the role of managers' political networking and functional experience in new venture...

Strategic Management JournalStrat. Mgmt. J., 28: 791–804 (2007)

Published online 16 March 2007 in Wiley InterScience (www.interscience.wiley.com) DOI: 10.1002/smj.605

Received 12 August 2002; Final revision received 5 September 2006

THE ROLE OF MANAGERS’ POLITICAL NETWORKINGAND FUNCTIONAL EXPERIENCE IN NEW VENTUREPERFORMANCE: EVIDENCE FROM CHINA’STRANSITION ECONOMY

HAIYANG LI* and YAN ZHANGJesse H. Jones Graduate School of Management, Rice University, Houston, Texas,U.S.A.

Drawing upon the resource-based view and transaction cost economics, this study aims toexamine how various types of managerial resources (i.e., political networking and functionalexperience) can be beneficial to new ventures in a transition economy. Using survey datafrom a sample of new ventures in China’s high-technology industries, we demonstrate thatmanagers’ political networking and functional experience are positively related to new ventureperformance. We also find that the positive relationship between functional experience and newventure performance is moderated by the type of ownership of the ventures and the level ofdysfunctional competition in their environments. Theoretical and managerial implications arediscussed. Copyright 2007 John Wiley & Sons, Ltd.

It has long been argued that new ventures expe-rience liabilities from their newness and have ahigh failure rate, because they often have limitedresources and their stable links to clients, support-ers, and customers have not yet been established(Stinchcombe, 1965). The literature suggests thattop managers play an important role in new ven-ture success (e.g., Eisenhardt and Schoonhoven,1990; Keeley and Roure, 1990; McGee, Dowl-ing, and Megginson, 1995). Managers can gen-erally offer two types of resources: human cap-ital as indicated by their experience (Eisenhardtand Schoonhoven, 1990; McGee et al., 1995) andsocial capital as indicated by their external ties(Granovetter, 1985; Shane and Cable, 2002). Thesemanagerial resources can enable new ventures toleverage and exploit other types of resources, to

Keywords: political networking; functional experience;new venture; transition economy*Correspondence to: Haiyang Li, Jesse H. Jones GraduateSchool of Management, Rice University, 6100 Main Street,Houston, TX, 77252-2932, U.S.A. E-mail: [email protected]

develop competitive advantage, and to achieve bet-ter performance (Barney, 1991).

Previous studies in this area are mainly limitedto new ventures operating in Western developedmarkets with relatively stable institutional environ-ments. Yet little is known about how managerialresources are related to new venture performancein transition economies that are experiencing sig-nificant institutional changes in moving from cen-tral planning to market competition. While sev-eral scholars have demonstrated the importance ofmanagerial ties in transition economies (e.g., Pengand Luo, 2000; Xin and Pearce, 1996), this lineof research has mainly focused on firms in generalrather than specifically examined new ventures. Inaddition, no study has examined the roles of man-agerial ties and experience simultaneously. Thisnarrow focus limits theoretical completeness and isa significant gap in the literature. Since the marketmechanism (i.e., the allocation of resources mainlyby market forces) and the redistributive mechanism(i.e., allocation mainly by governmental agencies)coexist in transition economies (Nee, 1989; Zhou,

Copyright 2007 John Wiley & Sons, Ltd.

792 H. Li and Y. Zhang

2000), new ventures need to have different typesof managerial resources to deal with the redistribu-tive power and the market forces, respectively, forbetter performance.

More importantly, the link between manage-rial resources and new venture performance isnot universal but rather could be context specific.Prior research has noted that transition economiesrepresent an institutional context characterizedby a lack of well-established legal frameworksto define property rights (Choi, Lee, and Kim,1999; Hoskisson et al., 2000; Li and Atuahene-Gima, 2002). The lack of strong legal frameworkshas allowed widespread opportunistic behaviorsand has affected the ability to enforce propertyrights even where legislation has been enacted(Hoskisson et al., 2000). Thus the institutionalcharacteristics of transition economies can influ-ence the roles of managerial resources in new ven-ture performance. So far, however, little theoreticalor empirical work has addressed this issue.

In this study, we aim to address the above gapsin the literature by examining the roles of man-agers’ political networking (as their social capital)and functional experience (as their human capi-tal) in new ventures in China’s high-technologyindustries. We define political networking as theextent to which managers cultivate relationshipswith government officials (cf. Li and Atuahene-Gima, 2001). Previous studies have suggested thatsuch ties can substitute for the insufficient for-mal infrastructure in a transition economy (Xinand Pearce, 1996) and thus may help new ven-tures to deal with the redistributive power. Wedefine functional experience as managers’ work-ing experience in various functional areas, includ-ing sales/marketing, R&D/engineering, manufac-turing, finance, and administration. We focus onfunctional experience because prior new ventureresearch has argued that ‘management’s functionalexpertise often dictates an organization’s primarydistinctive competence’ (McGee et al., 1995: 567).Because of increasing privatization and liberaliza-tion in a transition economy, managers’ functionalexperience can enable new ventures to build theircompetitive advantages in market competition.Specifically, we will address two research ques-tions: (1) How are managerial resources relatedto new venture performance in China’s transitioneconomy? (2) How do institutional contexts (i.e.,the ownership of the ventures and the level ofdysfunctional competition in their environments)

moderate the links between managerial resourcesand new venture performance? Based upon thetransaction cost economics (Williamson, 1985),we argue that managers’ political networking willhave a stronger relationship with new venture per-formance when the institutional support is weakthan when it is strong. This is consistent withthe argument that managerial ties can substitutefor insufficient institutional infrastructure (Xin andPearce, 1996). Based upon Teece’s (1986) argu-ment of the appropriability of rents, we arguethat managers’ functional experience will havea stronger relationship with new venture perfor-mance if the institutional contexts allow the ven-tures to retain the rents generated by their man-agers’ functional experience.

