMSEA= 0.09; NFI = 0.85; CFI = 0.92). Consistent with the regression results, the SEM analysis reveals that institutional support and opportunity recognition mediate the relationship between political ties and firm performance. However, organizational regulatory legitimacy is not a mediator because the link between regulatory legitimacy and firm performance is not significant. 5.2. Additional analyses The above results fail to demonstrate the mediating effect of organizational regulatory legitimacy on the relationship between political ties and firm performance. One possible reason for this finding might be differences in ownership structures. As previous studies indicate (Ahlstrom et al., 2008; Xin & Pearce, 1996), in the absence of political connections, private firms in China, as compared to SOEs, are more interested in achieving regulatory legitimacy. As a result, in the context

of China's transition economy, performance of private firms is more strongly dependent on political tie-building efforts and the regulatory legitimacy that results. In order to determine whether this finding is the case, the study further analyzes the mediating effect of regulatory legitimacy building by disaggregating the sample into two subgroups: SOEs versus non-SOEs (see Table 4). Consistent with expectations, Models 2 and 4 show that political ties are positively related to regulatory legitimacy for both SOEs (β = 0.36, p b 0.05) and non-SOEs (β = 0.53, p b 0.001). Concerning the main effect of political ties on firm performance, results show that political ties are significantly positively related to performance of non-SOEs (β = 0.15, p b 0.05), but negatively and insignificantly related to performance of SOEs (β =−0.16, p = 0.44), thus providing support for the prediction that political tie-building is more important for non-SOEs. Further, Model 6 reveals that the impact of political ties on performance of non-SOEs becomes insignificant after achieving regulatory legitimacy (β = 0.08, p = 0.34). Meanwhile, the positive link between regulatory legitimacy and firm performance is marginally significant for non-SOEs (β = 0.13, p = 0.09). Hence, interestingly, the additional exploratory analyses find that the mediating role of regulatory legitimacy indeed varies across firms with different ownership structures: regulatory legitimacy has the potential to mediate the

Table 2 Mediation tests using hierarchical regression analyses. Dependent variables Firm performance (Model 1) Independent variables Political ties Regulatory legitimacy Institutional support Opportunity recognition Control variables Firm size Firm age Firm ownership Demand uncertainty Technological turbulence Competitive intensity Model summary F value R2 Adjusted R2 +

p b 0.10. ⁎ p b 0.05. ⁎⁎ p b 0.01. ⁎⁎⁎ p b 0.001.

0.19⁎

0.50⁎⁎⁎ −0.01 −0.02 −0.15⁎ 0.06 0.19⁎

9.09⁎⁎⁎ 0.26 0.23

Institutional support (Model 2) 0.37⁎⁎⁎

0.16+ 0.01 0.10+ 0.16⁎ 0.17⁎ −0.11 5.67⁎⁎⁎ 0.18 0.15

Regulatory legitimacy (Model 3) 0.51⁎⁎⁎

−0.03 0.01 −0.05 0.01 0.09+ 0.07

15.14⁎⁎⁎ 0.37 0.35

Opportunity recognition (Model 4) 0.13⁎

Firm performance (Model 5)

Firm performance (Model 6)

Firm performance (Model 7)

Firm performance (Model 8)

0.08 (n.s.) 0.22⁎

0.06 (n.s.)

0.15 (n.s.)

0.25⁎⁎⁎

0.07 (n.s.) 0.07 (n.s.) 0.15⁎ 0.18⁎

0.23⁎⁎⁎

−0.05 0.01+ 0.07 0.09 0.22⁎⁎⁎ 0.07

0.51⁎⁎⁎ −0.01 −0.01 −0.15⁎ 0.04 0.18⁎

0.46⁎⁎⁎ −0.01 −0.05 −0.16⁎ 0.02 0.22⁎⁎

0.51⁎⁎⁎ −0.01 −0.04 −0.17⁎ 0.01 0.17⁎

0.48⁎⁎⁎ −0.01 −0.05 −0.19⁎⁎ −0.01 0.19⁎⁎

5.26⁎⁎ 0.17 0.14

8.70⁎⁎⁎ 0.28 0.25

9.79⁎⁎⁎ 0.31 0.28

9.73⁎⁎⁎ 0.31 0.27

8.54⁎⁎⁎ 0.33 0.29

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Table 3 Mediation tests using structural equation model analyses. Path model

