s8_political markets and uncertainty

52 Academy of Management Perspedives August

S Y P O S I U

Political Markets and Regulatory Uncertainty:Insights and Implications for Integrated Strategyby Allison F. Kingsley, Richard G. Vanden Bergh, and Jean-Philippe Bonardi

Executive OverviewManagers can craft effective integrated strategy by properly assessing regulatory uncertainty. Leveraging theexisting political markets literature, we predict regulatory uncertainty from the novel interaction ofdemand- and supply-side rivairies across a range of political markets. We argue for cwo primary drivers ofregulatory uncertainty: ideology-motivated interests opposed to the firm and a lack of competition forpower among political actors supplying public policy. We align three previously disparate dimensions ofnonmarket strategy—profile level, coalition breadth, and pivotal target—to levels of tegulatory uncer-tainty. Through this framework we demonstrate how and when firms employ different nonmarket strategies.To illustrate variation in nonmarket strategy across levels of regulatory uncertainty, we analyze severalmarket entry decisions of foreign firms operating in the global telecommunications sector.

Firms know that entering a new industry orgeographic market involves market risk. Com-mitting to that investment may also suhject

flrms to a critical nonmarket risk: regulatory un-certainty. Firms entering new markets are oftenrequired to gain approval from a regulator, andonce approved the firm's investments are typicallysuhject to ongoing scrutiny hy a regulator overissues such as product safety, pricing, rate of re-turn, competition, and access to distrihutionchannels. The uncertainty associated withchanges in regulation or public policy can reducethe firm's profitability or block the firm frommeeting other performance objectives.

This applies, of course, to developed countriesbut also to emerging economies. Consider for in-stance the case of the German wholesaler MetroCash and Carry when it enteced India in 2003

(Khanna, Palepu, Knoop, & Lane, 2009). Al-though Metro's distribution processes could be ofvalue in India, where getting fresh fruits and veg-etables was often challenging for local restaurantsand hotels, the firm struggled to obtain regulatoryapproval. Several years after obtaining initial reg-ulatory approval to enter the market, shelves inMetro's large stores were still half-empty becauseof local governments' interpretation of the Agri-cultural Produce Marketing Committee Act. Thisact, in effect, prevented the company from sourc-ing from farmers directly. Metro also faced muchstronger local opposition, particularly from localretailers, than it had expected. Overall, regulatoryuncertainty was the major reason a multinationallike Metro struggled in India.

In a similar spirit, more than 300 multinationalexecutives from diverse firms, industries, and host

* Allison F. Kingsley ([email protected]) is Assistant Professor of Management at the University of Vermont School of BusinessAdministration.Richard G. Vanden Bergh ([email protected]) is Associate Professor of Management at the University of Vermont School ofBusiness Administration.Jean-Philippe Bonardi ([email protected]) is Professor at the Faculty of Business and Economics of the University ofLausanne.

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2012 Kingsley, Vanden Bergh, and Banardi 53

countries were asked in July 2011 to assess thesalience of political risks in their emerging marketinvestments (World Bank, 2011). Among the re-spondents, 54% rated adverse regulatory change asa political risk of most concem, a significantlymore pressing concem than either risk of expro-priation (34%) or risk of war (31%). About one infive executives regarded war (23%) and expropri-ation (18%) risk as having "no impact" on theirrisk perception; fewer than 1 in 25 regarded reg-ulatory uncertainty as such (3%). Indeed, 35% ofmultinational companies have experienced finan-cial losses in the past three years due to adverseregulatory changes. In the past 12 months alone,43% of surveyed multinationals withdrew existingor canceled planned investments due to unfavor-able changes in regulation. To manage ongoinginvestments with regulatory uncertainty, execu-tives closely monitor the risk (27%) but also findthat the most effective strategy relies on engagingwith local public entities (10%), local enterprises(14%), or key political leaders (25%). Nonmarketstrategies matter to executives. When firms fail toalign nonmarket strategies to the regulatory un-certainty they face, struggles like those experi-enced by Metro Cash and Carry in India occur.

Understandably, both market and regulatory un-certainty will vary from one industry or geographicregion to the next but are not exclusive to any oneindustry or region. Thus firms need to develop anunderstanding of the key factors affecting both typesof uncertainty, and from this understanding craft anintegrated strategy (Baron, 1995a, 1995b) that min-imizes the costs associated with the regulatory un-certainty while complementing the firm's marketinvestments. Crafting strategy to manage marketuncertainty is important and highly developed in thebusiness field. In this paper we focus our analysis ondesigning nonmarket strategies to manage regulatoryuncertainty and discuss ways for firms to integratethis with their market strategy. Our empirical con-text centers on firms' market entry strategies, al-though our analysis can be applied across multiplemarket strategies.

We propose a practical and novel frameworkfor managers to predict the level of regulatoryuncertainty. The framework we develop buildsfrom what are referred to as "political markets," a

term first coined by Nobel laureates in economicsJames Buchanan and Gordon TuUock (1962) andlater applied to the study of firms' nonmarketactivities (Bonardi, Hillman, & Keim, 2005). Ac-cording to the framework, political markets con-sist of demanders of public policy such as firms,consumers, and special-interest groups. Demand-ers have a stake in regulatory policy. For example,a firm's stake reflects the incremental effect aregulation will have on profitability, while a con-sumer's stake reflects the effect a regulation willhave on the value-to-price ratio of the product.Political markets also consist of suppliers of publicpolicy such as legislators and the executive, regu-lators, and courts. Similar to demanders, suppliersalso have interests in regulatory outcomes. Sup-plier interests, in contrast to firms', are assumed toreflect their own ideology and/or the interests oftheir constituents (Kalt & Zupan, 1984).

Demanders and suppliers interact with eachother by exchanging information, votes, and/orother valuable resources. Erom this exchange be-tween demanders and suppliers a regulatory policyemerges; predicting the level of regulatory uncer-tainty, however, remains elusive. Whereas the po-litical market approach has already been used tostudy firms' ability to influence policy-making, wepropose that a similar approach can be used topredict regulatory uncertainty and how firms canmanage the regulatory uncertainty through thedesign of an integrated strategy.

