Luo Et Al-2008-Strategic Entrepreneurship Journal

Strategic Entrepreneurship Journal
Strat. Entrepreneurship J., 2: 133153 (2008)

Published online in Wiley InterScience (www.interscience.wiley.com). DOI: 10.1002/sej.46
HOW PRIVATE ENTERPRISES RESPOND TO

GOVERNMENT BUREAUCRACY IN EMERGING
ECONOMIES: THE EFFECTS OF ENTREPRENEURIAL
TYPE AND GOVERNANCE
YADONG LUO* and MARC JUNKUNC
Department of Management, School of Business Administration, University of
Miami, Coral Gables, Florida, U.S.A.
This study examines how private enterprises in emerging economies politically respond to
government bureaucracy they face. With an emphasis on two political responses, engagement
and influence, we propose that private enterprises react to bureaucracy differently, depending on their entrepreneurial traits, and this leads to different susceptibilities to bureaucracy.
Our analysis of 9,123 private enterprises in 72 emerging economies suggests that political
engagement and influence are positively associated with bureaucracy for all firms, but the
levels of political engagement and influence vary according to a firms entrepreneurial type
(new vs. established venture; venture of entrepreneurial origin vs. other private) and governance (family vs. nonfamily; with vs. without government or foreign ownership). Firms in
different groups of emerging economies also display some different propensities to political
engagement and influence. Copyright 2008 Strategic Management Society.
INTRODUCTION
The privatization and growth of entrepreneurial enterprises has been a defining feature of new economic
and business conditions in most emerging economies. This is evidenced by the private and entrepreneurial sector contributing more than half of GDP
in most emerging economies (World Bank, 2002).
Unfortunately, government bureaucracy (hereafter
bureaucracy) remains largely unimproved (World
Bank, 2006), consequently lowering country competitiveness and business performance and retarding
economic growth and entrepreneurship development (Banerjee, 1997; Lau, Smith, and Fiske, 1991;
Keywords: private enterprise; entrepreneurship; bureaucracy;

emerging economy
*Correspondence to: Yadong Luo, Department of Management, School of Business Administration, University of Miami,
417 Jenkins Building, Coral Gables, FL 33124-9145, U.S.A.
E-mail: yadong@miami.edu
Copyright 2008 Strategic Management Society
McNoll, 1987). Such bureaucracy increases transaction costs and uncertainty and undercuts speed and
flexibility (Mauro, 1995; Williamson, 1999). Thus,
dealing with bureaucracy becomes critical as entrepreneurial businesses feverishly search for sources
of competitive advantages so they can survive and
thrive. While management scholars have extensively
examined actions taken by firms to influence public
policy decisions by political actionscorporate
political strategies (e.g., Hillman and Hitt, 1999;
Keim and Zeithaml, 1986; Lenway and Rehbein,
1991; Schuler, Rehbein and Cramer, 2002), how
private and entrepreneurial enterprises (hereafter
private enterprises) politically respond to bureaucracy in emerging economies has remained largely
unexplored, both theoretically and empirically.
To fill this void, this study attempts to reveal how
private enterprises in emerging economies, defined
broadly here as developing countries under significant economic transformation, politically respond
to bureaucracy. The article emphasizes two political
134
Y. Luo and M. Junkunc
responsesengagement and influenceand develops a framework that leads to propositions: 1) for

entrepreneurial firms in general, political engagement
and influence will be heightened when bureaucracy
increases; and 2) for firms with different entrepreneurial traits (new vs. established venture; venture of
entrepreneurial origin vs. other private firms; family
vs. nonfamily business; with or without government or
foreign ownership) differ in levels of political engagement and influence in the context of bureaucracy. The
underlying premise we develop is the notion of institutional susceptibilitythe extent to which private
enterprises vary in their dependence on bureaucracy,
public resources, institutional support, and regulatory interventionwhich is the view consistent with
resource dependence theory (Pfeffer and Salancik,
1978). Entrepreneurial governance and attributes,
such as those noted above, determine heterogeneity
in their vulnerability to governments bureaucratic
control and administrative barriers.
We acquired a dataset comprising 9,123 private
enterprises in 72 emerging economies around the
world to test how these enterprises politically respond
to bureaucracy and how their institutional susceptibility affects their political responses. Our analysis documents that these firms tend to respond to increased
bureaucracy by fortifying their political engagement
with bureaucrats and by accentuating their political
influence over bureaucracy-related policy making.
New ventures tend to exert higher political engagement and influence than established ventures. Ventures of entrepreneurial origin (VEO) commit less to
political engagement than firms without this origin,
while family businesses undertake less political influence than nonfamily businesses. Firms with some
government or foreign ownership tend to undertake
more political engagement but less political influence
than those without any ownership of this kind. Our
results also caution that entrepreneurs in different
emerging economies are not homogeneous in terms of
their political behavior in dealing with bureaucracy.
These findings suggest some important implications
to both research and practice for entrepreneurship in
emerging economies.
THEORETICAL DEVELOPMENT
Privatization and bureaucracy
It is now universally acknowledged that private
ownership, especially entrepreneurial development,
in and of itself is a major force in nourishing the
transition to a market economy. With the right policies at play, privatization can provide substantial
economic gains, such as improved productivity,
competitiveness, and innovation. It also has the
potential to transform national economies, industries, and organizations by fostering the spirit of
entrepreneurial risk taking (Zahra et al., 2000).
There is a growing consensus as well that privatization is not a panacea for all economic transformations, given multilevel compounding factors that are
complex and difficult to change (Ramamurti, 1992,
2000) along with political, legal, administrative, and
social obstacles that resist the growth of legitimate
private enterprises (Spicer, McDermott, and Kogut,
2000). According to a recent survey by World Bank
(2006), one of the least addressed obstacles of this
kind is government bureaucracy.
This study defines government bureaucracy as
superfluous and cumbersome administrative barriers
in various forms that obstruct normal investment and
business activities in the domain (region or industry) governed by related bureaucrats and officials in
charge. Hence, bureaucracy indicates overall quality
and efficiency of services delivered by government
agencies as well as the availability, predictability,
and consistency of information on governmentally
imposed rules and regulations that impact business
activities (World Bank, 2006). There are numerous
forms of administrative barriers, including excessive
documentation requirements, inadequate information on rules and regulations, inconsistent procedures
mandated by different departments, lengthy registration or ratification periods, artificially imposed
regulatory obstacles, redundant complexity of formalities, absence of a uniform system of fees, taxes,
and other charges, complicated processes requiring
multi-agency approval, and unsupportive attitudes
from public and government institutions, among
others.
Privatization and bureaucracy coexist in almost
every emerging economy where well-functioning
and corruption-resisting legal and political institutions are still lacking. Privatization is, for the most
part, intended to reduce government oversight and
control. Its often accompanied by heightened economic deregulation and political decentralization
and giving more discretionary power to lowerlevel (province, state, city, etc.) government agencies. However, the use of such discretion often
gives rise to suspicions of patronage, bribery, and
favoritism (McNoll, 1987; Rose-Ackerman, 1999).
The World Bank (2006) actually found a positive
DOI: 10.1002/sej
Enterprise Response to Government Bureaucracy in Emerging Economies

correlation between privatization and bureaucracy
in many emerging economies (most notably, the
Commonwealth of Independent States) where, after
massive privatization, governments became more
corrupt and less transparent, and private businesses
had to devote substantially more time to deal with
increased bureaucracy. Rising flexibility and power
of lower-level officials is an area where incentive
to bribe comes into play (La Porta et al., 1999).
Government agencies are, in large part, insulated
from their constituencies by layers of government
bureaucracy and civil service protections to the point
that they follow an agenda of their own, serving
the needs of their officials and employees as well
as a few narrow, external constituencies that have
leverage over them. Bureaucrats rents increase as
bureaucracy increases due to the private information and discretionary power they maintain (RoseAckerman, 1999).
Bureaucracy severely impedes the progress of
routine business activities and new investments.
While many central-level governments of emerging economies have enacted far-reaching policies
and legal or regulatory reforms along the process of
privatization, private enterprises complain that practical, day-to-day problems caused by bureaucracy
in lower-level governments significantly hold them
back (World Bank, 2002). Administrative changes
in bureaucracies, especially in lower levels handling routine public management, are insufficiently
executed to ensure that new policies and laws are
truly effective. Bureaucracy stymies reform efforts
in these countries (La Porta et al., 1999). Ideally,
if improved through reforms that reduce business
burdens and enhance transparency of regulatory
regimes, bureaucracy reduction can foster market
entry, business expansion, economic development,
and growing entrepreneurship that would, in turn,
produce more wealth and jobs for society. Moreover, bureaucracy reduction can contribute to good
governanceimproving the quality, objectivity, and
professionalism of government regulatory bodies,
while reducing the opportunities for corruption
and bribery (Banerjee, 1997; Mauro, 1995; RoseAckerman, 1999).
Bureaucracy and corporate politics
Recognizing the strong impact of government
bureaucracy on the growth of private enterprises,
entrepreneurs must be able to respond appropriately
to bureaucracy. Recent studies have addressed the
135
political imperatives and strategies needed for firms

