The impact of political connection on firm performance: empirical evidence from Vietnamese listed companies in manufacturing sector.

Abstract

The concept of political connection and its related determinants have received significant attention in academic discussion due to political heterogeneities across countries. Furthermore, although the appointment of current or former politicians to corporate boards is a highly prevalent corporate political strategy, empirical evidence is inconclusive as to whether and how such appointments create or destroy value for firms and their shareholders. To mitigate these challenges and ambiguities, a deeper understanding of the variances in the implication of political connection from different certain features of firm-, industry- and country-specific factors has been accentuated in this research area. Moreover, such implications might be contingent upon varying institutional environments. This results in a research call for fuller examination of considering institutional factors in the investigation of dynamic role of political connection. Drawing from different theoretical lens in the field of political connection, the thesis conducts two related empirical studies to analyse the impact of political connection on firm performance and what determinants influence this impact. In particular, the first goal seeks to investigate the relationship between political connection and firm performance. It also assesses the moderating effect of ownership structure (namely SOE1) on the relationship between political connection and firm performance. The second goal examines the joint effect of political connection and institutional indicators on firm performance. To achieve the purposes of research, the thesis applied main method of two-way fixed effects controlling for unobservable company and time characteristics and two-step system GMM controlling for endogeneity issue to a panel of 172 manufacturing companies during the period from 2007 to 2016. For the first goal, the research develops the hypotheses based on existing theories on political connection, namely helping-hand and resource-dependency against grabbing- hand and agency theory. Additionally, the study disentangles political connection into its types and calculates its strength based on political administrative rankings, and its ratio via number of politically connected directors relative to board size, thus suggesting the different roles played by different types, strength and ratio of political connection. This analysis helps to extend existing literature of political connection on emerging countries and generalise its findings to Vietnamese context. It challenges much of the current literature only focusing on the benefits of acquiring political capital on the board by showing the dark side of political connection in Vietnamese listed companies in manufacturing sector. Furthermore, the thesis concentrates on the factors receiving the limited attention in current literature by investigating the moderating effect of ownership structure on the relationship between political connection and firm performance. The findings show that the effects of political connection on the performance of state-controlled enterprises remain negative. These findings support the integrated viewpoint of grabbing-hand and agency theory to explain these negative effects. Through the analysis of margin, there is evidence that political connection has no benefit on the performance of non-state-controlled enterprises. The findings stay the same with those obtained by two-step system GMM technique. The further analysis is also done by examining the effect of different types, strength and ratio of political connection on the performance of state-controlled enterprises. The additional findings inform the different impacts of types, strength and ratio of political connection on the performance of state-controlled enterprises and non-state-controlled enterprises. As a result, the study contributes to existing literature on reconciling inconclusive findings of previous studies on the importance of taking into account the identity of controlling shareholders, which tends to be underexplored in previous literature, to investigate the net performance effect of political connection. For second study, the study scrutinises the contingent value of political connection on firm performance during the development of regional institutional development. There are the limited studies carried out regarding the effect of interactions of political connection and institutional indicators on firm performance. A few studies have put a major emphasis on Chinese context due probably to the influence of state over economy and data availability of regional institutional indicators as NERI index. In order to develop this line of literature, the study is thus to utilise data availability of provincial competitiveness index in Vietnam to capture the contingent role of political connection during regional institutional development. This chapter uses four different institutional indicators, such as legal system, corruption, entry costs and business support service. Through the results from the analysis of fixed-effect estimation, it shows the positive role of political connection in the face of the development of legal system, the high degree of local anti-corruption effort, but no its contingent role when the entry costs are diminished and the institution of business support service is developed. These results from fixed-effect estimations remain the same with those from two-step system GMM approach, excluding the interaction of entry costs and political connection. As a result, such finding of joint effect between political connection and entry costs should be interpreted with careful caution. Generally, the contribution of the chapter is to enrich our understanding on the contingent role of political connection in emerging countries with different institutional conditions.