Double-Edged Political Connections: The Effects on Domestic and International Performance Under Weak Institutions

While political connections are commonly linked to positive effects on firm performance, much less is known about the contingencies that shape these benefits. This study examines the simultaneous differential effects of political connections on domestic and international performance, and how political instability and regulatory deficiencies moderate these effects. Drawing on resource dependence and institutional theories, we argue that while political connections will be beneficial for performance in domestic markets, they will hinder firms’ international performance. Moreover, we postulate that these direct effects will be weakened by political instability and strengthened by regulatory deficiencies, respectively. We test these hypotheses using data from the World Bank’s Enterprise Surveys on more than 1300 firms from Egypt, a context marked by a high prevalence of political connections, persistent political instability, and severe regulatory deficiencies. Our empirical results yield important insights for managers in emerging economies who seek to balance the benefits of political connections with their strategic risks.