Business and Politics in Europe

Corporate Political Strategy Formulation: A Model of Approach, Participation, and Strategy Decisions Author(s): Amy J. Hillman and Michael A. Hitt Source: The Academy of Management Review, Vol. 24, No. 4 (Oct., 1999), pp. 825-842 Published by: Academy of Management Stable URL: http://www.jstor.org/stable/259357 Accessed: 16-09-2016 12:45 UTC

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t Academy of Management Review

1999, Vol. 24, No. 4, 825-842.

CORPORATE POLITICAL STRATEGY FORMULATION: A MODEL OF APPROACH,

PARTICIPATION, AND STRATEGY DECISIONS

AMY J. HILLMAN University of Western Ontario

MICHAEL A. HITT

Texas A&M University

In this article we examine two general approaches to political action (transactional and relational), two levels of participation (individual and collective), and three types

of generic political strategies (information, financial incentive, and constituency building), thus presenting a comprehensive taxonomy of political strategies. In addi- tion, we identify firm and institutional variables that affect the likelihood of making

specific decisions within the formulation model. The result is a decision-tree model of political strategy formulation that integrates and extends prior diffused work.

Because government policies have significant

effects on the competitive environment of firms, many firms are expanding their efforts to affect

public policy decisions. There are a variety of ways in which firms try to influence public pol- icy decisions. Relatively little is known, how-

ever, about the formation or choice of particular political strategies by firms. To date, research-

ers have focused on why government policy is important to firms' profitability (Keim &

Baysinger, 1988; Schuler, 1996; Shaffer, 1995), what the objectives are of firm political activity

(Baysinger, 1984; Weidenbaum, 1980), and what

types of firms are likely to become politically active (Pittman, 1976; Zardkoohi, 1985). In this article we begin not with the question of why firms engage in political behavior but how firms engage in political behavior. We examine the

process of political strategy formulation by ex-

amining the specific decisions firms make when formulating political strategy and by exploring firm and institutional variables that affect these decisions. This work adds value to the literature on corporate political strategies by developing a comprehensive taxonomy of specific political

strategies, by building a decision-tree model of

political strategy formulation that integrates and extends previous diffused literature, and by

exploring variables that affect political strategy formulation.

We begin with a review of political decision- making importance to a firm's market or com-

petitive environment and the objectives of cor- porate political action. Next, we develop a decision-tree model of political strategy formu- lation wherein firms that have decided to be

politically active face three sequential deci-

sions: (1) approach to political strategy, (2) par- ticipation level, and (3) specific strategy choices. Although existing literature provides insight into the decision of participation level, we add

to this literature by developing the choice of

approach and by developing a taxonomy of stra- tegic options available to firms, both of which

are grounded in resource dependence and mar- ket exchange theories. Finally, in an exploratory effort, we draw on the resource-based view and institutional theory to develop propositions re- garding specific firm and institutional variables that affect each of the three critical decisions in formulating political strategy.

THE IMPORTANCE OF GOVERNMENT POLICY AND THE OBJECTIVES OF FIRM POLITICAL

ACTIVITY

The effects of government policy on the com- petitive position of businesses represent, in turn, important determinants of firm perfor- mance (Shaffer, 1995). The government-and government policies-are critical sources of un-

We thank Frank Baumgartner, Barry Baysinger, Bert Can- nella, Gerry Keim, Ramona Paetzold, and three anonymous reviewers for helpful comments in the development of this work.

825

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826 Academy of Management Review October

certainty for firms (Boddewyn, 1988; Jacobson, Lenway, & Ring, 1993) and have control over critical resources that shape firms' competitive environments. There is substantial interdepen- dence between a firm's economic or competitive environment and government policy (Baron, 1995; Lenway & Murtha, 1994; Murtha & Lenway, 1994; Porter, 1990). In advanced industrialized

nations literally hundreds of issues are formu- lated in a public policy process in a given year. This vast number of issues and directives cre- ates uncertainty for firms and may substantially increase the transaction costs (Jacobson et al., 1993; Williamson, 1979) of doing business.

Government decision makers have the ability to alter the size of markets through government

purchases and regulations affecting substitute and complementary products; to affect the struc- ture of markets through entry and exit barriers

and antitrust legislation; to alter the cost struc-

ture of firms through various types of legislation

pertaining to multiple factors, such as employ- ment practices and pollution standards (Gale & Buchholz, 1987); and to affect the demand for products and services by charging excise taxes and imposing regulations that affect consump- tion patterns. Indeed, the power of government over business practices has become so substan- tial Weidenbaum (1980) argues that the expan-

sion of government regulation since the 1970s has fundamentally altered the relationship be- tween business and government and that these changes are tantamount to a second managerial revolution. Weidenbaum contends that the shift of decision making away from the firm to gov- ernment regulators (through increased regula- tion and selected deregulation) is as significant for management as the separation of ownership and control was earlier this century (Berle & Means, 1932).

As early as 1969, Epstein argued that "political competition follows in the wake of economic competition" and that the government may be viewed as a competitive tool to create the envi- ronment most favorable to a firm's competitive efforts (1969: 142). For example, MCI's initial strategy was political. The company success- fully created a market opportunity by influ- encing regulators to deregulate the U.S. long-distance telephone market (Yoffie & Ber- genstein, 1985). Firms also use political strate- gies to ensure competitive advantage, or possi- bly even survival. Recently, PepsiCo. Inc., losing

in a fierce competitive battle for international

soft drink market share to rival Coca-Cola,

turned to the governments of Venezuela, France, India, and the United States for help in regain-

ing market share (Light, 1998). In a study of the

U.S. steel industry, Schuler (1996) found that do-

mestic steel producers used the government's

control over access to the U.S. market as a polit-

ical tool to enjoy stabilized prices and profits in

a declining market and to gain temporary relief

from downsizing by lobbying for trade protec-

tion. Similarly, as the tobacco industry faces

serious threats in the U.S. market, tobacco firms

are using political strategies to ward off similar

threats in the European and Asian markets (Fi-

nancial Times, 1997).

