Is your playing field unleveled? U.S. defense contracts and foreign firm lobbying

• Date: 01 December 2019
• Author: Jin Hyung Kim
• Published date: 01 December 2019
• DOI: http://doi.org/10.1002/smj.3061

RESEARCH ARTICLE

Is your playing field unleveled? U.S. defense

contracts and foreign firm lobbying

Jin Hyung Kim

George Washington University, Washington, District of Columbia

Correspondence

Jin Hyung Kim, George Washington

University, 2201 G Street NW, Funger

401C, Washington, DC 20052.

Email: jinhyung_kim@gwu.edu

Abstract

Research Summary:Prior research in political strategy

shows that political capital is critical in achieving desirable

nonmarket strategy outcomes. Less attention has been paid

to the fact that firms vary in their ability to acquire politi-

cal capital. Foreign firms, which typically suffer from the

liability of foreignness, have difficulty acquiring and

strengthening political capital in a host country. Drawing

on the literatures on political capital, the liability of for-

eignness, and certification, I argue that relying on outside

political capital—that is, hiring outside lobbyists—helps

foreign multinational enterprises (MNEs) achieve better

nonmarket outcomes, thanks to outside lobbyists' certify-

ing role as political insiders. Empirically, the study exam-

ines U.S. Department of Defense weapons-system prime

contracts awarded to 20,301 U.S. and foreign-owned

defense contractors from 1998 through 2006. This study

has theoretical and practical implications for studies on

political capital, international business, and nonmarket

strategies.

Managerial Summary:Political capital is assumed to be

critical in nonmarket strategy to achieve positive firm out-

comes, particularly in industries where political and regula-

tory players play an important role. However, due to

certain industry or firm characteristics, some firms are at a

disadvantaged position in acquiring and consolidating the

political capital they need. In this research, I argue that one

of the factors creating such disadvantage is foreignness.

Received: 3 April 2018 Revised: 13 May 2019 Accepted: 21 May 2019 Published on: 12 August 2019

DOI: 10.1002/smj.3061

Strat Mgmt J. 2019;40:1911–1937. wileyonlinelibrary.com/journal/smj © 2019 John Wiley & Sons, Ltd. 1911

The results indicate that for those foreign firms with a lia-

bility of foreignness, relying on outside lobbyists is benefi-

cial to overcome the disadvantages and to achieve better

nonmarket outcomes because outside professional lobby-

ists can ease information flows between political and regu-

latory players and foreign firms through their

trustworthiness as political insiders.

KEYWORDS

certification, corporate lobbying, liability of foreignness, political capital,

regulated industry

1|INTRODUCTION

Firms engage in various types of political strategies, such as lobbying and campaign contributions, to

reduce uncertainty driven by the regulatory environment (Schuler, Rehbein, & Cramer, 2002) or to

receive favorable treatment (Holburn & Vanden Bergh, 2014). Political strategies are particularly

salient in industries like telecommunications, pharmaceuticals, and defense, where the decisions and

interventions of such key stakeholders as elected politicians and regulatory agencies are critical to

firm performance (Werner, 2015). Studies in political strategy have shown that the political capital

that firms possess—connections with regulatory agencies (Li & Zhang, 2007), ties with government

bureaucrats (Haveman, Jia, Shi, & Wang, 2017), relationships with political players, and in-depth

knowledge and expertise on policy and regulatory domains (Hillman & Hitt, 1999)—is positively

associated with firm performance. However, the current literature largely conceptualizes political

capital as a resource exogenously given (e.g., Faccio, 2006), overlooking factors that could create

heterogeneity in political capital across firms. Furthermore, we know little about how a disadvan-

taged status in political capital can drive different political strategies. This gap in our knowledge is

critical, given that differences in political capital may lead to strategic heterogeneity that results in

different firm outcomes.

I posit that the liability of foreignness (Hymer, 1960/1976; Zaheer, 1995) creates disadvantages

for foreign firms in accumulating necessary political capital. Foreign multinational enterprises

(MNEs) are less socially embedded than domestic firms (Mezias, 2002; Zaheer & Mosakowski,

1997), which causes them greater difficulty building up a strong constituency. In turn, such foreign

MNEs are at a disadvantage when seeking the support of key political and regulatory players

(Hiatt & Park, 2013; Keim & Zeithaml, 1986) that is critical for positive firm performance (Li &

Zhang, 2007). I thus argue that relying on outside lobbyists helps foreign firms compensate for their

weaknesses. Outside contract lobbyists play the roles of certifier and of information intermediary

(Bertrand, Bombardini, & Trebbi, 2014), transmitting valuable but difficult-to-observe information

to political and regulatory players via their unique insider status (Birnbaum, 1992). The effect of hir-

ing outside lobbyists is more salient to foreign firms than to domestic firms because the latter have a

wider range of strategies to create political capital. In other words, although foreign firms have fewer

effective options for building up political capital than domestic firms due to the liability of foreign-

ness, the marginal returns of hiring outside lobbyists are higher for them than for domestic firms.

1912 KIM