Our study will have significant practical and the-oretical importance. Practically, findings of thisresearch will allow us to better understand howdifferent types of managerial resources are ben-eficial to new ventures in transition economies.Theoretically, our study can provide evidence onhow institutional contexts influence the values ofresources and thus contribute to our knowledgeof the boundary of the well-established resource-based view (Priem and Butler, 2001). Also, thisstudy responds to the recent notion by severalscholars that international entrepreneurship litera-ture has not yet paid much attention to how institu-tional factors influence entrepreneurship processes(Baker, Gedajlovic, and Lubatkin, 2005; Oviattand McDougall, 1994). The remainder of thispaper is organized as follows: First, we develop ourtheory and research hypotheses; next, we describeour methods to test these hypotheses; finally, wepresent the results of the study and discuss theirimplications.

THEORY AND HYPOTHESES

Managerial resources and new ventureperformance

Managers’ political networking

Previous studies on firms in transition economieshave emphasized the importance of managerial ties(guanxi in Chinese) in firm success. In transitioneconomies in which the formal institutional frame-work has not been well developed, it appears thatwho you know is all that counts. For example, Xinand Pearce (1996) argued that in China guanxi can

Copyright 2007 John Wiley & Sons, Ltd. Strat. Mgmt. J., 28: 791–804 (2007)DOI: 10.1002/smj

Political Networking in Chinese New Ventures 793

substitute for the insufficient formal infrastructure.Luo (2003) noted that ties provide flexible resourceallocation in an environment where factor mobilityis severely constrained and governmental interfer-ence remains a factor. In addition, institutionalunderdevelopment in a transition economy cre-ates an uncertain and risky business environmentthat lowers trust among people (Atuahene-Gimaand Li, 2002: 65). As a result, information passedthrough external ties ‘may be more trustworthy,richer, and more useful than information gainedby other means’ (Luo, 2003: 1317). This is partic-ularly the case when we consider China’s uniqueculture, which emphasizes collectivism rather thanindividualism. Individuals are evaluated on thebasis not only of their own competence and con-tributions but also those of other people who arerelated to them. Ties or guanxi based on family,relatives, hometown connections, schoolmates, oreven colleagues are all-important in Chinese soci-ety (Chen, Chen, and Xin, 2004). Indeed, closeguanxi can be classified as family-like in China(Hwang, 1987).

Managers’ ties with government officials—i.e.,their political networking—represent a unique typeof managerial resource in China’s transition econ-omy (Li and Atuahene-Gima, 2001). Because thegovernment still controls significant portions ofstrategic factor resources and has considerablepower to approve projects and allocate resources,managers tend to maintain a ‘disproportionatelygreater contact’ with government officials (Child,1994: 154). Empirically, Nee (1992) found thatmanagers’ networking with local officials leads tobetter performance of new ventures in China. Pengand Luo (2000) showed that managerial ties withgovernment officials are positively related to firmperformance in China. High-technology industriesas examined in this study are taken as strate-gically important industries in China. The gov-ernment has provided strong support in terms offinancing, information, and technology for firmsin these industries through institutional devicesand regulatory regimes (Li and Atuahene-Gima,2002; Lu, 2000). Given the government’s impor-tant role in developing and supporting these indus-tries, new ventures with extensive networking withgovernment officials can rely on such network-ing to obtain information and funding, which cancontribute to their performance (Li and Atuahene-Gima, 2001). Therefore, we propose the followinghypothesis:

Hypothesis 1: Managers’ political networkingwill be positively related to new venture perfor-mance in a transition economy.

Managers’ functional experience

It should be recognized that economic transitionintroduces fundamental changes in ‘the formal andinformal rules of the game that affect organizationsas players’ (Peng, 2003: 275). With the develop-ment and institutionalization of markets, factorsother than managerial ties or guanxi, such as man-agers’ expertise, also become crucial. Indeed, newventure research in market economies has longhighlighted the importance of managers’ expertiseas reflected in their experience (e.g., Eisenhardtand Schoonhoven, 1990; Keeley and Roure, 1990).Since experience is a prime source of learning (i.e.,learning by doing), managers’ experience in var-ious functional areas leads to expertise and skillsin these areas. In addition, managers’ experiencein certain areas can further facilitate their learningand development of related expertise and skills inthe future. In the context of new ventures, man-agers’ functional experience enables the venturesto more efficiently and effectively develop, pro-duce, and market new technologies and products.Their functional experience can also be used byinvestors and other actors, on whom the successof new ventures depends, to evaluate the potentialof the ventures. For example, Keeley and Roure(1990) found that managers’ functional experienceis positively associated with new venture growth.

