The resource-based view (RBV) of firms posits that competitive advantage is rooted in the possession of scarce, valuable, and non-substitutable resources. While this framework traditionally focuses on tangible and intangible business assets like intellectual property, skilled labor, or unique technology, political connections can also be seen as a vital resource. The ability to influence, navigate, or leverage political systems often provides significant strategic benefits to firms, helping them to secure regulatory advantages, preferential treatment, and reduced competition. That political influence can be a boon to business performance is almost patently obvious. Trump’s election saw his close ally Elon Musk enjoy a boost to the valuation of his companies almost immediately. However, this topic is interesting to study because of the various areas to be unpacked: How much are these connections worth, how companies can cultivate these relationships, and how can these relationships be best deployed.
Quantifying Political Connections
Political connections, while intangible, can indeed be quantified in terms of the value they add to a company. The Suharto government in Indonesia is a case example of how friendly companies can benefit. For instance, the clove market of Indonesia is largely domestic. Indonesia is the world’s largest producer of cloves, and most of the output was used domestically to produce cigarettes. The Suharto government formed a company with the exclusive license to import, buy, and sell cloves. This company was headed by the son of the president, Tommy Suharto. As the market was regulated by government fiat, the company enjoyed a monopoly and high leverage over Indonesian clove farmers and the makers of cigarettes. The company was also extended hundreds of millions of dollars in loans. The company was only dissolved after the IMF applied pressure on the Indonesian government following the Asian Financial Crisis of 1997.
Fisman’s 2001 study, which examined firms linked to then-President Suharto of Indonesia. Fisman found that the stock prices of these politically connected firms dropped significantly when Suharto’s position was threatened by political instability. This demonstrates how deeply a company’s market value can be intertwined with political capital, showing that political ties function as an asset with measurable financial impacts.
Lobbying as a Political Strategy
Lobbying is one of the more transparent ways businesses attempt to exercise political influence, particularly in countries like the United States, where corporate lobbying is institutionalised. However, the effectiveness of lobbying for individual firms tends to be diluted when carried out on an industry-wide basis. When firms lobby through industry groups or associations, the benefits often accrue to the entire sector rather than to a single company. This collective nature of lobbying makes it substitutable, meaning that the gains for any one company can be shared or even negated by competitors within the same industry.
That said, some firms do see individual gains through direct lobbying efforts, especially when targeting specific legislation or government contracts. Large corporations like ExxonMobil and Google are well-known for their robust lobbying operations, spending millions annually to influence legislation and secure favourable policies. However, these efforts often pay off more slowly and indirectly compared to other forms of political engagement.
Businesses as a result of regulation
While the usual debate is around whether governments should regulate corporations, there is an underbelly of corporations that are protected by regulations. These are often thriving because regulations mandate that you use them in order to achieve a primary objective. Yet, the attractiveness of this primary objective is not based on the performance of this provider, but rather their dominant position within an industry propped up by government support. As such, these companies are often accused of having subpar-standards of service, since they have little incentive to cater to the end-customer rather than the government departments that dictate their continued existence.
Some examples are:
- Standardised testing providers (ETS in the USA), which is driven by the immigration requirements of the education ministry
- Visa-providers (VFS Global), which is driven by the attractiveness of the destination country
- Driving schools, which is driven by the need/want to drive
The “Revolving Door” Phenomenon
Another key political resource is the so-called “revolving door” between politics and business, where political figures transition into high-ranking business positions after their public service ends. This incentivises political leaders to be sympathetic to business interests during their tenure, as they may anticipate a lucrative career post-politics. The promise of future rewards can shape the behaviour of policymakers, aligning their decisions with the interests of corporations that might employ them later.
A prime example is the U.S. financial sector, where figures like former Treasury Secretary Hank Paulson, who was CEO of Goldman Sachs, transitioned between the public and private sectors. The revolving door ensures that political leaders and business elites maintain close relationships, blurring the line between policymaking and corporate strategy.
Targeting Politicians Before They Rise to Power
Interestingly, the most successful instances of leveraging political connections often occur before political leaders come into power. When political leaders are in office, the cost of maintaining those connections can be high due to the political rents they extract in exchange for favours. Therefore, it’s often more advantageous for businesses to cultivate relationships with rising politicians, laying the groundwork before they reach positions of power.
This strategy aligns with research by Acemoglu et al. (2016), which found that firms connected to key political figures, such as Timothy Geithner during his appointment as U.S. Treasury Secretary, saw excess returns. Similarly, Indonesian businessman Liem Sioe Liong built a business relationship with the aforementioned Suharto when he was still a lieutenant, long before Suharto rose to power. By aligning early, Liem gained access to significant political resources that would later pay dividends as Suharto’s influence grew.
Political Connections During Crises
Political connections become particularly valuable during times of crisis. When governments scramble to stabilise economies or respond to major upheavals, they often rely on advice and support from trusted individuals within their networks.
This trust can lead to preferential treatment for businesses when the politicians turn to their executives for help and advice. It especially benefits those businesses with a long-standing relationship, since it’s natural to look to known quantities for stability during times of chaos. Political allies may become de facto economic advisors, and firms connected to these leaders can secure favourable outcomes, whether these are financial bailouts, regulatory exemptions, or priority in government contracts.
Conclusion
In summary, political resources can be a critical element of a firm’s competitive advantage, just like any other scarce resource. Whether through lobbying, cultivating relationships before leaders rise to power, or benefiting from the revolving door between politics and business, firms that effectively leverage their political connections can secure strategic benefits that are hard to replicate. However, these resources are not without their risks, especially if they are tied too closely to the fortunes of individual political figures. When political fortunes change, so too can the fortunes of businesses that are deeply intertwined with them.