Basic model standardized coefficient

Direct effect standardized coefficient

Partial mediation standardized coefficient

Main effects Political ties Political ties Political ties Political ties Institutional support Regulatory legitimacy Opportunity recognition

⇨ ⇨ ⇨ ⇨ ⇨ ⇨ ⇨

Institutional support Regulatory legitimacy Opportunity recognition Firm performance Firm performance Firm performance Firm performance

0.62⁎⁎⁎ 0.69⁎⁎⁎ 0.37⁎⁎⁎

Control variables effects Firm size Firm age Firm ownership Demand uncertainty Technological turbulence Competitive intensity

⇨ ⇨ ⇨ ⇨ ⇨ ⇨

Firm Firm Firm Firm Firm Firm

0.48⁎⁎⁎ −0.01 −0.05 −0.18⁎⁎

0.50⁎⁎⁎ −0.01 −0.03 −0.15⁎

0.48⁎⁎⁎ −0.01 −0.05 −0.19⁎⁎

−0.01 0.20⁎⁎⁎

0.08 0.20⁎⁎

−0.01 0.20⁎⁎⁎

Overall fit χ2 df RMSEA NFI CFI

performance performance performance performance performance performance

0.18⁎ 0.10 (n.s.) 0.20⁎

962.70 371 0.09 0.85 0.92

0.20⁎

0.61⁎⁎⁎ 0.66⁎⁎⁎ 0.37⁎⁎⁎ 0.01 (n.s.) 0.18⁎ 0.11 (n.s.) 0.20⁎

359.13 103 0.10 0.87 0.92

953.88 370 0.09 0.85 0.92

⁎ p b 0.05. ⁎⁎ p b 0.01. ⁎⁎⁎ p b 0.001.

relationship between political ties and performance of non-SOEs, but does not enhance performance of SOEs. Nevertheless, due to the small sample size of SOEs (N= 29), the authors suggest caution when interpreting these findings. 6. Discussion 6.1. Theoretical contributions The study contributes to the existing literature in at least three ways. First, the findings help to open the black box regarding the intriguing relationship between managerial political ties and firm performance by examining the specifics of the mediating forces by which political ties become relevant. Unlike other applications of the contingency perspective (e.g., Li & Zhang, 2007; Peng & Luo, 2000; Sheng et al., 2011; Sun et al., 2010a, 2012; Wu et al., 2012), the study provides insight regarding the complex processes linking political ties to firm performance. With respect to improving firm performance, political ties possess both advantages (Peng & Luo, 2000; Wang et al., 2011), and disadvantages (Li et al., 2008; Okhmatovskiy, 2010; Siegel, 2007; Sun et al., 2010a). Acknowledging and departing from this fact, the study determines that overall, political ties have a positive impact on firm performance. This finding helps to confirm the active role such ties have played in transition economies, such as China. More importantly, the findings uncover two fundamental mediating mechanisms that can translate political ties into firm performance: institutional support and institutional entrepreneurial opportunity recognition. Specifically, political ties contribute to improved firm performance through both the unleashing of the benefits of various forms of institutional support, i.e., beneficial policy implementation and license authorization, and also by improving the recognition potential of entrepreneurial opportunities. The results support Li and Zhou's (2010) notion that managerial ties represent a unique way to establish institutional advantages in China. They also confirm the close link between institutions and entrepreneurship in transition economies (Puffer et al., 2009). Taken together, the study provides new insights into political ties research by transferring the stream of contingency-based research to a process-based one (e.g., Peng & Luo, 2000).

