This dissertation investigates how political alignment between firms and the ruling government influences innovation, investment, and corruption in a polarized political environment. It combines a dynamic theoretical model with novel empirical analysis based on unique data from Turkey between 1998 and 2008. The first part of the dissertation introduces a dynamic theoretical model where firms compete to lead technological innovation while also having the option to form political connections. The model reveals that political alignment reduces market leaders' innovation efforts while increasing challengers' innovation incentives. This tension leads to an ambiguous relationship between corruption and productivity growth, depending on institutional parameters such as election frequency, government persistence, and the magnitude of political benefits. Quantitative exercises provide insight into how these parameters shape the economy's growth and corruption dynamics, although they stop short of being fully conclusive. The second part of the dissertation empirically tests the theoretical predictions using novel data from Turkey around 2002 general elections resulting a change in political environment. A key challenge is measuring firms’ political affiliations. To address this, the empirical section uses Google search results of board members to develop a new, objective measure of political alignment by linking firm board members to business associations with clear political ties. Developed political alignment measure is validated by showing its effect on firm market value. Using a novel firm-level investment dataset, the empirical analysis shows that political alignment increases non-leading firms' investment probability. Conversely, among the largest firms, political alignment has no effect on investment. Moreover, the largest firms that lose political alignment with an election are more likely to start an investment project relative to other largest firms. These findings are consistent with my theoretical model's prediction that political alignment discourages innovation among market leaders but incentivizes it among challengers.