In many industries the success of business in

the public policy arena is no less important than

business success in the marketplace; as a result,

it is critical for firms to develop political strate-

gies as a part of their overall strategy (Baron, 1995; Oberman, 1993; Yoffie & Bergenstein, 1985). If the government is important to a firm's com-

petitive future, political action must be a busi- ness priority (Yoffie, 1988). In some countries,

such as Sweden, Japan, and Germany, busi-

nesses formally participate in the public policy

process. In many others, such as the United States, Canada, and Mexico, firms "compete" with a variety of other interest groups informally to affect public policy.

In general, corporate political behavior is an

attempt to use the power of government to ad- vance private ends (Mitnick, 1993). The overall objective of political behavior is to produce pub- lic policy outcomes that are favorable to the firm's continued economic survival and success (Baysinger, 1984; Keim & Baysinger, 1988). To the extent that individual firms are able to influence the nature and extent of public policy, corporate

political behavior may be viewed as strategic (Salorio, 1993). Firms can use their influence in public policy for a number of strategic ends: to bolster their economic positions, to hinder both their domestic and foreign competitors' progress and ability to compete, and to exercise their right to a voice in government affairs (Keim & Zeithaml, 1986; Wood, 1986). Through political behavior firms can potentially increase overall market size; gain an advantage related to indus- try competition, thereby reducing the threats of substitutes and entry; and increase their bar-

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1999 Hillman and Hitt 827

gaining power relative to suppliers and custom- ers.

Although the importance of government pol- icy to firms, the relationship between firm com- petitive and political strategy, and the general objectives of firm political activity are com- monly accepted and understood, the specific be- haviors that firms choose in order to participate in the public policy process have received rela- tively little attention. Thus, we need a better understanding of the strategic decisions re- quired to become politically active-that is, what are the specific decisions firms face, and what are the specific choices to be made? We now turn to these questions of specific actions firms may take in order to achieve the overall objectives of political action.

CORPORATE POLITICAL ACTION: PROACTIVE STRATEGIES

Weidenbaum (1980) outlined three general business responses to public policy: (1) passive reaction, (2) positive anticipation, and (3) public policy shaping. The first two-passive reaction and positive anticipation-are reactive, with no direct participation in the public policy process, and are similar to Boddewyn and Brewer's (1994) "nonbargaining" form of political behavior. In passive reaction firms make no attempt to play a role in policy formulation or implementation; rather, they react only post hoc to new legisla- tion. Positive anticipation denotes more of an active stance toward public policy but still does not include participation in the process; rather, it refers to factoring government policy into the planning process of a firm. In this response method firms try to anticipate future regulations and make adjustments accordingly to their strategies, thereby turning regulation into a business opportunity. Weidenbaum's third form-public policy shaping-represents the common conceptualization and objectives of po- litical behavior discussed by Baysinger (1984). Public policy shaping entails proactive behav- ior undertaken by firms to achieve specific po- litical objectives.

Although corporate political behavior may be proactive or reactive in general, efforts to antic- ipate political problems and to set political ob- jectives have become essential for most firms in the current competitive landscape (Bettis & Hitt, 1995; Hitt, Keats, & De Marie, 1998); only imitat-

ing a competitor's moves or coping with a prob- lem on an ad hoc or crisis basis is a poor way of handling government relations (Boddewyn, 1993; Keim, 1981). As Weidenbaum so aptly ex- plains, "Public policy is no longer a spectator sport for business" (1980: 46). If firms remain passive and only react to government policies, they can be assured that other interest groups are proactively working to shape government policies in a direction that benefits other inter- ests-which may or may not coincide with those of the firm. Purely reacting to legislation is not sufficient if political behavior is to become an integral part of firm strategy. Instead, firms must be proactive to achieve the objectives and potential benefits from political behavior (Keim, 1981). Thus, our interest is on the proactive or public policy shaping form of political strategy; therefore, our focus now turns exclusively to- ward this type of political behavior. That is, our strategy formulation model begins after a firm responds affirmatively to the question "Will we be politically active?"

Proactive Corporate Political Strategy Formulation

A proactive approach to political strategy may entail a number of specific strategies and tac- tics (Baysinger, Keim, & Zeithaml, 1985), but, to date, no generally accepted or uniform classifi- cation of corporate political strategies or what constitutes formulation of political strategies exists in the literature. Some scholars have fo- cused on implementation levels of political be- havior, such as whether action is taken by indi- vidual corporations, by executives within corporations, or collectively by such organiza- tions as trade associations (Schollhammer, 1975; Yoffie, 1987). Other scholars have examined par- ticular political tactics, such as Political Action Committee (PAC) contributions, lobbying, advo- cacy advertising, or grassroots mobilization (e.g., Baysinger et al., 1985; Keim & Zeithaml, 1986; Sethi, 1982), or have examined a limited number of political tactics (Getz, 1993; Lord, 1995; Oberman, 1993). Finally, in one stream of re- search, in the area of corporate political activity, scholars have focused on strategies used during different stages of the life cycle of a specific political issue (Buchholz, 1992; Getz, 1993).

In addition, much of the existing literature is country specific (e.g., Baysinger et al., 1985; Buch-

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828 Academy of Management Review October

holz, 1992; Getz, 1993), providing little insight to the

generalizability to different country contexts.

Throughout this diffuse literature, there is no con-

sensus regarding the appropriate integration of

the many research questions or the meaning of an

aggregate conceptualization of political strategy.

A comprehensive schema for proactive political

strategies that spans across nations is absent

from the literature. Most existing literature, how-

ever, can be understood in terms of three general

dimensions of political strategy: (1) approaches to

political strategies, (2) participation levels, and (3)

types of strategies. These three dimensions repre-

sent the sequence of decisions firms make in for-

mulating political strategy.

In our discussion of each of the three deci-

sions, we explore variables that are likely to

influence such choices. Previous literature spec-

ifies general levels of variables that may affect

the choice of political strategies, but little pub-

lished work addresses the use of specific polit-

ical strategies within a general model.' The fol- lowing discussions are based on a number of

important firm and institutional or country-

specific variables that affect the likelihood of

specific political action being formulated. Be- cause of the various approaches, levels of par-

ticipation, and strategies involved, we examine

each decision, in turn, to discuss potentially in- fluential variables.

