Why Should New Businesses Think Carefully Before Making Political Connections?

Customers in emerging economies may be wary of B2B startups because of their proximity to the government.

Why Should New Businesses Think Carefully Before Making Political Connections?
B2B startups

The future is fraught with danger for new businesses. In developing markets, where infrastructure and governance structures are often lacking, this might be even more the case than in more established ones. For example, when the legal system is unclear or company data is suspect, both buyers and sellers understand that they are acting at their own peril.

China’s economic environment has improved dramatically in recent years, yet local businesses still face challenges. Several businesspeople in the past and present have attempted to solve this issue by forming productive relationships with municipal leaders. A survey conducted by the World Bank and the Department of Small and Medium Businesses of China indicated that among B2B startups, 54% have a founder whose primary responsibility is to foster positive relationships with local government. Once associated with corrupt practices, such relationship building is now more often about bringing private and public interests into harmony as a result of President Xi Jinping’s extensive anti-corruption effort.

Political ties may help or hurt Chinese B2B start-ups, as Ling Yang, Xiaobin He, and I have discovered in a recent study. On the one hand, having these contacts may increase a startup’s reputation and make it easier to obtain suppliers who would otherwise be reluctant to work with the company due to payment concerns. But, they may deter commercial purchasers who would rather work with a less powerful partner who, in the absence of government support, is more likely to give in to more stringent terms and conditions. Because of this, new businesses should think long and hard about whether or not they want to leverage political goodwill.

Differences in priorities between suppliers and retailers in the supply chain

Buyers often pay for China manufactured items only after they have been sent (or services rendered). Because payment is typically made after goods have been shipped, vendors are understandably concerned about the long-term viability of the startups with whom they work because of this practice. Thirty in-depth interviews were conducted with Chinese business owners and their supply chain partners. As one of the founders we spoke to put it, “I told them that one of our founders has been cultivating great relationships with the local administration, and dropped some names” when asked about the company’s finances repeatedly by prospective vendors. It was a big assistance. They were aware that we could stay in business longer than other startups since we had easier access to capital than most.

We used the study conducted by the World Bank to compile information from 337 privately held ventures, mostly in manufacturing, that have been operating for less than eight years. Although most businesses had between one and six suppliers, those with a government affairs manager on staff averaged 1.59 more (i.e. after taking into account control variables).

What a political connection looks like

It’s common for founders who are serious about cultivating government relationships to already have some political clout. And they might even:

  • Invite local government officials to visit the new venture and learn about its key aspects
  • Co-create an industry-specific expo (or other platform) to help the venture attract partners or foreign investors
  • Assist the government with achieving its goals in terms of infrastructure or local employment.

It gives me peace of mind to know that a client has solid government backing, since it means they are less likely to disappear the next day. You have no idea how many of my customers have mysteriously vanished! in the words of one vendor.

What B2B buyers want

Buyers aren’t as concerned about the long-term viability of a startup as suppliers are. As they only make payments for items they really receive, they won’t lose too much money if a startup they bought from goes bankrupt. The Chinese manufacturing industry is a cutthroat one. In addition to wanting premium goods, B2B customers also want the ability to set the conditions with their suppliers. They could, for instance, shop around for vendors that offer very low rates, flexible customization options, or even the opportunity to collaborate on product development at no cost.

Why Should New Businesses Think Carefully Before Making Political Connections?
What B2B buyers want

Buyers typically attribute a startup’s strong negotiating power to the fact that it has established positive relationships with local government officials and can thus rely on their support and resources. To paraphrase what one purchaser said to us: “New businesses are typically eager to find a customer. Yet, in our experience, new businesses who have spent time and money cultivating government contacts are notoriously tough to negotiate with on pricing.

Our research revealed that most young businesses only served between one and six large clients. In contrast, companies with a founder who was responsible for cultivating government contacts had 1.65 percentage points less corporate clients. This was a major distinction.

Read more: How to Escape the Herd Mentality

We also discovered that the more of a foothold a new business has in the market (whether via substantial assets or delivering a less commoditized product), the more potential customers may be turned off by the company’s political ties.

A weapon with two sides

Challenges might arise for early-stage business-to-business (B2B) endeavors if its founders have political ties. While these connections might boost their standing with their suppliers, they may turn off potential customers who are afraid about losing leverage in a cutthroat market.

While our research focused on B2B initiatives in China, we expect very comparable situations in other emerging economies where the state is a major economic role. Government officials in these regions sometimes act as market mediators, so working closely with them might be beneficial. New businesses, however, need to be upfront about the dangers they face, especially in terms of finding customers. Businesses can’t function without their suppliers, but they can’t live without customers too.

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