Business-Society Relations in Retail Value Chain (23E54000, 6cr)

8.10.2012Government regulation and corporate political

activity

Mika SkippariAalto University School of Business

The role of government as a regulator of business environment

• Government is the central actor in a firm’s business environment, affecting both nonmarket and market environments– Legislative, coercive power: monopoly power to determine the ”rules of

the game”, distribution of economic resources

– Goverment regulation is a potential threat to business activities and competitiveness: source of uncertainty: government policies are difficult to foresee

– Government is a focal economic actor in many societies (state-owned companies, monopolies or competitors to private entreprises; government purchases from private actors)

– Government provides infrastructure for business environment (education, roads, telecommunications, planning…)

– Many of the firms’ nonmarket strategies are targeted to government, either directly or indirectly throuhg various stakeholders (e.g. collaboration with NGOs to pressure changes in government policy)

Government regulation and freedom of action

Am

ount

of

regu

latio

n

Firm’s freedom of action

Market economy

Closed economy

regulation

deregulation

- Firms can act profitably in both closed and market economies.- Government can be both facilitativeand nonfacilitative in both cases.

Long-term development in government regulation

1600-l 1700-l 1800-l 1900-l 2000-

Amount of regulation

Mercantilism

Liberalism

Conservatism

New liberalism

??- National states-Supporting export trade

- Protectionism- Protecting national economies- Bilateral trade

- First wave of internationaleconomic cooperation- customs unions

- Multilateral collaboration(EEC, EFTA, EU, NAFTA)- Globalisation- Markets have the power

Wars and economiccrises have always increased regulation!

General forms of regulation

• Supranational (WTO)

• Multinational (EU, NAFTA)

• National (value added tax, income tax)

• Industry-specific (planning policy of retail stores, opening hours)

• Firm-specific regulation (regulation of mergers by competitive authorities)

• Industry self-regulation (The Council of Ethics in Advertising)

• Civil regulation (market forces in the form of consumer and/or market pressures, also in collaboration with government regulation)

Trends in government regulation

• Deregulation as a major trend in international trade from 1980s: liberalization of trade between countries

• On the other hand, many new forms of regulation have emerged that restrict business activities, but aim to social benefits – Competition law and competition authorities since 1990s– Environmental laws and limits to environmental pollution since 1970s

• The role of supra- and multinational regulatory institutions (such as WTO) has increased, and the role of national states have declined: national states lack power against multinational companies – Increasing self-regulation, self-monitoring: danger of losing government

control over multinational corporations – Global economy without global regulation (cf. current financial crises) – Rise of civil (private) regulation: collaboration between governments and

NGOs

• Despite multinational agreements and systems of regulations, the amount of regulation varies tremendeously among countries

Why we need government regulation?

• Paradox of regulation: in what degree we need market regulation vis-a-vis self-regulation or free market competition?

• Market mechanisms are not necesserily the most efficient solution in every cases (cf. current financial crises!!)

• The general aim of regulation is to fix and/or prevent the negative effects of free competition (such as excessive profits, rent-seeking) and to protect consumers / citizens; control over natural monopolies

• Information asymmetry in free market economy: attempt to equal and open flow of information

• Preventing the effects of negative externalities (societal impacts of free markets)– Environmental legislations, product safety, aspects of national

health (opening hours of restaurants, advertising of alcohol)

Deregulation: why we should have less regulation?

• Critics argue that regulation leads to higher prices, inefficiency, less than optimal investments, technological underdevelopment

• Regulation and bureaucracy incur costs that treat firms differently and assessing its benefits is difficult

• Degerulation increases competition by opening opportunities for new actors to enter the market

• However, the positive aims of deregulation are not always achieved; for example, emissions trading led to increasing energy prices!

The effects of regulation to competition

• Changes in regulatory environment significantly affects the competitive situation between firms: non-equal effects of regulation to competition

• Various effects– Limiting competition (e.g., licenses to pharmacy retailing, taxis)– Prohibit competition (monopoly of alcohol retailing)– Increase costs (package markings) – Change cost structures (emissions trading: those who pollute will pay

more) – Regulation of income distribution (price controls)– Effects on the size of the market (government purchases)

• Firms might have strategic incentive to favor regulation (pharmacies) and prevent deregulation (= lobbying for deregulation / liberalization)