Throughout this discussion, we adopt the re- source-based view (Barney, 1991; Penrose, 1959; Wernerfelt, 1984) that firms are bundles of het-

erogeneous resources. We assume that firms make specific political action choices based on differential resources. For example, firms with

plentiful resources are more likely to take indi- vidual political action, whereas resource-poor firms will use collective political action. Al- though many potential resources that can affect these choices may exist at the firm level, we examine a few suggested by previous research from diverse disciplines related to political ac- tion. In addition, we employ the traditions of institutional theory from organization theory and political economy (Granovetter, 1985; North, 1991; Scott, 1995) that important institutional dif- ferences affect the choice of political action.

Thus, as institutional arrangements vary by

country, so will firms' political actions. We ex-

amine several institutional variables that affect

the likelihood of certain choices within our de-

cision tree. This discussion offers a first step in

the examination of the variables that affect cor-

porate political strategy formulation.

Decision One: Approach to Political Strategy

The first decision a firm must make in formu-

lating political strategy is its general approach

to political strategy. In much of the existing lit-

erature on corporate political strategies, re-

searchers assume that firms formulate political

strategy only in response to specific, salient is-

sues (e.g., Buchholz, 1992; Gotz, 1993; Yoffie,

1987). This may be labeled a transactional ap-

proach, where firms await the development of

an important public policy issue before building a strategy to affect this issue. Many firms, how-

ever, pursue political strategies over the long

term, rather than on an issue-by-issue basis.

This represents a more relational approach to

political strategy. Instead of monitoring public

interest and becoming involved only in specific

issues, firms using a relational approach at-

tempt to build relationships across issues and

over time so that when public policy issues arise

that affect their operations, the contacts and re-

sources needed to influence this policy are al- ready in place.

Transactional and relational approaches to

political action differ in terms of length and scope of continued activity and exchange, and they parallel the notions of transactional and relational exchange in contract law (Macneil, 1974, 1980). Therefore, a transactional approach refers to a relatively short-term exchange rela-

tionship or interaction, whereas a relational ap- proach denotes a long-term exchange relation- ship. Parallels in the area of contract law include how the primary focus of planning in the transactional approach is the substance of the exchange between parties, whereas in the rela- tional approach the structures and processes of the relation are of key importance (Macneil, 1974).

Hillmnan and Keim (1995) describe the public policy process as having "demanders" and "suppliers" of public policy. In a relational ap- proach trust develops between the suppliers and demanders of public policy, thereby reduc-

'One exception is related work by Buchholz (1992), in which he develops an issue-specific model of political strat- egy choice. We discuss this later in a subset of our model.

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1999 Hillman and Hitt 829

ing the marginal transaction costs of participa- tion. In many ways a relational approach to political strategies is akin to the development of social capital that is embedded in a continued

exchange relationship between parties (Na- hapiet & Ghoshal, 1998). This social capital, in turn, facilitates continued exchange, because when parties trust one another, they are more

willing to engage in cooperative exchange, which then increases each party's social capital.

The distinction between transactional and re-

lational approaches is similar to that discussed

in the context of supplier relationships (Martin, Mitchell, & Swaminathan, 1995) in that the gov- ernment may be considered another factor of production (Kindleberger, 1970). Thus, firms first choose to develop either transactional or rela-

tional approaches to exchange with suppliers, which is akin to the spot or forward market ap- proaches in traditional supplier markets (Lassar & Kerr, 1996).

The use of a relational approach is growing for both domestic and multinational firms. For example, the number of firms in the United States with government relations offices in

Washington has increased dramatically over the last two decades (Walker, 1991); similarly, the number of firms with offices in Brussels (the head of the European Union) has increased (Grant, 1993). The existence of these offices (giv- en the expense of having full-time representa- tion in these areas) implies that some firms are regularly concerned with government relations. In addition, government relations functions within firms are receiving increased attention (Fleisher, Brenner, Burke, Dodd-McCue, & Rog- ers, 1993).

Scholars have not examined explicitly this long-term political emphasis (as witnessed in practice) in the literature on corporate political strategies, although the increased importance of firms' government relations function is widely accepted (Baetz & Fleisher, 1994). Two excep- tions to this are Yoffie (1988), who asserts that executives must bring to politics the same long- term perspectives they apply to marketing and investment decisions, and Oberman (1993), who identifies evolutionary approaches to political strategy based on patterns of interaction across time. This evidence and the social capital impli- cations of long-term relational approaches sug- gest the criticality that conceptualizations of corporate political strategies incorporate both

transactional and relational approaches to po- litical behavior.

Variables Likely to Affect Decision One

Several variables may affect a firm's decision to adopt a transactional versus a relational ap- proach to political action. We examine three prominent ones: (1) the degree to which firms are

affected by government policy, (2) the level of firm product diversification, and (3) the degree of corporatism/pluralism within the country in which firms are operating.

First, the distinction between transactional

and relational approaches to political strategy may be dependent upon a company's perception of its dependence on government regulation. If, for example, a firm operates in a relatively un- regulated environment, it may be more inclined to become involved in politics only sporadical- ly-when a major important issue arises. How-

ever, firms operating in more regulated environ- ments, or those that perceive a high degree of dependence on government policy, may have a number of important issues at any given time likely to affect them. Thus, we assert that a firm's perception of its dependence on the gov- ernment may influence the decision to approach political action either transactionally or rela- tionally, with those being more dependent opt- ing for relational approaches.

Proposition 1: Firms with higher per- ceived or actual dependence on gov- ernment policy are more likely to use

a relational approach to political ac- tion.

