POLITICAL CONNECTIONS and FIRM PERFORMANCE: EVIDENCE FROM VIETNAMESE SMES

Abstract

This paper examines the influence of political connections on firm performance in Vietnam, considering different levels of market competition and institutional quality. 1 Using a three-year panel data survey of 500 small and medium-sized enterprises and a fixed-effects model, the study finds that political connections with government officials positively impact firm performance after controlling for firm and industry effects, as well as the endogeneity of political connections. The positive impact of these connections varies with market competition. However, in conditions of weak market institutions in Vietnam, political connections have a significantly negative effect on firm performance, supporting the first stage of the institutional political connection hypothesis. 2 The study found no significant difference in institutional effects on firm performance across different stages of institutional development. The paper concludes with policy recommendations for institutional development and corporate governance to improve firm performance and maximize the potential benefits of political connections.