In jointly analyzing political markets and regula-tory uncertainty, we make several meaningful con-tributions. We provide a flexible framework thatapplies to the range of nonmarket settings by trans-lating the political markets framework developed inmore mature and formal institutional settings (e.g.,the United States and Westem Europe) to theemerging-market and developing-country context.Specifically, we analyze the supply-side interactionamong multiple political actors, including autocraticsovereigns. We also develop new insights into thekey characteristics of demand-side interest groups.Eurthermore, we explore how the characteristics ofboth the demand- and supply-side actors interactwith each other to affect the degree of regulatoryuncertainty a firm faces.

We offer an innovative perspective on the

54 Academy af Management Perspetiives August

three dimensions of firms' nonmarket strategies,effectively synthesizing several previously dispa-rate nonmarket choices. In addition, we integratethis nonmarket analysis with one of a firm's mostcritical market strategies: market entry. In show-ing how firms can assess regulatory uncertainty inthe context of entering new markets, we contrib-ute to several literatures on market, nonmarket,and integrated strategy. In addition, our insightson nonmarket strategies offer managers clear, ex-ecutable strategies with direct overall performanceimplications for firms.

The paper is organized as follows. Overall wepropose a simple two-by-two framework in two parts.In the "Political Markets and Regulatory Uncer-tainty" section, we develop the first part of theframework, which derives predictions about regula-tory uncertainty. In the 'TSIonmarket Strategies" sec-tion, we propose the second part of the framework,which develops strategic implications for firms tomanage regulatory uncertainty in the context oftheir expected and/or existing market investments.To create an integrated strategy, we suggest thedimensions of a nonmarket strategy that fit well withthe characteristics of the political market, that is,activities and tactics in which market decisions suchas market entries are aligned with nonmarket onessuch as campaign contributions, lobbying, or coali-tion building (Baron, 1995a; de Figueiredo &. Ed-wards, 2007; Hillman & Hitt, 1999). In the "Discus-sion" section, we provide various examples fromfirms' market entry choices in the global telecom-munications sector that involve different nonmarketstrategies; we argue that the observed integratedstrategy fits well with our framework. Finally, in the"Gonclusions" section, we discuss our contributionand the critical open questions that need to beaddressed to develop a deeper understanding of reg-ulatory uncertainty and the implications for firms asthey develop their integrated strategy.

Political Markets and Regulatory Uncertainty

Political markets are different from economicmarkets (Boddewyn &. Brewer, 1994; Bonardiet al, 2005; Bonardi, 2011; Buchanan & TuU-

ock, 1962; Hillman & Keim, 1995; Weingast &Marshall, 1988). This is why managers pursuemarket strategies to improve the firm's economic

performance and nonmarket strategies to improvethe firm's political performance. For the best over-all firm performance, managers integrate marketand nonmarket strategies (Bach &. Allen, 2010;Baron, 1995a, 1995b). In this section of the paper,we focus mainly on the nonmarket environmentof business, specifically the political market forregulation, and we analyze a key nonmarket issueconfronting managers: regulatory uncertainty.

The magnitude of regulatory uncertainty iscritical to the performance of firms in many in-dustries, including oil, natural gas, electric utili-ties, airlines, pharmaceuticals, and telecommuni-cations. Research has shown that heavilyregulated (e.g., banking, telecommunications, nu-clear power) and government-dependent (e.g., de-fense) industries necessarily spend the most cor-porate resources managing regulatory uncertainty(Baron, 1995a; Goates, 2011; Grier, Munger, &.Roberts, 1994; Stigler, 1971). However, the re-cent growth of social and environmental interestgroups has spread regulatory uncertainty to indus-tries not traditionally considered highly regulated(Holbum & Vanden Bergh, 2008; King & Lenox,2000). Such uncertainty is difficult for business(Ryan, Swanson, &. Buchholz, 1987), and execut-ing nonmarket strategies is increasingly seen as"the cost of doing business" (Kwak, 2012). Thatcost derives in part from regulators' leamingcurve—their need to learn how to regulate newbusiness models and/or technologies—and fromthe political games taking place among the variousplayers involved in the regulatory process, such asfirms, regulators, politicians, consumers, and in-terest groups (Holbum & Vanden Bergh, 2004,2008). Whereas authors in the international busi-ness literature typically have focused on the bar-gaining power of multinational firms vis-à-vis lo-cal govemments (Blumentritt & Rehbein, 2008;Lecraw, 1984; Luo & Zhao, in press), we considerhere the interactions among a much larger poten-tial set of institutional players.

Managers will find it useful to view regulationin the context of a political market where thereare demanders of regulation and suppliers of regu-lation. See Figure 1 for an illustration. As expli-cated in the introduction of this paper, demandersare the regulated firm, other firms, consumer


Figure 1Political Markets, Regulatory Uncertainty, and Integrated Strategy

Rivalry faced by thefocal firm on theDEMAND SIDE of thepolitical market(interest groups,activists, other firms)

Political Market Conditions

REGULATORYUNCERTAINTY

Rivalry among publicplayers on the SUPPLYSIDE of the politicalmarket (regulators,politicians, courts)

Focal Firm'sIntegrated Strategy

groups, and other activist interests or stakeholders(Arrow, 1951; Black, 1958; Buchanan & TuUock,1962); suppliers are the regulator, the executive,legislators, political parties, and courts (Downs,1957; Riker, 1962; Stigler, 1971). Demanders andsuppliers transact by trading regulatory policies forresources such as votes, finances, or information(de Eigueiredo & Edwards, 2007; Hillman & Hitt,1999). Eirms can be strategic with political markettransactions to maximize firm performance.

Indeed, the political market matters for firms.Scholars have shown that the nature of demand-ers can influencé the regulatory process. Eor ex-ample, in the electric utility sector regulators tendto reduce the allowed rates charged to consumerswhen a competing interest group advocates forconsumers within the political market (Bonardi,Holbum, & Vanden Bergh, 2006). Researchershave also shown that the nature of suppliersshapes regulatory outcomes. In the political econ-omy literature, for example, scholars have shownthat elected regulators tend to have a negativeeffect on tiie profitability of firms (Besley &.Coate, 2003). There are thus factors in the polit-ical market that tend to bias regulation in predict-able directions. However, there are also factorsthat create greater uncertainty for firms subject toregulation over their market investments.

