No. 1376 - Connecting to power: political connections, innovation, and firm dynamics

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by Ufuk Akcigit, Salomé Baslandze and Francesca LottiJuly 2022

The paper assesses to understand whether the political connections of some firms, in addition to bringing advantages for the companies that exploit them, by alleviating some regulatory or bureaucratic constraints (for example, by reducing the time to obtain a licence), negatively affect other companies, the degree of competition in the markets, innovative capacity and productivity trends in the economy as a whole.

The results document a 'leadership paradox': market leaders are much more likely to be politically connected, but also less likely to innovate, a finding in contrast to the literature on the Schumpeterian growth model, according to which leading companies are also the most innovative. The presence of connections is associated, at company level, with greater survival rates, growth in employment and in revenues, but not with productivity gains. Using a theoretical model, it is shown how the advantages of political connections for the companies that implement them do not compensate offset the aggregate losses associated with lower growth in overall productivity and a poor ability to reallocate resources between firms.