to deal with governments (e.g., Bonardi, Hillman
and Keim, 2005; Hillman, Zardkoohi, and Bierman,
1999; Hoskisson, Eden, Lau, and Wright, 2000).
Overall, these studies document that corporate
politics in relation to governments do influence
firm performance. Firms use political strategies to
pursue their competitive advantages (Schuler et al.,
2002), achieve their strategic objectives (Keim and
Zeithaml, 1986; Shaffer, 1995), or respond to pressure for isomorphism (Suchman, 1995). Although
they were not designed to address corporate political responses to bureaucracy nor specifically tackle
political strategies for private enterprises in emerging economies, these studies offered insights into
the two generic political responses probed in this
studypolitical engagement and political influence. Political engagement (hereafter engagement)
is defined as the extent to which a firms senior
management invests time in actively checking with
related government agencies and officials for clarifying existing rules or policies, interpreting new laws
or regulations, verifying changes in existing rules or
laws, or requesting faster handling of cumbersome
formalities. Political influence (hereafter influence)
concerns the extent to which an entire organization shapes or impacts the content of a new law,
rule, regulation, or decree being discussed that could
significantly affect the organizations business and
performance, whether such law or rule is enacted
by legislative and regulatory authorities or executive and ministerial bodies of government. These
definitions conform to World Banks measurement
of engagement and influence, allowing us to test
them later.
While they are interrelated, engagement and influence differ in approaches and participating levels.
Generally, engagement is more reactive, seeking
or verifying information on specific rules, regulations, or procedures through an entrepreneurs
or executives own contact and checking. In this
approach, firms may wait until specific rules arise
before attempting to contact bureaucrats. Therefore, firms tend to engage in this type of political
response in an ad hoc manner. In contrast, influence
is more aggressive and proactive, using not only
an entrepreneurs or executives personal ties, but
also the organizations forces and resources in a
more ongoing manner, attempting to change existing
policies or shape new rules before they arise.
Political markets are prone to inefficiency
(North, 1990b; Rose-Ackerman, 1999). Government
DOI: 10.1002/sej
136
institutions are not necessarily created to be socially

efficient; they are created to serve the interests of
those with bargaining power to create new rules
(Dixit, 1996). Inefficiency is often accompanied
by bureaucracy, especially in institutions that have
higher levels of constrained rationality, opportunism,
and procedural malfeasance (Williamson, 1999). In
the face of escalated bureaucracy, private enterprises
will perceive greater deterrence and higher transaction costs associated with administrative barriers.
Bureaucracy elevates environmental impediments
and increases information search costs. This deterrence also increases the uncertainty of external
resources, pushing the firm to look at alternative
resources or find a way to surmount with bureaucracy. Pfeffer and Salancik (1978) explained the
negotiated environment of organizations, assuming
that organizational relations with the regulatory environment are open to negotiation and the exchange
of concessions. Oliver (1991) further suggested that
lobbying efforts should be bolstered in the face of
increased regulatory pressure if such regulations can
be influenced by businesses or if businesses can
gain from gray areas not covered by regulations in
place. Pfeffer and Salancik (1978) clearly stated that
law, legitimacy, political outcomes, and economic
climate reflect, in part, actions taken by organizations to modify their environmental components for
the sake of survival and growth.
Consistent with the above notion, we anticipate
that both political engagement and political influence will increase when bureaucracy increases. To
respond to increased bureaucracy, entrepreneurs
need to possess first-hand information on changes
in administrative procedures and policies. Not
every change in bureaucracy necessarily affects the
company, but having this first-hand information is
critical, as it helps the entrepreneur better understand the new regulatory environment (Hoskisson
et al., 2000; Keim and Zeithaml, 1986; Schuler et al.,
2002). Engagement satisfies this need because this
approach may be less expensive than other political
approaches. Engagement is largely an investment of
time by an entrepreneur to inquire, check, and verify
new administrative barriers. It may involve the use
of his or her personal contacts in the government
sector when bureaucracy is not transparent. Through
engagement with bureaucrats and officials, private
enterprises are expected to benefit from greater
access to the information and insights of administrative procedures and barriers. This increased access
is also said to increase a firms ability to survive
by decreasing uncertainty in the political domain

(Hillman et al., 1999; Luo, 2006).
Political engagement alone may not be sufficient
to cope with increased bureaucracy; it may be a
too passive political strategy because every private
enterprise can do it. In order to establish a political
competitive advantage, individual firms may need
to actively pursue influence over policy changes by
attempting to transform them to their advantage, or
at least alleviate new threats and risks associated
with these changes. There is a consensus that the
long-term goal of corporate political activity is to
maintain parity with competitors and even attain
strategic advantage (Getz, 1997; Hillman and Hitt,
1999; Suchman, 1995). This action is especially vital
to private enterprises in emerging economies where
institutional protection and property rights safeguards are limited (Guthrie, 1997; Henisz, 2000).
These businesses desperately need a stable and
favorable institutional environment to grow (Tsui,
Bian, and Cheng, 2006). Although influence is not
necessarily easy to substantiate, it is plausible. As
bureaucracy is amplified, so too is the bargainability
in an emerging economy under regulatory transition.
Bureaucrats at various levels are granted more discretion by their upper-level authority, giving rise to
more resilience and elasticity and, therefore, more
opportunity for private enterprises to exert influence. Because bureaucracy straddles many agencies,
firms may emphatically influence a few key political
bodies that set forth administrative rules. Based on
these discussions, we postulate:
Hypothesis 1 (H1): Private enterprises political
engagement with government is positively related
to government bureaucracy;
Hypothesis 2 (H2): Private enterprises political
influence over governmental policies is positively
related to government bureaucracy.
Bureaucracy and institutional susceptibility
Although it seems straightforward to regard private
enterprises in emerging economies as active responders to increased levels of bureaucracy through political
engagement and influence, the diversity of such enterprises suggests that not all of them benefit equally from
such political responses, nor should they be committed equally to engagement and influence in the face of
bureaucracy. To elucidate this heterogeneity, consider
this institutional vulnerability logic: private enterprises
DOI: 10.1002/sej

with different entrepreneurial types (e.g., new vs. established venture; venture of entrepreneurial origin vs. other
private forms in the inception) and governance (e.g.,
family vs. nonfamily business; with vs. without government or foreign ownership) are subject to varying
vulnerabilities to government bureaucracy and varying
dependencies on government-instituted rules, which
leads to idiosyncratic strategic needs for the use of political engagement and influence in response to bureaucracy.
The resource dependence view holds that organizations
can lobby to have the government control the environment in their interest or can persuade established regulators to create favorable environmental contexts (Pfeffer
and Salancik, 1978: 107), but the forms or strengths
of organizational adaptations depend on the nature and
amount of interdependence confronted by the organization (Pfeffer and Salancik, 1978: 108). Corroborating
this view, institutional susceptibility logic suggests that
private enterprises in emerging economies are exposed
very differently to institutional control by the government
(e.g., rules, norms, regulations, provisions, and laws) due
to the varying environments they face and differing subjections to government instituted rules. For instance, new
ventures will be much more prone to administrative barriers in order to survive and grow than established ventures.
In this case, the criticality of a particular relationship
(with government) on which a firm depends (Pfeffer
and Salancik, 1978: 111) is higher for the former than
for the latter.
With an adaptive structure of organization and management playing a discretionary role, firms with diverse
dependencies respond differently to critical external relationships by placing different commitments on shaping
or altering the system of constraints and dependencies
137
confronting the organization (Pfeffer and Salancik, 1978).

