Do business and political ties differ in cultivating marketing channels for foreign and local firms in china?

Do Business and Political Ties Differ
in Cultivating Marketing Channels for
Foreign and Local Firms in China?

Maggie Chuoyan Dong, Caroline Bingxin Li, and David K. Tse ABSTRACT
Despite the prominence of social ties in emerging economies, it remains unclear whether and how social ties matterin cultivating marketing channels for both local and foreign firms in China. Moreover, few studies have explicitlydistinguished and examined the roles of business versus political ties. Drawing on the resource-based view and socialnetwork theory, the authors propose and test the moderating effects of political ties and business ties on channelcapability–performance relationships. The findings from a survey of 342 firms indicate that the value of channelcapability is conditional on political and business ties, but in opposite directions: business ties impede and politicalties strengthen the effect of channel capability on firm performance. Furthermore, the moderating role of social tiesis stronger for local, nonleading firms than for foreign, leading firms. Keywords: social ties, emerging economy, channel capability, China
The achievement of superior channel performance Building on the resource-based view (RBV), which derives is a challenge for firms operating in emerging from an internal analysis of a firm’s capabilities and economies and thus has attracted increasing resources (Amit and Schoemaker 1993; Barney 1991; attention in channel strategy and relationship market- Rumelt 1984; Wernerfelt 1984), an increasing body of lit- ing literature (Ambler, Styles, and Wang 1999; Gu, erature has stressed the essential role of channel capability Hung, and Tse 2008; Zhang, Cavusgil, and Roath in building superior firm performance (e.g., Gu, Hung, 2003). Although high-performance distribution net- and Tse 2008; Heide and John 1992). The RBV also sug- works offer distinct advantages to firms, cultivating gests that the combination of internal and external them is both difficult and time-consuming (Dong, Tse, resources will create synergies (Barney 1991; Lorenzoni and Hung 2010; Zhang, Cavusgil, and Roath 2003).
and Lipparini 1999); in line with this suggestion, recent This challenge may be particularly critical for foreign research developments have further emphasized that the firms marketing in emerging economies because they extent to which a firm can leverage internal capabilities have less understanding of the distribution systems for superior performance is contingent on the use of that are culturally embedded in market environments social ties, which serve as a bridge between organizational that experience dynamic changes in their economic, members and external institutions (Kemper, Engelen, and social, and legal institutions (Davies et al. 1995; Liu et Brettel 2011; Li, Zhou, and Shao 2009; Zhou and Poppo al. 2008; Peng 2003; Zhou and Poppo 2010).
2010). Particularly in emerging economies characterizedby turbulent environments and weak institutional infra-structures (Peng and Luo 2000), social ties emerge asimportant mechanisms in coordinating channel activitiesthrough informal social mechanisms (Granovetter 1985).
Maggie Chuoyan Dong is Assistant Professor, Department of Market-
ing, City University of Hong Kong (e-mail:
Caroline Bingxin Li is Assistant Professor, Marketing Department,
Daniels College of Business, University of Denver (e-mail:
Journal of International Marketing David K. Tse is Chair Professor of International
2013, American Marketing Association
Marketing and Director of Chinese Management Centre, University of Hong Kong (e-mail:
ISSN 1069-0031X (print) 1547-7215 (electronic) Business and Political Ties 39
In line with this logic, we propose that the effectiveness assess how the effects of channel capability are differen- of a firm’s channel capability is contingent on its social tially conditional on business versus political ties. Fur- ties with external entities in emerging economies, and thermore, we examine the boundary conditions of such we contribute to extant literature by addressing three contingent effects by comparing how they differ in terms research gaps. First, although increasing research inter- of ownership (foreign vs. local) and market position.
est has highlighted the importance of social ties as infor- Taken together, we examine a contingent view of chan- mal mechanisms in coordinating exchanges in emerging nel capability and provide a deeper understanding of the economies (Li, Poppo, and Zhou 2008; Park and Luo moderating role of political versus business ties in 2001), few studies in channel literature have integrated the RBV and social network theory or examined theeffects of social ties and channel capability interactively.
We selected China as the empirical setting for this study.
This shortcoming prevents theoretical completeness and China has a long tradition of using ties to conduct busi- limits understanding of channel capability and tie-based ness, and social relationships constitute the core compo- nent of its value system (Bond 1991, 1996; Yang 1994).
