Cronyism from the perspective of the firm: a cross-national assessment of nonmarket strategy.

Author:Parnell, John A.
Position::Report
 
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  1. Introduction

    The strategic management field evolved from industrial organization (IO) economics decades ago as scholars began to focus on firm efforts to develop and sustain competitive advantage. Nonmarket concerns have always existed, but in past decades were considered peripheral to market-oriented strategic action (Bach and Allen 2010; Baron 1995; Mellahi et al. 2016; Wei et al. 2016). Today, with the heightened emphasis on corporate social responsibility (CSR) and the continued erosion of free enterprise in the West, nonmarket considerations have assumed greater prominence.

    Nonmarket strategy (NMS) refers to any part of a firm's strategy that seeks to generate superior performance through means not directly associated with market activity, such as lobbying legislators, colluding with rivals to erect industry entry barriers, and pursuing direct business-government partnerships. NMS has many surrogates within the management domain and has been portrayed by some scholars as a positive extension of corporate social responsibility (CSR) (Scherer and Palazzo 2011; Scherer, Palazzo, and Baumann 2006). While others call it corruption or cronyism (Adly 2009; Economist 2016; Unsal, Hassan, and Zirek 2016), evidence suggests that emphasis on NMS can enhance firm performance in some instances (Mellahi et al. 2016).

    This paper reports on a cross-national study that investigates links among competitive (market) strategy, NMS, environmental uncertainty, strategic capabilities, and organizational performance. Evaluating results from a diverse set of nations--China, Ghana, Turkey, and the United States--provides insight into contextual factors that influence NMS.

  2. Nonmarket Strategy

    NMS is a multifaceted construct. Within the economics tradition, analysis of NMS is rooted in the public choice perspective, whereby firms pursue transactions with government entities to benefit both parties (Bonardi, Hillman, and Keim 2005; Bonardi, Holburn, and Vanden Bergh 2006b; Wood and Frynas 2006). Within the management tradition, NMS is in part embedded in the behavioral theory of the firm (Ji-Yub, Jerayr, and Finkelstein 2011; Liu et al. 2014; Cyert and March 1963), which assumes that firms engage in behavior that expands their resource/cognitive scope. When a firm is unable to attain an aspirational level of performance, its managers have a stronger incentive to engage in risky behavior. To the extent that NMS is viewed negatively as corruption and cronyism, one might expect managers in poorly performing firms to emphasize NMS more than their counterparts in higher performing firms.

    Market strategy (MS) acknowledges both industry and firm influences on performance and is concerned with customers, competitors, suppliers, and other entities that influence competitive advantage through strategic orientations such as cost leadership and differentiation (Cadogan et al. 2002; van Raaij and Stoelhorst 2008). NMS focuses on factors such as lobbying, government collaboration, and industry influence (Baysinger 1984; Keillor, Wilkinson, and Owens 2005; Lawton, McGuire, and Rajwani 2013; Baines and Viney 2010). It seeks to minimize the effects of government regulation through lobbying, campaign contributions, and direct collaboration with government actors (Delmas and Montes-Sancho 2010; Lawton, McGuire, and Rajwani 2013; Okhmatovskiy 2010). Hence, NMS can be considered an organizational alternative to MS. Put another way, firms can pursue superior financial performance by either NMS or MS, or through some combination of the two.

    NMS has always been an important topic for firms operating in less developed and socialist nations fraught with corruption, but it is also a growing concern in developed nations where market economies coexist with substantial government intervention and extensive regulatory regimes. With the growth of emerging economies and an increased emphasis on government-business partnerships in many developed nations, NMS--traditionally viewed as a standalone activity--is now seen by many as a complement to MS (Doh, Lawton, and Rajwani 2012; Henisz and Zelner 2012; Kingsley, Bergh, and Bonardi 2012; Sawant 2012; Meyer and Peng 2016; Brito-Bigott et al. 2008). Indeed, corruption can be viewed as part of an MS in emerging economies to the extent that firms engage in it to compete more effectively (Iriyama, Kishore, and Talukdar 2016). However, relatively little is known about why some organizations emphasize NMS more than others--especially in emerging economies--or how emphasis on NMS translates into firm performance (Parnell 2015).

    Scholarly interest in NMS has considered several variants with distinct nomenclature, including strategic political management, strategic political emphasis, and corporate political activity (Oliver and Holzinger 2008; Hillman and Hitt 1999; Hillman, Keim, and Schuler 2004; Hillman and Zardkoohi 1999). Distinctions among these research streams are beyond the scope of this paper, but several competing perspectives regarding NMS can be identified.