Firms facing different institutional susceptibility are likely
to commit dissimilarly to the levels of political engagement and influence in order to manage their dependence
on bureaucracy. For private enterprises in emerging economies, this susceptibility is determined, in part, by their
entrepreneurial type (whether they are new ventures and
whether they are originally entrepreneurial from time of
start-up) and governance (whether they are family businesses, whether they are partially owned by government,
and whether they are partially owned by foreign investment). These attributes determine either the area (breadth)
and/or vigor (intensity) of corporate friction with bureaucracy. For instance, in the presence of liability of newness,
new ventures may need to engage more actively with
government to cope with bureaucracy. Government and
foreign participation in a firms ownership may bring in
institutional or competitive supports, thus reducing the
need for political engagement or influence.
The above discussion suggests that political
engagement and influence are responding variables
to government bureaucracy, and that the levels of
engagement and influence depend on a firms entrepreneurial traits (type and governance). While we
later address the possible moderating (interaction)
effect of such traits on the link between political
response and bureaucracy, we propose that these
entrepreneurial traits are mainly a set of predicting
variables affecting political engagement and influence. The underlying logic is that entrepreneurial
and private enterprises respond to bureaucracy
according to their needs, and such needs are contingent on entrepreneurial traits independent of the
change of bureaucracy. Figure 1 summarizes the
Political
engagement
Government
bureaucracy
Political
influence
Entrepreneurial type
and governance
New venture vs.
established
Venture of entrepreneurial
origin (VEO) vs. other
private
Family vs. nonfamily
business
Government ownership
Foreign ownership
Figure 1. Bureaucracy, political response, and entrepreneurial attributes: a theoretic framework


DOI: 10.1002/sej
138
integrated framework and overall relationships that

link bureaucracy, corporate politics, and entrepreneurial type and governance. Below we discuss such
relationships in more detail.
New vs. established ventures
New ventures (defined in this study as five years or
younger) in emerging economies tend to control fewer
important resources and, as a result, may be less able
to resist social or political pressures. These ventures
are expected to adopt more accommodating postures
(Meznar and Nigh, 1995). Moreover, their legitimacy would not always be based on the importance
of the product or service they provide and, hence,
such firms tend to succumb to social or political pressures as a means of maintaining legitimacy (Pfeffer
and Salancik, 1978). Freeman, Carroll, and Hannan
(1983) noted that young organizations are subject to
the liability of newness because routines, both internal and external, are rarely perfected and stabilized,
organizational politics are unstable, and links with
key actors in the environment are irregular. It takes
time for an organization to acquire institutional legitimacy and become valued in its own right.
On the other hand, new ventures are less entrenched
with internal inertia and have more entrepreneurial
values to adapt dynamically to government bureaucracies and environmental changes (Park and Luo,
2001). In other words, the managers at the early stages
of firm development are more likely to be wearing
many hats and encouraged to think outside of the
box in how to use their time and limited resources to
develop and grow the firm. Thus, new ventures need
to and are able to adapt more aggressively to the
regulatory environment and engage more actively
with bureaucrats and officials to overcome their
liability of newness and compensate for their lack
of legitimacy (including the lack of long-established
ties with government institutions). Greater political
engagement and political influence can help new
ventures attenuate such institutional disadvantages
vis--vis established ventures. Managers and owners
in new ventures are likely to appreciate and value the
potential payoffs of these actions and may also have
the necessary time and flexibility within their stilldeveloping roles at the company in order to pursue
it. We thereby predict:
Hypothesis 3a (H3a): There is a positive link
between new ventures (as opposed to established
ventures) and political engagement;
Hypothesis 3b (H3b): There is a positive link

between new ventures (as opposed to established
ventures) and political influence.
Venture of entrepreneurial origin (VEO) vs.
other private
Ventures of entrepreneurial origin (VEOs) refer to
private enterprises that are originally entrepreneurial
in the inception, that is, from time of start-up. Aside
from VEOs, those categorized as other private firms
in a typical emerging economy include privatized
state-owned firms, privatized subsidiaries of a formerly state-owned firm, or joint ventures established
by domestic and/or foreign parent firms. Prior work
has developed salient dimensions of entrepreneurial
orientation (Lumpkin and Dess, 1996) which we
expect to be at play for VEOs, as opposed to other
private firms in this study. Lumpkin and Dess (1996)
clarify the entrepreneurial orientation construct and
link it to performance, proposing that five aspects
autonomy, innovativeness, risk taking, proactiveness, and competitive aggressivenessare salient
dimensions that may vary independently of each
other in a given context. In the context of bureaucracy in emerging economies, we suggest that the
entrepreneurial orientation of competitive aggressiveness is particularly important. This aggressiveness refers to a firms propensity to directly and
intensely challenge its competitors to achieve entry
or improve position, that is, to outperform industry
rivals in the marketplace (Lumpkin and Dess, 1996).
The entrepreneurial orientation of VEOs may lead
to a preference to compete head-to-head in the marketplace, rather than alternative potential strategies
selected by other private categories of firms in this
study. This orientation propels VEOs to use less
political engagement or influence than other forms
of private enterprises.
Moreover, VEOs tend to be more innovative than
other private enterprises in emerging economies
(Guthrie, 1997). They flourish through pursuing
novel ideas and innovative products and services,
rather than relying on business-government connections as privatized state-owned enterprises often
do (Peng, 2000). When business-government relationships are not emphatically sought, firms will
be less committal to political engagement and
influence (Park and Luo, 2001). In addition, VEOs
often operate in less monopolistic, less oligopolistic industries, whereas other firms categorized as
other private tend to operate in sectors traditionally
DOI: 10.1002/sej

dominated by state-owned enterprises and in industries still regulated by the central or local governments (Ramamurti, 1992, 2000). Thus, compared to
VEOs, other private enterprises need to continuously
and frequently interact with bureaucrats to obtain
insightful information and institutional resources, as
well as influence governmental rules and regulations
in the direction favoring them. Hence, we posit the
following relationships:
Hypothesis 4a (H4a): There is a negative link
between ventures of entrepreneurial origin (as opposed to other private) and political engagement;
Hypothesis 4b (H4b): There is a negative link
between ventures of entrepreneurial origin (as
opposed to other private) and political influence.
Family vs. nonfamily businesses
Recently, theory and empirical research indicate that
family ties and agency relationships in family firms
are significant antecedents of corporate governance,
drawing attention to potential distinction in agency
relationships between family and nonfamily businesses (Gomez-Mejia, Nunez-Nickel, and Gutierrez,
2001; Schulze, Lubatkin, Dino, and Buchholtz, 2001).
Competitive advantage can arise from the family
business form of governance (Carney, 2005). In
fact, studies of U.S. publicly traded Fortune 500
(Villalonga and Amit, 2006) and S&P 500 firms
(Anderson and Reeb, 2003) have found a positive
relationship between performance and family ownership, when founder-CEOs or founder-Chairmen are
present. From the network perspective, the networks
set up by family businesses will be longer-term investments and more sustained than those established by
nonfamily businesses, because the former have more
stable governance structures (Gomez-Mejia et al.,
2001).
To be more contextually specific, family businesses involve governance aspects and leadership
characteristics that may help incentivize longer-term
investments and free up additional resources (Carney,
2005; Gomez-Mejia et al., 2001; Sirmon and Hitt,
2003), which can be expected, in our context, to lead
to greater use of political engagement and influence
to deal with the same bureaucracy facing nonfamily
businesses. For example, family governance is distinguished by the unification of ownership and control
(Carney, 2005), meaning that if family members
are effective in pursuit of political engagement and
139
influence, the value of that engagement and influence

will accrue to both the owners and managers (and,
hence, the family members and family as a whole).
Noting potential advantages of family firms over
nonfamily firms, Sirmon and Hitt (2003) examined
resource management in family firms. They argued
that effective management could lead to value creation for the business as well as the family as owners,
by focusing on five resourceshuman capital, social
capital, patient capital, survivability capital, and the
governance structure attribute. The authors explained
how these characteristics can differentiate family
firms from nonfamily firms due to the integration
of business and family. This applies directly to the
issue of political engagement and influence. One way
that the integration of these characteristics translates
into tangible value in the case of engagement and
influence is seen by considering that the tenures of
CEOs at family-controlled firms typically exceed 15
years (Le Breton-Miller and Miller, 2006), which is to
say that family-controlled business CEOs stay at the
job an average of three to five times as long as
nonfamily-controlled business CEOs (Lansberg,
1999; Ward, 2004). This renders the value of political
engagement and influence potentially much longer
lasting for family firms, and also provides value for
future generation family members.
As such, due to the drivers of long-term orientation and the governance characteristics in family
business (such as long CEO tenures), care for future
generations, family and CEO control, family ownership stakes (Le Breton-Miller and Miller, 2006)
and the resources freed up by reduced agency costs
(Anderson and Reeb, 2003; Gomez-Mejia et al.,
2001), family businesses are more structurally agile
and can use political engagement or influence in
responding to bureaucracy. Moreover, family businesses are often at a disadvantage compared to
nonfamily businesses in obtaining institutional or
governmental support in emerging economies (Peng,
2000), prompting family businesses to increase political efforts, such as higher engagement and influence, in order to secure governmentally controlled
resources. Thus, we hypothesize the following:
Hypothesis 5a (H5a): There is a positive link
between family business (as opposed to nonfamily business) and political engagement;
Hypothesis 5b (H5b): There is a positive link
between family business (as opposed to nonfamily business) and political influence.
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140
Foreign ownership
Government participation in a firms partial ownership signifies institutional support from government agencies. Private firms without government
ownership are sometimes precluded from business
opportunities due to various administrative hurdles.
Compared to their peers with some government
ownership, they lack the legitimacy and political
backing to secure access to government controlled
resources. Therefore, they are more prone to network
capitalism (Boisot and Child, 1996), meaning they
tend to focus more on relational approaches, such as
engagement, to overcome their institutional disadvantages (Park and Luo, 2001). Pfeffer and Salancik
(1978) noted that those firms who do not control the
critical resources needed for maintaining legitimacy
are more vulnerable to pressures from their environment than others. Oliver (1991) argued that firms
facing greater uncertainty in the task environment
tend to adapt more to institutional pressures.
Due to an inability to possess critical resources
controlled by the government (Guthrie, 1997;
Newman, 2000), as well as the greater uncertainty in both task and institutional environments
(Hoskisson et al., 2000; Ramamurti, 2000), private
enterprises without government ownership face
greater pressure to adapt to regulatory barriers. Political engagement and influence are two important
means of such adaptation. Firms without government ownership need more information on administrative rules and regulations that may affect business
decisions, and political engagement helps these
firms fulfill it. This strategy alone, however, seems
inadequate because it does not allow these firms
to compensate for their institutional disadvantages
(Hillman and Hitt, 1999). Therefore, political influence over bureaucracy and policy change is necessary for them to bolster legitimacy and surmount
disadvantages. Thus, firms without any government
ownership are likely to show a greater commitment
to political engagement and influence than those
with government ownership. Hence, we propose:
According to Pfeffer and Salancik (1978), one of