To predict the relative magnitude of regulatoryuncertainty, managers must understand their spe-cific political market context, notably the natureof demand-side rivalry and the nature of supply-side rivalry. Drawing from the political markets

literature we focus on two drivers of regulatoryuncertainty: political motivation/level of ideology(on the demand side) and level of competition forpower among political decision makers (on thesupply side). Eurthermore, we argue that this reg-ulatory uncertainty makes political markets lessattractive for business investment.

Nature off Demand-Side Rivalry

The political markets literature identifies demandersof regulation as firms in the industry, consumergroups affected by regulatory policy, and other activ-ist interest groups with a stake in the policy outcome(Bonardi et al., 2005; Hardin, 1982; Moe, 1980;Olsen, 1965). Demanders can originate locally orintemationally. In developing-country contexts, ex-ternal or foreign interests tend to assume a largerrole, capitalizing on foreign firms' vulnerabilitiesand/or vocalizing local groups' interests. We exam-ine regulatory uncertainty from the perspective ofregulated firms, whereby the focal firm is opposed byeither another firm or an interest group representingstakeholders or affected interests. The firm's rival onthe demand side is characterized by its motivationfor regulatory change, either ideology or efficiencymotivations.

Ideology-motivated interests generate the mostregulatory uncertainty. Demanders with ideologi-cal agendas are difficult to manage (Bonardi et al.,2006; Bonardi & Keim, 2005) and tend to lever-age public pressure effectively through tactics suchas mailings, campaigns, boycotts, reports, and/oradvocacy advertising (Baron, 2010; Holbum &

56 Academy oí Management Perspectives August

Vanden Bergh, 2004). Nonmarket issues thathave an ideological underpinning also tend to beuniquely partisan and widely salient, which corre-lates with more unattractive political markets(Bonardi et al, 2006; Bonardi & Keim, 2005).Intensified rivalry among competing demandersmakes markets even more unattractive. Researchfinds that rivalry increases with election issues,concentrated costs or benefits, and attempts tochange existing regulation (Bonardi et al., 2005;Bonardi et al., 2006; Bonardi & Keim, 2005; Hill-man &. Hitt, 1999; Lowi, 1964; Wilson, 1980), allof which arguably accompany ideological opposi-tion. In addition, the coalition of voter intereststied to ideology-motivated opponents likely holdsmore strongly felt preferences with greater indi-vidual stakes, and thus they make more durableopponents than efficiency-motivated interests(Stigler, 1971; Weingast & Marshall, 1988).

Efficiency-motivated interests, by contrast, tendto be associated with narrower issues that are notdefined along partisan lines but rather reflect bot-tom-line concerns. With efficiency-motivated ri-vals, the regulated firm is better able to identifyrivals and has more substitute actions available totrade, which, in tum, lowers transaction costs ofnegotiation relative to ideology-motivated rivals(Coase, 1960). Thus, from the regulated firm'sperspective, the political market is more attractive(Bonardi et al., 2006) when there is less intenserivalry among demanders (Bonardi et al., 2005;Bonardi et al., 2006; Bonardi & Keim, 2005) andless saliency in the eyes of suppliers. All else beingequal, if demand-side rivalry exists, regulatory pol-icy outcomes are more predictable and regulatoryuncertainty lower when the rival is an efficiency-motivated interest.

Nature of Supply-Side Rivalry

Suppliers of regulation are the regulator, execu-tive, legislators, political parties, courts, and otherinstitutional decision makers. Previous work hastended to concentrate analysis on select roles. Eorinstance, much of the literature on foreign invest-ment and bargaining power focuses on only oneaggregate supplier: the host government (Brewer,1992; Dunning, 1993). In the nonmarket strategyliterature, Bonardi et al. (2005) focused on two

types of suppliers, bureaucrats and elected officials;Holbum and Vanden Bergh (2004) and Bonardiet al. (2006) focused on regulatory agencies, rep-resentatives and senators, and executives; andSpiller and Gely (1990) and Spiller and VandenBergh (2003) focused on courts. Eollowing thiswork, we focus on how the regulator suppliesregulatory policy jointly with politicians.

Competition among political actors creates amore attractive political market for firms (Anso-labehere, de Eigueiredo, &. Snyder, 2003; Baron,2001; Bonardi et al., 2006). Eundamentally this isbecause competitive elections increase rivalry(Bonardi et al., 2006), which makes politiciansmore willing to trade policy favors (Baron, 2001)and more responsive to satisfying constituent in-terests (Keim & Zeithaml, 1986). As Stigler(1971, p. 13) noted, "If entry into politics is ef-fectively controlled, we should expect one-partydominance to lead that party to solicit requests forprotective legislation but to exact a higher pricefor the legislation." Thus competition amongelected politicians creates opportunities for corpo-rate political strategies to work (Hillman &. Keim,1995; Keim &. Zeithaml, 1986), including in aregulatory setting. We note, however, that in de-veloped countries such political actors are typi-cally elected, whereas in developing countrieselections may be less potent or even nonexistent.There are fewer actors, potentially only one piv-otal decision maker, less delegation of power fromthe executive, and thus signiflcantly less compe-tition. We incorporate this important distinctionexplicitly in our framework.

Competition may be defined beyond rivalryfor power. When competition among politicalactors is driven also by heterogeneous prefer-ences (Bonardi et a l , 2006; Vanden Bergh &.Holburn, 2007) instead of or in addition tochecks and balances, the logic holds: More com-petition creates a more attractive (and oppor-tunistic) political market, which correspondswith less regulatory uncertainty.

