How does party heterogeneity influence firms' perceived obstacles to business? The corporate challenges in the political context

Abstract

In this paper, we argue that firms that operate in uncertain and heterogeneous institutional environments are affected by political structure, such as party heterogeneity. Based on the new institutional economics, resource dependence theory and the transaction cost perspective, we investigate how political uncertainty can increase perceived transaction costs for firms and entrepreneurs, thereby impeding business operations. To explore this relationship, we utilised the World Bank Enterprise Surveys of 8947 observations from 23 countries. The findings suggest that firms that operate in environments with high levels of party heterogeneity perceive more significant obstacles to conducting business. Additionally, we identify firm-level characteristics that act as boundary conditions. While state ownership and multinationality mitigate the negative relationship between party heterogeneity and perceived business obstacles, a firm's political activities can increase perceived business obstacles in highly heterogeneous environments. These findings have important implications for firms operating in uncertain and heterogeneous political environments.