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The purpose of this paper is to investigate the impact of political instability at the local level on foreign firms in China. Building on the literature on political embeddedness and business power, the authors propose a theoretical framework to explain how political turnover can affect foreign firms’ performance and how they respond to such challenges by leveraging their power bases.

To test the hypotheses, the authors apply fixed effects regression to an unbalanced panel data set comprising 13,360 foreign firms from 1998 to 2013 and the political replacement that involved changes in provincial governors.

The findings confirm that political turnover incidents have a negative impact on the performance of foreign firms in China. However, the authors also found that this negative relationship is weaker for firms that can choose various types of power sources. Specifically, the study reveals that foreign firms with large firm size, government ownership and a strong foreign direct investment community are better qualified to mitigate the negative effects of political instability.

This study contributes to the literature by developing the understanding of how political uncertainties and risks affect the performance of foreign firms in China and the importance of firms’ power in counterbalancing these effects. The research provides valuable insights into how multinational corporations can exploit their power to manage the effects of local political turnover, which has practical implications for the strategy and management of foreign firms operating in China.