the most important determinants of a firms power
is the importance of its controlled resources needed
for maintaining legitimacy in the environment. A
firm providing a vital good or service that cannot be
easily replaced is in a powerful position relative to
social and political stakeholders. In this situation, the
firm tends to use controlrather than engagement or
influenceas a response to institutional pressures.
This is because the organizations objective is to
dominate, not to understand, influence, shape, or
neutralize institutional sources or processes (Oliver,
1991; Rowan, 1982; Zucker, 1987). This means that
firms possessing stronger resource capability have a
lesser propensity toward political engagement and
influence in response to bureaucracy (Meznar and
Nigh, 1995). In emerging economies, private enterprises with some foreign ownership often acquire
superior technological capabilities, managerial
skills, and operational resources from their foreign
partners (which are mostly from advanced economies) (Beamish and Banks, 1987; Lyles and Salk,
1996).
Through alliances or joint ventures, foreign ownership participation allows these private enterprises
to learn, assimilate, and absorb critical knowledge
from competent partners. As such, private firms
equipped with stronger resources due to foreign
ownership will have less desire to increase political engagement and influence to deal with bureaucracy. These firms may try to use their competitive
advantages supported by superior competencies
to solidify their dominant position in the task and
institutional environment. Conversely, firms with
weak capabilities due to the lack of foreign partnership experience may have a greater propensity to
increase political engagement and influence in order
to overcome competitive disadvantages. They do so
to attain insightful information on new rules or find
loopholes in bureaucracy via engagement and obtain
concessions yielded by the bureaucracies over which
they have influence. Therefore, we anticipate:

between government ownership (as opposed
to no government ownership) and political
engagement;

between foreign ownership (as opposed to no
foreign ownership) and political engagement;

between government ownership (as opposed to no
government ownership) and political influence.

between foreign ownership (as opposed to no
foreign ownership) and political influence.

DOI: 10.1002/sej

METHODS
Data
We acquired a dataset from the World Banks World
Business Environment Survey (WBES) to measure
all related variables in the study and test the above
hypotheses. Designed to better understand the
constraints that hinder the development of private
businessesespecially those in emerging economiesthis dataset surveyed more than 10,000 firms
in 81 countries in late 1999 and early 2000. The
survey covered a large array of issues, from investment climate to financial impediments, corporate
governance to political strategies, and institutional
conditions to corruption practices. After excluding
all firms in developed countries, we had 9,123 firms
in 72 emerging economies, which is our final sample
size. Appendix 1 lists distribution of the final sample
and the number of firms surveyed in each emerging
economy.
WBES is a large and ambitious undertaking conducted by World Bank, with help from the European
Bank for Reconstruction and Development, the Asian
Development Bank, the Inter-American Development Bank, and Harvard University. To ensure the
validity and reliability of responses, World Bank
carefully set forth the criteria for selecting samples,
trained each countrys task managers and project
surveyors, pretested the questionnaire with at least
141
five enterprises in each country, adjusted translated

phrases to assure item appropriateness, revised the
questionnaire based on pretesting and consultant
feedback, and supervised surveyors and data entry
personnel in each country. Sample firms in every
country spread across manufacturing and service
sectors. They had varying sizes, locations, products, ownership, performance, investment plans,
and market orientations. After acquiring the dataset
from World Bank, we further refined it by harmonizing variable units among countries, using the mean
technique to replace missing values, and checked the
validity of the major multi-item constructs used in
this study (Table 1).
Variables
Appendix 2 displays the survey questions used to
measure all variables in this study. Government
bureaucracy was measured as the mean of seven
items, all on a six-point Likert scale (from 1 = very
good/helpful to 6 = very bad/unhelpful). As shown
in Table 1, Cronbachs alpha for this construct is
0.75, with valid factor loadings holding together
(factor 2) and distinct from the other multi-item
variable (influence). Political influence, one of the
two political strategies in this study, was defined
as the mean of four items that reflect a firms
influence over government officials, legislature
Table 1. Construct validity: inter-item consistency and factor loading

Multi-item variables
Bureaucracy
Central government inefficiency
Parliament inefficiency
Regional government inefficiency
Information unavailability
Interpretation inconsistency
Central government unhelpfulness
Regional government unhelpfulness
Influence
Executive body
Legislature authority
Ministries
Regulatory agencies
Factor loading#1
Cronbachs a
Factor 1
Factor 2
0.02
0.02
0.12
0.04
0.01
0.14
0.11
0.69
0.74
0.60
0.58
0.60
0.72
0.65
0.91
0.93
0.92
0.88
0.07
0.06
0.07
0.05
3.37
2.85
0.75
0.93
Variance explained by each factor

#1: Varimax was used as a rotation method in the factor procedure.

DOI: 10.1002/sej
0.10
0.76
0.10
0.04
0.02
0.06
0.06
0.06
0.04
0.07
0.11
0.08
0.05
0.01
0.03
0.05
0.06
0.05
0.23
0.22
0.10
0.46
0.01
0.02
0.13
0.19
0.15
0.13
0.02
0.06
0.04
0.11
0.02
0.07
0.04
0.00
0.04
0.17
0.12
0.10
0.01
0.03
0.06
0.06
0.07
0.03
0.11
0.01
0.01
0.11
0.19
0.02
0.10
0.09
0.01
0.03
0.04
0.04
0.11
0.07
0.01
0.17
0.02
0.05
0.02
0.07
0.08
0.15
0.05
0.09
0.07
0.11
0.05
0.09
0.01
0.02
0.02
0.05
p < 0.001 if a correlation coefficient 0.04.
p < 0.0001 if a correlation coefficient 0.06.
3.37
2.44
4.58
0.21
0.30
0.68
0.12
0.18
2.42
0.22
1.71
1.93
0.21
0.80
1.33
0.82
0.62
0.46
0.48
0.33
0.38
0.70
0.19
2.81
2.75
0.20
11
10
9
8
7
6
5
4
3
2
1
St.D
1. Bureaucracy
2. Engagement
3. Influence
4. Family business
5. New venture
6. Venture of entrepreneurial origin
7. Government ownership
8. Foreign ownership
9. Competition
10. Sales to public
11. Fixed assets
12. Sales performance
13. Off books
We conducted hierarchical regressions to verify our

hypotheses. Before doing so, we checked normality
and multicollinearity, the two key assumptions of
regression analysis. Due to the large sample size,
we performed the Kolmogorov-Smirnov test in the
univariate procedure. Most variables showed the
nonsignificance of this test (p > 0.10), confirming
the validity of the normality assumption. Still, sales
performance, fixed assets, and new venture presented the significant p-value in the K-S normality
test. As a remedy, we transformed them by taking
their logarithm. We then checked the multicollinearity among all predicting (independent and control)
variables by looking at their variance inflation factor
Mean
RESULTS
Variables
authorities, industrial ministries, and regulatory

agencies. Cronbachs alpha for this variable is 0.93,
with high factor loading estimates for each item
(Table 1). Political engagement was measured by a
direct question on senior executives amount of time
spent in dealing with government institutions. The
five entrepreneurial governance and attributes variables were measured by dummy variables: family
business (1 if yes; 0 otherwise), new venture (1 if
under 5 years old; 0 otherwise), venture of entrepreneurial origin (1 if entrepreneurial from time of
start-up; 0 otherwise: privatization of a state-owned
firm, private subsidiary of a formerly state-owned
firm, joint venture owned by domestic or foreign
private owners, and other), government ownership
(1 if government has certain ownership; 0 otherwise), and foreign ownership (1 if foreign investors
have certain ownership; 0 otherwise).
In all tests, we controlled for: (1) competition (the
number of close competitors); (2) sales to public
(the percentage of sales to the public sector in the
firms total sales); (3) fixed assets (US$ million); (4)
sales performance (US$ million); and (5) off books
(defined by the question Recognizing the difficulties many enterprises face in fully complying with
taxes and regulations, what percentage of total sales
would you estimate the typical firm in your area of
activity keeps off the books?). These variables were
included because they either affect the firms susceptibility to political forces or influence its pressure
to compete for governmentally controlled resources.
Table 2 outlines descriptive statistics and Pearson
correlations between all the variables.
12
Table 2. Descriptive statistics and Pearson Correlation matrix (N = 9,123)
142