Firms in transition economies, such as China,have long been constrained by the legacy of Marx-ist ideology implemented through central eco-nomic planning. With this legacy, managers his-torically were selected for their positions pri-marily because of their political loyalty ratherthan for their experience. As Peng and Heath(1996: 509) noted, ‘decades of operations underthe rigid central planning system have made man-agers at these firms become agents of the govern-ment, whose primary function was to take ordersfrom the top . . . they are simply not equipped towork in the context of markets because of theirlack of knowledge, skills, and experience in suchan environment.. . .’ However, privatization andenhanced market competition resulting from eco-nomic transition have created the need for manage-rial expertise (Child and Markoczy, 1993). Indeed,



successfully managing new ventures in a transi-tion economy requires managers to have experi-ence in many areas. For example, as their venturesexplore new market opportunities, they need mar-keting experience to be able to understand themarkets and satisfy customer needs. Also, man-agers need financial experience in order to fundtheir entrepreneurial activities from sources otherthan the government. Therefore, we propose thefollowing hypothesis:

Hypothesis 2: Managers’ functional experiencewill be positively related to new venture perfor-mance in a transition economy.

The contingency values of managerialresources

It should be noted that managers’ political net-working and functional experience are embeddedin institutional contexts and may not have the samevalues for all new ventures. A hallmark of transi-tion economies is the coexistence of state-ownedand non-state-owned firms, which differ in theirbehaviors and performance (Peng and Luo, 2000).In addition, dysfunctional competition representsan important environmental dimension in a transi-tion economy. It specifically refers to the extent towhich the competition in a firm’s environment isopportunistic, unfair, or even unlawful (cf. Li andAtuahene-Gima, 2001). In the following sections,we will examine how these institutional contextsmoderate the roles of political networking andfunctional experience in new venture performance,respectively.

The contingency value of political networking

As noted earlier, managers’ political networkingis important to new venture performance in a tran-sition economy because it can substitute for theinsufficient formal infrastructure (Xin and Pearce,1996). Accordingly, we would expect that man-agers’ political networking should be more impor-tant when the institutional support for a new ven-ture is weak than when it is strong. This argu-ment is consistent with transaction cost economics(Williamson, 1985), which suggests that an impor-tant feature of hierarchical controls is their abilityto manage potential moral hazards. Thus, hierar-chical controls will become more important when

firms are concerned about the problem of moralhazards.

Because ties such as political networking canbe very close in China (Hwang, 1987), politicalnetworking can transform the relations betweennew venture managers and their networked gov-ernment officials into semi-hierarchical relations.Thus, according to transaction cost economics,managers’ political networking should be particu-larly important to new venture performance whenthe institutional support is weak and moral haz-ards (e.g., violation of property rights and contractbreaking) are a major concern. Under such condi-tions, extensive political networking can representa substitute for the legal system and law enforce-ment. In contrast, when the institutional support isstrong, moral hazards become less of a concern,and accordingly political networking may be lessimportant. Based upon these arguments, we willexamine below how ownership and dysfunctionalcompetition can moderate the relationship betweenmanagers’ political networking and new ventureperformance.

Ownership. Compared with non-state-ownedventures, state-owned ventures are founded by thegovernment or its agencies, and their top man-agers are typically appointed by the government.As a result, these ventures naturally have legiti-macy and receive support or even protection fromthe government agencies that have founded them.In contrast, non-state-owned ventures receive lit-tle support from the government and lack marketlegitimacy, thus they are in a relatively weak posi-tion in the institutional environment (Nee, 1992).For example, it has been reported that of the U.S.$38 billion in loans to firms granted by state banksin China in 1998, only 5 percent were to non-governmental firms (China Economic News, 2000).

Because of the weak institutional position ofnon-state-owned ventures in a transition economy,moral hazards become a major concern to them.For example, if their property rights are violatedand/or their business partners break contacts withthem, they may not get sufficient protection fromthe existing institutional framework. As a result,political networking is crucial for non-state-ownedventures as a substitute for insufficient formalinstitutional support. These firms can influencegovernment officials to bring the officials’ interestsin line with their own (Peng, 2003). Hence, theirties with government officials may protect them



from moral hazards even if the existing legalsystem cannot.

In comparison, because state-owned venturesalready have relatively strong institutional sup-port in a transition economy, political networkingbecomes less important to protect them from moralhazards. It is possible, of course, that managers instate-owned ventures may spend more time andmoney in networking with government officialsthan those in non-state-owned ventures becausethey are beholden to government officials and needto spend a great deal of effort trying to influencethese officials. However, we argue that while polit-ical networking may help secure the careers ofmanagers in state-owned ventures, its contributionto venture performance should be smaller than thatin non-state-owned ventures for the reasons notedearlier. Empirically, Peng and Luo (2000) foundthat managerial ties with government officials arepositively related to firm performance for non-state-owned firms but not for state-owned firms.Therefore, in the new venture context, we proposethe following hypothesis:

Hypothesis 3: The positive relationship betweenpolitical networking and new venture perfor-mance will be stronger in non-state-owned ven-tures than in state-owned ventures in a transitioneconomy.

