Nonmarket Effects on Strategic Fit and Performance: an Economic Institutional Change Perspective Sean Lux
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Florida State University Libraries Electronic Theses, Treatises and Dissertations The Graduate School 2008 Nonmarket Effects on Strategic Fit and Performance: An Economic Institutional Change Perspective Sean Lux Follow this and additional works at the FSU Digital Library. For more information, please contact [email protected] FLORIDA STATE UNIVERSITY COLLEGE OF BUSINESS NONMARKET EFFECTS ON STRATEGIC FIT AND PERFORMANCE: AN ECONOMIC INSTITUTIONAL CHANGE PERSPECTIVE By SEAN LUX A Dissertation submitted to the Department of Management in partial fulfillment of the requirements for the degree of Doctor of Philosophy Date Awarded: Spring Semester, 2008 Copyright © 2008 Sean Lux All Rights Reserved The members of the Committee approve the dissertation of Sean Lux defended on February 8, 2008. Dr. Bruce T. Lamont Professor Directing Dissertation Dr. Michael D. Hartline Outside Committee Member Dr. Annette L. Ranft Committee Member Dr. Gerald R. Ferris Committee Member Approved: . Dr. Caryn Beck-Dudley, Dean, College of Business The Office of Graduate Studies has verified and approved the above named committee members. ii To my wife Jennifer. Without her love and support, my pursuit of a doctorate simply would not have been possible. iii TABLE OF CONTENTS List of Tables…………………………………………………………………………….. v List of Figures…………………………………………………………………………..... vii Abstract…………………………………………………………………………………... viii 1. INTRODUCTION……………………………………………………………………. 1 2. THEORETICAL DEVELOPMENT………………………………………………….. 7 3. STATISTICAL ANALYSIS…………………………………………………………. 32 4. RESULTS…………………………………………………………………………….. 43 5. DISCUSSION AND CONCLUSIONS………………………………………………. 48 TABLES………………………………………………………………………………… 54 FIGURES……………………………………………………………………………….. 103 REFERENCES………………………………………………………………………….. 107 BIOGRAPHICAL SKETCH……………………………………………………………. 115 iv TABLES Table 1 Antecedents of Political Activity Table 2a Descriptive Statistics and Correlations: Market Factors in the U.S. Semiconductor Industry (1986-2000) Table 2b Descriptive Statistics and Correlations: Nonmarket Factors in the U.S. Semiconductor Industry (1986-2000) Table 2c Descriptive Statistics and Correlations: Market Factors in the U.S. Pharmaceutical Industry (1986-2000) Table 2d Descriptive Statistics and Correlations: Nonmarket Factors in the U.S. Pharmaceutical Industry (1986-2000) Table 2e Descriptive Statistics and Correlations: Market Factors in the U.S. Coal Mining Industry (1986-2000) Table 2f Descriptive Statistics and Correlations: Nonmarket Factors in the U.S. Coal Mining Industry (1986-2000) Table 3a Generalized Least Squares Estimates: Effects of Economic Contingencies on U.S. Semiconductor Research & Development Investment Activity (1986-2000) Table 3b Generalized Least Squares Estimates: Effects of Political Contingencies on U.S. Semiconductor Total Political Activity (1986-2000) Table 4 Generalized Least Squares Estimates of Deviation from Economic Contingency Prediction on Economic Performance: U.S. Semiconductor Industry (1986-2000) Table 5a Generalized Least Squares Regression: Effects of Economic Contingencies on U.S. Pharmaceutical Advertising and Research and Development Investment Activity (1986-2000) Table 5b Generalized Least Squares Regression: Effects of Political Contingencies on U.S. Pharmaceutical Total Political Activity (1986-2000) Table 6a Generalized Least Squares Estimates of Deviation from Economic Contingency Prediction on Economic Performance: U.S. Pharmaceutical Industry (1986-2000) Table 6b Generalized Least Squares Estimates of Deviation from Political Contingency Prediction on Economic Performance: U.S. Pharmaceutical Industry (1986-2000) Table 7a Generalized Least Squares Regression: Effects of Economic Contingencies on U.S. Mining Capital Investment Activity in Plant, Property, and Equipment (1986-2000) v Table 7b Generalized Least Squares Regression: Effects of Political Contingencies on U.S. Mining Total Political Activity (1986-2000) Table 8a Generalized Least Squares Estimates of Effects of Deviation from Economic Contingency Prediction: U.S. Mining Industry (1986-2000) Table 8b Generalized Least Squares Estimates of Effects of Deviation from Political Contingency Prediction: U.S. Mining Industry (1986-2000) vi FIGURES Figure 1 Market and Institutional Opportunity Sets Figure 2 Nonmarket Affects on Dynamic Strategic Fit Figure 3 The Co-Evolution of Economic Institutions and Markets Figure 4 Co-evolution of Market and Political Opportunities vii ABSTRACT How do market and nonmarket environmental factors affect firm investment decisions and subsequent performance? Economic Institutional Change Theory is extended to the product market-firm level of analysis to develop