A second variable that can affect transac- tional or relational approaches is a firm's degree of product diversification (related or unrelated). Single-business or related-product- diversified firms necessarily have a narrower focus on political issues because they are con- cerned with limited industry domains (Hoskis- son & Hitt, 1990). Focused domains create oppor- tunities for specialized political capital (defined as relationships with decision makers, in-depth information on particular policy domains, and so on). Firms with a limited primary policy do- main (e.g., regulation of financial institutions) are able to focus attention on a relatively smaller set of issues and regulations than are more unrelated-product-diversified firms,

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830 Academy of Management Review October

which are likely concerned with diverse policy domains (corresponding to diverse business units and product markets). Thus, highly relat- ed-product-diversified firms are more likely to adopt a relational approach to political action, to attempt to develop specialized political knowledge, and to form relationships with key policy makers within their domains of interest. However, more unrelated-product-diversified firms may not have the ability to form such long- standing relationships in all of the policy do- mains of interest or to invest in specialized knowledge across diverse policy and business domains. Therefore, unrelated-product-diversi- fied firms are more likely to adopt a transac- tional approach to political action and become politically active only on select issues or regard- ing specific politically important events (e.g., election of critical decision makers). Thus, we assert the following:

Proposition 2a: Firms with more relat- ed-product diversification (or that are single business) are more likely to use a relational approach to political ac- tion.

Proposition 2b: Firms with more unre- lated-product diversification are more likely to use a transactional approach to political action.

A third variable-an institutional or country- specific variable-that can affect the adoption of a transactional or relational approach to po- litical action is a country's degree of corpo- ratism/pluralism. A common means of distin- guishing among political systems (which are rooted heavily in national culture) is the corpo- ratist versus pluralist continuum (Murtha & Len- way, 1994; Schmidt, 1982; Schmitter, 1982). Cor- poratist political systems, on the one hand, have institutionalized participation by certain inter- ests-usually business and labor and some- times agriculture-in the public policy process. Pluralist systems, on the other hand, are char- acterized by a wider variety of interest groups that can influence political decisions on any given issue. Because corporatist nations empha- size cultural traits of cooperation and consen- sus, competition among firms or a perception of self-interest-seeking behavior by individual firms generally is viewed with suspicion (Wil- son, 1990). Thus, firms operating in more corpo-

ratist countries often adopt a relational ap- proach to political action to build social capital and to create positive-sum outcomes. In more pluralist nations, however, opportunities to af- fect public policy occur more idiosyncratically (Hillman & Keim, 1995). The competition among interest groups in more pluralist nations is con- stantly changing, thereby presenting opportuni- ties for firms to act selectively. The emphasis on relationships important in more corporatist na- tions is relatively absent in more pluralist na- tions. As a result, firms in pluralist nations are more likely to employ a transactional approach to political action. Thus, we assert the following:

Proposition 3a: Firms are more likely to use a relational approach to politi- cal action in more corporatist coun- tries.

Proposition 3b: Firms are more likely to use a transactional approach to po- litical action in more pluralist coun- tries.

After a firm selects a general approach, it must choose its level of participation. We exam- ine the decision regarding participation level next.

Decision Two: Levels of Participation

Mancur Olson's (1965) seminal work in politi- cal science delineates two levels of participa- tion that individuals or interest groups may adopt when active in the public policy arena: individual and collective. Individual action re- fers to solitary efforts by individuals, or individ- ual companies in this case, to affect public pol- icy. Collective action refers to the collaboration and cooperation of two or more individuals or firms in the policy process. An example of the former is an individual firm lobbying political decision makers (individual participation). A trade association of firms lobbying political de- cision makers (collective participation) is an ex- ample of the latter.

In the political strategy literature, Scholl- hammer (1975) also has discussed participation levels but has categorized participation into three categories of action: (1) collective action, (2) action taken by individual corporations, and (3) action taken by individuals within the organ- ization (e.g., executives). A further look at these

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1999 Hillman and Hitt 831

three levels, however, points to a problem with

Schollhammer's delineation of individual action into actions taken by "individual corporations" and by individu'als within the corporation. Indi- vidual corporations are not entities that "act," other than through the individuals who make up the organization (March & Olsen, 1976; Hitt & Tyler, 1991). That is, if the individuals within the

corporation are participating as representatives of the corporation, there is no distinction be- tween these two levels.

Therefore, it is more parsimonious and appro-

priate to use Olson's (later adopted by Yoffie, 19872) two fundamental levels of participation. Firms, similar to individuals, choose between

individual (independent) political participation and coacting with other firms. This distinction is similar to the one in the market strategy litera- ture between competitive or cooperative strate- gies in that firms can choose either to pursue competitive advantage in the market indepen- dently or collaboratively (Grimm & Smith, 1997). Thus, the second dimension or choice in politi-

cal strategy formulation is the level of partici- pation: individual or collective. After a firm has

decided to approach political action either transactionally or relationally, it must then de- cide whether to pursue political action alone or with others. Regardless of whether a firm de- cides to pursue a transactional approach or a relational approach, it may do so either alone or with others.

Variables Likely to Affect Decision Two

Irrespective of the approach taken, perhaps the most obvious distinction regarding the choice between individual and collective partic- ipation in politics relates to the different finan- cial resources necessary at each level. Individ- ual action loads all costs directly on the participating party or firm, whereas in collective action, such as trade associations, the cost of

political action is shared among members (Ol- son, 1965). Larger firms with more slack re- sources and dominant firms in an industry often prefer individual rather than collective actions. In short, they have the requisite resources for individual action, and such independent action may allow them to affect a government policy that best favors the firm. Some firms may also have more intangible resources. For example, firms with experience influencing public policy have knowledge about the process that firms without such experience are unlikely to have. Firms with this knowledge are more likely to act independently. Firms without such knowledge may feel it necessary to act collectively.

Thus, overall, firms with fewer resources favor collective action. Collective action should pro- vide a more forceful voice than any one firm, assuming constrained firm-level resources. Re- gardless of the dues structure for trade associa- tions, member firms pool their resources, result- ing in lower per-firm costs of political action (Chong, 1991). Instead of each firm monitoring the political process and attempting to influence this process alone, the trade association per- forms these functions in a collective manner, thereby creating economies of scale. Member firms also collectively pool their knowledge, which should enable them to capture synergies or other intangible resources by integrating their knowledge bases. Therefore, we assert the following:

Proposition 4a: Firms with greater fi- nancial resources and/or other intan- gible resources, such as knowledge of influencing public policy, are more likely to use individual participation, regardless of approach chosen.

Proposition 4b: Firms with fewer fi- nancial resources and/or other intan- gible resources, such as knowledge of influencing public policy, are more likely to use collective participation, regardless of approach chosen.