• Regulation also directs competitive strategic actions of firms: – E.g., planning policy favoring convinience stores in UK, similar

development in Finland

International trends in retail regulation: OECD study on cross-country retail regulation (Boylaud & Nicoletti 2001 / 2008)• http://www.oecd.org/document/31/0,3746,en_2649_34323_35790943_1_1_1_1,00.h

tml

• Boylaud & Nicoletti (2001) Regulatory reform in retail distribution. OECD Economic Studies No. 32, 2001/I

• Large differences in the retail regulation across countries, implying different policy approaches in retail sector

• No remarkably change in cross-country variation in retail regulation 1998-2003, implying little evidence of recent policy convergence

• There is a generalised trend towards more stringent legislation in OECD countries (also in Finland)

Forms of retail regulation internationally

• barriers to entry– requirements for setting up and opening a business, which

include entry formalities (trade register), regulations on the establishment, extension and location of commercial premises, and legal impediments to the establishment of large outlets

• operational restrictions– Shop opening hours and regulations on specific operations and

products (e.g., prohibition / regulation of advertising of certain products like tobacco, pharmaceuticals), the existence of local monopolies for some products (wine, spirits in Finland by Alko)

• price controls– the freedom to set prices, regulation of promotional activities

(selling beer in discount price)

Retail regulation varies across countries (OECD 2008)

• Overall, most stringent regulation prevails in France, Japan, Greece and Austria (Finland 6th).

• The countries with the most liberal environment are the Czech Republic, Switzerland and Australia.

• The mode of regulations varies across countries– Price regulation common in Belgium, Spain, Mexico and Canada

• Operational restrictions common in Australia, Norway and Holland• Entry barriers most restrictive in Korea, Austria and Poland• In Sweden and USA opening hours have been liberalized for decades (e.g.

Wal-Mart supercenter open 7/24): – In the USA the employment costs for Sunday and nighttime shifts are relatively low

Retail planning regulation

• Societal motives of planning regulation:

– Planning and controlling the community structure

– Limiting environmental effects of private transport

– Favoring small stores toward hypermarkets

– Securing comprehensive retail service network (in mid-town and out-of-town locations)

Retail planning regulation

• Possible negative effects:– Can slow down modernization and consolidation of retailing– Can hinder efficiency gains from the exploitation of scale and scope

economies– Can limit the specialised services that new retail formats can offer

consumers and may impede positive spillovers of large commercial centres on surrounging business.

– Favors incumbent firms (who already possess good locations and hypermarket network)

– May speed tendencies towards concentration at national level or international level (to penetrate a market, firms may have to form alliances with others already established in the country)

Forms of regulation in Finnish retailing

• Regulation has been gradually liberalized, but still quite heavy regulation exists

• Opening hours (exceptions: car sales, kiosks, stores not exceeding 400 square metres) – though opening hours are relatively long in Finland (c.f., Sweden)

• Retail planning and construction – Location and size of retail (especially grocery) stores

• Sales prohibition of non-prescipted pharmacy products and mild alcoholic beverages in grocery stores

• VAT of food (higher than EU average)

• Hybrid regulation: Opening hours are connected to the location and size of a grocery stores

Evolution of retail regulation in Finland

• Freedom of Trade Act 1860s: totally liberal opening hours, except Sundays• Business Operations Act (Liikeapulaislaki) 1919 restricted opening hours• Prohibition Law 1919-1932 (alcohol)• 1946 Sunday opening denied from all stores • 1966 extended opening hours (to 8 pm) on weekdays• 1969 liberalization of sales of medium strength beer in grocery stores• 1988 end of price regulation • 1990 opening hours of stores located on sparsely populated area liberalized• 1994 Sunday opening allowed in December for all stores • 1997 extended opening hours to 9 pm on weekdays• 1999 Planning policy act: large-scale units prohibited (over 2000 sqm) to sparsely

populated area unless they are marked in zoning plan for commercial use• 2001: liberalized Sunday opening hours in summer and Nov-Dec, stores smaller than

400 sqm can be open all sundays at 12-21• 2009: liberalization of Sunday opening hours to all stores

• T-Group’s wholesale in crises 1996, K-Group tried to acquire but failed• T-Group’s retail transformed into Suomen Spar Oy in 1996• S- Group acquired Spar in 2006 (1/3 of stores, rest established M-Chain)• Wihuri sold its retail chains to Tradeka in 2005 and focused on wholesale• Stockmann (1,3 %) focuses on premium stores• Hard discounter Lidl entered market in 2002

High concentration and regulation in Finland: top three companies dominate 87 % of markets

Finland is one of the most regulated retail environment

Source: Indicators of regulatory conditions in the retail distribution sector: OECD.Indicator includes: barriers to entry, operational restrictions, and price controls.Scale is 0-6 from least to most restrictive of competition

Relationship between concentration and regulation?