Dysfunctional competition. In transition econo-mies, formal market institutions have not beenwell developed to govern market transactions anddefine and protect property rights (Peng and Heath,1996). It is not unusual for firms to engage inwidespread opportunistic and unlawful behaviors(Li and Atuahene-Gima, 2001). Patent and copy-right violations, broken contracts and agreements,and unfair competitive practices have becomewidespread. We argue that managers’ political net-working will have a stronger relationship with newventure performance when the level of dysfunc-tional competition is high than when it is low.When the market competition is highly dysfunc-tional, intellectual property rights may go unpro-tected, and it may be difficult to monitor andenforce business contracts, which will increasenew ventures’ concerns about moral hazards intheir business environments. Under such condi-tions, political networking can circumvent the lackof property rights and become a substitute forlaw enforcement and the legal system. It thus

can reduce the risk and uncertainty of new ven-tures’ business environments and facilitate theireconomic exchanges. In addition, under such con-ditions, new ventures may even use their man-agers’ political networking to take advantage ofthe dysfunctional competition in the environment.For example, they may win contracts and businesslicenses via political networking even though theirtechnologies and products are no better than thoseof the rivals.

In contrast, when the level of dysfunctional com-petition is low, the importance of political net-working in both reducing risk and winning busi-nesses will be reduced. Our above arguments areconsistent with Peng and Luo’s (2000: 486) notionthat ‘social capital embedded in managerial tiesmay be more important in imperfect competitioncharacterized by weak institutional support anddistorted information.’ Therefore, we propose thefollowing hypothesis:

Hypothesis 4: The positive relationship betweenpolitical networking and new venture perfor-mance will be stronger when the level of dys-functional competition is high than when it islow in a transition economy.

The contingency value of functional experience

As noted earlier, with the development and insti-tutionalization of the markets, managers’ func-tional experience becomes important in transitioneconomies. However, the extent to which man-agers’ functional experience can be transformedinto new venture performance depends upon thestrength of the appropriability regime of theirinstitutional contexts. According to Teece (1986),appropriability refers to the ability of firms to cap-ture rents generated by their innovation activities.Concerns about appropriability originate from thepervasive presence of behavioral uncertainty, com-bined with the difficulties of specifying intellec-tual property rights and monitoring and enforcingcontracts (Teece, 1986). In our research context,the appropriability regime refers to the extent towhich firms are able to capture rents generated bytheir resources. As Gulati and Singh (1998: 789)argued, ‘in a tight appropriability regime, firms canretain the profits they earn from their proprietaryresources, while in a loose regime, these profitsare subject to involuntary leakage or spilloversto other firms.’ Following this logic, we argue



that managers’ functional experience will be moreimportant to new venture performance if the insti-tutional contexts allow new ventures to retain therents generated by their managers’ functional expe-rience. Below we will examine how ownership anddysfunctional competition can moderate the rela-tionship between managers’ functional experienceand new venture performance.

Ownership. As noted earlier, in a transition econ-omy state-owned ventures are founded by thegovernment or its agencies and have great legiti-macy and government protection. In contrast, non-state-owned ventures lack legitimacy and govern-ment protection, and thus they are in a relativelyweak position in the institutional environment(Nee, 1992). Following Teece’s (1986) appropri-ability argument, we expect that the positive rela-tionship between functional experience and newventure performance should be stronger in state-owned ventures than in non-state-owned ventures.As managers’ functional experience enables newventures to develop new technologies and prod-ucts and build brands, such benefits can be betterretained by state-owned ventures because of theirlegitimacy and government protection. Also, stateownership can provide new ventures with criti-cal information, financial resources, and businessopportunities (Lu, 2000). These resources repre-sent complementary assets to managers’ functionalexperience, which can help materialize the benefitsof that experience.

In contrast, because non-state-owned ventureslack legitimacy and government protection, thebenefits of their managers’ functional experiencemay be involuntarily leaked to other firms, whichmay copy their innovations, break contracts, etc.In addition, government interference may fur-ther weaken the appropriability regime of non-state-owned ventures. For example, Nee (1992:9) explicitly noted that ‘in the absence of well-defined private property rights, private firms arevulnerable to unauthorized interference by distrib-utors who impose illicit levies on them. . . .’ Thusgovernment interference can counteract the posi-tive effect of managers’ functional experience onperformance. Therefore, we propose the followinghypothesis:

Hypothesis 5: The positive relationship betweenfunctional experience and new venture perfor-mance will be stronger in state-owned ventures

than in non-state-owned ventures in a transitioneconomy.

Dysfunctional competition. The level of dysfunc-tional competition in a new venture’s environmentcan also influence the strength of the appropri-ability regime in its environment. High levels ofdysfunctional competition, which are characterizedby patent and copyright violation and difficultiesin monitoring and enforcing contracts, represent aweak appropriability regime in Teece’s (1986) ter-minology. Dysfunctional competition also appearsto be opportunistic competition in Williamson’s(1985) sense of the word, which implies that itis difficult for firms to benefit from their markettransactions.

Note that managers’ functional experience isa market-based competitive competence that requiresthe support of a well-developed institutional frame-work for market competition. For example, eventhough managers’ experience in technology areascan help new ventures develop new technologiesand products, lack of intellectual property rightsprotection in a dysfunctional environment maymake it difficult for the ventures to appropriatethe potential economic benefits from their innova-tions (Teece, 1986). The profit potential of innova-tions will be dissipated through imitations or theunlawful behaviors of other firms. Similarly, asmanagers’ experience in marketing can help buildbrand image, this could be illegally imitated byrivals.

