Cornell on Emerging Markets

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The Impact of Political Capital on Firm Internationalization:  Evidence from Russian FDI and Exports

Mar 20 2017

The Impact of Political Capital on Firm Internationalization: Evidence from Russian FDI and Exports

Issue No. 13

by Lilac Nachum*, Andrei Yu. Panibratov** and Rajeev J. Sawant***

      Is a firm’s political capital in the home country of value internationally? As a form of firm-specific capital that originates in firms’ relationships with home country politicians, the value of this asset outside the home country is dubious, calling to question the benefits it could offer firms in international markets. The sphere of influence of home country politicians is derived from the home country and is most powerfully exercised within this jurisdiction. Their influence outside this domain, and the extent to which they can affect firms’ activity, is less apparent and less understood. Nor is the extent to which firms’ political capabilities are transferable across political borders apparent. The mixed findings of studies that examined these relationships indeed suggest that the causal relationships between a firm’s stock of political capital at home and its international activity is nuanced and complex. As the number of firms with political capital at home that expand internationally is growing rapidly, this question has gained considerable importance.

      In this study we seek to deepen the understanding of this issue by extending the conceptualization of the political capital construct and explicating its implications for firms’ international activity. Building on the notion of political capital as developed in political sciences and combining it with the theory of firms’ internationalization, we distinguish between different types of political capital and allow their impact to vary across different modes of international activity. 

      Political scientists define political capital as encompassing various types of resources that are built and utilized by actors in the discourse of the political process to advance their goals. As such, it is a major determinant of political exchange and relationships among participants in political markets, and its possession fosters exchange in these markets. Theorizations of the political capital construct view political capital as an amalgamation of various types of capital that are combined in various ways for specific political markets. 

      Applying this conceptualization to the theory of firms’ internationalization, we suggest that in this context, the types of political capital that are likely to be most impactful on firms’ international activity are relational and knowledge political capital. This distinction appears to be the most appropriate for explicating the relationships between firms’ stock of political capital and their international activity because they have direct bearings for the choices that firms make between modes of international activity. Rational political capital is created via personal connections of a firm’s members to powerful political agents and is geographically bound by constrains on the power of these actors outside the home country. Knowledge political capital, in contrast, originates in political learning and experience that is accumulated over time within the firm and becomes part of its stock of intangible assets and as such can be utilized across countries.  This conceptualization implies that firms accumulate political capital by virtue of their own capabilities and via relationships they build with political agents.

      We further suggest that, due to the different sources of value and varying means of value creation, the two types of political capital offer different leveraging and utilization opportunities and are of value in varying geographic arenas, whether at home or overseas. The ties of relational capital to the home country favor its exploitation via exports from the home country, whereas the mobility of the knowledge capital furthers a firm’s engagement in FDI.

      We test the theory with a novel data set of Russian firms, a population of emerging market firms that has not been studied extensively to date. Most research in this area has focused on Chinese firms, and hence theoretical developments have been based on this country’s industrial and institutional characteristics and the distinctive relationships between its political leaders and firms. Studying Russian MNEs provides an opportunity to examine the impact of political capital on firms’ international activity in a different economy and political system and generate empirical insights that advances this field of study. Our sample includes 281 Russian firms operating in 35 industries, operating via export or FDI in 106 countries. We observe these firms during 2012 through 2014.

      We find empirical support for the underlying assumption of the study, namely that different dimensions of political capital differentially affect a firm’s international activity. Relational political capital, which originates in personal relationships, is constraint by the scope of influence that politicians have outside their home country jurisdiction and is therefore of limited value outside the home country, leading firms to serve foreign markets via exports from the home country. As a firm-specific capability that is embedded within the firm and partly mobile over distance, knowledge political capital can be exploited outside the home country and becomes part of the firms’ intangible assets that encourage FDI. Although both modes of international activity are affected by political capital, the relationships are stronger for exports than for FDI. We suggest that these differences might be indicative of some push and pull factors that drive firms to seek more FDI to compensate for weak political capital at home, providing a countervailing force to the relationships we anticipated and obscuring the positive impact we predicted. The impact of both types of political capital increases with state ownership and in regulated industries.

      These findings make important contributions to theorization of the role of political capital in the internationalization of firms. The distinction we make between different types of political capital and the varying value we assign to them is a novel contribution to a research area that has implicitly or explicitly treated political capital as a cohesive concept whose impact on firms is exercised uniformly. Specifically, our treatment of political capital as the aggregation of firm-specific political capabilities (which we named knowledge political capital) and their relationships with political agents (in our terminology relational political capital) is novel and has considerable merits because these two types of political capital are developed differently and carry different implications for the outcomes. Our theory and findings speak for the merits of the nuanced view of this concept that we adopt for elucidating its value and impact on firms’ international activity. This rich conceptualization of political capital makes it also more important strategic asset and source of competitive advantage. Political capital can be utilized by firms in different forms and diverse combinations to advance varying strategic goals.

      The findings also serve to advance the development of MNE theory by conceptualizing political capital as a firm-specific asset and studying its impact on firm internationalization. In doing this, we extend the set of firm-specific, intangible assets traditionally considered as determinants of firms’ internationalization prospects to include political capital as an additional asset (Hymer 1960; Cavusgil & Knight, 2015). In addition to its value by itself, this is a notable contribution because political capital differs from the traditional sources of MNE intangible assets, such as knowledge and marketing skills, in that it is partly tied to the home country institutional environment and it does not belong to the firm in the same way as these other traditional assets. Hence, its utilization and the value that firms can derive from it in their international activity, are likely to differ from these other assets, stressing the merits of deepening its understanding.  

      Our study makes important contribution also to research on the international activities of emerging market firms, by illuminating the impact of these countries’ political systems on firms’ international activities. This is an important contribution because a country’s political system shapes the nature of the exchange and utilization of political capital and the gains that firms can assume from political capital, and is therefore likely to significantly affect the relationships we studied. 

      The findings also contribute to theorizations of political capital. By combining their insights with the theory of firms’ internationalization we are able to introduce types of political capital that have not been previously recognized in these discussions. Our findings show that the two types we identify vary in the value they create for firms, supporting the need to account for the complex nature of this construct and the multiplicity of ways by which it affects firms. The development and testing of our theory in an emerging economy makes another contribution to this theory whose foundations are in democratic political regimes that differ a great deal from the political regimes that predominate emerging markets. These differences are likely to affect the way firms develop political capabilities and the nature of their relationships with political actors.

*Lilac Nachum  
Professor of International Business
Zicklin School of Business
Baruch College, CUNY

**Andrei Yu. Panibratov
Professor of Strategic & International Management
Graduate School of Management
St. Petersburg University

***Rajeev J. Sawant
Assistant Professor of International Business
Zicklin School of Business
Baruch College, CUNY

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