The choice of individual versus collective par- ticipation in politics may also be affected by the degree of corporatism/pluralism in a country. Weaver and Rockman (1993) suggest that in the more corporatist parliamentary systems (i.e., Austria, Germany, and Sweden), the centraliza- tion of legislative power presumably reduces

2 Yoffie (1987) develops five main types of political strat- egy: (1) freerider, (2) follower, (3) leader, (4) private goods, and (5) entrepreneur. The first-freerider-refers to reactive po- litical strategies, leaving the proactive shaping of policy to others and freeriding from their efforts. The remaining four are proactive strategies. The second and third-follower and leader-refer to collective participation in a group and the role individual firms take within those groups as either followers or leaders. The fourth and fifth-private goods and entrepreneur-represent individual participation.

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832 Academy of Management Review October

the alternatives open to interest groups. Corpo- ratist nations emphasize consensus on policy.

Many corporatist structures are the result of na-

tional cultural trends that promote consensus

and cooperation among relatively homogeneous

interests. Rather than promoting the interests of

one group at the expense of another, corporatist nations, in general, promote more positive-sum

policies in the electorate (Hillman & Keim, 1995). Therefore, the opportunity to affect public policy

in corporatist nations on specific issues is more

limited than in systems that are open to individ-

ual special-interest-group pressure and that

have a greater probability of developing nega- tive-sum (where one group benefits at the ex-

pense of another) or zero-sum policies (Hillman & Keim, 1995). Thus, owing to the emphasis on

consensus and working with others, it is likely

that firms in more corporatist nations will choose to participate in politics collectively

rather than individually, regardless of the

choice of transactional or relational approach.

In more pluralist structures, however, the in-

stitutional arrangements result in a variety of interests coming into play in the policy arena

(Hayes, 1992), resulting in the fragmentation of

political and economic power (Vogel, 1996). The ability to gain support for issues may be af- fected by the fragmentation in society (Coleman, 1988). In the political process of pluralistic na-

tions, interest groups and firms do not have to compromise with other groups. The policy maker may write or vote for policy that repre- sents a compromise among his or her constitu- ents, but the actual groups do not have to reach consensus across a variety of issues. Through these institutions, more pluralistic nations cre- ate the incentive for groups and firms to assert their own interests on specific issues in the po- litical process (Murtha & Lenway, 1994). Thus, the likelihood of firms participating individually in politics is greater in more pluralist nations (Hillman & Keim, 1995). Thus, we assert the fol- lowing:

Proposition 5a: Firms are more likely to use collective participation in more

corporatist countries, regardless of ap- proach chosen.

Proposition 5b: Firms are more likely to use individual participation in

more pluralist countries, regardless of approach chosen.

One variable might affect the decision regard-

ing participation level, however, for those firms

pursuing a transactional approach. When pur-

suing an issue-by-issue approach to political

action, a firm's encounter with specific issues

will often affect the nature of participation. In

the multitude of issues decided politically each

year, whether in regulatory or legislative/

parliamentary venues, firms may divide issues

into one of two categories: (1) election issues and

(2) non-election issues. Election issues are those

that have received such a high degree of public

interest, attention, and visibility that individual

voters may cast ballots based on their position

on them. Few issues reach this level of visibility

and importance over the period of a year. Non-

election issues represent the hundreds (some-

times thousands) of issues that often do not re-

ceive intense scrutiny or widespread interest. It

is possible for a firm (or other interest group) to

work for or against a non-election issue without

much attention from others. However, this would

be unlikely for election issues.

Therefore, firms may prefer collective action

on election issues for two reasons. First, it limits

their exposure and or liability if the position is

unpopular or if they lose the battle. For example, lobbying against health care reform in the 1994

U.S. off-year election might have branded a pharmaceutical company as "working against

the public interest" or "out to make money from sick people." Second, election issues by nature will dictate that a large coalition of parties, on

any given side, is needed to win. This is neces- sary in order to persuade opinion and garner votes and also to obtain the resources required

to conduct a highly visible campaign. In the health care example, large coalitions were formed from diverse industries and groups to have the financial resources and influence needed to affect the issue (Stone, 1994). Thus, we assert the following:

Proposition 6: A firm is more likely to use collective participation with elec- tion issues and when it has chosen a

transactional approach to political strategy.

Decision Three: Specific Strategies and Tactics

After a firm has decided to approach political strategies either transactionally or relationally,

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1999 Hillman and Hitt 833

and then has decided whether to pursue partic- ipation individually or collectively, its next de- cision relates to the specific strategies it should employ.3

Many scholars interested in political strate- gies have developed lists of specific strategies or tactics firms may use to compete in the public policy process. Unfortunately, there are many different lists of strategies, with little consensus among scholars. Many scholars limit their ex- amination of political strategies to a few popu- lar ones, such as lobbying or campaign contri- butions (e.g., Baysinger et al., 1985; Keim & Zeithaml, 1986; Sethi, 1982), or provide a list of five or six different strategies to use (e.g., Getz, 1993; Lord, 1995; Oberman, 1993). The compre- hensiveness of these lists is questionable, and the theoretical origins that differentiate these strategies from one another have not been ex- plored.

The public policy process has been described by some as a market (Hillman & Keim, 1995), with suppliers of policy and those demanding policy. The suppliers are political decision mak- ers who shape government policies and agen- das. The demanders include the interest groups, individual citizens, and firms that vie for public policy outcomes. The concept of mutual interde- pendence and exchange is of critical impor- tance (Benson, 1975; Majumdar & Ramaswamy, 1995; Salisbury, 1969). Interest groups, including firms, desire specific forms of policy or policy outcomes.

The two primary incentives for political deci- sion makers to supply these policies are infor- mation and direct incentives. In systems of in- terest aggregation, political decision makers serve as the agents of citizens and citizen groups (Getz, 1993; Mahon, 1993; Mitnick, 1993).

However, it is often difficult for political decision makers to know the preferences of their princi- pals on the multitude of issues considered. There exists the potential for information asym- metries between the suppliers and demanders of public policy. Therefore, one critical resource for political decision makers is the information required to form opinions or votes on particular policies.