• Countries with highly concentrated markets tend to have less regulation (Switzerland, Australia)

• In countries with most high regulation, the retail markets are the least concentrated (France, Greece, Austria)

• Thus, it seems that the degree of concentration (percentage of the sector represented by the three largest groups) is inversely related to the overall degree of regulation (but not in Finland!)

• So, does liberalizing retail markets increase market competition?

• It largely depends on the nature of regulation!!

• Also, it is dependent on how competition is determined: Local competition can be hard despite concentrated markets (cf. Lidl’s entry to Finnish markets decreased price levels locally, S- and K-group’s hypermarkets typically locate next to each other…)

How regulation has affected on retail structures and competition in Finland?

• Opening hours’ regulation has favored smaller shops• Alko–stores located near to grocery stores: more sales

to both (10-15 %)– In-store Alko-shops in the near future?

• Strategic focus on small shops and hypermarkets• Search for regulatory holes and developing new

business models: S-Groups’ ABC-chain that integrates grocery store and gas station, 24/7 opening hours.

Insights to corporate political activity:How firms proactively try to influence

nonmarket environment?

Mika SkippariAalto University School of Economics

Corporate political activity (CPA): definition

• Actions taken by firms to influence political decision-making in order to create the environment most favorable to a firm's competitive efforts.

• Firms vary across their approaches to political action (transactional and relational), the levels of participation (individual and collective), and the types of generic political strategies (information, financial incentive, and constituency building) (Hillman & Hitt, 1999)

Modes of corporate political activity (ks. Hillman & Hitt 1999: 835)

– Direct influence: • Lobbing (by internal or external professionals and

executives)• Statements to parliament and government• Membership in state committees (that prepare new

legislation) and governmental organizations (e.g., trade negotiations)

– Indirect influence: • Election funding• Advocacy advertising• Grassroots mobilization (e.g., cooperation with NGOs)

Pervasive interest of corporations towards public policies

• Firms employ 41% of all Washington lobbyists and trade associations another 22%

• 16 000 lobbyists in Washington, 10 000 in Bryssels

• 2/3 of Bryssel-based 3000 lobbying organizations (both public and private) represent business interests

Total money spent on lobbying in the USA,1998-2009

Total lobbying expenditures, 1998-2009, in U.S.A, billion dollars

0

0,5

1

1,52

2,5

3

3,5

4

1998

1999

2000

2001

2002

2003

2004

2005

2006

2007

2008

2009

Billion U.S. dollars

Lähde: www.opensecrets.org

Lobbying expenditures, by industry, in the USA, 1998-2009

• Pharmaceuticals/Health Products $2,015,490,460• Insurance $1,459,020,859• Electric Utilities $1,373,062,096• Business Associations $1,112,424,154• Computers/Internet $1,106,924,851• Oil & Gas $1,037,342,537• Education $935,332,858• Misc Manufacturing & Distributing$893,055,157

– Incl. retail sales, about 10 per cent

• Hospitals/Nursing Homes $869,050,540• Real Estate $844,306,261

Corporate election funding and lobbying expenditures in the USA 1989-2009, million USD

• Election funding

1. AT&T $36,9

2. Goldman Sachs $24,4

3. FedEx Corp $22,7

4. Altria Group $22,3

5. Citigroup Inc $20,6

6. United Parcel Service $20,4

7. Time Warner $16,4

8. Microsoft Corp $15,8

9. Verizon $15,3

10. JP Morgan Chase $15,3

• Lobbying expenditures

1. General Electric$229,3

2. AT&T$158,6

3. Northrop Grumman $155,5

4. Exxon Mobil$148,9

5. Verizon $145,2

6. Boeing Co$134,7

7. Lockheed Martin $132,4

8. PG&E Corp$117,0

9. Southern Co$113,6

10. General Motors$113,4

Go to www.opensecrets.orgto exlore more!!

Key issues in political activity

• Knowledge of political system (i.e., formal institutional setting): how and where political decisions are being made: who are the key decision-makers

• Knowing the interests of various parties (knowing ”the enemy”, opposing views)

• Having a legitimate claim (knowing informal institutional setting)

• Having sufficient resources (interpersonal ties, reputation, economic / political power)

Antecents to CPA: why some firms are more active than others?

