How Formal Institutional Failure Shapes the Corporate Political Connection-Innovation Relationship: A Strategic Sensemaking Perspective

Abstract

PurposeThe purpose of this paper is to examine how managerial perceptions of formal institutional failure shape between-firm variance in the relationship between corporate political connections (CPCs) and innovation. We develop and empirically test a model in which such perceptions moderate both the CPC-innovation input and CPC-innovation output relationships.Design/methodology/approachWe test our hypotheses using data from the EBRD-EIB-World Bank Enterprise Surveys 2018-2020, a joint initiative of the European Bank for Reconstruction and Development (EBRD), the European Investment Bank (EIB) and the World Bank. The dataset includes approximately 28,000 enterprises across 41 countries in Europe, Central Asia, the Middle East and North Africa, representing a wide range of institutional systems. We analyze these data with multiple regression techniques that account for potential endogeneity in observational settings.FindingsOur findings indicate that stronger managerial perceptions of formal institutional failure enhance the extent to which firms leverage their CPCs for both innovation input and innovation output.Practical implicationsWe highlight the practical importance of cultivating political acumen to effectively mobilize CPCs and show how managers can calibrate their political ties by observing patterns of formal institutional failure. Our findings provide actionable guidance for executives seeking to foster innovation in both developed and developing countries.Originality/valueWe theorize how managerial sensemaking of formal institutional failure fosters the development of political acumen, which in turn shapes the CPC-innovation relationship. Moreover, we show that these perceptions exert their influence regardless of the overall quality of formal institutions in the national context.