Can politics harm firm performance around the world?

A government’s political beliefs can have a direct impact on financial performance and social goals.

By Ruth Aguilera

It doesn’t matter what part of the world you live in. A government’s political beliefs can have a direct impact on its willingness to prioritise business objectives over social goals.

Our research findings in the Journal of World Business reveal how state-owned enterprises providing public services around the world may change their priorities based on the ideology of the government in power.

The reasons behind these shifting priorities vary around the world.

State-owned enterprises play an important role in the global economy – they account for 10% of the global gross domestic product. In China, the country with the largest number of state-owned enterprises, these firms are estimated to contribute 23-28% of national GDP.

Around the world, state-owned enterprises pursue a variety of objectives:

  • Business goals aimed at improving financial firm performance.
  • Social goals directed at improving societal welfare and preventing social unrest.
  • Political goals intended to enhance the interests of politicians, bureaucrats and special interest groups, such as staying in power.

These goals can clash with each other depending on the political beliefs of the government in power – political and social goals are often at odds with the business goals of improving financial performance.

Politicians may use state ownership to pursue political objectives that benefit the ruling government party

In some cases, politicians and bureaucrats may use state ownership to pursue political objectives that benefit the ruling government party. They may do this by transferring rents to their political constituents.

For instance, state owners may push state-owned enterprises to enter into financially questionable contractual agreements with private companies because these can support their re-election (e.g., by making donations to political parties).

States may also use their ownership position to prioritise social objectives that are expected to benefit society and the electorate at large.

Social protection

While governments often pursue their societal agenda through taxation and public welfare spending, they also often use their ownership positions in companies to increase social protection.

For example, governments often pursue the social goal of low unemployment by maintaining high employment levels in state-owned enterprises.

Governments can also use their ownership positions in firms to enact social change, particularly when this change may be challenging to achieve through regulatory action. For instance, partly state-owned Dutch bank ABN-AMRO stopped granting loans to tobacco and coal-mining companies due to health and environmental concerns, and actively started lobbying other Dutch banks to follow suit.

Governments often use their ownership positions in companies to increase social protection

In Norway, the government introduced gender quotas for the boards of directors of its state-owned enterprises to promote gender diversity, three years before imposing the same quotas on private firms.

Clashing priorities

How does a government’s political ideology influence the public agenda of priorities across the globe? We tested our ideas by conducting an analysis that covered 1,831,935 firm-year observations from 131 countries.

In our findings we show strong evidence that a government’s political ideology influences both the willingness and the ability of state-owned enterprises to pursue business and social goals.

When the ruling party is right-wing, state-owned enterprises around the world show stronger financial performance.

However, when the party in power is left-wing, our data reveals that the financial performance of state-owned enterprises tends to drop.

Government goals: pro-business or pro-social?

Our analysis shows that right-wing governments across the globe are more motivated to promote business goals in state-owned enterprises, compared to countries with left-wing governments where social goals are given priority.

In countries with right-wing governments, state-owned enterprises are expected to behave more like private companies: their goal is to work towards business objectives. In these countries, we show how this business-driven mentality improves financial performance.

In countries with right-wing governments, state-owned enterprises are expected to behave more like private companies

But right-wing governments don’t always have it easy to pursue business goals alone.

We show that when multiple parties with conflicting interests are involved in policymaking, right-wing governments experience political constraints and tend to reach a compromise to blend business objectives with social goals.

For instance, right-wing governments may want to implement management practices such as performance-based compensation contracts, but other political actors may use their veto power to attack these pro-business objectives.

Higher political constraints benefit the left

We find evidence that higher political constraints benefit firms with left-leaning ownership. It turns out the conflicting political scenario helps these firms to improve their financial performance.

Why? The reason lies in a stronger separation of political powers, which makes it more difficult for left-wing governments to divert resources from state-owned enterprises to social and political goals.

The opposite is true for firms owned by states with right-wing executive branches. Here, low levels of political constraint lead to even stronger financial performance.

It appears that while right-wing governments seek to prioritise business objectives, the political fragmentation pushes these governments to “compromise” with other political factions, which results in the “blending” of business and social objectives.

This study shows that we cannot neglect the political orientation of government when studying state-owned firms around the world, regardless of how different these state-owned firms are.

All written content is licensed under a Creative Commons Attribution 4.0 International license.