Most economic transactions are embedded and inter- Second, extant research (Luo 2003; Park and Luo 2001; preted within China’s sociocultural context and inter- Peng and Luo 2000) recognizes that in emerging personal connections (Li, Poppo, and Zhou 2008). In economies such as China, managers build ties not only particular, within the context of channel management, with managers in business communities (i.e., business local markets are fragmented and interconnected by ties) but also with government officials (i.e., political ineffective logistic systems and ill-coordinated infra- ties). However, few studies in marketing have distin- structures, which makes tie-based mechanisms essential guished the effects of political and business ties or in business operation and coordination. In addition, uncovered how these ties differentially interact with China is in the midst of transitioning from a central firms’ capabilities to generate impacts on performance.
planning system to a free market. Thus, both govern- Therefore, it remains unclear whether political or busi- ment and market have controls over economic activities ness ties play more salient roles in leveraging the influ- and shape business operations. To survive and stand out ence of channel capability on performance in emerging from the fierce competition in China, firms are moti- vated to build ties with both business connections andgovernment authorities, which thus provides an ideal Third, recent developments in social network theory platform for studying and distinguishing the effect of suggest that researchers should consider firm-level char- acteristics when examining the value of ties (e.g., Li,Poppo, and Zhou 2008; Li and Zhang 2007; Peng andLuo 2000; Xin and Pearce 1996). In emerging economies, THEORY AND HYPOTHESES
ownership (i.e., foreign vs. local firms) and market posi-tion (i.e., leading vs. nonleading firms) are among the The RBV of the firm (Amit and Schoemaker 1993; Barney most noteworthy characteristics (Li, Zhou, and Shao 1991; Wernerfelt 1984) argues that firm-specific capabili- 2009). Foreign and local firms gain distinct access to ties are the roots of a firm’s success. Capabilities are a resources critical to their operations, which in turn may firm’s accumulated skills and knowledge that are deeply differentiate the role of social ties in economic activities embedded within organizational processes and routines.
(Li, Zhou, and Shao 2009). Similarly, we can expect that Capabilities enable a firm to employ and leverage the effectiveness of social ties may differ for leading and resources that help it perform value-creating activities nonleading firms. However, in channel literature, little is effectively (Day 1994; Krasnikov and Jayachandran known about whether social ties interact with channel 2008). Such strategic capabilities can be pooled as internal capability differently in foreign versus local firms or in resources for the creation of competitive advantage (Lorenzoni and Lipparini 1999). Previous studies haveexamined capabilities in different functional areas, includ- In this article, we extend and bridge the RBV and social ing product development capability (Murray, Gao, and network theory to examine the role of channel capa- Kotabe 2011), production capability (Hitt and Ireland bility in firms operating in emerging economies and to 1985), marketing capability (Krasnikov and Jayachandran explore the interplay between channel capability and 2008), and learning capability (Luo 2002), among others.
social ties. We distinguish business and political ties and In this study, we focus on examining the functional capa- 40 Journal of International Marketing
bility that is crucial to channel management: channel capa- interpersonal connections (Uzzi 1997). Social ties repre- bility and its interactive effects on social ties.
sent managers’ boundary-spanning activities and theirassociated interactions with external entities (Gelet - kanycz and Hambrick 1997, p. 654). According to theRBV (Amit and Schoemaker 1993; Barney 1991; Wern- Conceptualized as a functional capability, channel capa- erfelt 1984), the social capital embedded in managers’ bility reflects a firm’s ability to build, maintain, and external ties represents a valuable and unique resource strengthen its management over its channel members so to the firm. These managerial resources enable firms to that its products or services can be delivered to target obtain access to external resources and information markets efficiently (Gu, Hung, and Tse 2008; Kemper, (Podolny and Page 1998) and to coordinate and inte- Engelen, and Brettel 2011; Zou, Fang, and Zhao 2003).
grate internal activities (Barney 1991). Specifically, According to the RBV, one of the key challenges for supe- social ties connect a firm’s internal resources and opera- rior channel performance lies in firms’ ability to identify tions with external networks, which in turn affect the and leverage resources and information to facilitate their effectiveness with which a firm can leverage capabilities entire channel activities and adaptation to market uncer- tainties (Bharadwaj 2000; Collis 1994). Channel capa-bility enables a firm to recruit qualified distributors, align The resources generated from social ties are more distributors’ goals with market changes, manage distribu- critical for firm performance in imperfect competition tors’ behaviors, and stimulate knowledge sharing and col- characterized by weak institutional support and ineffec- laboration with channel members (Griffith and Myers tive infrastructure (Peng and Luo 2000; Powell 1990).
2005; Jap 1999). Thus, channel capability serves as a Thus, in emerging economies, managers must form potential source of competitive advantage for firms informal, interpersonal ties to perform basic functions (Ambler, Styles, and Wang 1999; Davies and Walters and coordinate business by themselves, such as acquir- 2004) in pursuing superior channel performance.
