Business and Management INK

How Do Firms Create Government Regulations?

April 18, 2024 551

In this post, Jun Xia, Fiona Kun Yao, Xiaoli Yin, Xinran Wang, and Zhouyu Lin detail their research from their new paper, “How Do Political and Non-Political Ties Affect Corporate Regulatory Participation? A Regulatory Capture Perspective,” appearing in Business & Society.

What motivated you to pursue this research?

Our intrigue lies in the active role firms play in the creation of government regulations that may standardize firm practices in a field. Such regulations do not emerge spontaneously; instead, they are often the result of governments drawing on the specialized knowledge of firms to develop industry-specific regulatory measures. This collaboration is termed corporate regulation-making, in where both governments and firms contribute. This is especially common when the government does not have sufficient technical expertise to formulate technology-based regulations independently. Our study reveals this possibility in which firms are seen participated in making regulatory standards that guides product development within an industry.

A notable aspect of this collaborative approach between firms and the government is its potential to lead to regulatory capture by the firms. This occurs when a specific entity, referred to as Firm A, gains support from regulatory bodies to create new regulations. These regulations then become compulsory for a group of related businesses, labeled as Firm Bs, which can include competitors or those with whom Firm A conducts business.

Our research delves into the factors that drive such regulatory capture. Specifically, we explore how various stakeholders of a firm collectively influence its involvement in regulation-making. During this process, Firm A may face competing interests from different stakeholders, both political and non-political, and must navigate these to make informed decisions.

Were there any surprising findings?

A fundamental discovery of our research is that firms with political connections are more effective in influencing regulatory standards. Unexpectedly, we find that firms with extensive non-political ties, like those with universities and with interlocked firms, see a diminished impact from their political connections. While one might assume that political and non-political ties would be mutually reinforcing, our study reveals that they can have divergent pulls on a firm: political ties tend to align a firm with governmental policies, whereas non-political ties might orient it towards professional norms or shared business interests. Our findings suggest that maintaining a balance can be complex for organizations, as meeting the demands of one stakeholder group could inadvertently neglect the concerns of another.

In what ways is your research innovative, and how do you think it will impact the field?

Our research offers new insights into regulatory capture by considering the joint influence of a firm’s political and non-political connections on its regulatory involvement. The prevailing body of work on regulatory capture often disregards the nuanced impact diverse stakeholders can have on a firm’s decisions. It is essential for a firm to address and balance the varied and sometimes opposing interests of its stakeholders.

We contribute to organizational studies by identifying the setting of regulatory standards as a non-market strategy firms employ to sway governmental policy. Most previous studies have focused on co-optation through inter-firm partnerships, joint initiatives, or specific committees to exert organizational influence, paying less attention to regulatory capture. As firms increasingly partake in regulation formulation, the likelihood of corporate regulatory capture escalates, affording these firms greater power to shape and enact new technology-based regulations.

Fiona Kun Yao (pictured) is an assistant professor of business administration at the Gies College of Business at the University of Illinois Urbana-Champaign. She received her PhD is Business Administration from the University of California at Berkeley and received the 2022 Best Paper Award in Illinois Strategic Organizations Initiative from the Gies College of Business. Jun Xia is a professor in organizations, strategy, and international management in the Naveen Jindal School of Management at The University of Texas at Dallas. He received his PhD from Texas Tech University and has current research interests in organization theories, social networks, corporate struggles, and international business. Xiaoli Yin is an associate professor in the departments of chemical and biomolecular engineering, chemistry, materials science and engineering. Diao is also a Thrust Leader from the Molecule Maker Lab Institute. Xiaoli Yin is an associate professor in the Zicklin School of Business at Baruch College. Yin received their PhD in organization behavior/sociology from the Kellogg Graduate School of Management at Northwestern University. Xinran Wang is an associate professor at the Zicklin School of Business at Baruch College. She received her PhD in Strategy from the University of Tennessee, Knoxville and has research expertise in the following areas: social evaluations, impression management strategies, behavioral strategies, and social issues in management. Zhouyu Lin is a scientific researcher at Jinan University in Guangzhou, China. Lin has a wide array of publications, primarily involving economics and politics.

View all posts by Fiona Yao, Jun Xia, Xiaoli Yin, Xinran Wang, and Zhouyu Lin

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