Strategic Alliance

Shon Hiatt helps firms choose their friends wisely

November 14, 2019

Business researchers have long shown a need for firms to build and manage relationships with government stakeholders. The finding is true around the world, but particularly salient in developing countries where political conflict and violence fuel high levels of uncertainty and economic instability.

Less ­common in the academic literature is a breakdown of relationships with various government actors relevant to business ventures. Agency officials, regulators, the police, the military and others contribute to a governmental infrastructure. For the first time, USC Marshall Associate Professor of Management and Organization, Shon Hiatt and his collaborators examine how ventures can strategically leverage relationships with the various state actors to their advantage.

“Overall, relationships with military officials provide the greatest value to ventures hoping to survive in a developing country.”—Shon Hiatt, Associate Professor of Management and Organization

Their paper, “Manu Militari: The Institutional Contingencies of Stakeholder Relationships on Entrepreneurial Performance,” published last year in Organization Science, finds that ties to various entities are complementary. Under certain circumstances, ties to politicians are most helpful to the survival of a venture, while at other times, ties to the military are better at helping firms stay afloat. The researchers measured the impact of these relationships on survival because most ventures fail within the first few years.

While each have their role, “Overall,” Hiatt said, “relationships with military officials provide the greatest value to ventures hoping to survive in a developing country.”

In the study, the researchers used a huge data set of all airline companies in 10 Latin American countries over a 65-year period. They identified the distinct resources obtained through relationships with different types of government stakeholders.

Among the resources, political actors increasingly enhance firm survival in countries experiencing declining economic conditions and where political stakeholders have a greater ability to enact policy. On the other hand, political ties can hurt new ventures located in areas of armed conflict.

Relationships with military leaders help support firms by providing security benefits under conditions of armed conflict and revolutions.

Hiatt and his team went on to measure firm performance in different institutional environments. They found that having military ties decreases the probability of venture failure by 79 percent. Having political ties decreases the probability of failure by 44 percent. In countries where armed conflict and political chaos are constant threats, military ties are more valuable than ties to elected officials and policy makers.

“Entrepreneurs should stay alert to this twist,” Hiatt said. “In times of political instability, strong ties with politicians can actually be a detriment. The politician in office today may be toppled tomorrow. But the guns generally stay under the control of today’s general.”

Hiatt is also studying the relationship between defense contractors and regulators in the United States. Geographic proximity is operative in these cases. “If defense contractors are near a regulatory agency, they get faster contracts,” Hiatt said. “It comes down to influence.”