ing high-quality materials, obtaining scarce “insider”information, interpreting regulations, and enforcing As the distribution system in China moves from a rigid contracts (Khanna and Palepu 1997; Peng and Luo planned structure to a free market system, together with 2000; Podolny and Page 1998). In this sense, the effec- the apparent movement toward a more fragmented and tiveness of a firm’s value-creating activities is shaped by heterogeneous distribution network, it becomes more managers’ connections with external networks, espe- imperative for both local and foreign firms to develop a strong channel capability (Luk 1998; Zou, Fang, andZhao 2003). Companies armed with a strong channel Extant literature has long recognized the importance of capability are more adept in managing local markets, social ties in emerging economies and has empirically enhancing collaboration with local distributors, and tested their main effects. However, the empirical find- integrating activities across channel partners, which ings are mixed. Some authors contend that social ties enables them to lower logistic costs, improve opera- affect firms’ financial outcomes (Luo and Chen 1997), tional efficiency, and improve profitability (Gu, Huang, market benefits (Davies et al. 1995), and competitive and Tse 2008; Jap 1999). In addition, the distribution advantages (Tsang 1998; Yeung and Tung 1996); others reform has introduced a new dynamism and has radi- find that the influence of social ties in China is on the cally reshaped the channel system and operations in decline (e.g., Lau, Tse, and Zhou 2002) and argue that China, and thus a strong channel capability likely this decline may be due to China’s continuous market enhances the firm’s adaptability to uncertainties and liberalization efforts or the growing maturity of its for- enables it to adjust its management strategy accordingly mal institutions (Child and Tse 2001). Regarding the for improvements in channel performance. In conclu- inconsistencies, more recent research has implied that sion, we predict that channel capability can positively social ties may connect with important organizational affect firm performance in China, and we base our or contextual factors to affect firm performance (e.g., Li, Poppo, and Zhou 2008; Li, Zhou, and Shao 2009).
Some scholars further suggest that inconsistencies are Social Ties: Business Versus Political Ties partially caused by mixing business and political tiesand thus call for further research to differentiate the two Extant research suggests that economic actions, such as types to advance the understanding of social ties (e.g., channel activities, are closely embedded in networks and Business and Political Ties 41
“Business ties” refer to a firm’s informal, interpersonal networks nationally. In 2006, Carrefour was forced to social connectedness in the marketplace, such as connec- open its stores without an operating license in a local tions with supply chain or channel partners, competi- city to pressure local administrations (Lee 2006). tors, and other market collaborators. Political ties are a Mercedes-Benz (People’s Daily 2002) and BMW suf- firm’s informal, interpersonal social connections with fered public relations ordeals when owners smashed government officials at different levels of administration their unserviced cars in public as the firms waited for (Peng and Heath 1996; Peng and Luo 2000). Business government approval to expand their service outlets ties provide managers with important market resources, throughout the country. In contrast, local car brands such as insider information and market changes. Politi- receive speedier approvals. Indeed, political ties are cal ties help managers obtain key regulatory resources, influential in cultivating distribution channels in China such as favorable policies, access to scarce resources, as locally uneven and arbitrary governmental treatments and political legitimacy. Because business and political remain a constant danger (Nee 1992; Peng 1997).
ties differ fundamentally in terms of the resource theyprovide to managers, they may also differ in how they In the distribution sector, managers are also confronted moderate the impact of channel capability on firm with challenging bottlenecks and unpredictable costs.
Even firms with strong channel capabilities may havedifficulty controlling and supporting local distributors “Political ties” help firms obtain institutional support, because of vulnerable and complex local institutions.
such as regulation interpretation, contract enforcement, Regulatory restrictions remain, with many government and negotiation settlement. Although China has made entities controlling the distribution activities in different continuous and substantial reforms in its social, eco- regions. Local protectionism, which is one of the top nomic, political, and legal institutions, it still lacks mod- business challenges in China, has yet to be seriously ern and effective communication systems, administra- addressed (Fernandez and Underwood 2006). Facing tive structures, and free-market economies to augment these problems, managers resort to political networks.
its resources fairly and efficiently (Peng and Luo 2000).
First, political ties can help firms control and support As a result, firms use political ties to help decode poli- the local distributors more efficiently. The fragmented cies and regulations as well as future development plans local markets in China are protected by local govern- and priorities (Fernandez and Underwood 2006). The ments, increasing the challenge for a firm to manage need to co-opt sources of environmental uncertainty local distribution. A firm with a good relationship with (Pfeffer and Salancik 1978) has motivated many multi- the local government will likely find support for its local national corporations (e.g., BASF, Caterpillar, IBM, distribution. Moreover, strong political ties, as a valua - Sony) to set up headquarters in Beijing to ensure that ble asset, can reinforce the firm’s reputation of strong they receive the most updated information on China.
channel capability, which is likely to promote its localdistributors’ collaboration and achieve resource combi- China’s central government continues to empower local nation with distributors (Lorenzoni and Lipparini governments in investment and development decisions, and thus officials at various levels of the governmenthave considerable power to approve projects and allo- Second, with insider information from the local govern- cate local resources (Walder 1995). Some scholars ment, a firm can adjust its channel strategies with local regard China’s state regulatory regime as the most influ- distributors much more quickly when the market or the ential, most complex, and least predictable (e.g., Tan regulation changes. Building strong ties with govern- and Litschert 1994). Accordingly, senior executives ment agencies may enable the firm to gain unpublished maintain “disproportionately greater contacts” with market intelligence controlled by government agencies, local government officials (Child 1994). Firms with which in turn may facilitate the firm’s and its channel stronger ties gain access to local resources and can partners’ adaptation to market changes (Luo, Hsu, and buffer local policy changes, enabling them to navigate Liu 2008). The greater adaptability of the channel part- nership thus creates better performance. Therefore, wepropose the following: Furthermore, China’s local governments are known forbureaucratic red tape, administrative hurdles, and H1a: The use of political ties positively moderates uneven implementation of policies. They cause unnec- the effects of a firm’s channel capability on its essary delays as firms try to expand their distribution 42 Journal of International Marketing
Business ties refer to ties with managers in other firms.