The political markets literature uses severalempirical measures to capture this idea of compe-tition among political actors. In Bonardi et al.(2006), the degree of supply-side rivalry is opera-tionalized as the margin of winning votes for the


executive (governor or president) or the legislator(or party). Rivalry is considered intense if there isa greater than 5% difference between votes. In.Holbum and Vanden Bergh (2012), legislativecompetitiveness is also measured by the degree ofpartisan control of the legislature. Rivalry is mostintense when political parties hold equal shares ofthe legislative seats. In addition, a country's gov-emance environment has been measured by thepolitical constraint index (POLCON) compiledby Henisz (2000) and tested successfully againstintematiorial infrastructure data (2002) andacross a wide range of developed and developingcountries. POLCON measures the feasibility ofpolicy change based on a simple spatial model ofveto players, party alignment, and preferencesacross branches of government.^ The index rangesfrom 0 to 1, with higher scores indicating morepolitical constraints. The more political con-straints there are, the less feasible policy changebut the more potential leverage or pivot points. Inpolitical markets with no delegation of powerfrom the executive (e.g., autocratic regimes),there are no constraints against the executive. Inall measures of political competition, the funda-mental idea remains the same: Competitionmakes political markets more attractive and lessuncertain for the regulated firm.

Predicting Regulatory Policy Uncertainty

I ntegrating these insights on the nature of de-mand-side rivalry and the nature of supply-siderivalry, we can predict regulatory uncertainty.

Figure 2 suinmarizes these insights in the first partof our simple two-by-two framework.^

Figure 2Predicting Regulatory Uncertainty

' POLCON I measures the feasibility of policy change, that is, theextent to which a change in the preferences of any one political actor maylead to a changé in govemment policy. The index is composed from thefollowing information: the number of independent branches of govemmentwith veto power over policy change, counting the executive and thepresence of an effective lower and upper house in the legislature (motebranches leading to more constraint); the extent of party alignment acrossbranches of govemment, measured as the extent to which the same partyor coalition of parties controls each branch (decreasing the level of con-straint); and the extent of preference heterogeneity within each legislativebranch, measured as legislative fractionalization in the relevant house(increasing constraint for aligned executives, decreasing it for opposedexecutives).

We recognize that differences among political markets are more aptlyrepresented as continua of competition and ideology.

I

Ideology-Motivated

Opponent(s) I

Efficiency-Motivated

Opponent(s)

Highly Uncerlairi

"NC/E"

Uncertain

uncertain

"C/l"

"C/E"

Least Uncertain

No Competition CompetitionAmong Among

Political Actors Political ActorsNATURE OF SUPPLY-SIDE RIVALRY

Using the insights on regulatory uncertaintyfrom Figure 2, we can also make predictions aboutmarket entry and implications for investment. Ifthe regulated firm is opposed by an efficiency-motivated interest and there is significant compe-tition among political actors (Cell C/E), there isless uncertainty. We predict that the regulatedfirm will enter the new market, potentially as aleader (Bonardi et al, 2005). In hybrid situations(Cell C/I and Cell NC/E), there is moderate reg-ulatory uncertainty, which constrains the firm'sentry decision. If the regulated firm is playing apolitical game with an ideology-motivated oppo-nent in the context of no or little competitionamong political actors (Cell NC/I), the regulatoryoutcome is highly uncertain. This uncertainty im-pedes investment, akin to a postpone strategy(Bonardi et al., 2005). The regulated firm is likelyto not enter a new market (or further invest in anexisting market) if it cannot foresee the value ofits investment over time or anticipate opportuni-ties to influence the political market. Generallythis results in a net loss for society but may be thebest outcome for the individual firm. Accordingly,when considering entry into a new market andwhen regulatory uncertainty exists, firms have twostark choices: if uncertainty is too great, delayinvestment, or develop and implement a nonmar-ket strategy that sufficiently mitigates the negativeeffects of the uncertainty. We now focus our at-tention on the latter.

SB Academy af Management Perspedives August

Nonmarket Strategies

D ifferent types of regulatory uncertainty requiredifferent strategies (Bonardi &. Keim, 2005).As uncertainty increases so too does the cost

of implementing a nonmarket strategy. We iden-tify three dimensions previously treated dispa-rately in the literature to guide how a regulatedfirm should allocate incremental resources to mit-igate uncertainty. The strategies differ in terms ofprofile level, coalition breadth, and pivotal tar-get—and, ultimately, cost. Variation in firm strat-egies is driven by changes in the nature of bothdemand-side and supply-side rivalries, and we ar-gue that the demand side explains more of thevariation. Eigure 3 summarizes these strategic im-plications for firms.

Profile Level

Corporate political strategies can be divided intolow- and high-proflle strategies. Low-profile strat-egies occur without public involvement, whereashigh-profile strategies engage the public. High-profile strategies are significantly more costly be-cause the firm needs to invest more in publicityand runs a greater risk of suffering reputationaldamage.

Using the taxonomy of political strategies iden-tifled in Hillman and Hitt (1999) and furtherdiscussed in Hillman (2003) and Bonardi andKeim (2005), low-profile strategies include butare not limited to information strategies such aslobbying, commissioning research projects and re-porting research results, and supplying positionpapers or technical reports; financial incentivestrategies such as honoraria for speaking and paidtravel; and constituency-building strategies suchas political education programs. High-profile strat-egies can include information strategies such astestifying as an expert witness; financial-incentivestrategies such as contributions to politicians andpolitical parties and personal service (hiring peo-ple with political experience or having a firmmember run for office); and constituency-buildingstrategies such as grassroots mobilization (of em-ployees, suppliers, and customers), advocacy ad-vertising, public relations, and press conferences.

We can find numerous examples of high-profile

strategies in the literature. They include engagingin public corporate social responsibility programsto signal information to consumers and potentialcoalition partners (Siegel &. Vitaliano, 2007) aswell as other demanders and suppliers, attendingto political ties and personal relations between themultinational corporation (MNC) and its hostgovernment (evaluated at length in bargainingpower and political connection theories); strate-gically increasing political connections betweenthe firm and high-level govemment officials (Blu-mentritt, 2003; Blumentritt & Rehbein, 2008;Dieleman & Boddewyn, 2012; Faccio, 2006; Law-rence, 2010; Luo &. Peng, 1999); and preemptiveself-regulation (Bonardi &. Keim, 2005; Maxwell,Lyon, & Hackett, 2000),

Firms tailor the profile of their strategy basedon the nature of opposing demand. For example, ifthe firm is opposed by an ideology-motivated in-terest, it will deploy high-profile political strate-gies that actively engage the public as well aspolitical actors. In cases of extreme regulatoryuncertainty (Cell NC/I), the firm will also needlow-profile strategies thai go behind the scenes toprovide information and financial incentives tokey decision makers. With efficiency-motivatedopponents, and thus less uncertainty, the firmneed pursue only low-profile strategies.