Second, reliance on both resource dependence theory and institutional theory results in reasonable explanations of the meanings and the functions of political ties for firms experiencing significant institutional change. Extant studies have depended on interpretations of political ties based on western mainstream theories such as social capital theory (Acquaah, 2007; Li & Zhang, 2007). Recognizing the particular importance of institutional theory for conducting strategy research in emerging or transition economies (Hoskisson et al., 2000; Peng, 2003), and the complementarity of institutional theory and resource-based logics (Meyer et al., 2009; Wright et al., 2005), this study successfully interprets the performance implications of political ties in China's transition economy by blending insights from both resource dependence theory and institutional theory. Results show that managerial political ties play triple roles during institutional transitions. First, they help firms build regulatory legitimacy via firm compliance to constraints in the existing institutional environment. Second, they help firms gain governmental support by melding firm strategies with the institutional environment. Finally, they also help firms to recognize political opportunities by unleashing the unused potential of institutions or by proactively shaping the institutional environment. These findings contribute to the institutionbased view of firm strategy (Peng, 2003; Peng et al., 2009). They achieve this goal by concluding that political ties, in their role as substitutes for weak formal institutions, not only potentially constrain firm behaviors, but also enable entrepreneurial activities (Bruton & Ahlstrom, 2003). Further, these findings enrich resource dependence theory (Pfeffer & Salancik, 1978), by treating managerial political ties as an instrument for managing the institutional environment, both reactively and proactively. Third, the study contributes to entrepreneurship as well as institutional entrepreneurship research by emphasizing the important role that political ties play in the recognition of institutional entrepreneurial opportunities. Entrepreneurship research focuses on opportunity recognition as a key issue (Eckhardt & Shane, 2003), but seldom examines the question of how to recognize opportunities within the context of institutional change. Conversely, institutional entrepreneurship addresses how entrepreneurs influence and shape the institutional context so as to realize interests that they value highly (DiMaggio, 1988).

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Table 4 Testing mediating effect of organizational regulatory legitimacy: Differences between SOEs and Non-SOEs. SOEs (N = 29) Firm performance (Model 1) Independent variables Political ties Regulatory legitimacy

−0.16 (n.s.)

Control variables Firm size Firm age Demand uncertainty Technological turbulence Competitive intensity

0.29 −0.03 0.11 −0.22 0.74⁎⁎

Model summary F value R2 Adjusted R2

3.83⁎⁎⁎ 0.51 0.38

Non-SOEs (N = 166) Regulatory legitimacy (Model 2) 0.36⁎

0.01 −0.09 0.32 0.04 0.39⁎

5.47⁎⁎⁎ 0.60 0.49

Firm performance (Model 3)

Firm performance (Model 4)

−0.25 (n.s.) 0.23 (n.s.)

0.15⁎

0.28 −0.01 0.03 −0.23 .654⁎

0.41⁎⁎⁎ 0.09 0.18⁎ 0.06 0.14⁎

3.41⁎⁎ 0.53 0.39

9.09⁎⁎⁎ 0.25 0.23

Regulatory legitimacy (Model 5) 0.53⁎⁎⁎

−0.06 0.12⁎ −0.01 0.10 0.05

13.04⁎⁎⁎ 0.34 0.31

Firm performance (Model 6) 0.08 (n.s.) 0.13+

0.42⁎⁎⁎ −0.10 −0.18⁎ 0.04 0.13⁎

8.21⁎⁎⁎ 0.28 0.24

+

p b 0.10. ⁎ p b 0.05. ⁎⁎ p b 0.01. ⁎⁎⁎ p b 0.001.