opportunities (Poppo and Zenger 1998). Given the Good relationships with suppliers may help a firm changing landscape, we postulate that business ties acquire high-quality materials, good service, and timely may impede the function of channel capability to delivery (Luo, Hsu, and Liu 2008). Social ties with buy- adapt to the environmental changes. As a whole, we ers may spur customer loyalty, sales volume, and relia- ble payment (Ambler and Styles 2000). Moreover, goodrelationships with managers at competitor firms may H1b: The use of business ties negatively moderates facilitate possible interfirm collaboration and implicit the effects of a firm’s channel capability on its collusion while minimizing uncertainties (Rindfleisch However, the positive role of business ties has gradu- ally decreased as the market has been transformedfrom a supply-deficient to a supply-surplus economy Recent developments in social network theory suggest with highly efficient and severely competitive markets that the value of ties in a given context is contingent on (Walters and Samiee 2003; Zhou, Yim, and Tse 2005).
particular organizational traits (Baker and Faulkner Regarding channel management, ties with other busi- 2004; Li, Poppo, and Zhou 2008; Li and Zhang 2007; ness entities can be a double-edged sword in such a Noordhoff et al. 2011; Peng and Luo 2000). We expect high-velocity market (Walder 1995). First, business ties that these contingency influences significantly affect the in China usually imply close friendship with other firms, which may cause the firm difficulties in manag-ing its distribution channels. The notion that formal The practice of political ties is not without price. For management decreases as relationships grow closer example, in emerging markets, engaging in political ties poses a paradox at high levels of business tie utiliza- sometimes involves bribery: Firms must offer money or tion. Although strong business ties establish norms and other forms of compensation to establish relationships expectations about appropriate behavior, thus lower- with local authorities (Warren, Dunfree, and Li 2004).
ing the need for formal control in the exchange, they Such practices not only incur substantial costs to the also increase the temporal window for misconduct firm but also lower its ethical standards. Local firms before being discovered and thus provide channel part- may take these practices for granted because the use of ners ample opportunity to take advantage of the firm ties is heavily rooted in traditions and customs that span with relative impunity (Dyer and Singh 1998; Wicks, thousands of years (Xin and Pearce 1996), but foreign Berman, and Jones 1999). Moreover, the chance for firms may find them incompatible with their value opportunistic exploitation goes hand in hand with maximization orientation (Li, Zhou, and Shao 2009).
increases in the payoff should the firm decide tobehave opportunistically (Wuyts and Geyskens 2005).
The ultimate goal of the Chinese government is to build As Granovetter (1985, p. 491) notes, “The more com- globally competitive Chinese firms (Nolan 2001). Child plete the trust, the greater the potential gain from and Rodrigues (2005) and Peng (2000) similarly observe malfeasance.” As a result, strong business ties may off- that foreign firms’ willingness to provide Chinese firms set the ability of channel capability to align distribu- with access to technology and expertise has often been a condition for the Chinese government to favor the for-eign firms’ operation. Furthermore, government author- Second, when firms rely on business ties as their main ities concerned about the political consequences of suc- information source, they become less sensitive to cessful foreign firms have often thwarted the growth of objective changes in their operating environments, Chinese firms (Child and Rodrigues 2005). At the same thus dulling their responsiveness to changing environ- time, in many emerging economies, the government’s ments (Park and Luo 2001; Wellman 1988). Business extensive bureaucracy never fully codifies the information ties gradually draw firms into networks in which in- it uses to control enterprises. The interpretation and group favoritism and reciprocal treatments are reinforcement of rules and regulations becomes subject to expected. Thus, they lose their motivation to find opti- local authorities’ discretion (Boisot and Child 1996). As a mal solutions to problems of adaptation (Jeffries and result, foreign firms may find it particularly difficult to Reed 2000) and tend to lock themselves in to one par- grasp the actual meaning of communications with local ticular field of knowledge at the expense of external government officials, who may purposely offer Business and Political Ties 43
ambiguous information (Li, Zhou, and Shao 2009).
