Regulator Vulnerabilities to Political Pressures and Political Tie Intensity: The Moderating Effects of Regulatory and Political Distance.
| Verfasser | White, George O., III |
| Posten | RESEARCH ARTICLE - Report - Statistical data |
1 Introduction
Uncertain regulatory environments represent a key source of concern for wholly owned foreign subsidiaries (WOFSs) since they often inefficiently govern and constrain critical transactions, resources and opportunities in a host country (Luo and Peng 1999; Peng and Heath 1996; Puck et al. 2013). WOFSs can be seriously affected by uncertain host-country regulatory environments as they are often subject to unpredictable policy shifts and inconsistent quality of administrative enforcement (Hoskisson et al. 2000; Kingsley et al. 2012; Luo 2004, 2007). For example, formal regulatory constraints in a host country may "change overnight as the result of political and judicial decisions" (Peng and Heath 1996, p. 504). Consequently, government interference will often force inexperienced, ill-equipped, and ill-informed public administrators to erratically enforce regulatory policies (Bevan et al. 2004; Folsom et al. 2002; Luo 2002; Meyer 2001). These policy shifts have serious consequences for WOFSs because laws and regulations established by a host government affect transactions within a specific market (Kobrin 1978; Rodriguez et al. 2005) due to their shaping the formal rules that determine the reward structures and character of commercial activity (North 1997; Rosenzweig and Singh 1991).
Past research has generally revealed that government interference through the regulation of WOFSs creates the risk of government property expropriation (Kobrin 1978), the repudiation of property contracts (Delios and Henisz 2003; Henisz 2000a, b, 2004), the limitation of licensing and/or company ownership (Davidow 1980), and/or the imposition of capital controls (Shen and Lin 2012). Therefore, government interference manifested through laws, regulatory policies and administrative rules enforced by civil servants in regulatory agencies can cause market imperfections that negatively influence and impede WOFS operations in a foreign market (Brewer 1993).
Due to such unstable operating environments, several researchers have suggested that WOFSs will be substantially motivated to find ways of strategically minimizing the influence of host-country regulatory and political uncertainty--for example, through the intensification of political ties with regulators--in order to safeguard investments and operations (Boddewyn and Brewer 1994; Lawton et al. 2012a, 2012; Sun et al. 2012; White et al. 2015). However, the intensification of political ties may benefit WOFSs if their target--namely government regulators--exhibit vulnerabilities to political pressure. Further, previous research has revealed that political distance (Malik 2013) and regulatory distance (Gaur and Lu 2007) have moderating effects concerning the handling of regulatory hazards by foreign subsidiaries. (1) Moreover, when WOFS' home and host countries differ significantly in terms of political and regulatory institutions, these foreign subsidiaries will experience greater difficulties in intensifying political ties with host-country government actors in order to mitigate government interference manifested through regulatory enforcement (Henisz and Zelner 2005).
Therefore, we argue that political and regulatory distances will cause WOFSs to be less capable of leveraging institutional similarities between home and host country political and regulatory institutions when WOFSs intensify political ties. However, research has yet to empirically investigate how political and regulatory distances between a WOFS's home and host country will influence the relationship between managerial perceptions of regulator vulnerabilities (2) to political pressure and the ability of WOFSs to intensify political ties. Hence we ask the following research questions: (1) How will managerial perceptions of regulator vulnerability to political pressure influence a WOFS's propensity to develop political ties, and (2) how will political and regulatory distances between a WOFS' home and host country moderate the relationship between managerial perceptions of regulator vulnerabilities to political pressure and the intensification of political ties?