Coalition Breadth

Much work on market strategy centers on thequestion of corporate scope, whether a firm shouldintegrate vertically and expand horizontally (Por-ter, 1985). For nonmarket strategy, the question ofcoalition scope can be equally important in deter-mining performance. Managers must evaluatewhether to build "horizontal" coalitions amonginterest groups and stakeholders outside of theflrm's "vertical" chain o: production where morenatural coalition partners often reside (Baron,1995b; Porter, 1985). This vertical rent chainincludes factor inputs (employees, suppliers andtheir employees, capital, communities), the valuechain (inbound logistics, operations, outbound lo-gistics, marketing and saies, service, support activ-ities, alliances), channels of distribution (whole-salers, distributors, retailers), and customers(consumers, locked-in customers) (Baron, 1995b).

2012 Kingsley, Vanden Bergh, and Bonardi 59

Figure 3Nonmarket Strategies

Cilug

Q

<

mau.OlU

oc

Ideology-Motivated

Opponent(s)


Opponent(s)

Profile: Low & High

Coalition: Horizontal & Vertical

Pivots': Regulator, Executive,

Legislators, Party Leaders

"NC/E"

Profile: Low

Coalition: Vertical

Pivots': Regulator, Party Leaders

iProfile: High

|Coa//i/on; Horizontal

iP/Vofs; Regulator, Executive,¡Legislators

"C/I"

"C/E"

Profile: Low

Coalition: Vertical

Pivots: Regulator, Executive,

Legislators

No Competition AmongPolitical Actors

Competition AmongPolitical Actors

NATURE OF SUPPLY-SIDE RIVALRY

*ln extremely uncompetitivecontexts (e.g., strongautocracy). Pivots: Executive $$

Horizontal coalitions can include any interestgroup that wants the same regulatory policy out-come the focal firm seeks.

Our framework helps firms determine thebreadth of their nonmarket coalition based on thenature of opposing demand. With ideology-moti-vated opponents, regulated firms must find alliesand advocates outside of their conventional coali-tion of business-related groups with aligned inter-ests. This makes horizontal coalitions more costlyto implement. With efficiency-motivated oppo-nents, firms pursue less costly vertical coalitions.Situations with the highest uncertainty (GellNG/I) require both horizontal and verticalcoalitions.

Pivotal Target

Based on the political markets' structured models,demanders will invest incremental resources ininfluencing pivotal institutions or actors (Grose-close, 1996; Groseclose & Snyder, 1996; Holbum& Vanden Bergh, 2004; Krehbiel, 1998, 1999;Snyder, 1991).^ The target of the regulated firm's

•* Because we combine executives and legislatures into one category of"political actors," our framework can be translated from presidential toparliamentary systems or corporatist and pluralist systems as explicated inHillman and Keim (1995) and Hillman (2003). Specifically, there is anelective affinity between our model and the predictions in the literature onpresidential versus parliamentary systems. Presidential systems that are

nonmarket strategy will depend on the relativepolicy preferences and formal structure of the dif-ferent institutions (de Figueiredo & de Figueiredo,2002; Hillman & Hitt, 1999; Holbum & VandenBergh, 2008; Vanden Bergh &. Holbum, 2007).Following the logic of Holbum and Vanden Bergh(2008) and Vanden Bergh and Holbum (2007),the pivotal political institution or actor is the onethat represents, in essence, the swing vote.

In a competitive political environment, thefocal firm will tend to allocate greater resources topivotal legislators/executives to counteract pres-sure brought by opposing ideology-motivated op-ponents. In a less competitive environment, ap-pointed party leaders are pivotal, as they organizethe politicians' preferences and constrain rivalry.Targeting party leaders is, however, more expen-sive than targeting legislators and the executive,as parties have ongoing costs of operation andcosts of maintaining an organization and compet-ing in elections (Stigler, 1971). Again, the mostuncertain or least attractive political market (GellNG/I) requires regulated firms to allocate signifi-cant resources to comprehensively target multiplepolitical actors (Vanden Bergh &. Holbum, 2007)

explicitly political, more confrontational, and legislator focused will groupin Cell C/I, generally, whereas parliamentary systems will group in CellNC/E due to their executive focus, long-term cost-benefit analysis, andmore cooperative sensibility.

60 Academy of Management Perspectives August

(see Eigure 4, which outlines the costs of nonmar-ket strategies). While costly, jointly targeting theregulator, executive, legislators, and party leaderscan serve as insurance or a majority protectionstrategy (Croseclose, 1996; Croseclose & Snyder,1996). In extreme situations lacking competition(e.g., strong autocracies), the swing vote is theexecutive, and all resources must be directed tothe single pivotal actor.

In sum, the most expensive nonmarket strate-gies are associated with the most uncertain polit-ical markets. Yet without a nonmarket strategytailored to the level of regulatory uncertainty, afirm will not (or cannot successfully) invest in anew market.

Discussionle illustrate our nonmarket framework by an-'alyzing several foreign entry decisions byfirms operating in the global telecommuni-

cations sector. Our goal is to highlight variation innonmarket strategy given different political land-scapes. We discuss general strategies used by for-eign investors and specifically address the marketentry strategies of firms domiciled in the UnitedStates, Malaysia, Italy, and Luxembourg that in-vested in the host markets of India, Thailand,Russia, and the more risky emerging markets. Atthe end of the section, we discuss where we needto develop a better understanding of regulatoryuncertainty, and we provide managers with keytakeaways.

Foreign Entrants to Emerging-MarketTelecommunications Markets

In global contexts, firms are keen to manage reg-ulatory uncertainty. Arguably, assessing the na-ture of demand-side rivalry and the nature ofsupply-side rivalry is most critical when enteringnew geographic markets, where success dependson navigating the new political landscape andwhere exit strategies are typically more compli-cated. To illustrate how our political markets andregulatory uncertainty framework applies to firmsentering foreign markets, we focus on select casesfrom the telecom sector. In doing so, we keepvariation associated with industry type constant,effectively isolating the effect of political markets.