low market share, most of which are smaller compa- Therefore, foreign firms may not be able to use the nies, business and political ties can exert greater information they obtain from political ties effectively, impacts because the organization-level systems or rou- which inhibits their channel operations for maximizing tines have not been clearly established. Thus, we pro- In addition, different cultural backgrounds and H3: The moderating role of (a) political ties and organizational practices of foreign firms may weaken (b) predicted in H1 is stronger for nonleading the moderating role of business ties. Most foreign com- panies build up their channel capability through a seriesof formal governances. However, such formal gover-nance capability may be a misfit with the social resources gained through the informal ties with other firms (Su et al. 2009). With a formal control system,foreign firms can reduce the possibility that distributors The unit of analysis is firms in China’s consumer prod- abuse the trust established through business ties. In uct markets. We use senior managers (i.e., marketing addition, foreign firms that are less embedded in the director, general manager, and sales manager) who are relational culture in China do not rely on com - involved with the strategic operations as our key munication with other firms in the same network as the informants. The sampling frame consists of 48 con- major source to forecast market changes. Instead, they sumer product markets, including home appliances, tend to use more quantitative information, such as beverages, snacks, cosmetics, apparel, cleaning prod- statistics, survey data, and reports from market research ucts, and personal computers. The senior managers are companies. Thus, the negative moderating role of responsible for establishing social ties and developing business ties should be weaker for foreign firms. As a Chinese law prohibits nonlocal people from conducting H2: The moderating role of (a) political ties and surveys by themselves. Therefore, we commissioned a (b) business ties predicted in H1 is weaker for research firm that has a long-standing reputation in mar- keting research services with branches in key cities to col-lect the data for this study. Careful and prudent use of local research contacts is crucial to obtain reliable infor- mation in emerging economies (Hoskisson et al. 2000).
Social ties with other firms and government authorities Data collection occurred in three stages. In the first are usually considered a supplement of formal channel stage, in-depth interviews were conducted with 20 sales governance capabilities (Su et al. 2009) because ties managers in China. The interviews provided insights can offset weaknesses of hierarchical governance that enabled us to better conceptualize the focus of our mechanisms. However, such a supplementary effect study. In the second stage, respondents were identified may be diluted for leading firms. First, leading firms through a multistage sampling procedure. First, we have already established a good reputation in the acquired a sampling frame from the China Marketing industry. Therefore, the effectiveness of political tie and Media Study, a well-recognized market share report utilization in reinforcing firm reputation among published by the Sino-Monitor International Company.
distributors is weakened for leading firms. Second, the Second, we selected firms from the report using a strat- interpersonal ties as a bridge between a firm’s internal ified random sampling technique. On the basis of the and external resources are actually vulnerable. Some- ranking of market share, we divided firms in each prod- times, these networks vanish with the termination of a uct market into two groups: leading firms (top 10 firms certain employee. In general, the market leaders, which in the category) and nonleading firms (the remaining are mostly large-scaled companies, have capitalized firms in the category). We selected at least 3 firms from some systems and routines as their channel capability each group at random to avoid oversampling successful to offset such vulnerability. Relying on such systems firms, a common problem in typical firm surveys. In and routines diminishes the moderating impacts of total, we selected 150 firms from the first and 250 firms business and political ties. Conversely, for firms with 44 Journal of International Marketing
In the third stage, one senior manager and two midlevel as buyers, suppliers, distributors, and competitors. The managers of each firm were contacted for personal political ties scale refers to the extent to which a firm interviews. All respondents were informed of the aca- uses interpersonal ties with relevant government offi- demic nature and the confidentiality of their responses cials, such as officials in industrial bureaus and local by letter or telephone before the interview. Each respon- dent received a gift (valued at US$25) and was promiseda copy of the survey report. Among those contacted, Channel Capability. “Channel capability” describes 22% did not complete the interview for two main rea- firms’ competitiveness in distributing products to dif- sons: travel plans and time conflicts. We assessed nonre- ferent regional markets (Gu, Hung, and Tse 2008; sponse bias by comparing firms that completed the Kemper, Engelen, and Brettel 2011). Because of the lack interview and those that did not in terms of annual of operationalization of channel capability, we refined sales, number of employees, and types of ownership. No Gu, Hung, and Tse’s (2008) scale. Considering the potentially weak reliability and validity of this two-item scale, we added one reversed item, which captures In total, 381 firm surveys, each with responses from one a firm’s efficacy in accessing the distribution channels.
senior and two midlevel marketing or sales managers, As a whole, we used three items that cover the level of were completed. We retained 342 usable surveys after firms’ effectiveness in accessing and controlling their screening and deleting missing data. With these surveys, we compared the senior managers’ responses with theaveraged responses from the two midlevel managers by Firm Type. The questionnaire asked respondents firm. We found no significant differences in their percep- whether their firms are local or foreign, so firm tions of key constructs in our study: political ties, busi- ownership (local vs. foreign) is a dummy variable. For ness ties, and channel capability. Thus, we used the leading and nonleading firms, we divided them in the responses from the senior managers for further analysis sampling frame. As we report in the “Research Design” because they reflect senior and leading perspectives in section, leading firms are the top ten firms in their managing firm resources, capabilities, and competitive product category, and nonleading firms are the remain- environments. Appendix A presents the descriptive sta- ing firms, according to their market share in a given tistics of the samples along with their major traits (e.g., market position, size, ownership type).
Firm Performance. We followed prior studies (e.g., Peng and Luo 2000; Zhou, Yim, and Tse 2005) to measurefirm financial performance by asking respondents to We adapted the measures from previous studies. All evaluate their firms’ sales growth, return on investment, items are measured with seven-point Likert scales (1 = and profit level, in comparison with that of their top “strongly disagree,” and 7 = “strongly agree”) except three competitors (1 = “much worse,” and 7 = “much those we specify otherwise (see Appendix B).
better”). Given the 48 industry categories included inour data, the relative measure we used is suitable to Social Ties. Extant research shows that employing the avoid the performance discrepancy across industries name-generator approach to measure social ties is diffi- cult in China because managers are protective of thissensitive information (Li, Zhou, and Shao 2009; Peng Control Variables. In addition to channel capability, and Luo 2000). Our in-depth interviews also indicated other resources and capabilities of a firm, such as prod- that managers were reluctant to reveal details about uct quality, affect its performance (Barney 1991; Kras- their social ties. Thus, we followed the approach of Peng nikov and Jayachandran 2008; Peng and Luo 2000).
