Corporate Political Activity: Why and when Political Knowledge Matters

Abstract: This paper focuses on political knowledge, which we define as the knowledge firms can use to influence public policies or, more broadly, to participate in public policy processes. Our goal is to answer three key questions: What is the nature of political knowledge? How does a firm’s political knowledge affect their corporate political strategy? In which institutional context is political knowledge most valuable? Building upon insights from New Institutional Economics, Public Choice, and the Political Markets literatures, we propose several hypotheses about how the interaction between the firm’s political knowledge and the characteristics of both political institutions and interest group rivals affects a firm’s incentive to participate in the public policy process. We develop a unique data set to test these hypotheses. Using a 32 year panel, we track every interaction between investor owned electric utilities and state-level regulators (within the U.S.) for the time period 1980 through 2011, and we analyze utility decisions to initiate regulatory proceedings. One of the most striking results of our study is that political knowledge accumulated experientially matters the most in situations where the demand side is unattractive (i.e., high competition from other interest groups), but the supply side is attractive (i.e., bureaucrats and politicians are relatively weak). In other words, political knowledge seems to be mainly about demand-side uncertainty limitation, and about seizing opportunities in the supply side. These findings have important implications for future research on how firms develop political activities, on the knowledge from which nonmarket capabilities originate, and on the integration of market and nonmarket strategies.