The current paper investigates the role of political connections in firm performance under various conditions of market competition and institutions in Vietnam. By employing a three-year panel-data survey from 500 small and medium-sized enterprises and a fixed-effects model controlled for unobserved invariants, estimation results show that political connections with servants positively affect the performance of their firms when firm and industry effects and endogeneity of political connections are controlled. We also find that the positive impacts of political connections on firm performance vary with market competition, as in the case of Vietnam. We further find that political connections are significantly negative to firm performance in the conditions of weak market institutions in the case of Vietnam (the first stage of the institutional political connection hypothesis). In addition, there are no different institutional effects on firm performance between stages of the institution. Policies related to institutional development and corporate governance are recommended to foster firm performance and positive side-effects of political connections.
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Ngo et al. (2024) studied this question.
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