Firm-level antecedents•Firm size•Firm slack•Political resources (organizational structures, revolving door, earlier success)•Firm diversification level•Dependence on government (state-owned firms)•Foreign ownership (liability of foreigness)•Managerial mindset

Firm-level antecedent to CPA

• Firm slack: two contradictory perspectives– Excessive economic resources enhance CPA (e.g., Wal-Mart)– Few economic resources enhance CPA (e.g. airlines after 9/11, commercial

banks after emergence of financial crises)

• CPA is being used to collect political know-how that help a firm to monitor, foresee and adapt to changes in political environment

– Earlier success and experiences in cpa increases political knowledge and know-how, thus leading to increased amount of cpa in the future

– Revolving door –effect

Liability of foreigness: Motorola vs. Nokia

Foreign companies tend to be less politicaly active than domestic firmsand they tend to favor indirect influence strategies (partnerships with localcompanies, using external lobbyists)

Effects of institutional setting to CPA

• The nature of political markets and business-government relations varies across countries– Collaborative vs. conflictive relationship between business and

government – Strong vs. weak government role – Symbiotic relationship (e.g., South-Korea, Japan)

• Political decision-making system – Concentrated vs. fragmented political decision-making system– Parlamentary vs. presidential system

Issue-specific factors

• Policy-salience (Rehbein & Schuler 1997): the policy’s net impact on the firm’s competitive performance

• Issue competition: attractiveness of the political market (Bonardi et al., 2005)– The less competing interests in the issue, the more likely firms

will engage in CPA

• Issue saliency: election issues and non-election issues (Bonardi & Keim, 2005) – Election issues are “widely salient issues”, those that have

received a high degree of public interest, attention, and visibility

Does CPA lead to better economic / competitive performance?

• Empicial results do not show that politically active firms would perform better than non-active firms (these are not studied simultaneously)

• On the other hand, several studies indicate that firms can achieve, at least temporary competitive benefits by CPA

• Firms that use varying political tactics and strategies simultaneously perform better (Schuler, 1996)

• The importance of political activity and strategies is more focal in unstable institutional environments (cooperation with local, politically connected firms)

• Political actions are more effective than competitive actions in eroding first mover advantage (Shaffer, Quasney & Smith, 2000)

• Political activity can enhance first-mover advantage and lead to long-term competitive advantage (Frynas et al., 2006)

• Close ties with government enhances survival of a firm in the long run (Baum & Oliver, 1991)

Contradictions and critics of CPA

• Are politicians and corporations self-interested rent-seekers? – Typically firms favor for free competition and resist excessive

government regulation, but when facing problems they turn to government’s help

– Is rent seeking economically reasonable? – Politicians are dependent on the information that interest groups

provide them and they are dependent on large interest groups (more voters)

– Politicians favor for free competition as long as it does not conflict with own countries’ economic interests (e.g., employment)

Various view on CPA in academic research

• Normative perspective: Public choice theory: CPA is socially damaging activity, leading to rent seeking activity and artificial redistribution of income. Firms should focus on their competitive stategies

• Descriptive (prescriptive) perspective: Strategy literature on CPA: CPA can lead to competitive advantage

– Decision is made based on cost-benefit calculus

• Ethical perspective: Is it right that firms seek economic benefits by CPA?

Key literature

• Hillman, A., & Hitt, M. 1999. Corporate political strategy formulation: A model of approach, participation and strategy decisions. Academy of Management Review, 24: 825–842.

• Hillman, A., & Keim, G. 1995. International variation in the business-government interface: Institutional and organizational considerations. Academy of Management Review, 20: 193–214.

• Bonardi, J.-P., Hillman, A., & Keim, G. 2005. The attractiveness of political markets: Implications for firm strategy. Academy of Management Review.

• Bonardi, J.-P.,&Keim, G. 2005. Corporate political strategies for widely salient issues. Academy of Management Review.

• Schuler, D. 1996. Corporate political strategy and foreign competition: The case of the steel industry. Academy of Management Journal, 39: 720–737.

• Schuler, D. 1999. Corporate political action: Rethinking the economic and organizational influences. Business and Politics, 1(1): 83–97.

• Schuler, D., & Rehbein, K. 1997. The filtering role of the firm in corporate political involvement. Business & Society, 36: 116–139.

• Amy J. Hillman, Gerald D. Keim and Douglas Schuler. 2004. Corporate Political Activity: A Review and Research Agenda. Journal of Management, 30(6): 837-857