In contrast, when the environment is character-ized by low levels of dysfunctional competition,market institutions are more effective and prop-erty rights can be better protected. Under suchconditions, the appropriability regime of the newventures’ environment becomes tighter, and as aresult new ventures are more likely to retain rentsgenerated by their managers’ functional experi-ence. One may argue that even under conditionsof high levels of dysfunctional competition, man-agers’ functional experience can still help newventures stay one step ahead of ventures whosemanagers lack functional experience. We arguethat the benefits of managers’ functional experi-ence tend to be lower under such conditions thanthe benefits under conditions of lower levels ofdysfunctional competition for reasons noted above.Therefore, we propose the following hypothesis:



Hypothesis 6: The positive relationship betweenfunctional experience and new venture perfor-mance will be stronger when the level of dys-functional competition is low than when it ishigh in a transition economy.

METHODOLOGY

Sample and data collection

We randomly selected 300 new technology ven-tures from a sample frame of 500 firms com-piled by the Administrative Office of the BeijingHigh Technology Experimental Zone, one of themost developed high-technology industry zones inChina. These ventures met three criteria used todefine a new technology venture in China: (1) themanagement of the firm was composed of engi-neers or scientists; (2) 30 percent or more of thefirm’s employees were technical employees; and(3) it spent 3 percent or more of total sales onR&D (cf. Li and Atuahene-Gima, 2001). Consis-tent with an accepted definition of a new venture,all sampled firms were 8 years old or younger (cf.McDougall et al., 1994). We first sent letters to theCEOs/general managers of these ventures, explain-ing the purpose of the study and inviting theirparticipation. We collected the data by adminis-tering a questionnaire on-site rather than throughthe use of archival data and mail surveys becausethe lack of reliable archival data and the inade-quate postal system in China made the use of thesemethods difficult (Hoskisson et al., 2000). The useof on-site interviews also helped us gain accessto the right respondents, ensured the correct useand understanding of the terms, and provided highresponse rates.

Questions were derived from the literature andin-depth interviews with eight entrepreneurs and15 managers from 10 new technology ventures inChina. The questionnaire was originally designedin English and then translated into Chinese by twomanagement scholars competent in both languagesand with substantial research experience in thesubject area in China. To avoid cultural bias andto ensure validity, the Chinese version was back-translated into English, and we paid special atten-tion to detecting any significant misunderstandingsdue to translations.

While it is preferable to use multiple informants,we selected one top manager (the CEO/general

manager or a senior manager having a directreporting relationship with the CEO/general man-ager) from each of the sampled ventures as thekey informant. Prior research has found that topmanagers provide data as reliable and valid asthose from multiple informants and objective data(Miller, Cardinal, and Glick, 1997; Zahra andCovin, 1993). Particularly considering the rela-tively small size of these ventures, the informantsshould possess comprehensive knowledge and rep-resent a reliable source for the needed information(Bagozzi and Phillips, 1982).

We received 184 completed and valid ques-tionnaires with a response rate of 38.6 percent(184/500). Of the responses, 54.4 percent werefrom CEOs/general managers, and the rest werefrom R&D/engineering or marketing managers.Among the responding ventures, 50.5 percent werein the electronic information industry, 17 percentwere in integrated optical-mechanical and electricproducts, 12.6 percent were in new energy andnew materials, 10.4 percent were in new pharma-ceuticals and bioengineering, and 9.3 percent wereclassified as others (e.g., aerospace). There wereno significant differences between responding ven-tures and nonresponding ventures in terms of ven-ture size and age. We collected additional data bysending identical questionnaires to alternative topmanagers from a random subset (N = 55) of theresponding firms, of which 45 were returned. Allof the correlations of matched variables betweenthe two raters were within the range of 0.90–1.00,indicating strong interrater reliability.

Measurement

New venture performance was measured by eightitems. The respondent was asked to rate his orher venture’s performance relative to its princi-pal competitors over the last 3 years on return oninvestment, return on sales, profit growth, returnon assets, overall efficiency of operations, salesgrowth, market share growth, and cash flow fromoperations. We measured political networking withfour items adapted from Xin and Pearce (1996).The scale indicates the extent to which the ven-ture’s senior management over the past 3 yearshas (1) spent much effort in cultivating personalconnections with officials of government and itsagencies, (2) maintained good relationships withofficials of state banks and other governmental



agencies, (3) devoted substantial resources to main-tain good relationships with officials of adminis-trative agencies, and (4) spent a lot of money onbuilding relations with the top officials in govern-ment. Following McGee et al. (1995), functionalexperience was measured with five items thatreflect the extent to which members of the seniormanagement had functional experience in the fol-lowing areas: (1) sales/marketing; (2) R&D/engi-neering; (3) manufacturing; (4) finance; and (5)administration. This measure indicates the over-all experience of a venture’s senior managementacross the various functional areas.

State ownership was coded 1 for state-ownedventures and 0 otherwise. Four items were usedto measure dysfunctional competition (Li andAtuahene-Gima, 2001). They indicate the extentto which the venture’s principal industry (i.e., theindustry that accounts for the largest percentage ofthe venture’s sales) has experienced the followingin the last 3 years: (1) unlawful competitivepractices such as illegal copying of new products;(2) counterfeiting of the venture’s own productsand trademarks by other firms; (3) ineffectivemarket competition laws to protect the venture’sintellectual property; and (4) increased unfaircompetitive practices by other firms.