The opportunity recognition issue, however, has not melded into this field of research (Pacheco et al., 2010). By finding that firms can use political ties, an informal kind of political strategy (Oliver & Holzinger, 2008), to help identify entrepreneurial opportunities relating to a fast changing institutional environment, the study contributes to the opportunity-based perspective of entrepreneurship (Eckhardt & Shane, 2003), and enriches the institutional entrepreneurship literature by increasing understanding of how to manage institutions in order to enhance politically related business opportunities (Rao et al., 2000). Despite the above contributions, the role that organizational regulatory legitimacy plays still requires further discussion. In contrast to the authors' assumptions, the results show that organizational regulatory legitimacy plays a non-significant role in explaining firm performance. This finding suggests that the function of organizational regulatory legitimacy for firm performance is far more complex than assumed. Here, the present study tries to explain this unexpected result in two distinct ways. First, organizational legitimacy might actually play a role similar to that of a double-edged sword (Ashforth & Gibbs, 1990). According to institutional theory, organizational legitimacy refers to a state in which organizational behaviors align with their institutional environments (Suchman, 1995). A firm possessing high organizational legitimacy is synonymous with stakeholder support of the organization. This fact acts to help the firm gain access to scarce external resources (He & Baruch, 2010; Zott & Huy, 2007), thus contributing to firm performance. Entrepreneurship scholars, however, argue that firm performance is closely associated with the pursuit of new business opportunities (Brown et al., 2001), which often involve substantial innovations (O'Connor & Rice, 2001; Park, 2005). Existing accumulated legitimacy results, to a great extent, in stakeholders' acceptance for current technologies, products, services, and/or business models. However, in order to exploit new opportunities, a firm will likely need to change existing business logics by engaging in product or business model innovation activities. Thus, high legitimacy might make a firm highly dependent on existing business logics, thus dampening firm innovation. In addition, transaction cost theory implies that, high regulatory legitimacy is costly because of the fosterage of frequent government intervention. For example, as a price for achieving regulatory legitimacy, the government might ask a firm to expand employment, to sponsor government programs, or to support various public services, all of which will increase the firm's operating costs and ultimately decrease its profitability (Barreto & Baden-Fuller, 2006).

Second, the impact of regulatory legitimacy on firm performance may vary across firms with different conditions. Particularly, as the additional analyses reveal, regulatory legitimacy seems playing a more significant role in improving firm performance for Non-SOEs rather than SOEs. This finding is reasonable in that nobody can assume the regulatory legitimacy of private business because private property lacks the full legal status and protection that state assets have in China (Huang, 2005). Lacking legitimacy can significantly hamper a firm's ability to conduct business (Suchman, 1995; Tsang, 1996). Thus, performance of non-SOEs, private firms in particular, should be more strongly dependent on legitimacy-building activities. 6.2. Managerial implications The findings of the study reveal two key managerial implications. First, firms in transitional markets possess the capacity to effectively use political ties to attain useful government support. Specifically, for firms in such environments, political ties can result in various benefits, for example, beneficial polices, simplified and improved regulatory processes, and access to useful information and resources (Li & Zhang, 2007). Thus, for firms that lack formal institutional support in the context of institutional transitions, such firms should make strong efforts to secure informal institutional support through the cultivation and utilization of the political ties possessed by firm managers. Second, political ties represent an effective avenue for the discovery of institutional entrepreneurial opportunities. Entrepreneurial opportunities that originate from the fast changing institutional environment are common in transition economies (Yang & Li, 2008). For example, changes in existing industrial policies or the establishment of new policies frameworks may result in the creation of valuable business opportunities. The findings suggest that firms within transitional environments can actively use political ties to explore entrepreneurial opportunities. 6.3. Limitations and future research directions The study has several limitations. First, the results of this study are context-specific. A natural extension would be to examine the roles of managerial political ties in other transition economies. Second, some of the measures adopted in this study require further improvement. In particular, while organizational legitimacy has been one of the hot points in strategy and entrepreneurship research, most existing studies