DOI: 10.1002/sej
143
Table 3. Hierarchical regression analysis#1,2,3 (N = 9,123)

Dependent variable: political engagement
Variables
Political engagement
Model 1
Bureaucracy
New venture
Venture of entrepreneurial origin (VEO)
Family business
Foreign ownership
Bureaucracy new venture
Bureaucracy VEO
Bureaucracy family business
Bureaucracy government ownership
Bureaucracy foreign ownership
Control variables
Competition
Sales to public
Fixed assets
Sales performance
Off books
Country dummy (BRIC)
Model F
Adjusted R2
R2
Hierarchical F
0.14(0.02)***
0.03(0.03)**
0.11(0.01)***
0.04(0.01)**
0.07(0.00)***
0.07(0.06)***
68.72***
0.044
Model 2
Model 3
Model 4
0.05(0.02)***
0.06(0.02)***
0.03(0.03)*
0.07(0.04)***
0.02(0.02)*
0.05(0.05)***
0.04(0.04)***
0.06(0.02)***
0.02(0.03)*
0.07(0.05)***
0.01(0.03)
0.06(0.05)***
0.04(0.04)***
0.04(0.04)***
0.01(0.04)
0.02(0.03)
0.02(0.06)
0.02(0.04)*
0.14(0.02)***
0.03(0.03)**
0.10(0.01)***
0.04(0.01)**
0.07(0.00)***
0.06(0.06)***
61.75***
0.046
0.002
19.11***
0.14(0.02)***
0.03(0.03)**
0.07(0.01)***
0.05(0.01)***
0.08(0.00)***
0.05(0.06)***
46.50***
0.059
0.013
25.17***
0.14(0.02)***
0.03(0.03)**
0.07(0.01)***
0.05(0.01)***
0.08(0.00)***
0.05(0.06)***
33.91***
0.060
0.001
1.94
#1: The entries are standardized bs with standard errors in parentheses.

#2: All interaction terms have been mean-centered.
#3: VIF values in the full model (Model 4) = 1:021:93.
*p < 0.05.
**p < 0.01.
***p < 0.001.
(VIF) values. The result (VIF 1 : 91) suggested no

threat of multicollinearity.
As shown in Table 3, political engagement is significantly and positively associated with bureaucracy
in the full model (b = 0.06, p < 0.001). A similar
positive relationship also exists between political
influence and bureaucracy in the full model in Table
4 (b = 0.11, p < 0.001). These results support H1
and H2, confirming the proposition that private
enterprises, in general, tend to react to exacerbated
bureaucracy by increased engagement with officials
and increased influence over regulatory policies.
Hierarchical comparison (Model 2 vs. Model 1) in
both tables also illustrates that including bureaucracy significantly increases the models power in
predicting variations of both political engagement
(F = 19.11, p < 0.001, Table 3) and political influence (F = 127.96, p < 0.001, Table 4).
The two full models (Model 4) in Tables 3 and

4 further exhibit that new ventures are found to
be positively associated with both engagement
(b = 0.02, p < 0.05) and influence (b = 0.06, p < 0.001),
the result supporting H3a and H3b. VEOs (Ventures
of Entrepreneurial Origin) are negatively related to
political engagement (b = 0.07, p < 0.001, Table
3) as predicted. However, VEO is not significantly
associated with political influence (Table 4). This
lends support to H4a but not to H4b. This suggests
that VEOs commit less to political engagement than
non-VEOs, but VEOs do not differ from non-VEOs
in political influence. The two full models also show
that family (vis--vis nonfamily) business is not significantly associated with political engagement. Furthermore, family business is negatively, rather than
positively, related to political influence (b = 0.03,
p < 0.05). This suggests that family businesses do
DOI: 10.1002/sej
144
Table 4. Hierarchical regression analysis#1,2,3 (N = 9,123)

Dependent variable: political influence
Variables
Political influence
Model 1
Model 2
Bureaucracy
New venture
Venture of entrepreneurial origin (VEO)
Family business
Foreign ownership
Bureaucracy new venture
Bureaucracy VEO
Bureaucracy family business
Bureaucracy government ownership
Bureaucracy foreign ownership
Control variables
Competition
Sales to public
Fixed assets
Sales performance
Off books
Country dummy (BRIC)
Model F
Adjusted R2
R2
Hierarchical F
0.17(0.01)***
0.03(0.02)*
0.12(0.01)***
0.00(0.01)
0.01(0.00)
0.06(0.04)***
95.72***
0.061
Model 3
Model 4
0.12(0.01)***
0.11(0.01)***
0.06(0.02)***
0.01(0.02)
0.03(0.01)**
0.03(0.03)*
0.07(0.02)***
0.11(0.01)***
0.06(0.02)***
0.02(0.03)
0.03(0.02)*
0.02(0.03)*
0.07(0.02)***
0.00(0.02)
0.02(0.03)
0.00(0.02)
0.01(0.04)
0.01(0.03)
0.17(0.01)***
0.02(0.02)*
0.12(0.01)***
0.00(0.01)
0.01(0.00)
0.04(0.04)***
100.99***
0.074
0.013
127.96***
0.15(0.01)***
0.02(0.02)
0.11(0.01)***
0.01(0.01)
0.01(0.00)
0.03(0.03)**
67.43***
0.084
0.010
19.89***
0.15(0.01)***
0.02(0.02)
0.11(0.01)***
0.01(0.00)
0.01(0.00)
0.03(0.04)**
47.70***
0.084
0.000
0.00
#1: The entries are standardized bs with standard errors in parentheses.

#2: All interaction terms have been mean-centered.
#3: VIF values in the full model (Model 4) = 1:021:93.
*p < 0.05.
**p < 0.01.
***p < 0.001.
not significantly differ from nonfamily businesses in

terms of political engagement; however, family businesses undertake much less political influence than
nonfamily businesses in the context of bureaucracy.
This finding rejects both H5a and H5b.
Meanwhile, the full models in Tables 3 and 4
reveal that government ownership and foreign ownership are both significantly related to the two political responses, but in very different directions in the
last two sets of hypotheses (H6 and H7). Specifically, government ownership is positively related to
engagement (b = 0.06, p < 0.001, Table 3), but
negatively related to influence (b = 0.02, p < 0.05,
Table 4). Similarly, foreign ownership is positively
associated with engagement (b = 0.04, p < 0.001),
but negatively associated with influence (b = 0.07,
p < 0.001). That is, with government or foreign ownership, private firms tend to have greater engagement or interactions with government officials, but
lower influence over governmental agencies than

counterparts without such institutional ownership,
when other variables are controlled for. This finding
supports H6b and H7b but rejects H6a and H7a.
Overall, the entrepreneurial type and governance
significantly increase the model power in explaining
the variance of political engagement (hierarchical F
= 25.17, p < 0.001, Table 3) and influence (hierarchical F = 19.89, p < 0.001, Table 4).
Tables 3 and 4 also report the results regarding
interactions between bureaucracy and entrepreneurial attributes. Overall, most interaction terms are
not significantly related to political engagement
(Table 3) or influence (Table 4), confirming, in
general, the predicting, rather than the moderating, role of entrepreneurial type and governance in
shaping political behavior. Particularly, the effects
of all five interactions on political influence are not
significant at all, individually and collectively
DOI: 10.1002/sej

