Research Summary: We examine the value of political ties on firm performance in an emerging economy. Using social exchange theory, we posit that political connections propel firms to engage more in proself and prosocial activities, which mediate the relationship between political ties and firm performance. The institutional environment moderates the dual mediations such that as the institutional environment improves, the mediation effect through proself engagement weakens, whereas the mediation effect through prosocial engagement strengthens. We found support for these propositions by analyzing two samples of firms in China: A surveyed sample of 363 small‐ and medium‐sized firms and data from 2,780 publicly listed firms from 1999 to 2014. Our findings shed light on the strategic value of political ties, coinciding with the development of institutional environments. Managerial Summary: Political ties have been considered important for firm survival and performance in emerging economies, as they enable firms to obtain critical information and resources to buffer uncertainty and build up competitive advantages. Our study demonstrates that what truly matters may not be a firm’s political ties themselves but the firm’s strategic engagement in both proself and prosocial activities in order to maintain social exchange with governments. Also, our study reveals that the development of institutional environments alters the business–government exchange and influences a firm’s proself and prosocial engagement differently, making the value of political ties on a firm’s performance difficult to predict.
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