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tend to examine its nature and effects theoretically (e.g. Ahlstrom et al., 2008; Suchman, 1995; Zimmerman & Zeitz, 2002). The result is that, although scholars have articulated the concept of organizational regulatory legitimacy, they have not yet developed either an objective or a subjective operational measure. In order to examine the mediating mechanisms that transfer political ties into firm performance, this study has developed an exploratory measure for organizational regulatory legitimacy. The measure is a self-report one rather than a direct one, because of the difficulty to ask a variety of government agencies to evaluate organizational regulatory legitimacy. Thus, despite the acceptable validities that this study reveals, this perceptual-based measure cannot ensure firm managers to make accurate and rational judgments and then might have affected the findings of the study. Hence, future research should endeavor to improve the measure for organizational regulatory legitimacy. Third, the potential for CMB is always a concern in survey data. Because this study collects perceptual data on independent and dependent variables through the same survey, this fact may have introduced CMB. Although the present study uses several procedures to reduce and evaluate this potential problem, the authors of this article advise caution in interpreting the results of this investigation. Finally, the cross-sectional data set used in the study does not allow for causal interpretations among the different factors. In particular, some scholars insist that tie utilization is in fact a dynamic process (Chen & Chen, 2004). Thus, future research should potentially explore the complex relationship existing between political ties and firm performance, particularly in a dynamic sense, by conducting longitudinal studies or other appropriate experimental studies. The study also highlights two additional directions for future research. First, the “dark side” of political ties utilization needs further examination. This study mainly discloses the positive aspects of political ties for firm performance, but scholars have recognized that political ties entail both advantages and disadvantages (Sun et al., 2010a). Thus, an interesting and important question is to examine specific mediating mechanisms underlying which political ties could undermine firm performance. Second, this study provides a basis for further investigations of the mediating effect of organizational legitimacy. As analyses revealed, the mediating role of regulatory legitimacy will vary across firms. Thus, this study calls for further exploring under what conditions can legitimacy help firms better transfer political ties into performance. 7. Conclusion The findings of the study portray the functions of managerial political ties in transitional markets, as viewed from the perspective of resource dependence theory and institutional theory. Although previous research has indicated the importance of political ties for firms in the context of transition economies, systematic investigation into the paths of political ties in promoting firm performance has been lacking. Drawing on resource dependence theory and institutional theory, this study helps unpack the processes that link political ties to firm performance in transition economies, an important but still largely unexplored issue. The study finds that institutional support and institutional entrepreneurial opportunity recognition play important mediating roles by which managerial political ties help firms produce value. These findings lend support to the contingency perspective of political ties. In addition, the adoption of an integrated theoretical approach contributes to both institution-based view of firm strategy and resource dependence theory. By finding that firms can recognize institutional entrepreneurial opportunities by taking advantage of managerial political ties, this study also provides new insights into entrepreneurship and institutional entrepreneurship research. In conclusion, the study suggests that in future research scholars emphasize more greatly processes by which firm managers utilize their political ties within the context of transition economies.

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Appendix A. Survey items The following five constructs are measured based on 5-point Likert scales ranging from 1 ‘strongly disagree’ to 5 ‘strongly agree’. A.1. Managerial political ties: (4 items; α = .78; AVE = 61%) How would you characterize your firm's managerial political ties in the following areas? 1. Improving our relationships with government have been important to us. 2. Having invested heavily in building relationships with government officials 3. Spending a lot of time dealing with government affairs 4. Ensuring good relationships with influential government officials A.2. Institutional support: (5 items; α = .91; AVE = 74%) How would you characterize various institutional supports your firm has won in the following areas? 1. The government often implements policies and programs beneficial to our operations. 2. The government provides us with much useful information. 3. The government offers us technical trainings and technical support. 4. The government provides us with powerful financial support. 5. The government often helps us obtain licenses such like an import license or a technical license. A.3. Institutional entrepreneurial opportunity recognition: (4 items; α=.82; AVE =66%) Please evaluate your firm's efforts in recognizing institutional entrepreneurial opportunities by indicating whether you agree or disagree to each of the following statements. 1. Recognizing opportunities from the new established industrial policies and planning 2. Recognizing opportunities from the adjustments of existing industrial policies and planning 3. Recognizing opportunities from the changes of political environment 4. Recognizing opportunities by communicating with government officials A.4. Organizational regulatory legitimacy: (4 items; α = .91; AVE = 79%) Please evaluate your firm's regulatory legitimacy by indicating whether you agree or disagree to each of the following statements. 1. What we do are authorized by the government. 2. What we do confirm with the policies, rules and regulations. 3. What we do correspond to the government's thinking of possible policy adjustments. 4. What we do often become industrial templates as recommended by the government. A.5. Firm performance: (6 items; α = .94; AVE = 76%) Please evaluate your firm's performance compared to your major competitors in the following areas. 1. 2. 3. 4. 5. 6.

Sales growth Market share growth Profit growth Productivity Return on assets (ROA) Return on sales (ROS)

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Note: Following Luo and Junkunc (2008), the third item of managerial political ties is originally measured based on a 6-point Likert scale. To in line with other measures, this study has converted this item into a 5-point Likert scale item.

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