The paradox of political legitimacy: the political inclusion and entrepreneurs’ firm strategies

This paper examines the paradoxical impact of political legitimacy by exploring the relationship between legitimacy due to political inclusion by the state and subsequent strategic actions by entrepreneurs in both domestic and global contexts in a transition economy. We argue that political legitimacy conferred by the state affects a firm’s strategies in different ways because it is associated with both benefits and constraints. Using a unique dataset of more than six thousand privately owned enterprises in China, we demonstrate that after an institutional change that permitted the inclusion of entrepreneurs into an elite political system (the Communist Party of China) in 2001, private firms became more motivated to invest in their domestic production but less incentivized to form international cooperation strategies. We further find that the impact of the legitimacy from political inclusion on domestic production was less pronounced for firms in places where the market economy was more established and when entrepreneurs are female. For entrepreneurs with past work experiences in the government or in state-owned enterprises, the negative impact of political inclusion on global cooperation was strengthened. These findings have important implications for research on legitimacy, entrepreneurship, and business strategy.