Big Firms Tend to Have Political Connections

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Illustration by Feri Fenoria

UNAIR NEWS – Indonesia is one of the countries with strong political influence in business. Even so, there has not been much research discussing the distribution of industries and the characteristics of politically connected firms in Indonesia.

It inspired Iman Harymawan, Ph.D and team conducted a study. The study was conducted to determine the types and characteristics of firms with directors on the firm board politically connected.

The results showed that the size of politically connected firms is significantly different and greater than other firms. The size of the firm becomes an important determining factor in establishing political relations in Indonesia. The larger the firm, the more likely it is to have political connections.

“For example when a former member of Parliament holds the position of commissioner in a firm, it can be concluded that the firm has political connections. That’s how we measure whether a firm has political connections or not, “he explained.

The firm size is the only characteristic that significantly influences a politically connected firm. In Indonesia, large firms tend to build political relations to support their business.

The bigger the firm, the larger connection it required. Large firms need a lot of support for financial accessibility, diversification (product diversification, ed), permits and so on.

The research also proved that firms will get more benefits by making political connections in the regulated market. Regulated market or regulated industry itself is an industry that is regulated by the government, for example firms in the agriculture, mining and infrastructure sectors.

“We suspect that firms under government regulation will become firms that have political connections. So if they are regulated by the government, the firm will look for connections so they can bypass the regulation, “he said.

After the reform period, political connections in Indonesia have spread in various industries. It means that it is no longer centered on regulated industry alone because many individuals currently have their own power.

Previous studies have found that firms with political relations in developing countries receive some special benefits from their connections. Firms that have political connections automatically gain benefits, such as information, networking, and other benefits.

Changes in the map of political power will affect the proportion and source of corporate debt politically connected. The share price of politically connected firms is also affected by health issues or news from connected politicians.

The political connection will also affect the firm’s decision making process and results. However, there is no significant connection between the political ties with the firm’s performance, debt structure, and firm liquidity.

“With this finding, when OJK has a policy to disclose the political activities of a firm, it is necessary to look at how the political activities of big firms,” he concluded. (*)

Author: Erika Eight Novanty

Editor: Nuri Hermawan

Reference : Iman Harymawan, Dian Agustia and Ardyan Kusuma Agung (2017). Characteristics of politically connected firms in Indonesia. Problems and Perspectives in Management (open-access) , 15 (4), 17-23.

Link        : https://www.researchgate.net/publication/322073058_Characteristics_of_politically_connected_firms_in_Indonesia

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