    First, NMS has been traditionally viewed as a necessary evil to defend firms against regulatory overreach; within this context, NMS is a budget line, not an activity directly linked to firm performance. Even detractors of NMS acknowledge the need for firms to craft a plan to defend the organization against the government intrusion often promoted by rivals (Parnell 2015; Woiceshyn 2011).

    Second, NMS and MS have been couched as alternative approaches to superior firm performance. Within this perspective, firms unable or unwilling to compete via market forces craft a nonmarket approach as an alternative (Parnell 2015; Adly 2009).

    Third, NMS and MS can be viewed as complementary, with nonmarket considerations integrated into a single, overarching strategy. Advocates of this perspective often emphasize a stakeholder orientation, whereby decisions seek to satisfy all stakeholders instead of focusing primarily on shareholders (Bosse, Phillips, and Harrison 2009; Choi and Wang 2009; Harrison, Bosse, and Phillips 2010; Harrison and Wicks 2013). Proponents of this view argue that an NMS can support a profit orientation by helping the firm attain broader social objectives (Singer 2013), but detractors warn that desired outcomes vary across stakeholders, and conflicts between market and nonmarket orientations are inevitable, requiring strategic managers to make choices (Cavazos and Rutherford 2012; Baron 1995; Hadani, Dahan, and Doh 2015).

    Finally, some see political involvement by firms not as a means of influencing a stout regulatory regime, but as a means of addressing a lack of oversight. As such, social and environmental problems such as worker exploitation and child labor, water depletion, and deforestation occur when governments are unwilling or unable to promote socially and environmentally responsible business conduct (Scherer and Palazzo 2011; Scherer, Palazzo, and Baumann 2006). As a result, consumers and interest groups encourage firms to collaborate with nongovernmental organizations (NGOs) and other parties to fill these regulatory apertures by engaging in political activity (Valente and Crane 2010). Political corporate social responsibility (PCSR) occurs when businesses seek to fill the regulatory void caused by insufficient social and environmental standards and norms (Wickert 2016).

    From the PCSR perspective, NMS broadens both strategy and performance to include social entities (McWilliams and Siegel 2000, 2001). CSR has been posited as a key building block of NMS insomuch as both ostensibly seek to build trust between organizations and society and to influence public policy in a manner consistent with social values (Liedong et al. 2015; Mellahi et al. 2016; Scherer 2017; Scherer and Palazzo 2011; Schneider and Scherer 2016). This view is gaining acceptance in the field (Scherer et al. 2016; Scherer, Palazzo, and Matten 2014; den Hond et al. 2014; Matten and Crane 2005), but it is not without its critics (Liedong et al. 2015; Mellahi et al. 2016; Scherer 2017; Scherer and Palazzo 2011; Schneider and Scherer 2016). Moreover, executives today typically couch NMS activity in CSR vernacular, possibly masking their real strategic intentions.

  3. Propositions

    This paper evaluates three propositions about NMS across China, Ghana, Turkey, and the United States (see figure 1). Each is discussed in kind.

    1. Strategic Uncertainties as Drivers of Market and Nonmarket Strategies

      Managers craft strategies in part to address uncertainty (Jauch and Kraft 1986; Sun, Hsu, and Hwang 2009). As such, the type and extent of strategic uncertainty can ultimately impact firm performance (Parnell et al. 2012; Swamidass and Newell 1987). Although market, competitive, technology, regulatory, and other forms of uncertainty have been examined as precursors to MS (Parnell, Long, and Lester 2015; Kingsley, Vanden Bergh, and Bonardi 2012; Sun, Hsu, and Hwang 2009), a link between perceived uncertainty and NMS has not been widely considered in the literature. In one study, however, managers whose US firms exhibited a greater strategic political emphasis also reported greater competitive and market uncertainty (Parnell 2015).

      There is logical support for uncertainty as a key driver of both MS and NMS, especially in emerging economies (Bonardi, Holburn, and Vanden Bergh 2006a; Delios and Henisz 2003; Ghemawat 2008). Components of NMS are more pervasive in emerging economies that lack appropriate legal frameworks and infrastructures (Mantere, Pajunen, and Lamberg 2009; Barron 2010; Lailani Laynesa and Mitsuhashi 2013; Vazquez-Maguirre and Hartmann 2013; Holburn and Vanden Bergh 2008; Peng 2003; Khanna, Palepu, and Sinha 2005). Hence, NMS can carry a neutral or even positive connotation in developed nations, and a negative connotation in emerging ones (Adly 2009; Calderon, Alvarez-arce, and Mayoral 2009), where activities such as competitive collusion, political lobbying, and...

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