For this purpose, we apply the institution-based view to better understand how foreign-subsidiary strategies are influenced by managerial perceptions of the institutional environment (Peng 2002). The institution-based view suggests that "institutional frameworks signal to managers [...] which strategic decisions are suitable in a host country" and that these "strategic decisions concern 'rational choices' that managers may or may not exercise in order to mitigate adverse effects associated with formal institutions" (White et al. 2015, p. 343; Peng et al. 2009). Thus, we suggest that increasing the intensity of political ties with key government actors in the nonmarket arena represents an attempt to proactively mitigate the uncertainty associated with perceived regulator vulnerability to political pressure. It is our contention that enhanced intensity of political ties with key government actors will serve as a nonmarket strategic attempt to influence the regulatory oversight process (Bonardi et al. 2005; Oliver and Holzinger 2008), thereby creating opportunities for the WOFS to proactively shape how it is regulated (Bonardi 1999). However, we also apply neo-institutional theory (Scott 1995) in suggesting that political distance (Malik 2013) and regulatory distance (Gaur and Lu 2007) will have moderating effects on regulatory hazards, negatively influencing a WOFS' ability to identify regulators vulnerable to political pressure and diminishing a WOFS' capability of leveraging regulatory and political similarities between home and host countries to enhance the intensity of political ties.
With this in mind, recent reviews of the CPA literature concludes that firm governance, as one of the identified less examined CPA antecedents, is especially in need of further theoretical development and empirical research. For example, Lux et al. (2011, p. 240, 242) review of the corporate political activity (CPA) literature has stated that "of the less examined CPA antecedents [...] firm governance is one antecedent that especially requires theoretical development and empirical investigation" and "institutional theory is not yet a central theory guiding CPA inquiry [...]" (see also Doh et al. 2012). CPA scholars have also observed that strategic choices often differ markedly but little is known about the role of managerial cognition concerning strategic decision-making, particularly how management's leadership, motives, judgement, and choices influence their firm's proactive nonmarket strategies (Mellahi et al. 2016). These observations are of particular salience for CPA scholars conducting international management research in that an "up-and-coming challenge for CPA scholars is to understand non-market activity in emerging economies [...]" (Lawton et al. 2012, p. 14) yet the reliance by scholars "on secondary data and perceived difficulty in collecting primary data also likely contribute to the lack of stronger support for current theoretical perspectives" (Lux et al. 2011, p. 241).
Our study sets-out to answer these calls by filling important gaps in the CPA literature through the application of both the institution-based view and neo-institutional theory in exploring the relationship between (a) managerial perceptions of regulator vulnerabilities to political pressures in the regulatory oversight process and (b) WOFS intensification of political ties in a host country's operating environment. Second, we also contribute to the CPA literature by considering how managerial perceptions of regulator vulnerabilities to political pressures and institutional (political and regulatory) distance affects WOFS intensification of political ties in an emerging market environment. Our findings suggest that: (1) Perceived regulator vulnerability to government interference will influence a WOFS's propensity to develop political ties, (2) regulatory distance negatively moderates the relationship between perceived regulator vulnerability to political pressures and the intensification of political ties, and (3) the simultaneous, and moderating, impact of both political and regulatory distances will further diminish the relationship between perceived political pressures and the intensification of political ties. Third, we contribute to the CPA literature by testing our hypotheses via unique survey data gathered from the rarely explored context of the Philippines.
Our study is organized as follows. In the next section we discuss the theoretical foundations and hypotheses of our study. We then empirically assess our theory and model. Subsequently, we summarize the study's results. Finally, we conclude with a discussion of the study's results, limitations, and implications for future research.
2 Theory Development and Hypotheses
2.1 Regulator Vulnerability to Political Pressures
Government regulation is imposed to address market imperfections or failures in order to benefit the economy and the general public within a society. However, some governments are less independent than others as when, for instance, they become beholden to powerful interests that want administrative rules written to benefit private interests through government regulatory interference acquired through rent-seeking activities (Stigler 1971; Peltzman 1976; Posner 1974). When government regulators are independent and there is a lack of government interference, there will be an improvement in overall market competition on account of the lack of regulatory bias in favor of powerful interests such as incumbent firms and state-owned enterprises.
However, host-country governments frequently make long-term regulatory policy commitments, only to later renege on their commitments and expropriate rents generated by foreign subsidiaries (Chung and Beamish 2005; Luo 2003). These indeterminate public policy shifts...
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