We controlled for the following variables. First,venture size referred to the natural log of the num-ber of full-time employees. Second, venture agereferred to the number of years since the ven-ture was founded (upper limit was 8 years). Third,senior management team size referred to the num-ber of senior managers in the venture. Fourth,senior management industry experience referred tothe average number of years that a venture’s seniormanagers have spent in the current industry. Fifth,given the importance of product innovation in newtechnology ventures, we controlled for sales fromnew products, referring to the ratio of the venture’ssales that were from new products introduced inthe last 3 years. Finally, because half of the sam-ple was from the electronic information industry,we coded the electronic information industry as 0and all other firms 1 in order to control for indus-try effects.

Harman’s one-factor test was used to check forthe presence of common method variance (Pod-sakoff and Organ, 1986). We subjected all the keymeasures to a factor analysis and then determinedthe number of factors accounting for the variancein the measures. The results of the tests indicate

no single factor accounted for a majority of thevariance. We also examined the scree plots, whichshowed no sign of a common method bias. Dis-criminant validity of the constructs was tested bycomparing a constrained model in which correla-tions between two constructs were constrained to1 with an unconstrained model. The results of thepairwise tests among the constructs indicated thatin each case the χ 2 difference was significant atthe p < 0.01 level, and the fit of the unconstrainedmodel was significantly better than the constrainedmodel (Bagozzi and Phillips, 1982), providing evi-dence of discriminant validity. In addition, weassessed the reliability of the multi-item scaleswith Cronbach’s alpha. All scales had reliabilitiesabove the 0.70 threshold.

DATA ANALYSES AND RESULTS

Table 1 presents means, standard deviations, cor-relations, and reliability coefficients (Cronbachalpha) of variables examined in this study. Table 2presents the results of hierarchical multiple regres-sions. To create the interaction terms, both inde-pendent and contingent variables were mean cen-tered to reduce the potential problem of multi-collinearity (Aiken and West, 1991). We testedour hypotheses based on Model 3, which hasthe most complete model specification. Hypoth-esis 1, proposing that political networking willbe positively related to new venture performance,is supported (b = 0.12, p < 0.05). Hypothesis 2,proposing that functional experience will be posi-tively related to new venture performance, is alsostrongly supported (b = 0.25, p < 0.001).

Hypothesis 3 proposes that the positive relation-ship between political networking and new ventureperformance will be stronger in non-state-ownedventures than in state-owned ones. This hypothe-sis is not supported because the coefficient for theinteraction of political networking and state owner-ship is not significant (b = −0.10, n.s.). Hypothe-sis 4 predicts that the positive relationship betweenpolitical networking and new venture performancewill be stronger when the level of dysfunctionalcompetition is high than when it is low. Thishypothesis is not supported because the coefficientfor the interaction of political networking and dys-functional competition is not significant (b = 0.06,n.s.).

Hypothesis 5 suggests that the positive relation-ship between functional experience and new ven-ture performance will be stronger in state-owned



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−0.0

7(0

.71)

9.Po

litic

alne

twor

king

3.95

0.80

0.13

−0.0

5−0

.01

0.12

−0.0

8−0

.08

−0.0

40.

09(0

.86)

10.

Func

tiona

lex

peri

ence

3.87

0.60

0.09

−0.0

10.

08−0

.10

0.07

0.02

−0.1

20.

120.

23∗∗

(0.7

6)11

.N

ewve

ntur

epe

rfor

man

ce3.

540.

600.

090.

02−0

.01

−0.0

20.

050.

13−0

.20∗∗

−0.0

20.

22∗∗

0.34

∗∗(0

.87)

aN

=18

4.b

Num

bers

indi

agon

alar

ere

liabi

litie

s.∗p

<0.

05;

∗∗p

<0.

01



Table 2. Results of regression analysesa

Variables Model 1 Model 2 Model 3

Constant 3.33∗∗∗ (0.28) 1.95∗∗∗ (0.38) 2.00∗∗∗ (0.38)

Control variablesVenture size 0.08∗ (0.04) 0.05 (0.04) 0.06 (0.04)Venture age 0.01 (0.02) 0.01 (0.02) 0.02 (0.02)Type of industry −0.09 (0.09) −0.09 (0.08) −0.07 (0.08)Senior management team size −0.03 (0.02) −0.02 (0.02) −0.01 (0.02)Senior management industry experience 0.01 (0.01) 0.01 (0.01) 0.01 (0.01)Sales from new products (ratio) 0.24 (0.19) 0.30† (0.18) 0.33† (0.18)State ownership −0.40∗∗ (0.13) −0.31∗∗ (0.12) −0.23∗ (0.11)Dysfunctional competition −0.02 (0.05) −0.05 (0.05) −0.07 (0.05)PredictorsPolitical networking 0.13∗ (0.05) 0.12∗ (0.05)Functional experience 0.26∗∗∗ (0.07) 0.25∗∗∗ (0.07)InteractionsPolitical networking × State ownership −0.10 (0.12)Political networking × Dysfunctional competition 0.06 (0.06)Functional experience × State ownership 0.43∗ (0.19)Functional experience × Dysfunctional competition −0.17∗ (0.09)

