Abstract
It is widely accepted that better-connected firms exercise more political influence. However, because both social ties and political influence are difficult to observe, it remains little understood how different types of ties affect different types of political action. We develop new theory that contrasts the effects of ties to other firms in the same industry (peer ties) with ties to elected officials and bureaucrats (government ties). We argue that peer ties are useful for facilitating collective action, which is most often used to seek influence over broad policy issues that affect many firms. In contrast, while government ties are more versatile, these should primarily also allow firms to pursue narrow, particularistic issues that benefit only one or a small number of firms. Using a new survey of foreign-owned firms operating in the Philippines, we demonstrate that peer ties play an important role in firms’ efforts to influence policy at the national level, where issues are more likely to affect large numbers of firms. Government ties are also valuable, though primarily at the local level, where issues are more likely to affect a smaller number of firms.
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Notes
Indeed, one of the major liabilities faced by foreign firms operating in developing countries is that these firms often lack the necessary social ties in the investment host country to interface effectively with government officials and business counterparts (e.g. Johanson and Vahlne 2009, Graham 2019).
We use the term “peer” ties because our pilot testing suggested that “competitors” had a more negative connotation (thus priming respondents to report only a subset of their comparator firms with whom they had adversarial relationships), and the alternative “comparator” firms was even less familiar to respondents.
See Appendix D for the question text.
In order for reverse causation to induce the pattern of correlation predicted by H1 and H2B, three things would have to be true: 1) firms use means other than peer ties to pursue particularistic political benefits at the national level; 2) politically active firms seek these particularistic benefits on behalf of firms to whom they have peer ties; 3) firms engage in this behavior at the national level and not at the local level. Condition 1 is quite plausible. However, condition 2 seems unlikely to hold for very many firms and we find no evidence of this behavior in the responses to our open-ended questions that ask respondent about the effects of owners’ and managers’ social ties on their firm. Condition 3 seems even less likely to hold. If politically active firms frequently seek particularistic benefits on behalf of their friends, why would they do so only at the national level and not also at the local level? Given what we view as the extremely low probability that all three of these conditions hold, we interpret correlations consistent with H1 and H2B as being inconsistent with this particular type of reverse causation.
For an overview of clientelism, please see Hicken (2011).
The business environment in the Philippines is similar to many democracies in the developing world. In the World Bank’s Doing Business Index, for example, the Philippines is ranked 124th out of 190 countries.
While technically there is a requirement that at least 20% of funding should go towards development projects, the so-called Local Development Fund (LDF), it is not enforced in practice (Troland 2014).
The primary limitations are: 1) Even the government often does not possess an accurate list of all firms; 2) When such lists exist they are often classified and/or flawed (i.e. lacking accurate contact information); 3) If an appropriate list is obtained scholars face extremely low response rates. See Hoskisson et al. (2000).
This geographic limitation was put in place to limit enumeration costs.
In the survey we also asked whether firms succeeded in achieving any of their political objectives. However, we focus in this paper on attempts to influence because it is the most direct measure of political participation.
From the standpoint of measurement, there is no quantitative or qualitative evidence that respondents had difficulty with the module or that they were interpreting the module differently in a way that would confound the results. First, the qualitative evidence suggests that there is remarkable similarity in the understanding of social ties and the form that these ties may take in a business environment (even to the point of invoking similar activities that CEOs or managers of different firms engage in socially, such as golf and tennis). Second, quantitative evidence from the survey shows that there are no enumerator-reported difficulties in answering, nor are there differential rates of non-response in this module compared to other modules in the survey.
Our vector of sector dummies contains 12 categories: agriculture; mining; utilities; construction; manufacturing; retail/wholesale; transport & waste; finance & real estate; IT/tech/science; restaurants & hotels; admin & management; arts, education, & health. These are based on 2-digit NAICS codes with sectors pooled where necessary to prevent perfect prediction in regression analysis.
We set all control variables to their mean value if continuous and their modal value otherwise. With respect to sector and region dummies, we assign the hypothetical respondent to be a manufacturing firm based in the Americas.
One potential concern is that these results are driven by local-level government ties leading to local-level policy by construction. However, most of the government ties in our sample come from the national legislature or the bureaucracy. In the online appendix we confirm that our results hold even if all municipal and provincial ties are omitted (see Table A2).
In the case of trade in specialized intermediate goods, the overlap of political interests between customer and client can be quite strong (e.g. Johns and Wellhausen 2016), but in most cases we expect client ties are relatively low-cost to sever and do not provide a strong basis for collective action.
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Both authors contributed equally (50%) to the survey design and implementation. Cruz completed approximately 65% of the quantitative analysis and Graham completed approximately 35%. Graham drafted approximately 65% of the prose of the paper, while Cruz drafted approximately 35%. Of particular note, Cruz provided expertise on survey methodology and Benjamin Graham provided expertise on multinational firms. Author order is alphabetical, reflecting equal contributions overall.
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Cruz, C., Graham, B.A.T. Social ties and the political participation of firms. Rev Int Organ 17, 117–142 (2022). https://doi.org/10.1007/s11558-021-09420-6
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DOI: https://doi.org/10.1007/s11558-021-09420-6
Keywords
- Networks
- Social ties
- Social capital
- Firms
- Foreign investment
- Foreign direct investment
- FDI
- Lobbying
- Interest groups
- Corporate political participation
- Collective action