Second, the suppliers of public policy may respond to direct personal incentives, such as constituent support or financial inducements (e.g., campaign contributions). For all political decision makers, constituent support is a critical resource. As an example, votes are the key to re-election, and constituent support is the driver of polls and popularity for elected decision mak- ers. But even nonelected political decision mak- ers are concerned with constituent support. Con- stituent support may affect the future funding allocated to their particular agency or other gov- ernmental positions, and it shapes the prestige and respect granted to a position within the government.

Third, political decision makers may also re- spond to financial inducements. For elected de- cision makers, campaign financing may be a very important resource (e.g., in the United States), and donations to a particular party will affect that party's control and influence in an election (e.g., Mexico). Other financial induce- ments may appeal to nonelected and elected decision makers alike. These inducements in- clude promises of future employment (or current outside employment, such as is the case with over 50 percent of Italian bureaucrats; Grant, 1990), paid speaking fees, travel, and other hon- oraria. Although many personal financial in- ducements may be regarded as ethically sus- pect in some countries, they may nonetheless provide incentive for some suppliers of public policy.

Exchange theory suggests three general or "generic" political strategies that firms and in- terest groups may use to compete in the public policy process based on the fundamental re- sources exchanged: (1) information, (2) financial incentive, and (3) constituency building. We dis- cuss these in order below.

It is important to note that each of the three strategies may involve a variety of tactics. In previous literature on corporate political strate- gies, researchers have used the terms strategy

3 It is important to note that the specific choices of strat- egies presented in this section are available to firms partic- ipating individually and to the collectives within which firms participate. The variables discussed below, therefore, are based upon the resources of the individual firms or collectives. With collective action, however, these decisions will be made at the collective level rather than within the individual firm. Therefore, individual interests of the firm in choosing political strategies within collective action are constrained. Once the collective participation level is cho- sen (whether in a transactional or relational approach), de- cision making falls primarily to the collective. These deci- sions, nonetheless, will be affected by similar resources, but at the collective level as opposed to the individual firm level.

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834 Academy of Management Review October

and tactics interchangeably. However, in tradi- tional strategic management literature "strate- gies" are more long term and involve a substan- tial amount of resources and commitment. "Tactics," however, generally refer to short-term

activities designed to fine tune strategy, and they involve a smaller commitment of resources. In keeping with this tradition, the taxonomy we

present in Table 1 is based on the three theoret- ically distinct strategies, each comprising a va- riety of tactics. These tactics are specific politi- cal behaviors that may be used repeatedly and in various combinations, but alone do not con- stitute a strategy.

Information strategy. Those using the infor-

mation strategy seek to affect public policy by providing policy makers specific information about preferences for policy or policy positions and may involve providing information on the

costs and benefits of different issue outcomes

(Aplin & Hegarty, 1980). The target of this politi-

cal strategy is the political decision maker, and the good provided is information. An informa- tion strategy includes such tactics as lobbying,4 both by internal or external professionals and executives (Lord, 1995); reporting research and

survey results; commissioning research/think- tank research projects; testifying as expert wit- nesses and in hearings or before other govern-

ment bodies; and supplying decision makers with position papers or technical reports.

Financial incentive strategy. The financial in-

centive strategy also targets political decision makers directly. Users of this strategy, which is called "direct pressure" by Aplin and Hegarty (1980), however, attempt to influence public pol- icy by directly aligning the incentives of the policy makers with the interests of the princi- pals through financial inducements. This strat- egy includes such tactics as providing financial support (either direct contributions to a political decision maker or political party), PAC contribu- tions in the United States, honoraria for speak-

ing, paid travel expenses, or personal service (which involves having a representative of a

firm in a political position, hiring personnel with

direct political experience-as managers, direc-

tors, consultants, and so forth-or hiring politi-

cal decision makers' relatives) (Getz, 1993; Hill-

man, Zardkoohi, & Bierman, 1999).5 This category of political strategy is similar to that of "absorp- tion" described by Ring, Lenway, and Govekar

(1990), in that these actions attempt to absorb a

part of the external political environment into the firm, either by hiring or by direct financial incentives.

Constituency-building strategy. Whereas the

information and financial incentive strategies

target political decision makers directly, users of a constituency-building strategy attempt to

influence public policy by gaining support of

individual voters and citizens, who, in turn, ex-

press their policy preferences to political deci- sion makers (Baysinger et al., 1985). Thus, this

strategy targets political decision makers indi-

rectly by working through individual constitu-

ents or voters via public exposure/appeal and

constituent contact (Aplin and Hegarty's 1980

categories of public exposure/appeal and polit- ical). This strategy is similar to Buchholz's (1992) and Oberman's (1993) "bottom-up" communica-

tion strategy, which includes such tactics as grassroots mobilization of employees, custom- ers, suppliers, retirees, or other individuals linked to the firm; advocacy advertising,

wherein a particular policy position is adver-

tised to the public (Sethi, 1982); public image or

public relations advertising; press conferences on public policy issues; and economic or politi- cal education.

The targets of a constituency-building strat- egy are individuals linked to the firm or individ- ual societal members, and the good provided to the political decision maker is constituent sup- port, indicated by the expressed preferences of these individuals. A constituency-building strat-

egy should not be confused with collective par- ticipation. Collective participation denotes a firm joining with other firms or interest groups in the public policy process but not the specific strategies and tactics used. A constituency- building strategy targets individual constitu-

4 The term lobbying in this article refers to the common U.S. and other non-European connotations implying the pro- vision of information to policy makers by individuals repre- senting the firms interest-that is, by lobbyists; this infor- mation may be conveyed through informal meetings, formal settings, and social settings. The European connotation of lobbying, however, implies political action in general. That is, lobbying in the European sense refers to any proactive political strategy.

'This practice is a common political strategy in most Latin American countries.

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1999 Hillman and Hitt 835

TABLE 1

Taxonomy of Political Strategies

Strategy Tactics Characteristics

Information strategy * Lobbying Targets political decision makers by providing * Commissioning research projects and information

reporting research results

* Testifying as expert witnesses

* Supplying position papers or technical

reports

Financial incentive strategy * Contributions to politicians or party Targets political decision makers by providing * Honoraria for speaking financial incentives * Paid travel, etc.