(1997), Xin and Pearce (1996), and Peng and Luo Thus, we used a set of control variables (i.e., product (2000) by asking general questions rather than using the quality, production capability, and innovativeness) that name-generator approach to obtain responses. Specifi- capture the extent to which these strategy variables cally, we adapted the scales of business ties and political drive firm performance. We also included firm demo- ties from the work of Li, Poppo, and Zhou (2008). The graphics, such as size (logarithm of the number of measurement of business ties captures the degree to employees), age, and industry (durable vs. nondurable), which a firm uses interpersonal ties at other firms, such Business and Political Ties 45
Construct Validity. First, we ran exploratory factor Table 1 reports the descriptive statistics and correla- analyses for all constructs to assess and purify the meas- tion matrix. As described previously, we tested the ures. We retained items with high loadings on the hypotheses using the moderated regression approach intended factor and no substantial cross-loadings. Sec- of Jaccard, Wan, and Turrisi (1990) and Aiken and ond, we performed confirmatory factor analysis to West (1991). We mean-centered each scale that consti- assess the validity of the measures (Anderson and Gerb- tutes the interaction term (Aiken and West 1991) to ing 1982, 1988; Hunter and Gerbing 1982). We ran sep- reduce potential multicollinearity between the inter- arate measurement models for the focal and control action terms and their components. Then, we formed constructs (Atuahene-Gima and Li 2002). The measure- the interaction terms by multiplying the relevant mean- ment fit indexes (see Appendix B) are acceptable. All centered scales. Table 2 reports the results of the factor loadings are significant and positive (p < .001), in regression models with firm performance as the support of convergent validity of the measures. Third, we confirmed discriminant validity by comparing twonested models for each pair of focal constructs in which With only the main and control effects, Model 1 reveals we either allowed the correlation between two con- a significant, positive relationship between channel structs to be free or restricted the correlation to 1. Dis- capability and performance ( = .28, p < .001), as we criminant validity is supported; the chi-square statistic is expected and as reported in the literature. Notably, significantly lower (p < .05) in the unconstrained model political ties and business ties do not exert significant than in the constrained model for all constructs. Finally, direct effects on performance, confirming that as China to establish the internal consistency of the measures, we continues to reform its social institutions, social ties may computed their Cronbach’s alpha. As Appendix B operate in less obvious ways or mask themselves in shows, the Cronbach’s alpha of all constructs is higher than the widely accepted threshold of .70 (Nunnally1978). Taken together, the measures have good validity Model 2 goes beyond the main effects by including the two-way interaction effects between channel capabilityand the two types of ties (political and business), as well Common Method Bias. Because the dependent and as the moderating effects of market position (leading vs.
independent variables come from the same source in our nonleading) and firm ownership (foreign vs. local). We study, we recognized the potential for common method proposed only three-way interaction effects of these two bias and statistically investigated this issue. Specifically, firm characteristics, but for the sake of completeness of we explicitly estimated a common method factor in the regression equation, we also need to include all the which each manifest item was hypothesized to have an relevant two-way interactions, which are not the focus equal loading on the method factor in addition to a of our study. In Model 2, channel capability still exerts loading on its theoretic construct (Podsakoff et al.
a positive and significant effect on firm performance 2003). The fit index for the model with common ( = .23, p < .01). The interaction between political ties method factor added was 2(36) = 81.2. The fit index and channel capability on performance is positive and for the model without common method factor was significant ( = .23, p < .01), in support of H1a, whereas 2(38) = 82.4. The difference in fit between these two the interaction between business ties and channel capa- models was not significant (2diff = 1.2, d.f.diff = 2, n.s.), bility is negative and significant ( = –.20, p < .05), in which suggests that common method bias is not an issue support of H1b. Taken together, the results illustrate the differential moderating roles of political and businessties in China’s consumer product markets. The divergentmoderating roles of political and business ties prompt us ANALYSES AND RESULTS
to further delineate their underlying causes. We plotthese two moderating effects in Figure 1. The steeper We followed the method for identification of modera- slope of the line for strong political ties corroborates tors that Sharma, Durand, and Gur-Arie (1981) and H1a, and the steeper slope of the line for weak business Brown (1989) propose. We used hierarchical regression to examine the hypothesized moderating effects first.
Then, for the insignificant interaction terms, we used In Model 2, among the four three-way interaction subgroup analysis to examine whether the suspected terms, only the political tie ¥ channel capability ¥ lead- moderators influenced the strength of the relationship.
ing/nonleading interaction is significant ( = –.15, p < 46 Journal of International Marketing
Table 1. Descriptive Statistics of the Constructs
*Significant at the p < .05 level.