R2 0.08 0.19 0.25Increase in R2 — 0.11∗∗∗ 0.06∗

F -value 1.99∗ 4.17∗∗∗ 3.95∗∗∗

N = 184.a Because firm size and senior management team size are highly correlated, in supplementary analyses we dropped seniormanagement team size and the results did not change.† p < 0.10; ∗ p < 0.05; ∗∗ p < 0.01; ∗∗∗ p < 0.001 (two-tailed test)

ventures than in non-state-owned ventures. Thishypothesis is supported because the coefficient forthe interaction of functional experience and stateownership is positive and significant (b = 0.43,p < 0.05). To facilitate interpretation of this find-ing, we plotted this interaction effect in Figure 1by following the procedure described by Aikenand West (1991). To create the plot, all variablesexcept functional experience and state ownershipin Model 3 of Table 2 were constrained to theirmean values. Functional experience took the val-ues of one standard deviation below and abovethe mean and state ownership took the values ofzero and one (because it is a dummy variable).As shown in the plot in Figure 1, functional expe-rience has a stronger positive relationship withperformance in state-owned ventures than in non-state-owned ventures, which is consistent withHypothesis 5.

Hypothesis 6 states that the positive relation-ship between functional experience and new ven-ture performance will be stronger when the levelof dysfunctional competition is low than when itis high. This hypothesis is supported because the

coefficient for the interaction of functional expe-rience and dysfunctional competition is negativeand significant (b = −0.17, p < 0.05). Followinga similar procedure as described above, we plot-ted this interaction effect in Figure 2. The plotin Figure 2 shows that the positive relationshipbetween functional experience and new ventureperformance is stronger when the level of dys-functional competition is low than when it is high,providing support for Hypothesis 6.

DISCUSSION AND CONCLUSION

How do managerial resources matter in new ven-tures in transition economies? With a sample ofnew ventures in China’s high-technology indus-tries, we examined simultaneously the roles ofmanagers’ political networking and functionalexperience. We found that political networking hasa positive relationship with new venture perfor-mance. This finding is consistent with other stud-ies of transition economies (e.g., Peng and Luo,2000; Xin and Pearce, 1996). However, we foundthat the link between political networking and new



0

0.5

1

1.5

2

2.5

3

3.5

4

3.27 4.47

Functional Experience

New

Ven

ture

Per

form

ance

State-OwnedVentures

Non-State-Owned Ventures

Figure 1. Functional experience and new venture performance: the moderating role of venture ownership

3.1

3.2

3.3

3.4

3.5

3.6

3.7

3.8

3.9

3.27 4.47

Functional Experience

New

Ven

ture

Per

form

ance

HighDysfunctionalCompetition

LowDysfunctionalCompetition

Figure 2. Functional experience and new venture performance: the moderating role of dysfunctional competition

venture performance is not moderated by owner-ship or dysfunctional competition. This finding isdifferent from that of Peng and Luo (2000), whoexamined firms in various industries and found thatthe link between managerial ties with governmentofficials and firm performance is moderated byownership and industry. This inconsistency maybe attributed to the sample difference (new ven-tures vs. firms in general). It seems that becausenew ventures face the liability of newness andgovernment plays a significant role in develop-ing high-technology industries in China, politicalnetworking has a universal relationship with newventure performance across different institutionalcontexts.

We found a more complex relationship betweenmanagers’ functional experience and new venture

performance. These two variables are significantlyand positively related. Further, their positive rela-tionship is stronger in state-owned ventures thanin non-state-owned ventures and when the levelof dysfunctional competition is low rather thanwhen it is high. The strong yet contingent linkof managers’ functional experience with new ven-ture performance suggests two important issues.First, as market transition theorists (e.g., Nee,1989) have suggested, with the development andinstitutionalization of markets, managers’ expertiseas reflected in their experience becomes impor-tant. Note that firms examined here are new ven-tures in high-technology industries, which haveemerged along with China’s economic transitionand have been playing a significant role in devel-oping and commercializing new technologies and



products and in creating new employment oppor-tunities. Managers’ functional experience is crucialin enabling these ventures to explore market oppor-tunities and achieve better performance.

Second, the contingent relationship betweenmanagers’ functional experience and new ven-ture performance can also be attributed to thecharacteristics of transition economies. Given theinadequate legal framework that defines and pro-tects property rights in a transition economy, man-agers’ functional experience may not necessarilybe transformed into better performance becausetheir strategies, products, and services (or otheroutcomes that may stem from their functionalexperience) cannot be effectively protected bylaw and can be illegally copied by competitors.Our findings that the positive relationship betweenmanagers’ functional experience and new ventureperformance is stronger in state-owned venturesand under conditions of lower levels of dysfunc-tional competition thus suggest that managers’functional experience is more important to newventure performance if the institutional contextsallow the ventures to appropriate the benefits gen-erated by their managers’ functional experience,which is consistent with Teece’s (1986) appropri-ability argument.

Theoretical and managerial implications

The present study makes several important con-tributions to the literature. First, while managers’role in new ventures has long been highlighted inthe literature, most previous studies have focusedon new ventures in market economies. Relative totheir counterparts in market economies, new ven-tures in transition economies face more constrainedresource conditions because the legal institutionalframework and strategic factor markets have notbeen well developed. Our study contributes tothis line of research by empirically demonstrat-ing how and under what conditions various typesof managerial resources are linked with new ven-ture performance in a transition economy. Alsoour study advances the international entrepreneur-ship literature by providing empirical evidence thatinstitutional contexts affect the role of managerialresources in new venture performance. Consistentwith Baker et al. (2005), our results suggest thatinstitutional contexts affect the extent to whichmanagers in new ventures are able to appropriate

the benefits from their managerial resources (e.g.,functional experience).

