Public and Private Political Strategy

Contributed by John M. de Figueiredo

The field of non-market strategy examines how players outside of the market and the firm’s value chain affect the performance of the firm. Recent extensions to the field elucidate how firms develop market and non-market strategies together (in integrated strategies) that allow the firms to obtain competitive advantage. The field is structured around two questions. First, how do firms affect non-market institutions and actors. Second, how do these non-market institutions and actors affect markets, competition, competitive advantage, and firm performance. The papers in this syllabus provide an overview of some of the main topics in the field of public and private politics and strategy. The Baron book listed in the extended syllabus overview section provides a synopsis of the field.

Although the importance of government to the business enterprise was recognized decades ago, the research in “business-government relations” focused almost exclusively on how government rules affect business outcomes. Building on the foundational work of Stigler (1971) and Peltzman (1976), the field of non-market strategy began to coalesce around 1990. At that time, a number of papers in strategic management (Yoffie 1988, Spulber 1989, Baron 1993 [first edition], 2010 [sixth edition]) developed conceptual models of how firms affect government policies.

Today the field is largely comprised of three parts: public politics, private politics, and international non-market strategy. Public politics, the most advanced stream of literature, examines how firms gain competitive advantage through influencing government policies. A challenge in this field, however, has been to craft general equilibrium formal models where firms affect policies AND policies affect firm performance. Baron (1999) provides an excellent example of a paper that incorporates firms with differential capabilities competing in the marketplace and these same firms engaging in non-market competition in government institutions using spatial modeling of capabilities and preferences. In particular, it demonstrates which policies firms will prefer and when they will form coalitions. Given the paucity of theoretical papers modeling general equilibrium behavior, this is an excellent path for future research. This said, empirical papers in public politics abound, covering lobbying, campaign contributions, grassroots organization, and strategic facilities location. The challenge many of these studies face, however, is that they suffer from omitted variable bias because of endogenous right hand side variables. One way to solve this problem is with natural experiments. A second way is to use instrumental variables. In examining the effect of campaign contributions on legislator voting behavior, Ansolabehere et al (2003) demonstrate the problem of not using instruments and show how instrumental variables can change the outcomes of empirical analysis.

The second area of non-market strategy is private politics. Private politics refers to an action by stakeholders (and reactions by firms) who are outside the government, the firm, and the firm’s value chain, that attempts to influence the firm’s behavior and performance. These actors include activists, the media, standards setting committees, and others—each of which might have a substantial impact on the competitive advantage of the firm. Despite a consensus that private politics can have a significant impact on the firm’s performance, this area of non-market strategy is very under-theorized and under-analyzed empirically, creating great opportunities for substantial contribution by researchers. One of the most advanced formal models of activism is found in the Baron and Diermeier (2007). It develops an extended model of activist behavior with testable empirical predictions on the targets the activists will choose and the likely reaction of firms. Empirical work in the field is also in its relative infancy. The Eesley and Lenox (2006) paper illustrates the most advanced empirical test to date on the effect of activism on corporate behavior.

The final area of non-market strategy examines international strategy. Although most work in this area is published in international business, international economics, or comparative politics journals, the non-market strategy approach endogenizes the international political institutions—making policy susceptible to the firms that political agents regulate. The applications in this area, however, are generally lacking formal models or are only partial equilibrium analyses—examining government effects on investment. An exception to this is the Iaryczower et al (2006) paper that examines how groups can affect policy through lobbying the judiciary. This “lobbying” in turn, affects judicial decision-making. The paper presents a formal model of this general equilibrium phenomenon and then tests it examining the labor strikes and judicial decisions in Argentina. The second paper, though not endogenizing institutions, is a seminal paper on political connections—which is an important area of the nexus of firm strategy (and firm governance) and political institutions. Fisman (2001) very creatively measures the value of having politically connected board members on a corporation’s board in Indonesia using a natural experiment, the death of the Indonesian leader Suharto.

While no “overview” paper of the field is assigned in the core reading, an instructor might find it very useful to choose one paper from Section I of the Overview section of the extended syllabus to assign to PHD students. While these three papers take very different tacks, they might help pull together nicely a seemingly disconnected field. I highly recommend that one of these papers be used in addition to the core syllabus.

Overall, these papers are building blocks toward the main goal of the field—developing theories and empirical work that describe successful integrated strategies—strategies that integrate nonmarket and market strategies for the firm to gain sustainable competitive advantage. While progress has been made on some of the pieces, we have yet to reach a comprehensive understanding of integrated strategies.