Political Connections, Growth and Firm Network

Status: Working paper · 2025
Areas: Political economy, Network theory, Causal inference, Firm Strategy

Coauthors: Addisu Lashitew, Rizal Shidiq, Eric Werker

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Abstract

This study revisits the role of political connections (PC) in shaping firm outcomes in weak institutional environments. Using a panel of publicly listed Indonesian firms from 2002 to 2019, we construct a continuous, power-weighted political connection score and apply a dynamic panel model to examine how PC influences firm growth, credit access, and performance. We find that stronger political ties are associated with higher asset growth, sales, and leverage. However, these effects diminish once we account for firms’ embeddedness in inter-firm networks.

This fading effect points to a novel and less studied channel: political connections may improve firm outcomes by facilitating access to business networks that substitute for underdeveloped formal institutions. Rather than working solely through direct state access or rent distribution, PC appears to help firms overcome market frictions by enabling informal governance through peer connectivity. Furthermore, our network analysis reveals that the benefits of political connections for size and growth are more pronounced among firms with initially weaker access to business networks, suggesting higher marginal returns to political capital for more peripheral firms.