Second, our findings can contribute to the lit-erature on firms in transition economies. So far,most studies in this area have focused on man-agerial ties (e.g., Peng and Luo, 2000; Xin andPearce, 1996) as if managerial ties are the main, ifnot the only, factor that is important in transitioneconomies. However, it should be noted that giventhe coexistence of the redistributive mechanismand the market mechanism in transition economies,firms need different types of managerial resourcesto deal with the redistributive power and the mar-ket forces. In this study, we adopted a broader viewby examining the roles of managers’ political net-working and functional experience simultaneouslyand found that both of them have significantly pos-itive relationships with new venture performance.Our findings represent an important addition to theliterature because they suggest that managerial tiesare not the only factor (and probably not the mostimportant factor) that contributes to firm successin transition economies. We believe our study willencourage future research on transition economiesto go beyond ties or guanxi and to focus on abroader range of managerial resources affectingfirm success.

Third, our findings can contribute to theresource-based view. Recently, scholars have pro-posed a contingent resource-based view suggest-ing that effective deployment of firms’ resourcesis conditioned by contextual factors (Priem andButler, 2001). Our focus on China’s transitioneconomy provided us with a unique opportunityto contribute to this line of research. We inte-grated the resource-based view with transactioncost economics to examine how institutional con-texts can moderate the relationship between man-agerial resources and new venture performancein a transition economy. In support of Teece’s(1986) argument of the appropriability of rents, ourfindings suggest that managers’ functional experi-ence has a stronger relationship with new ventureperformance if the ventures’ institutional contextsallow them to retain the rents generated by theirmanagers’ functional experience. These findingsprovide insights into the interplay of resources andefficiency vs. legitimacy and the impact of appro-priability. They suggest that the value of resourcesactually depends upon the strength of the appro-priability regime in a firm’s institutional context.



These findings thus contribute to our knowledgeof the boundary of the resource-based view.

Our findings also have important practicalimplications. Practitioners in transition economies,both local ones and foreign investors, have longbelieved that in transition economies ‘who youknow is all that counts,’ and they have expendedsignificant efforts in building various types of ties.Our results suggest that while political networkingremains important, managers’ functional experi-ence is also crucial. Indeed, a transition economy isone that is transitioning toward—and thus becom-ing closer to—a market economy. Hence, firmsshould pay increasing attention to building market-related competitive competences in order to cap-ture the emerging market opportunities in theseeconomies. Our results also inform that the extentto which firms can benefit from their market-related competitive competences depends upon thestrength of the appropriability regime in their insti-tutional contexts. Thus, rather than simply adapt-ing to the environments in a passive way, firmsneed to proactively strengthen the appropriabilityregime in order to maximize the benefits from theirmarket-related competitive competences.

Limitations and future research

This study has several limitations that also sug-gest directions for future research. First, the studyhas examined the contingent roles of managers’political networking and functional experience innew venture performance. Further research canexamine the roles of other types of managerialhuman capital (e.g., their education background)and social capital (e.g., their ties with externalactors other than government officials). Futureresearch can also benefit from examining con-tingency variables other than those examined inthis study. For example, it would be interestingto examine how the roles of managerial resourcesdiffer between high-technology industries and low-technology industries.

Second, our sample was limited to Chinese newtechnology ventures. A natural extension of ourstudy would be to compare the roles of politicalnetworking and functional experience within tran-sition economies and between transition economiesand market economies. Third, the use of self-report data may pose such potential problems asthe limited recall of the respondents, biased per-ceptions of past realities, and common methodissues. However, we took several actions during

data collection to improve both the reliability andthe validity of the retrospective reporting. Our posthoc examination and validation analysis indicatedno serious common method problems. In particu-lar, considering the supported interaction hypothe-ses, it is unlikely that respondents would have an‘interaction-based theory’ in their minds that couldsystematically bias their responses to produce theseresults (Aiken and West, 1991). Finally, the cross-sectional data used in the study do not allow forcausal interpretations among the variables. Theyalso do not allow us to examine the ‘dynamic’nature of managerial resources. Future studies canbenefit from a longitudinal research design. In fact,Kraatz and Zajac (2001: 653) have suggested avery useful approach, ‘of first identifying histori-cally valuable resources and subsequently examin-ing their impact over time in a changing environ-ment context.’ This approach could enable futureresearch to examine how the roles of differentmanagerial resources change in the process of eco-nomic transition.

In conclusion, this study examined the effectof managers’ political networking and functionalexperience on new venture performance acrossdifferent institutional contexts in China’s high-technology industries. The findings contribute toour understanding of the roles of managerial re-sources in new ventures during the process ofinstitutional development of markets.

ACKNOWLEDGEMENT

We want to thank SMJ Associate Editor EdwardZajac and two anonymous reviewers for their help-ful and constructive comments. We also thank BertCannella, Cindy Devers, Nandini Rajagopalan,Klaus Uhlenbruck, and Tieying Yu for their com-ments and suggestions on the earlier versions ofthis paper.

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