**Significant at the p < .01 level.
.05), in support of H3a that the moderating role of channel capability:  = –.19, p < .01), not for foreign political ties is stronger for nonleading firms. For the firms, in support of H2a and H2b. The finding of a non- other three hypothesized but not significant three-way significant interactive role of social ties for foreign firms interaction terms in Model 2, we followed Sharma, is not surprising because they are not native to such a Durand, and Gur-Arie’s (1981) procedure to determine whether moderation effects exist. Market position (lead-ing vs. nonleading) significantly affects firm financialperformance ( = .15, p < .05), suggesting the termina- DISCUSSION AND CONCLUSION
tion of the moderation test of market position. Thus, theresults do not support H3b.
Our investigation of the role of social ties in firms’channel management in China uncovered three issues Firm ownership (foreign vs. local) does not correlate that warrant further discussion. The first issue is the with any criterion or predictor variables (see Table 1), so salience of the interplay between social ties and chan- we conducted subgroup analysis to further examine nel capability in emerging markets such as China. In a whether it was a moderator (see Table 3). The result country in which social networking is valued highly, reveals that the main effects of channel capability are social ties have long been an operating system embed- significant for both local and foreign firms. Yet the ded in people’s everyday lives. It is not surprising that interactions between channel capability and the two firms often employ their social ties with other firms types of ties are significant only for local firms (political and with government entities as a bridge to connect tie ¥ channel capability:  = .20, p < .01; business tie ¥ external resources for their operation. However, extant Business and Political Ties 47
Table 2. Regression Results for Total Sample
Financial Performance
Dependent Variable
Total Sample: Model 1
Total Sample: Model 2
Main Effects
Interaction Effects
Political tie ¥ channel capability ¥ F/L Business tie ¥ channel capability ¥ F/L Political tie ¥ channel capability ¥ L/N Business tie ¥ channel capability ¥ L/N Control Variables
*p < .05.
**p < .01.
***p < .001. Notes: t-tests are one-tailed for hypothesized effects and two-tailed for control variables.
social tie literature offers mixed findings about the role China have since loosened the effect of social ties (Lau, of social ties. Some researchers suggest that social ties Tse, and Zhou 2002). To better investigate the role of as social capital are important to firm performance in social ties, it is necessary to integrate the RBV and the uncertain China market (Lovett, Simmons, and social network theory and further explore the interplay Kali 1999; Luo 2003), while others contend that the between social ties and important internal resources fierce competition and free channel access in current and capabilities. As our findings suggest, managers’ 48 Journal of International Marketing
The second issue pertains to the divergent effects of the Figure 1. Moderating Role of Business Ties and
two types of social ties. Although extant literature docu- ments that social ties are potentially a double-edgedsword, it has not clarified the underlying reasons. In this article, we attempt to classify social ties into politicaland business ties with clearer delineations regarding their respective roles in marketing channels. This approach seems fruitful. The findings show that politi- cal ties enhance the impact of channel capability on firmperformance, which further confirms the pivotal role of social ties with government entities in reinforcing the Performance 2.5
governance of local distributors by obtaining more insider information and increasing enforceability (Pengand Luo 2000). In contrast, business ties dampen the impact of channel capability on firm performance. This dampening effect reveals the dark side of managers’ social ties, which are harmful rather than beneficial to tradicts the previous understanding that in the frag- mented China market with serious local protectionism,the use of interpersonal connections with local distribu-tors can help firms achieve better performance (Ambler, Styles, and Wang 1999). It also indicates the declining role of social ties while emphasizing the increasingimportance of Western-style business relationships in channel management in China (Li, Poppo, and Zhou 2008). Given that our measure of business ties captures ties only within the firm’s industry domain (i.e., suppli- Performance
ers, buyers, and competitors), another possible explana- tion of the dampening moderating effect may be the col- lective blindness due to the closeness of a narrow industry network (Wellman 1988). More ties with firmsacross the business community may help offset such a negative effect because a broader range of informationis gained through Third, the role of social ties is contingent on firm char-acteristics. We explored contingency factors, includingfirms’ ownership and market position. Echoing extantresearch (Li, Poppo, and Zhou 2008; Miller and Parkhe2002), we found that the effects of social ties were social ties, regardless of whether they are political or diluted for foreign firms. In addition, we found no sig- business, do not exert direct effects on firm perform- nificant effect of social ties for foreign firms in con- ance. Rather, they have an indirect effect on the rela- sumer product industries. Although previous research tionship between channel capabilities and firm per- has argued that foreign firms recognize the salience of formance, and only political ties exert a positive ties when doing business in China (Tsang 1998), the moderating role. These findings confirm the salient realized effects of social ties tend not to be satisfactory.
role of social ties, but in an indirect form and with The reasons for this are twofold. First, foreign firms, divergent effects for different types of ties. Thus, we especially those in highly marketized industries and urge researchers to explore the indirect role of social those with strong brand equity, do not need to deploy ties as a bridge to link firms’ internal resources (e.g., ties in China markets, because they can access the nec- functional capabilities) and external resources.
essary external resources in the less regulated market.