* Personal service (hiring people with

political experience or having a firm

member run for office)

Constituency-building strategy * Grassroots mobilization of employees, Targets political decision makers indirectly suppliers, customers, etc. through constituent support

* Advocacy advertising

* Public relations

* Press conferences

* Political education programs

ents through its tactics (grassroots, advocacy advertising, and so on) and denotes the actual strategy taken rather than by whom. As an ex- ample, a group of firms acting collectively may take out advocacy advertising to induce individ- ual constituents to express public policy prefer- ences to political decision makers (this denotes collective participation and the adoption of a constituency-building strategy).

It is important to note that although political tactics can be classed in one of the three generic categories, the use of one political strategy (or tactic within) does not preclude the use of an- other. Rather, a configuration of strategies may be used (Meyer, Tsui, & Hinings, 1993). Mahon (1993) notes that several types of political behav- ior may be used simultaneously. In his study of political interest groups in the European Union, Grant states that "of course, interest groups are not so naive as to rely solely on one channel of access" (1993: 129). The simultaneous use of these three generic political strategies is akin to the more commonly discussed generic business strategies (cost leadership and differentiation) developed by Porter (1985). Recently, it has been argued that firms can integrate both the cost leadership and differentiation strategies into one (Hitt, Ireland, & Hoskisson, 1999). Similarly, a firm may use a combination of political strate- gies in an attempt to shape its competitive en- vironment through public policy influence.

Variables likely to affect decision three: trans- actional approach. If a firm has chosen to pur- sue an issue-by-issue or transactional approach to political action, regardless of whether it pur- sues this approach individually or collectively, the key determinant of strategy choice is the current stage of the issue's life cycle. Ryan, Swanson, and Buchholz (1987) assert that there are three stages in the public policy issue life cycle: (1) public opinion formation, (2) public pol- icy formulation, and (3) public policy implemen- tation. Public opinion formation and public pol- icy formulation refer to distinct stages, where the issue is emerging and public policy is for- mulated in response. Thus, these two issue life- cycle stages denote where proactive political action is possible. Public policy implementa- tion, however, refers to the bureaucratization of the regulation, legislation, and so on. Therefore, during this stage, political action is reactive rather than proactive. Thus, we focus on the first two stages of the issue life cycle here.

Public opinion formation denotes the stage where issues of concern to business are emerg- ing; public interest in the issue is emerging and developing. During this stage, corporations have the opportunity to shape public opinion. This opportunity may result in a policy prefer- ence that coincides with that of the firm or could obviate the need for public policy altogether. Thus, the key to shaping issue preferences dur-

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836 Academy of Management Review October

ing the stage of public opinion formation is com- munication with the public (Buchholz, 1992). The emphasis on communication and on public opinion may be facilitated by the strategy of constituency building because it focuses on in- dividuals within society. Therefore, we assert the following:

Proposition 7: Firms or collectives are more likely to use a constituency-

building strategy if the firm or collec- tive has chosen a transactional ap- proach to political action and the issue is in the public opinion forma- tion stage.

The public policy formulation stage is when

specific regulations or policies are introduced in the political decision-making institutions that affect business. The issues at this stage have been politicized and have taken on the form of government enactments (Buchholz, 1992), meaning that the primary objective of the firm or collective is the wording, support,

or opposition of such policy. In these cases, because the target is the political decision maker, firms are more likely to use directly targeted strategies, such as the information strategy that provides information to specific decision makers regarding policy preferences, or the financial incentive strategy that pro-

vides incentives for a political decision maker

to adopt the preference of the firm or collec- tive. Thus, we assert the following:

Proposition 8: Firms or collectives are more likely to use an information or financial incentive strategy if the firm or collective has chosen a transac-

tional approach to political action and the issue is in the public policy formu- lation stage.

Variables likely to affect decision three: rela- tional approach. If a firm has chosen to pursue a relational approach to political action, key de- terminants of the strategies chosen are not based upon specific issues since the relational approach spans across issues and time. There- fore, with a relational approach to political ac- tion, individual firms or collectives within which firms participate choose specific strategies based more on the resources at their disposal. Based on the underlying distinctions among the. information, financial incentive, and constituen-

cy-building strategies, we identify two variables that can affect the choice of strategies, whether by individual firms or collections thereof.

First, credibility is a resource that affects the

success of political behavior (Baron, 1995; Bod- dewyn, 1993; Boddewyn & Brewer, 1994; Hull,

1993; Keim & Baysinger, 1988). Recent studies

confirm that credibility is the most important

characteristic of effective lobbyists (a common

term applied to the providers of information to

political decision makers) in the United States, the European Union, and in most Asian nations

(Heinz, Laumann, Nelson, & Salisbury, 1993; Hull, 1993; Nooteboom, Berger, & Noorderhaven, 1997). To have influence, information providers must be perceived by political decision makers

as credible. In addition, Sethi (1982) found that

the most important determinant of success in

advocacy and public relations advertising was

the credibility or reputation of the source. Simi- larly, grassroots mobilization (another tactic

within the constituency-building strategy) is

based on good relations with employees and

other stakeholders (a form of social capital,

which is an important resource; Dyer & Singh,

1998; Keim & Baysinger, 1988) so that credible firms have an advantage over less credible

firms using this tactic. Given these indicators of the importance of credibility, we assert the fol- lowing:

Proposition 9: Firms or collectives with

greater credibility are more likely to use an information or a constituency-

building strategy if the firm or collec- tive has chosen a relational approach

to political action.

Second, Masters and Keim (1985), Keim and Baysinger (1988), and Boddewyn and Brewer (1994) have argued that a minimum employ- ment base, or a large number of employees, is essential to many types of political tactics. Keim and Baysinger (1988) assert that the greater the employment base, the greater the potential for constituency building. The ulti- mate goal of constituency building by a firm is to educate individuals on policy and to give them the incentive to become politically active on specific issues or across time. By giving these individuals the incentive to contact po- litical decision makers, firms hope to influ- ence the policy process in their favor. How- ever, encouraging a small number of

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1999 Hillman and Hitt 837

employees to contact political decision mak-

ers is not as effective as large numbers of

contacts. The larger number also increases the

likelihood of access to more legislative or par-

liamentary districts. Therefore, a larger em-

ployment base (or membership base in the

case of collections of firms) increases a firm's

ability to form constituency groups and the

effectiveness of such groups in the political

process. Although grassroots mobilization and

political and economic education programs

represent only a portion of the tactics included

in a constituency-building strategy, and other

tactics such as advocacy advertising or public

relations are not highly dependent upon the

number of employees, a larger number of em-

ployees or members, at the margin, increases

the likelihood of firms choosing this strategy.

