Conventional wisdom suggests that, all else being equal, a company favored by politicians should have a leg up on its competition, or at least be no worse off. Perhaps not, suggest two associate professors at Georgetown University’s Edmund A. Walsh School of Foreign Service in their January 2008 working paper, Do Politically Connected Firms Undermine Their Own Competitiveness? Evidence From Developing Countries.
“Political influence may come at the cost of lower productivity,” explains Anders Olofsgård, also a senior fellow at the Stockholm Institute of Transition Economics at the Stockholm School of Economics. “Politicians are expecting something in return from you. One way to pay back politicians is through jobs. So you may be locked into keeping higher employment than you otherwise might be.” Politically influential companies are also less likely to make the vital investments that lead to sustaining a company’s long-term growth, the paper shows.
Olofsgård and coauthor Raj M. Desai, who is also a visiting fellow at the Brookings Institution, model political influence as a quid pro quo. When companies have close ties with government officials, the authors argue, they often receive favors. Think selective enforcement of rules (or lack thereof), market restrictions that inhibit foreign or domestic competition, tax exemptions or other government actions that confer economic value. In return, however, companies are expected to give back. One method, the authors hypothesize, is... To read the complete article, login or sign-up using the form below.
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