(R2 = 0). Nevertheless, the interactions between
bureaucracy and new venture (b = 0.04, p < 0.001)
and between bureaucracy and foreign ownership
(b = 0.02, p < 0.05) are significantly positive in
relation to political engagement (Model 4, Table 3).
This means that new venture and foreign ownership
are the predictors of political engagement, as well as
the quasi moderators affecting the effect of bureaucracy on political engagement (but not on political
influence). The latter effect suggests that there is a
stronger positive relationship between bureaucracy
and engagement for new ventures than for established ones, and for ventures with foreign ownership
than for those without such ownership.
The above results come from the total sample
(N = 9,123) comprising private enterprises from 72
emerging economies. It is widely agreed that these
economies are neither totally homogenous (nor necessarily so) for entrepreneurial activities in different
economies (Ahlstrom and Bruton, 2006; Hitt et al.,
2004; Hoskisson et al., 2000; Wright et al., 2005).
Thus, we further performed several subgroup analyses along: (1) country size and growth; (2) government intervention; and (3) perceived country-level
corruption. Emerging economies often vary in these
dimensions (La Porta et al., 1999), and, importantly,
these dimensions potentially affect entrepreneurial
development (Zahra et al., 2000). In this study, we
separated the total sample into (1) the BRIC group
(Brazil, Russia, India, and China) and the non-BRIC
group to capture country differences in size and
growth; (2) high intervention and low intervention
groups, divided by the mean level of government
intervention in the sample (m = 2.77); and (3) high
corruption and low corruption countries, divided by
the mean level of perceived corruption (m = 2.92).
Seven items were used to measure intervention on
a six-point ascending scale, including government
intervention in investment decisions, employment,
sales, pricing, mergers and acquisitions, dividends,
and wages, respectively. Similarly, country corruption was measured by multiple items indicating the
frequency of a typical business in the country to pay
some irregular additional payments to the authorities
of 1) courts, 2) law, 3) telephone, 4) licensing, 5)
tax, 6) customs, and 7) local government (six-point
scale). Tables 5 and 6 report the subgroup results
obtained from the general linear modeling (GLM)
regression procedure.
It is evident that engagement and influence are
positively and significantly related to bureaucracy
in almost every subgroup. However, in BRIC
145
countries, political responses to bureaucracy do not

significantly differ between family and nonfamily
businesses or between new and established ventures.
Alternatively, in non-BRIC countries, new ventures
or nonfamily businesses show a greater propensity
to use engagement and influence. Interestingly,
private firms in BRIC countries behave similarly in
response to bureaucracy regardless of whether or not
the firm has foreign ownership. In non-BRIC countries, firms with foreign ownership use less influence
but more engagement. Moreover, firm traits in size
(fixed assets), performance (sales), sales reliance on
the public sector, and competition the firm faces
have a significant impact on political engagement
in non-BRIC countries, but generally not so in
BRIC countries. Overall, private enterprises in nonBRIC countries show more significant differences in
political engagement and influence between different private groups than those in BRIC nations. That
is, entrepreneurial attributes and ownership governance matter more in shaping political responses to
bureaucracy in smaller and less developed emerging
economies than in larger, faster-growing, and more
developed emerging economies.
Additionally, entrepreneurial governance and
attributes more significantly affect political engagement in dealing with bureaucracy in countries with
high government intervention than in countries
with low intervention. As Table 5 shows, in the
high intervention group, all five governance variables are significant in relation to engagement,
but in the low-intervention group, only one
entrepreneurial originis significant. Furthermore,
firm size and competition do not impact engagement
in low-intervention countries but do so significantly
in high-intervention countries. When government
intervention is low, family businesses do not differ
from nonfamily businesses concerning the use of
political influence. When intervention is high, nonfamily businesses actually influence governmental
policies to a greater degree than family businesses.
Finally, when the total sample is divided into highcorruption and low-corruption countries, the results
demonstrate that entrepreneurial governance variables are generally more forceful in affecting political engagement in high-corruption countries than in
low-corruption countries. For instance, new venture,
government ownership, and foreign ownership are
not significant in relation to engagement in the lowcorruption setting, but they are all significant in the
high-corruption context. In high-corruption countries, venture age (new vs. established) and form in
DOI: 10.1002/sej
0.74
2.73**
0.21
0.11
0.48
0.09
0.18
0.08
0.10
0.02
0.01
3.03***
0.06
Control variables
Competition
Sales to public
Fixed assets
Sales performance
Off books
Model F
R-square
0.30
0.09
0.08
0.03
0.01
43.01***
0.06
0.05
0.19
0.13
13.84***
2.92**
5.22***
3.74***
7.25***
2.00*
3.60***
3.51***
14.84***
4.99***
2.60**
5.78***
0.34
0.01
0.11
0.02
0.01
10.76**
0.05
0.07
0.41
0.10
1.34
0.08
0.09
0.32
10.83***
0.16
5.62***
1.52
4.01***
2.22*
5.53***
1.99*
9.30***
3.23**
1.93*
6.05***
G1 = High
0.03
0.12
0.04
0.02
0.01
9.87***
0.03
0.01
0.01
0.09
2.25
0.14
0.05
0.09
b
t
0.79
3.05**
1.62
1.75
5.35***
0.26
0.05
1.67
15.38***
6.02***
1.12
2.07*
G2 = Low
Government intervention
0.45
0.02
0.11
0.04
0.01
24.88***
0.09
0.04
0.39
0.16
0.66
0.15
0.11
0.15
10.28***
0.43
4.65
2.45*
4.90***
1.22
2.98**
2.62**
3.65**
4.83***
1.85*
2.13*
0.08
0.09
0.03
0.02
0.01
8.79***
0.02
0.03
0.10
0.09
2.20
0.12
0.01
0.16
3.01**
2.65**
1.68
2.50*
4.34***
1.04
1.78
1.83
17.60***
5.42***
0.04
3.93***
G2 = Low
Country corruption
G1 = High
#1: The entries are GLM estimates (b) and tvalues (t).
#2: The above subgroup analysis did not include the observations that originally had missing values for entrepreneurial governance variables.
*p < 0.05; **p < 0.01; ***p < 0.001.
1.76
0.66
1.07
0.99
2.50*
4.72***
3.22*
0.40
1.38
2.42
0.27
0.05
0.18
1.56
0.09
0.08
0.21
b
t
G2 = Other
G1 = BRIC
Developing countries
Intercept
Bureaucracy
New venture
Venture of entrepreneurial
origin
Family business
Foreign ownership
Parameters
Table 5. GLM subgroup analysis#1,2

Dependent variable: political engagement
146

DOI: 10.1002/sej
0.07
0.06
0.13
0.01
0.01
1.51
0.03
Control Variables
Competition
Sales-to-public
Fixed assets
Sales performance
Off-books
Model F
R-square
1.07
0.76
2.12*
0.43
0.73
15.03***
0.66
0.01
1.99*
0.56
1.85
0.06
0.20
0.03
0.07
0.01
0.01
68.59***
0.08
3.66
0.12
0.12
0.04
0.04
0.05
0.16
14.94***
1.46
7.80***
1.56
1.24
56.77***
10.32***
6.00***
1.66
3.05**
1.63
6.88***
0.18
0.01
0.03
0.02
0.01
25.42***
0.06
3.52
0.15
0.11
0.05
0.05
0.05
0.21
b
t
8.08***
0.09
2.03*
3.46**
1.52
34.24***
8.25***
3.39***
1.34
2.48*
0.92
5.87***
G1 = High
0.10
0.08
0.09
0.01
0.01
27.70***
0.06
4.07
0.09
0.08
0.02
0.02
0.07
0.11
b
t
6.11***
3.74**
7.97***
2.93**
1.38
53.09***
7.02***
3.63***
0.68
1.14
2.12*
3.88***
G2 = Low
Government intervention
5.85***
1.12
0.38
1.44
0.70
24.28***
10.13***
0.73
0.89
2.07*
2.20
4.77***
0.11
0.05
0.10
0.01
0.01
39.08***
0.07
4.10
0.08
0.10
0.06
0.02
0.10
0.13
7.27***
2.39*
9.82***
1.96*
2.48*
58.36***
6.57***
4.84***
2.72*
1.35
3.45**
4.81***
G2 = Low
Country corruption
G1 = High
0.18
0.04
0.01
0.02
0.01
18.89***
0.07
3.14
0.22
0.03
0.04
0.05
0.20
0.20
#1: The entries are GLM estimates (b) and tvalues (t).
#2: The above subgroup analysis did not include the observations that originally had missing values for entrepreneurial governance variables.
*p < 0.05; **p < 0.01; ***p < 0.001.
5.08
0.04
0.01
0.17
0.06
0.21
0.02
G2 = Other
Developing countries
G1 = BRIC
Intercept
Bureaucracy
New venture
Venture of entrepreneurial origin
Family business
Foreign ownership
Parameters
Table 6. GLM subgroup analysis#1,2

Dependent variable: political influence

147

DOI: 10.1002/sej
148
the inception (VEO vs. other private forms) do not

significantly affect political influence; but in lowcorruption countries, they do influence this political
response.
DISCUSSION AND CONCLUSION

