Home Political Connections and Outward FDI of Emerging Market Firms

Abstract While political connections are a critical non‐market strategy for emerging market firms (EMFs) to achieve success, how they affect EMFs’ outward foreign direct investment (OFDI) remains controversial. Building on the institution‐based view, we examine how home‐country political connections facilitate or impede EMFs’ OFDI. Using a panel dataset of listed private firms in China, we find that home political connections have an inverted U‐shaped effect on firms’ OFDI level; the effect becomes flatter as pro‐market reforms proceed in the home country, but becomes steeper for firms with strong technological capability. By revealing a nonlinear effect, our study helps reconcile inconsistencies regarding the role of home political connections in OFDI and has important implications for EMFs’ internationalization.