The telecom sector also makes for a strong test ofthe proposed framework: Civen domestic con-sumption and government oversight of pricingand sector regulation, telecom markets are in-tensely political affairs. The sector also exempli-fies the tensions of entering foreign markets, astelecom investments are characterized by highcapital intensity, significant asset specificity, andeconomies of scale and scope (Williamson, 1985).Our time period also covers the first decade ofinternationalization, which has been determinedthrough previous research (Holburn &. Zelner,2010) to be a critical and broadly applicable em-pirical framework.

When a telecom firm evaluates new geographicmarkets, it aims to predict the level of regulatoryuncertainty it will face over the life cycle of itsinvestment. Such uncertainty arises because theregulator can terminate exclusive rights, licensenew competitors, set new rate structures, changelicense terms, or intervene in consumer disputesor interconnection arrangements between serviceproviders. To predict the magnitude of the uncer-tainty, the telecom firm anticipates the motiva-tions of its primary opponents and assesses thecompetitiveness of poli deal actors. Ideology-mo-tivated opponents are often labor unions fightingagainst job losses, nationalists opposed to foreignownership of strategic state assets, or local andintemational development groups concerned withuniversal service requirements. Efficiency-moti-vated opponents tend to be consumers advocatingfor better service or local and intemational pro-liberalization groups opposed to anticompetitivepractices like monopolies or supportive of openingthe sector to foreign ownership. Because telecomregulation is jointly supplied by the regulator andother political actors (e.g., executive, legislators),telecom firms can benefit from competitionamong them. Where regulatory uncertainty ex-ists—due to an ideology-motivated opponentand/or lack of competitiveness of political ac-tors—telecom firms can implement a nonmarketstrategy to mitigate the uncertainty or delay in-vestment in the country if uncertainty is too great.

We use information from a subset of telecomentry decisions that took place in 103 emergingmarkets throughout the 1990s, the first decade of


Figure 4The Cost off Nonmarket Strategies

E

Ut

o

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o

3

Ideology-

Motivated

Opponent(s)

Efficiency-

Motivated

Opponent(s)

Profile: Low & High $S

Coalition: Horizontal & Vertical SS

Pivots': Regulator, Executive,Legislators, Party Leaders SSS

"NC/I"

"NC/E"

Profile: Low $

Coalition: Vertical $

Pivots': Regulator, Party Leaders $$

; No Competition Among

i Poiiticat Actors

Iproff/e; High $$

lcoa//f/on,- Horizontal $$

IP/Vois,- Regulator, Executive,¡Legislators $$

j "C/i""C/E"

Profile: Low $

Coalition: Vertical $

Pivots: Regulator, Executive,Legislators $$

Competition Among

Poiiticai Actors

i NATURE OF SUPPLY-SiDE RIVALRY

1 *ln extremely uncompetitive |1 contexts (e,g,, strong |; autocracy). Pivots: Executive $$ ;

internationalization in the telecom sector. Ana-lyzing cases during this time frame provides spe-cific insight into how firms integrate market andnonmarket strategy under extreme informationconstraints and in the process of new marketopenings. In the 1990s, 65 of the 103 countriesexperienced positive entry decisions by foreignfirms into the country's telecom sector. In theother 38 countries, either the sector did not opento new entrants (e.g., China) or telecom firmschose to postpone investing (e.g., Colombia in1992, Pakistan in 1996, Slovakia in 1999).

Eoreign investors strategically assessed their en-try options, specifically how well integrated strat-egies might work and thus which ones to employ.Eor instance, of the 597 individual foreign invest-ments, 39.5% used traditional vertical coalitionsthat involved foreign equity partners (49.8% ofinvestors), intemational banks (29.2% of inves-tors), or joint ventures with locals or the govem-ment (14.9% of investors); 19.1% used morecostly horizontal coalition strategies that involvedhome govemments through bilateral investmenttreaties (30.2% of investors), intemational orga-nizations and multilateral institutions such as theWorld Trade Organization General Agreementon Trade in Services (11.2% of investors), or theWorld Bank's Intemational Centre for the Settle-ment of Investment Disputes (15.9% of inves-tors). These findings align with the World Bank's

executive survey data discussed in our introduc-tion, thus suggesting that these telecom data are areasonable candidate to illustrate the general im-plications of our framework without sacrificingexternal validity.

To further assess the applicability of our regu-latory uncertainty framework and control for therole of market strategy, we discuss three cases inrelatively similar market contexts: Thailand, Rus-sia, and India in the mid-1990s (see Eigure 5). Ineach of these settings, the competitiveness of po-litical actors and the nature of opposing demandvary, thereby illustrating the key dimensions ofour framework. Using the political constraint in-dex as our proxy for the competitiveness amongpolitical actors (Henisz, 2000), we see that bothThailand (0.56 out of 1.00) and India (0.57 out of1.00) demonstrated more political constraints andthus more competition among politicians. Russia,by contrast, had a materially lower score of 0.15,suggesting that its political markets were less at-tractive. In terms of ideological political opposi-tion. Thai labor unions campaigned against for-eign investment in the sector, citing loss of jobsand depressed wages. Both Russia's and India'sforeign investment opportunities were opposedpredominantly by efficiency-motivated pro-liber-alization groups who fought against the lack oftransparency and "worst" practices in the licens-ing and privatization process.


Figure 5Indicative Empirical Cases

DC

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M

àZ

UJ

ooUJDC

H

Z

Ideology-Motivated

Opponent(s)


Opponent(s)

Millicom,Multiple Countries199O's

"NC/r

"NC/E"

Telecom Italia,Russia1995

No CompetitionAmong

Political Actors

Samart,Thailand

1997

"C/l"

"C/E"

US West,

India1995

CompetitionAmong

Political ActorsNATURE OF SUPPLY-SIDE RIVALRY

India in the mid-1990s (Cell C/E) experiencedsignificant competition among elected politicians,with preferences and control shifting often. USWest, an American Baby Bell, entered the Indianmarket in 1995 by acquiring five licenses, mostnotably a 10-year pilot license to set up India'sfirst private telephone network for basic phoneservices. The company pursued a baseline low-profile strategy of working with the Indian regu-lator almost exclusively. This involved informalbidding for licenses (often ahead of public ten-ders) in an attempt to manage opposition fromincreasingly vocal pro-liberalization groups, in-cluding key competitors such as NYNEX and Re-liance (Pyramid Telecom, 1995a). To secure li-censes and counter the efficiency opponents, USWest also structured a vertical coalition that in-cluded its proposed equipment suppliers and theCellular Operators Association.