We demonstrate that entrepreneurial and private
enterprises in emerging economies politically
respond to bureaucracy through engagement and
influence. This study contributes to our understanding of political behavior of entrepreneurs and managers in private enterprises, an already dominant
force in shaping many national economies in the
developing world, in dealing with bureaucracy in
emerging economies. Bureaucracy is ubiquitous in
most emerging economies, but has not yet been systematically explored in the management field. We
consider this issue critical. It merits further research
because bureaucracy significantly affects entrepreneurial activities in economies under transition.
Thus, appropriate responses to bureaucracy become
a strategic issue that has strong repercussions on
institutional and regulatory parameters individual
firms will actually face, which may in turn influence each firms transaction costs and operational
stability.
This study presents institutional susceptibility
logic. This logic suggests that in spite of privatization and liberalization, emerging economy governments still hold a dominant power in overhauling
national economies, but, at the same time, are misgoverned and lack incentive to improve administrative and institutional efficiency. An exacerbating
force for increased bureaucracy is that more power
is being shifted to lower-level government agencies
and more departmentalized institutions at each level
whose motives and interests are not only different
from central levels, but idiosyncratic across different departments or agencies at the same level.
Analysis confirmed our base proposition that both
political engagement and influence increase when
bureaucracy increases. This finding enriched the
institutional response perspective (North, 1990a;
Oliver, 1991) for businesses in emerging economies
by showing when political influence will increase
and when political engagement will increase to
respond to exacerbated bureaucracy.
The institutional susceptibility argument further
holds that private enterprises vary in political
engagement and influence, depending, in part, on
their entrepreneurial type and governance. This

firm-specific variance derives from the logic that
firms differ in their vulnerabilities to bureaucracy,
and this vulnerability is largely determined by their
postures in entrepreneurial orientation, newness,
and governance. For instance, this study reports that
firms whose ownership is partly shared by government (institutional advantage) or foreign investment
(competitive advantage) tend to have a lower propensity to influence bureaucratic procedures than
those without such ownership sharing. In other
words, private enterprises without such advantages
use more political influence to deal with bureaucracy, hoping that influence may compensate for
their disadvantages. This result entails the message
that cumbersome bureaucracy, like other government provisions and regulations, can be influenced,
though this is not guaranteed. It also confirms that
the neoinstitutional economics viewpublic and
private bureaucracies mutually influence each other
(North, 1990b) and both are prone to transaction cost
considerations (Williamson, 1999)applies in the
setting of emerging economies. What this view did
not elaborate on, however, was how and why different firms politically reacted differently to government bureaucracies. The institutional susceptibility
logic we explicated addressed this void.
The institutional susceptibility view also proposed
that due to the liability of newness, new ventures
would be more likely to engage with bureaucrats and
influence governmental policies. Our analysis validates these propositions, and again suggests that the
levels of political engagement and influence depend
on the institutional (newness) factor of the firm. The
liability of newness perspective (Freeman et al.,
1983) is advanced by the finding that new ventures
in developing and emerging economies are indeed
at a disadvantageous position concerning organizational legitimacy and political networking. As such,
these firms need to be more proactive and aggressive
in political engagement and influence to improve
their legitimacy and curtail the increased transaction
costs of bureaucracy and politics they face.
Prior research led to our expectation of a distinction between family business and nonfamily business
in this research agenda, as family business has been
argued to impact governance and agency (Schulze
et al., 2001; Gomez-Mejia et al., 2001). However,
our logic had led us to expect that family businesses
would pursue more engagement and influence activity, largely due to the governance and leadership
characteristics incentivizing longer-term specific
DOI: 10.1002/sej

investments to benefit the business and family. On
the contrary, we did not find support for this argument. In fact, we found a significant negative link
between family businesses and political influence.
That is, we have evidence that family businesses
commit less to political influence. Upon deeper
inspection though, in examining split samples of our
data, we can see that this result is likely driven by
non-BRIC developing countries, suggesting some
across-country differences within our set of 72
developing countries. We also suspect that the mode
of operation of family business when government
intervention and corruption is higher (see Tables 5
and 6) might be very different from those countries
where those factors are lower. This leads to less need
for engagement and influence as we define it here,
but perhaps greater levels of other, more indirect or
below the radar forms of interaction with the established bureaucracies. Another possible explanation
is that many family businesses in emerging economies have strong ties with or belong to high-ranking
government officials. Thus, rules and regulations are
only selectively enforced, meaning that the businesses protected by these officials may be excluded
from stringent regulations.
Within the context of emerging economies, just as
in other settings, one would expect that VEOs also
carry with them a certain entrepreneurial orientation
that influences the way they respond to the bureaucratic environment in which they operate. VEOs
can be expected to look toward market mechanisms
and competition and spend relatively less time with
political engagement activities, as compared to
non-VEOs, such as those that were formerly state
owned. As a policy implication, this understanding
is important, as it relates to the stickiness that might
be at play for bureaucracies in regions with high
concentrations of formerly state-owned or foreign
joint venture companies, as opposed to pure VEOs.
A slower process of encouraging new VEOs may
develop in a vicious circle where bureaucracy holds
back start-ups, and political engagement activities
are greater for incumbent firms spun off or privatized from state-owned entities, leading to greater
barriers for VEOs and so on. Policy makers might
look for ways to break this cycle and cannot rely on
privatization alone to spur entrepreneurial activity.
Though we do not find the same significant negative
relationship between VEOs and political influence in
our sample of all 72 countries as we do for political engagement, we do find among BRIC countries
that VEO is negatively associated with political
149
influence, highlighting that along this dimension

there may be a difference between BRIC countries
and others, worthy of further future distinction and
research in this regard.
Our analysis further reminds us that political
behavior (engagement and influence) of entrepreneurs and managers in the face of bureaucracy is
not necessarily universal. In countries with different
levels of government intervention and corruption or
country size (BRIC vs. non-BRIC), the magnitude
of engagement and influence varies in response to
bureaucracy. When country-level intervention or
corruption is higher, we found more significant differences between family and nonfamily business,
between new and established ventures, and between
VEO and other private enterprises in terms of their
political responses. When intervention or corruption
is relatively lower, such distinctions between groups
tend to be weakened. This infers that the institutional
susceptibility logic applies at the country-level as
well. That is, in countries where the institutional
environment is more established, firms in different
groups (e.g., family vs. nonfamily; new vs. incumbents, etc.) will face not only reduced uncertainty in
the institutional environment but similar conditions
in this environment. Therefore, variations in the
institutional susceptibility between groups are weakened. In contrast, in countries where the institutional
environment is much less developed, there will be
greater divergence and variability in the institutional
susceptibility across different groups of private
enterprises, hence prompting greater differences
in political responses among these groups. Future
research may continue to explore how legal, economic, social, and political environments in various
countries interact with bureaucracy and how private
enterprises politically react to such interactions.
Privatization and entrepreneurial transformation
have been prevailing in emerging economies, and
have become a particularly rich area for research
(Zahra et al., 2000). Nonetheless, many institutional platforms and infrastructures have not been
developed quickly enough during the mass privatization processes, and cumbersome bureaucracy
is one of the fundamental barriers to successful
entrepreneurial transformation. While transformation to a free market system unleashes the power of
entrepreneurship, heightened administrative barriers
against day-to-day business activities imposed by
lower-level government institutions critically deter
the success of entrepreneurial efforts. In fact, heightened bureaucracy is, in part, the result of a new type
DOI: 10.1002/sej
150
of agency costs peculiar to emerging economies:

lower-level government agencies have been provided with increased administrative and regulatory
power along with privatization, but these agencies
tend to serve their own interests first. These interests often deviate from those of the central government. Banerjee (1997) argues that bureaucrats in
these agencies have a mindset that is often counterproductive toward effective privatization. This
study exhibits that private enterprises cannot avoid
such barriers, but must adapt to them by investing
time for obtaining information (engagement) and
by exerting political influence over limited salient
issues and procedures enacted by the above agencies. For government policy makers, it is certainly
important to realize that bureaucracy increases information processing and transaction costs, thereby
jeopardizing entrepreneurial endeavors. For entrepreneurs and executives, it is essential to diagnose
their firm-specific susceptibility to bureaucracy and
match out their political responses to bureaucracy in
accordance with the level of institutional exposure.
This alignment may enhance the effectiveness (or
reduce the costs) of corporate political strategy in a
constantly changing environment.
Finally, we point out that this study is among initial
attempts to explain political responses to bureaucracy
for private enterprises in emerging economies, and
considerable refinement is necessary. Future studies
should continue to examine other political responses
not covered in this study. For instance, constituency
building, coalition building, and advocacy advertising are all regarded as active political strategies
(e.g., Hillman and Hitt, 1999; Keim and Zeithaml,
1986). Although they were not originally proposed to cope with bureaucracy, these strategies
individually and collectivelycan be the impetus
toward bureaucracy reduction. Another political
response is to selectively enforce existing rules and
regulations via targeting regulatory agencies governing such enforcement. The influence construct in
this study addresses the manipulation of policy formation. However, private firms in emerging economies can also change the rule of game during the
enforcement stage. Those equipped with inside government help or strong special ties with key officials
may obtain special or favorable regulatory treatment
during the enforcement stage. Others without such
inside help or ties may be discriminated against with
respect to enforcement of existing rules.
Bureaucracy itself is also a complex construct,
encompassing a multitude of different levels (e.g.,
central vs. local governments), essences (e.g.,

procedure-oriented obstacles vs. documentationoriented obstacles), and processes (e.g., single
agency vs. multi-agency involvement). Future
research may decompose bureaucracy into these ingredients and such content analysis can further advance
our understanding of how firms can effectively deal
with different aspects of bureaucracy and how public
managers and policy makers can effectively curb
those aspects that particularly harm entrepreneurial
transformation. Although we explained the adverse
effect of bureaucracy on business operations, we
still need to explore the ways in which bureaucracy
impedes entrepreneurial outcomes, such as innovation and venturing. Furthermore, bureaucracy is only
a part of the institutional infrastructure affecting the
entrepreneurial potential of privatization. Probing
how bureaucracy interacts with other parts of the
infrastructure and how such interactions together
impact entrepreneurial endeavors is among a specific set of research questions future scholars should
address.
ACKNOWLEDGEMENTS
The authors appreciate Professor Michael A. Hitt and
anonymous reviewers of SEJ for their insightful comments, and the Enterprise Analysis Unit of the World
Bank for sharing their data.
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APPENDIX 1: SAMPLE FIRMS IN 72 EMERGING ECONOMIES SURVEYED

