The Institutional Contingency of Political Embeddedness

Research on political embeddedness has suggested both positive and negative effects of such embeddedness to businesses. We propose that the value of a firm’s political embeddedness can be contingent on the strength of market institutions. In the context of obtaining bank loans, we argue that political embeddedness can serve as a positive signal in regions with relatively strong market institutions, but not in regions with relatively weak institutions, due to the government’s different roles and orientations towards businesses. We test our argument on Chinese public listed firms’ bank financing from 2005 to 2009, when different regions vary hugely in their market institutional development. We find that political embeddedness contributes to firm’s bank financing only for regionally concentrated firms in regions with relatively strong market institutions.