Essays on the Political Environment as an Institutional Force : Nonmarket and Market Strategies

This dissertation comprises three chapters with emphasis on how the political environments in which firms are embedded affect their market and non-market strategies. The first two chapters examine the political environment of South Korea focusing on the business group or so-called chaebol, and how it affects firms’ propensity to commit fraud and the type of connections they seek, while the third chapter examines the political environment of the U.S. and its impact on firms’ market strategy, which is acquisitions. In the first chapter, using the unique dataset of South Korean business groups, I take a novel approach by examining the business-government relationship through the lens of social exchange. Specifically, I find that business group-affiliated firms are less likely to engage in financial fraud when the extent of their political connection is high. By doing so, those firms can prove themselves to be legitimate business partners for the government, thereby leveraging their political connections more effectively. I additionally examine and find that such a relationship is strengthened under a business group-friendly government. My findings have implications for firm behavior driven by the exchange relationship between a business and the government and how it is affected by a firm’s internal and external features. In the second chapter, using South Korean family business group affiliates as the research context, we examine whether firms with strong family control are more likely to seek more opposition party connections. I further examine the mitigating impacts of higher public approval, legislative power, conservatism of incumbent governments, and firms’ short-term performance pressure on the positive relationship between family control and opposition party connections. In the third chapter, I introduce the concept of ideological distance between state and federal governments and examine the extent of its impact on firms’ acquisition strategies based on their headquarters location. I further examine the moderating effects of prevailing ideology of federal governments and geographical distance from firm headquarters to the political center of the U.S., Washington DC. Using a sample of S&P 500 firms between 2005 and 2011, I find that firms engage in more acquisitions when state and federal governments are ideologically more distant and even more so when the federal government is largely controlled by the Democratic Party, but less so when their headquarters are geographically distant from Washington D.C. Overall, by investigating various aspects of political environments and their implications for firms’ choice of strategies, this dissertation aims to extend the existing knowledge in strategic management as to how firm strategies are shaped by external environments.