Eastern Europe and
Central Asia
Country
Albania
Armenia
Azerbaijan
Belarus
Bosnia
Bulgaria
Croatia
Czech R.
Estonia
Georgia
Hungary
Kazakhstan
Kyrgyzstan
Lithuania
Moldova
Poland
Romania
Russia
Slovakia
Slovenia
Ukraine
Uzbekistan
Turkey
Regional total (N)
Latin America and

Caribbean
N
163
125
128
125
105
125
127
137
132
129
129
127
125
112
125
225
125
525
129
125
225
125
150
Country
Argentina
Brazil
Chile
Belize
Bolivia
Colombia
Costa Rica
Dominican Rep.
Ecuador
El Salvador
Guatemala
Haiti
Honduras
Mexico
Nicaragua
Panama
Peru
Trinidad/Tob.
Uruguay
Venezuela
Middle East and Africa
East and South Asia
Country
Country
100
201
100
50
100
101
100
111
100
104
106
103
100
100
100
100
100
108
101
100
West Bank
Botswana
Cameroon
Cote dIvoire
Egypt
Ethiopia
Ghana
Kenya
Madagascar
Malawi
Namibia
Nigeria
Senegal
S. Africa
Tanzania
Tunisia
Uganda
Zambia
Zimbabwe
100
101
57
97
102
105
119
113
116
55
95
93
124
121
83
52
137
84
129
China
Malaysia
Indonesia
Singapore
Philippines
Thailand
Cambodia
India
Bangladesh
Pakistan
101
100
100
100
100
422
326
210
50
103
3,543
2,085
1,883
1,612
3.47 (0.77)
3.35 (0.75)
3.19 (0.78)
3.12 (0.70)
2.61 (1.34)
1.71 (1.14)
2.75 (1.02)
2.63 (1.28)
3.15 (0.91)
3.32 (0.92)
3.55 (0.83)
3.25 (0.78)
Bureaucracy#1
Engagement
Influence
#1: These numbers are the mean values of bureaucracy in different regions, with the standard deviations in parentheses. The same is
true for engagement and influence rows.

DOI: 10.1002/sej
153
APPENDIX 2: SELECTED SURVEY QUESTIONS

Bureaucracy
1. Please rate the overall quality and efficiency of services delivered by the central government (1 = very good and 6 = very
bad)
2. Please rate the overall quality and efficiency of services delivered by the parliament (1 = very good and 6 = very bad)
3. Please rate the overall quality and efficiency of services delivered by the regional government (1 = very good and 6 = very
bad)
4. To what degree do you agree with the statement that, in general, information on the laws and regulations affecting my firm
is easy to obtain (1 = fully agree and 6 = fully disagree)
5. To what degree do you agree with the statement that, in general, interpretations of regulations affecting my firm are
consistent and predictable (1 = fully agree and 6 = fully disagree)
6. Please rate your overall perception of the helpfulness of central government (1 = very helpful and 6 = very unhelpful)
7. Please rate your overall perception of the helpfulness of local government (1 = very helpful and 6 = very unhelpful)
Political influence (1 = never influential and 5 = very influential)
1. How much influence does your firm typically have, over the executive body of government, on the content of a new law,
rule, regulation, or decree being discussed that could have a substantial impact on your business?
2. How much influence does your firm typically have, over legislature authorities, on the content of a new law, rule,
regulation, or decree being discussed that could have a substantial impact on your business?
3. How much influence does your firm typically have, over industrial ministries or departments, on the content of a new law,
rule, regulation, or decree being discussed that could have a substantial impact on your business?
4. How much influence does your firm typically have, over regulatory agencies, on the content of a new law, rule, regulation,
or decree being discussed that could have a substantial impact on your business?
Political engagement
What percentage of senior managements time per year is spent in dealing with government officials about the application
and interpretation of laws and regulations? (1 = up to 1%; 2 = 15%; 3 = 610%; 4 = 1125%; 5 = 2650%; and 6 = more
than 50%)
Entrepreneurial type and governance
1. Family business (1 if family business; 0 otherwise)
2. New venture (1 if new venture thats less than five years old; 0 otherwise)
3. Venture of entrepreneurial originVEO (1 if originally entrepreneurial/private, from time of start-up; 0 otherwise)
4. Government ownership (1 if government has certain ownership over the firm; 0 otherwise)
5. Foreign ownership (1 if foreign investor(s) has certain ownership over the firm; 0 otherwise)
Control variables
1. Competition (number of close competitors the firm faces)
2. Sales to public (% of sales to the public sector in total sales)
3. Fixed assets ($million; log transformed in regression tests)
4. Sales (annual sales in $million; log transformed)
5. Off books (% of total sales the typical firm in your area keeps off the books for tax purposes)

DOI: 10.1002/sej

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Strat. Entrepreneurship J., 2: 133153 (2008)

HOW PRIVATE ENTERPRISES RESPOND TO

Keywords: private enterprise; entrepreneurship; bureaucracy;

Copyright 2008 Strategic Management Society

Y. Luo and M. Junkunc

responsesengagement and influenceand develops a framework that leads to propositions: 1) for

Enterprise Response to Government Bureaucracy in Emerging Economies

political imperatives and strategies needed for firms

Y. Luo and M. Junkunc

institutions are not necessarily created to be socially

by decreasing uncertainty in the political domain

Enterprise Response to Government Bureaucracy in Emerging Economies

confronting the organization (Pfeffer and Salancik, 1978).

Figure 1. Bureaucracy, political response, and entrepreneurial attributes: a theoretic framework

Strat. Entrepreneurship J., 2: 133153 (2008)

Y. Luo and M. Junkunc

integrated framework and overall relationships that

Hypothesis 3b (H3b): There is a positive link

Enterprise Response to Government Bureaucracy in Emerging Economies

influence, the value of that engagement and influence

Y. Luo and M. Junkunc

According to Pfeffer and Salancik (1978), one of

Hypothesis 6a (H6a): There is a negative link

Hypothesis 7a (H7a): There is a negative link

Hypothesis 6b (H6b): There is a negative link

Hypothesis 7b (H7b): There is a negative link

Copyright 2008 Strategic Management Society

Strat. Entrepreneurship J., 2: 133153 (2008)

Enterprise Response to Government Bureaucracy in Emerging Economies

five enterprises in each country, adjusted translated

Table 1. Construct validity: inter-item consistency and factor loading

Variance explained by each factor

Strat. Entrepreneurship J., 2: 133153 (2008)

Copyright 2008 Strategic Management Society

We conducted hierarchical regressions to verify our

authorities, industrial ministries, and regulatory

Y. Luo and M. Junkunc

Table 2. Descriptive statistics and Pearson Correlation matrix (N = 9,123)

Strat. Entrepreneurship J., 2: 133153 (2008)

Enterprise Response to Government Bureaucracy in Emerging Economies

Table 3. Hierarchical regression analysis#1,2,3 (N = 9,123)

#1: The entries are standardized bs with standard errors in parentheses.

(VIF) values. The result (VIF 1 : 91) suggested no

The two full models (Model 4) in Tables 3 and

Y. Luo and M. Junkunc

Table 4. Hierarchical regression analysis#1,2,3 (N = 9,123)

#1: The entries are standardized bs with standard errors in parentheses.

not significantly differ from nonfamily businesses in

lower influence over governmental agencies than

Enterprise Response to Government Bureaucracy in Emerging Economies

countries, political responses to bureaucracy do not

Copyright 2008 Strategic Management Society

Table 5. GLM subgroup analysis#1,2

Strat. Entrepreneurship J., 2: 133153 (2008)

Copyright 2008 Strategic Management Society

Table 6. GLM subgroup analysis#1,2

Enterprise Response to Government Bureaucracy in Emerging Economies

Strat. Entrepreneurship J., 2: 133153 (2008)

Y. Luo and M. Junkunc

the inception (VEO vs. other private forms) do not

DISCUSSION AND CONCLUSION

their entrepreneurial type and governance. This

Enterprise Response to Government Bureaucracy in Emerging Economies