This is especially relevant given that of a

firm's major stakeholders, employees have a

large and important stake (Freeman, 1984).

Thus, we assert the following:

Proposition 10: Firms or collectives

with large employment/membership

bases are more likely to use a constit-

uency-building strategy if the firm or

collective has chosen a relational ap-

proach to political action.

Our decision-tree model depicting the three decisions of political strategy formulation,

and each specific-choice within, is presented

in Figure 1. Figure 2 shows the level of vari-

ables proposed to affect each of the three de- cisions.

SUMMARY AND CONCLUSIONS

Political strategies, much like market strate-

gies, involve a complex set of decisions for

FIGURE 1

Decision-Tree Model of Political Strategy Formulation

TCIN

D3 FI ~~~~TCFI

TIIN

Q D3 FI TIFI

DI ~~~~~~~~~~~~~~~~~~TICB RCIN

e D3 FI ~~~~RCFI

DI: RCCB Approach to DI political action RIN

D2: D3 FI RIFI Participation

level RICB D3: RO Strategy

type

Legend: IN, information; FI, financial incentive; CB, constituency building.

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838 Academy of Management Review October

FIGURE 2 Variables Affecting Specific Decisions

Diesio lIssue life cyc

LDegreend:N information; FLfinancial incentive; CB/ onstue build

* Corporatisremo ipuals e

< Diverslfication level y / i CB~~~~~~~~~F

{ * irmorclletiv's

Leen: N ifomtin;FI innca icetie C. osttunc uidig

firms. After a firm decides to become politically

active, the next question is "How?" In prior lit-

erature scholars have devoted little attention to

political strategy formulation. One goal of ours

in this work has been to highlight the impor-

tance of government policy making to a firm's

opportunity set and to describe the potential

firms have to shape government policy, thereby

shaping their own competitive space, by ex- panding the discussion of political strategy for- mulation.

Since its inception, the literature on political strategies has been widely varied, no general model of political strategy formulation has been proposed, and no specific variables that may affect these choices have been identified. Thus, our first goal has been to contribute to the field by developing and presenting the model and

identifying such variables. We have found no

prior research containing discussion of the ma-

terial in our Decision One, yet firms clearly have

two distinct approaches (theory points to their

distinctness). Thus, we add value by developing

this first choice and by proposing a set of vari-

ables (both firm and institutional) that are likely

to affect the choice between transactional and

relational approach. Second, while Mancur Ol- son's theories firmly identify our Decision Two,

to our knowledge there has been no explicit discussion of the variables that affect the choice

between individual and collective participation for firms. Therefore, although the propositions related to Decision Two may have firm theoret- ical foundations, they are important to include in a comprehensive model and may serve as the basis for future empirical research. Third, we

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1999 Hillman and Hitt 839

add value by developing the taxonomy of polit- ical strategies that represents Decision Three.

To our knowledge, no comprehensive taxonomy exists in the literature. In addition, we go be- yond the taxonomy to again develop proposi-

tions regarding variables that are likely to affect this decision.

Future research opportunities abound. Al-

though the general taxonomy of political strate- gies and the conceptual decision-tree model is

grounded in theory, empirical confirmation of

the distinctness of each of the levels of partici- pation, approach, and strategy should be ex-

plored. Testing of the propositions presented herein is also a critical next step.

In addition, other variables may be exam-

ined that can affect the decisions regarding

approach, participation, and strategy. Perhaps the likelihood that firms or collections of firms

will use a multitude of strategies simulta-

neously should be explored. This work pro- vides a conservative first step in identifying firm and institutional variables that affect po- litical action choices. In addition, our discus- sion has focused on likelihood estimations to represent the general tendencies across firms.

Work on competitive advantage, however, suggests that some firms choose a strategy not employed by most other competitors to gain a

competitive advantage. Finally, the dynamics

of political competition is a promising area for future study.

A related inquiry may be the likelihood of

using specific tactics within one strategy versus others. Each of the three categories of strate- gies-information, financial incentive, and con-

stituency building-represents a variety of tac- tics. Although the tactics are categorized based on their theoretical bases, in future studies re- searchers could examine the variation of tactics used within a strategy.

Further, as the model presented herein relates to strategy formulation, research is needed in the implementation and effectiveness of such choices. Certainly, the resource-based view of the firm and other models of firm heterogeneity suggest that firms making the same choices will implement them in heterogeneous ways. Thus, the importance of implementation of these strat- egies should not be disregarded.

A final area of future research is the exami- nation of the relationship between the choice combinations represented by the decision-tree

model and competitive advantage in the politi-

cal marketplace. Such an advantage should, in

turn, contribute to competitive advantage for

firms in product and service markets.

Ultimately, our goal with this work and in

suggesting future research areas is to provide

a basis from which managers can navigate the

public policy process and the interaction be-

tween market and nonmarket environments.

Practitioners have benefited from a wealth of

research on competitive and cooperative mar-

ket strategies, but the academic community

has paid far less attention to political strate-

gies. As more firms attempt to participate in

and gain influence with local, state, national,

and international governments, a thorough

understanding of political strategies is neces-

sary.

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842 Academy of Management Review October

Amy J. Hillman is an assistant professor at the Richard Ivey School of Business, University of Western Ontario. She received her Ph.D. from Texas A&M University. Her research interests include corporate governance, corporate political strategies, inter-

national strategy formulation, and firm/stakeholder linkages and financial perfor- mance.

Michael A. Hitt is a distinguished professor of management and holds the Paul M. and Rosalie Robertson Chair of Business Administration at Texas A&M University. He received his Ph.D. from the University of Colorado. His research interests include international strategy for large and entrepreneurial firms, resource-based and organ- izational-learning perspectives of alliance partner selection, corporate governance and innovation, and the new competitive landscape.

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