In Russia in 1995 (Cell NC/E) politics wereless competitive than in India, increasing uncer-tainty for foreign telecommunications firms.Much of the opposition to foreign investment wasfrom media and business communities who wereopposed to cozy sales lacking in transparency andefficiency. Investors generally used baseline low-proflle, vertical-coalition strategies as in India, buttheir political targets were the party and not theregulator, which was weak in the face of regimetransition and liberalization. Indeed, Telecom Ita-lia found that investing in Russia required exten-sive and quiet backroom negotiations with party

insiders. In the privatization of Russia's state-owned local telecommunications firm, Svyazin-vest, foreign telecom investors such as TelecomItalia were "careful not to arouse Russian sensibil-ities by demanding 'control'" and often portrayedthemselves "as a partner in Russia's development,"all the while negotiating with key political elitesand oligarchs (Pyramid Telecom, 1995b).

In Thailand (Cell C/I), the political environ-ment was different. Despite ideological oppositionfrom labor and trade unions that feared job lossesas the sector liberalized and state-owned enter-prises privatized (Pyramid Telecom, 1995a), Ma-laysian company Samart entered the Thai cellularmarket in 1997. The company strategically joinedforces with the state-owned Thai Telecom. It pur-sued high-profile targeting of elected politicians inthe Thai government and tried to leverage a hor-izontal coalition with the WTO, the IMF, and itshome govemment. In the wake of the 1997 Asianfinancial crisis, the WTO and IMF had stepped into advocate for both government austerity andliberalization. While not necessarily a naturalpartner for a Malaysian operator, the WTO's lib-eralization deadline and IMF's privatization de-mand as a condition for financial aid played intoSamart's desire to manage regulatory uncertaintyand enter the Thai market. Samart also rolled outhigh-profile advertisements aimed at the Thaipublic that advocated for privatization and foreignownership. Indeed, many telecommunicationsflrms in the Thai market employed high-profilestrategies: One firm put out explicit ads discussinghow its acquisition would not change labor wages;another aired an advertisement claiming that itscompetitor's handset was a health hazard.

One particular firm based in Luxembourg wasespecially opportunistic and entrepreneurial inemerging-market telecom deals. Millicom Inter-national Cellular was a niche player in globaltelecom investing and proved the second mostproliflc dealmaker in the 1990s. It pursued high-risk opportunities in smaller markets with moreuncertain growth potential. By 1996, Millicomhad amassed 29 cellular licenses in 30 countriescovering 375 million people in Asia, Eastern Eu-rope, and Africa. Most of Millicom's investments


occurred (and continue to occur) in unattractivepolitical markets (Standard &. Poor's, 1996).

To manage the regulatory uncertainty thatcomes with ideological opponents and the lack ofcompetition among political actors (Cell NC/I),Millicom negotiated "lucrative deals behindclosed doors, relying on the ability of its localmanagers to navigate Byzantine regional bureau-cracies and form lucrative partnerships with lead-ing local business interests" and telephone author-ities (Pyramid Telecom, 1996, p. 2). During itsissuance of senior subordinate debt, even therating agencies noted this nonmarket strategy:"Millicom's strategy is to develop mobile oper-ations by finding a local partner with localknowledge, expertise, and contacts to assistwith legal and regulatory issues, such as obtain-ing licenses and organizing interconnectionagreements with other market participants"(Standard & Poor's, 2004, p. 3). This is funda-mentally a low-profile vertical coalition target-ing the regulator. But Millicom also activelyadvertises its benefits to local consumers. Al-though Millicom charges high handset andmonthly service charges, its service and cover-age benefits the consumer base, and Millicompublicizes this to engender greater support. Mil-licom also engages local partners and regionalmanagers to assist with party and politicianrelations.

Conclusions

Properly assessing a firm's exposure to regulatoryuncertainty helps managers craft an appropri-ate integrated strategy. Our article suggests two

primary drivers of regulatory uncertainty for firms:ideology-motivated interests opposed to the firmand a lack of competition for power among polit-ical actors such as executives and legislators. Be-cause managers would like to devise the mosteconomical strategy to manage regulatory uncer-tainty, we identify three dimensions of nonmarketstrategy—profile level, coalition breadth, and piv-otal target—to distinguish how a regulated firmallocates incremental resources beyond a basiclow-profile strategy that engages the regulator andthe firm's vertical coalition. We argue and findanecdotal evidence that managers use high-profile

strategies and recruit horizontal coalition partnersto manage ideological opponents. Managers alsotarget their strategy at the pivotal swing voter—the regulator, the party, the legislators, or theexecutive. In cases of extreme uncertainty, man-agers pursue a multifaceted nonmarket strategy.

While we derive our two-by-two frameworkfrom diverse, established literatures in politicalscience, economics, and management, this studyraises a number of questions that will need to beaddressed in subsequent work. For example, we aresomewhat agnostic about the relative effect ofchanges in demand-side rivalry versus changes insupply-side rivalry. Our matrix implies thatchanges in demand-side rivalry have a greatereffect on the cost of nonmarket strategy, but whythis is remains incompletely understood. In addi-tion, this piece has been silent about the nature ofthe regulator. Previous research has shown thatappointed regulators create more attractive polit-ical markets for firms, and that knowing the reg-ulator's preferences relative to elected politiciansand the regulated firm matters (Holbum &Vanden Bergh, 2008). We plan an extension ofthe current framework that conceptualizes the na-ture of the regulator more precisely and identifieshow a change in the key characteristics of theregulator changes the level of regulatory uncer-tainty and firms' nonmarket strategies. We alsoaim to test the robustness of the theoretical frame-work to different empirical settings, includingthose with direct performance data.