Business and Political Ties 49
Table 3. Regression Results of Subgroup Analyses
Financial Performance
Dependent Variable
Local Firms (N = 215)
Foreign Firms (N = 126)
Main Effects
Interaction Effects
Control Variables
p < .10.
*p < .05.
**p < .01.
***p < .001. Notes: t-tests are one-tailed for hypothesized effects and two-tailed for control variables. Second, foreign firms still have difficulty comprehend- supplier (or brand-owner) firms, clarifying the exact ing the essence of social ties and properly employing roles of different types of social ties in channel develop- them in China. Moreover, the moderating roles of ment is important. Even in China, a country in which political ties are stronger for nonleading firms, suggest- interpersonal connections are emphasized and practiced ing the reinforced facilitating effects of political ties for in every aspect of social life and firm operations, the weak players in the marketplace. For these weak play- need to recognize dark-side effects of social ties is evi- ers, political ties exert stronger and more beneficial dent. This pertains especially to local or weaker firms, because political ties can be facilitating while businessties can be exploitive. However, doing so is not easy.
This article makes three contributions to the marketing Firms may have difficulty clearly separating interper- channels literature. First, it confirms the indirect effects sonal ties with business partners from those with gov- of social ties in channel management. Next, it delineates ernment officials and then deploying different strategies the specific roles of the two types of social ties, and for these two dimensions, because the guanxi orienta- finally, it defines the boundary conditions of their tion is a firm-level norm. Another possible strategy is to effects, including different firm-level characteristics. discard the deployment of social ties and replace it withmore market-based strategies or mechanisms in channel The findings from this study provide several managerial For foreign companies in China, the role of social ties implications to different members in the value chain. To may not be as significant as originally assumed, especially 50 Journal of International Marketing
in highly competitive markets; note that the China mar- firms (i.e., customers, suppliers, and competitors).
ket has been opened to the world for three decades and Although this measure appears in prior studies (e.g., Li, has witnessed remarkable marketization. Thus, foreign Poppo, and Zhou 2008; Peng and Luo 2000), it cannot companies should shift their focus in channel manage- fully capture the broad concept of business ties across ment from social ties to a more Western-style governance, the business community. Future studies should develop which could mean exerting less effort in localization.
a more comprehensive measure of business ties. Second,we examined the micro–macro link between managers’ Distributor firms face a different set of challenges.
social ties and firm performance in this study. Further Because the marketplace is more open and, thus, research could examine the specific functions of social intensely competitive, reliance on social ties as resources ties at multiple levels within the network to incorporate to substantiate their competitive advantage may no cross-level effects (Contractor, Wasserman, and Faust longer be valid. Rather, adopting a fair and open access 2000).Third, we chose China as a research context.
Other contexts in both emerging and developedeconomies would further enrich the findings and advance current knowledge for cultivating internationalmarketing channels. Fourth, in this study, we took the This article has several limitations that provide future holistic perspective of a firm to examine how social ties research opportunities. First, our measure of business can influence the role of channel capability to enhance and political ties only captures the relational aspect of firm performance. Further research could take a more the social ties, leaving the structural aspect of social ties focused view to examine how their interplay influences for further research. In addition, the measure of business channel performance, a more direct outcome of channel ties assesses top managers’ ties with managers of other Appendix A. Profile of Survey Samples
1. Market Position
3. Type of Firm Ownership
2. Number of Employees
4. Industry Type
Business and Political Ties 51
Appendix B. Measurement Items and Validity Assessment
Factor Loading
Political Ties (= .89)
Our senior managers have good personal relationship with … 1. Relevant key government officials.
2. Officials in relevant industry bureau (e.g., State Administration on Industry and Commerce, Ministry of Foreign Trade and Economic Cooperation).
3. Officials in local authorities (e.g., tax bureau, state banks, and commercial administration).
Business Ties (= .88)
Our senior managers have good personal relationship with our … Channel Capability (= .83)
1. Our firm has highly effective marketing channels.
2. We don’t have access to effective distribution channels in China. (reversed item) 3. Compared with our competitors, our speed of distributing new products is high.
Performance (= .86)
Model Fit: 2(38) = 82.37, p < .01; goodness-of-fit index = .96; adjusted goodness-of-fit index = .92; comparative fit index = .98; incremental fit index = .98; root mean square error of approximation = .06 Control Variables
Product Quality (= .79)
1. This brand offers unique benefits to customers.
2. This brand offers benefits superior to our competitors.
3. This brand provides higher quality than our competitors.
Production Capability (= .73)
1. We have good supervision over our production process.
2. Our managers and front line employees are capable of solving problems relating to our production process.
3. We can install a new production line by ourselves without any problems or difficulties.
Innovativeness (= .75)
1. This brand is highly innovative, replacing an inferior alternative.
2. This brand incorporates a radically new technological knowledge.
Model 2: 2(17) = 70.96, p < .01; goodness of fit index = .95; comparative fit index = .94; incremental fit index = .95. 52 Journal of International Marketing
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