a model of dynamic strategic fit to nonmarket and market factors. The co-evolution of market and institutional factors creates four basic opportunity sets comprised of low to high market opportunities and low to high political opportunities. Contingency models are estimated using generalized least squares regression for three of the four opportunity sets. Deviation from the contingency models is used to measure strategic fit and used to test the relationship between fit and economic performance. Empirical evidence did not support the assertion that fit is related to performance in the first two opportunity contexts. Empirical support was found in the third study for strategic fit to political factors. viii CHAPTER 1 INTRODUCTION Strategic management scholars have often focused solely on market factors in economic competition and performance, and have assumed nonmarket factors are exogenous to economic competition (Boddewyn, 2003; Boddewyn & Brewer, 1994). Baron (1995) defined nonmarkets as the “social, political, and legal arrangements that structure the firm’s interactions outside of, and in conjunction with, markets” (p.48). Contrary to the view that economic competition is affected only by economic factors, some scholars have asserted nonmarket factors affect firm performance (Baron, 1995, 1997; Baysinger, 1984; Mahon & McGowan, 1996). Empirical evidence has suggested that firms do engage in political activities (e.g. Hart, 2001; Schuler, Rehbein, & Cramer, 2002) and that these activities improve firm economic performance (Bonardi, Holburn, & Vanden Bergh, 2006; Hillman, Zardkoohi, & Bierman, 1999; Shaffer, Quasney, & Grimm, 2000). The extent effective economic institutions exist and are enforced in a given institutional environment largely determines the opportunities available to market actors (Eggertson, 1990; North, 1990, 1994). The institutional environment is comprised of the informal and formal institutions that govern economic exchange, and the social groups and political organizations that create, maintain, enforce, and change these institutions (North, 1990). Informal institutions are social and behavioral norms (Biggart & Delbridge, 2004; Blau, 1964; Ouchi, 1980), and constitutions, laws, and treaties are formal institutions that govern economic exchange (North, 1981, 1990). Effective and well enforced institutions encourage market actors to engage in economic activities beneficial to society, whereas ineffective and/or poorly enforced institutions dissuade economic activity and encourage market actors to pursue political activities (North, 1990). Baron (1995; 1997) observed that both market and nonmarket opportunities exist to varying degrees in most institutional settings. Market actors will engage in market and/or political activities to the extent those activities generate economic returns in a given institutional environment (Baron, 1995; Mitchell, Hansen, & Jepsen, 1997; North, 1990). A market actor generates economic returns through political activities when the institutional environment is altered or maintained to benefit an actor’s economic activities (Baysinger, 1984; North, 1990). Changes in the institutional environment include policy and policy enforcement changes as well as changes in government investment and contracts (North, 1990). Political opportunities are considered attractive when the economic returns from changing the institutional environment are greater than costs associated with lobbying nonmarket actors to enact those changes. The Walt Disney Corporation’s effort to extend United States copyright protection through influencing political actors is illustrative. The $6.3 million dollars Disney’s political action committee (PAC) contributed to members of the U.S. Congress influenced the creation of the Sonny Bono Copyright Term Extension Act. The Act extended U.S. copyright protection from life of the creator plus fifty years to life plus seventy years for all works copyrighted after January 1, 1923. The change in U.S. copyright law allowed Disney to protect their primary intellectual property, the Mickey Mouse character, for an additional twenty years. The resources invested in changing the institutional environment (U.S. copyright law) to Disney’s advantage were far less than the resources required to replace the loss of Disney’s intellectual property within the existing institutional environment. 1 Figure 1 illustrates how market actors face four predominant opportunity sets based on the market and nonmarket opportunities available in a given institutional environment. Market actors are likely to perceive that market activities will deliver the greatest returns on investment in the top right quadrant of Figure 1. Political, or nonmarket opportunities are unattractive or nonexistent, and the opportunity to generate economic returns through market-based