This paper nonetheless makes important con-tributions to firms' understanding of integratedstrategy. First, we provide a flexible frameworkthat applies to a range of nonmarket settings. Wetranslate the political markets framework devel-oped in more mature and formal institutional set-tings to incorporate the emerging-market and de-veloping-country context. In doing so, wedifferentiate ourselves from the traditional U.S./Eurocentric political markets literature and ad-vance the theory. Specifically, we analyze thesupply-side interaction among multiple politicalactors and decision makers, not just a select groupof (elected) regulators and legislators. Our char-acterization of the supply side in our frameworkcan also accommodate extremely uncompetitive


political markets situations, notably an autocraticsovereign. Further, we unpack the nature of op-posing demand by providing a new categorizationof interest groups based on motivation.

Second, much of the literature discussed in thisarticle recognizes the importance of adjusting po-litical strategy as political uncertainty increases(e.g., Dieleman & Boddewyn, 2012; Hillman,2003). Our research complements this literatureby creating a framework that predicts when regu-latory uncertainty is likely to be greater for a firm.We accomplish this by focusing on how the keydemand- and supply-side characteristics interactwith each other to create regulatory uncertainty.How this interaction leads to predictions aboutthe degree of uncertainty has not been explored inthe nonmarket strategy literature that analyzesfirms operating in different political contexts (e.g.,Dieleman & Boddewyn, 2012; Hillman, 2003;Lawrence, 2010; Luo & Peng, 1999).

Third, we empirically pair this novel nonmar-ket analysis with one of a firm's most criticalmarket strategies: market entry. In showing howfirms can assess regulatory uncertainty in the con-text of entering new markets, we contribute to theliterature on integrated strategy and, separately,offer an innovation to bargaining power theory.The latter argues that an MNG entering a newcountry has stronger bargaining power to the ex-tent that it has, for instance, technology, jobs, andpolitical ties (Blumentritt, 2003; Blumentritt &.Rehbein, 2008; Dieleman &. Boddewyn, 2012;Lawrence, 2010). We build our framework from asimilar insight that firms negotiate for the supplyof public policy with host govemments, but wesimultaneously focus on the institutional con-straints to firms' bargaining power and the otherparties in the negotiation network in addition tothe host government. We also provide clarifica-tion on when and how certain firm resources, suchas political ties, matter and affect firms' marketstrategies.

Thus we are able to complement existing in-sights (e.g., Blumentritt, 2003) by explaining whyand when we see MNGs employing different in-tegrated strategies as they enter different politicalmarkets. While this insight can be viewed as con-sistent with existing literature (e.g., Hillman,

2003), we also extend these insights by being ableto explain why different firms, operating withinthe same country, employ different integratedstrategies. The key characteristics of demandersand/or suppliers, within a given political jurisdic-tion, can vary across firms. Finally, our insightsextend beyond market entry and can be appliedto other market strategies, such as marketconsolidation.

Taken together, our nonmarket framework pro-vides managers with clear insights on regulatoryuncertainty: Uncertainty is higher in politicalmarkets characterized by ideologically motivatedopponents and less competition among suppliersof policy. From this assessment, we equip manag-ers with three discrete nonmarket strategy choicesto execute alongside market entry or other marketstrategies. Synthesizing profile level, coalitiondepth, and pivotal actor, we advance previouslydistinct strategy arguments. Thus our insightsfrom regulatory uncertainty yield meaningful im-plications for firms' integrated strategy and thusperformance.

Acknowledgments

The authors would like to acknowledge helpful commentsreceived from the editor and two anonymous reviewers onearlier versions of this article and from participants at the2011 Strategic Management Society and 2012 Academy ofIntemational Business annual meetings.

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Appendix 1

World Bonk (2011) Executives Survey

The survey was conducted on behalf of the World Bank'sMultilateral Investment Guarantee Agency by the Econo-mist Intelligence Unit. It contains the responses of 316senior executives (146 chief-level) at multinational enter-prises investing in developing countries. The geographicdistribution of the respondents is Asia 62, North America87, Europe 135, and the rest of world 32. The survey in-cludes 186 organizations with revenue over $500 million inthe following industries (number of executives in parenthe-ses): primary (26), manufacturing (80), services (110), fi-nance (77), utilities/transportation/storage/communications(23). Quota sampling was used to ensure that the industryand geographic composition of the survey sample approxi-mated the composition of actual foreign direct investmentoutflows to developing countries. We used the followingsurvey questions in this paper.

Question lOo. In your opinion, which types of political risk areof most concem to your company when investing in emerg-ing markets? Select up to three. Transfer and convertibilityrestrictions, breach of contract, non-honoring of govem-ment guarantees, expropriation/nationalization, adverse reg-ulatory changes, war, terrorism, civil disturbance.

Question 11. In your opinion, in the developing countrieswhere your firm invests presently, how do each of the riskslisted below affect your company? Rate each risk on a scaleof 1-5 where 1 = Very high impact and 5 = No impact.Transfer and convertibility restrictions, breach of contract,non-honoring of govemment guarantees, expropriation/na-tionalization, adverse regulatory changes, war, terrorism,civil disturbance.


Question 12. In the past 3 years has your company experiencedfinancial losses due to any of the following risks? Select allthat apply. Transfer and convertibility restrictions, breach ofcontract, non-honoring of govemment guarantees, expro-priation/nationalization, adverse regulatory changes, war,terrorism, civil disturbance.

Question 13. To your knowledge, have any of the followingrisks caused your company to withdraw an existing invest-ment or cancel planned investments over the past12 months? Select one answer for each risk (see question12). Withdraw existing investment, cancel planned invest-

ments, both withdraw and cancel, neither withdraw norcancel, don't know.

Question 15. In your opinion, in the countries where yourcompany invests, what are the most effective tools/mech-anisms available to your firm for alleviating each of thefollowing risks? Select one tool for each risk (see question12). Engage with local public entities, joint venture withlocal enterprises, risk analysis/monitor, relationships withkey political leaders, political risk insurance, risk insig-nificant for projects, no existing tool can alleviatethis risk.

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