Firm-Specific Determinants of Corporate Lobbying Participation and Intensity

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Firm-Specific Determinantsof Corporate LobbyingParticipation and IntensityFarid Sadrieh a & Madan Annavarjula ba School of Business, Quinnipiac University ,Hamden , Connecticut , USAb College of Business, Northern Illinois University ,Dekalb , Illinois , USAPublished online: 07 Feb 2007.

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Journal of Public Administration, 28: 179–202, 2005Copyright © Taylor & Francis Inc.ISSN 0190-0692 print / 1532-4265 onlineDOI: 10.1081/PAD-200044552

Journal of Public Administration281-2Taylor & FrancisTaylor and Francis 325 Chestnut StreetPhiladelphiaPA191060190-06921532-4265LPADTaylor & Francis Inc.4455210.1081/PAD-2000445522005146Sadrieh and AnnavarjulaFirm-Specific Determinants of Corporate LobbyingFirm-Specific Determinants of Corporate Lobbying Participation and Intensity

Farid Sadrieh*

School of Business, Quinnipiac University, Hamden, Connecticut, USA

Madan AnnavarjulaCollege of Business, Northern Illinois University, Dekalb, Illinois, USA

Abstract: Lobbying constitutes a major element in the political strategy of firmsseeking favorable regulatory outcomes and is perceived as a source of a firm’s compet-itive advantage. Recognizing firms’ ability to influence their external environmentsthrough reactive and proactive political behavior, this paper analyzes the firm-specificdeterminants of corporate political activity and intensity. Results from US and Japanesefirms indicate that firm size, diversification, and internationalization positively influencethe likelihood of a firm being an active lobbyist. While firm profitability influences the"intensity" of lobbying activity, foreign nationality has a negative impact.

INTRODUCTION

Government intervention is increasingly viewed as part of a firm’s strategicarsenal, a key resource that can be used not only to reduce uncertainty (Lord2000), but also to gain or sustain competitive advantage (Hillman et al. 1999;Boddewyn & Brewer 1994; Morrison & Roth 1992). Government interventioncan take many different forms and affect a variety of firm, industry, or marketparameters. Individual firms or coalitions design their political behavior inlight of the expected outcomes or benefits, on the one hand, and the likelycosts and their available resources, on the other. In order to better understandthe corporate use of public policy as a resource in pursuit of strategic objec-tives, the present study develops a framework for analyzing two interrelatedquestions: what are the determinants of a firm’s decision to engage in a spe-cific form of political activity, namely lobbying, and what are the likely expla-nations for the intensity of commitment for this course of action?

*Correspondence: Farid Sadrieh, School of Business, Quinnipiac University, Hamden,CT, 06518, USA. E-mail: [email protected]; [email protected]

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180 Sadrieh and Annavarjula

Public policy can provide many forms of rent-generating interventions,including subsidies, administered prices, entry restrictions, and productionrestraints (Salorio 1991; Marcus et al. 1987). From the perspective of theresource-based literature, these market distortions can be construed as externalassets, used as barriers to enhance the firm’s (or a group of firms’) competi-tive advantage over rivals. These political resources, however, do not accruewithout cost, except maybe in the extreme case of the free-rider firm (Olson1965), nor are the benefits equally distributed (Salorio 1991). For example,protectionist measures benefit differentially various domestic participants inan industry and may hurt other related industries. Moreover, trade protectionmay be costly to secure, especially when pursued through lobbying activities.

Firms’ political preferences do not necessarily translate into the pursuit ofa political strategy. Political activities, especially high-track lobbying effortsare costly and uncertain (Salorio 1991). Thus, the magnitude of the benefitsexpected and the probability of success must justify the risks incurred. Inaddition, as noted earlier, the firm has to be able to muster the resourcesneeded for this type of activity. Alternatively, the absence of political activi-ties does not equate lack of interest in government policy. It can reflect a pref-erence for the status quo, or a situation that is unsuitable for pursuing activepolitical intervention.

From Political Stance to Political Action: Firm and Industry Attempts at Influencing Public Policy

A firm engages in political action in an attempt to change or preserve its insti-tutional environment. The latter situation may arise when an undesired changeis imminent (pending legislation affecting the firm) or threatened (politicalaction initiated by others to modify the regulatory environment).

Political activities may also take place in a longer-term perspective: manyfirms actively develop relations with lawmakers, thus in fact building anintangible resource (e.g., goodwill) or a capability (e.g., access to key decisionmakers) that can be tapped over time (Amit & Schoemaker 1993; Dierickx &Cool 1989; Foss & Eriksen 1995).

The distinction between reactive political action and proactive politicalbehavior offers a first rough categorization to guide and inform the investiga-tion. A logical next step may be to draw a parallel between the type of politi-cal action (reactive or proactive) and the form that it takes (low track, e.g.,administrative petitioning or high track, e.g., lobbying). It seems reasonable toassociate low-track action with reactive behavior (triggered by foreign ordomestic competitors’ initiatives) while pairing high-track political actionwith a proactive firm strategy.

Proposed trade regulation can also benefit or harm the interests of varioussocietal actors, providing potential allies for interested business corporations.

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Firm-Specific Determinants of Corporate Lobbying 181

Reactive Political Behavior

Reactive political behavior is defined as political activism spurred by the emer-gence of a threat to the organization. Obviously, threats are of varying importanceand consequence, and political activism is far from being the sole or even the pre-ferred organizational response to exogenous shocks or challenges to the firm’scompetitive position. In fact, business corporations may fail to react altogether, asa result of organizational inertia (Rumelt 1995). Moreover, what may represent athreat to one firm (e.g., trade liberalization) may constitute an opportunity foranother. The less similar the firms are in an industry (in terms of their cost struc-ture, market share, profitability, linkages, etc.), the stronger the idiosyncraticeffects of an exogenous threat. In the presence of differential consequences, firmsare more likely to have diverging and/or conflicting interests. Conflicting interestsper se do not preclude collective political action: firms may join forces to formsubgroups in an industry, each bloc adopting a differentiated posture. Firms adoptdifferent strategies when confronted with a threat; moreover, these strategiesevolve over time as conditions change (Mahon & Post 1987).

Baysinger (1984) has divided reactive political strategies into efforts atrebuffing threats to organizational goals and purposes (domain defense) andattempts to neutralize challenges to the methods used to attain those goals(domain maintenance).

Proactive Political Behavior

Proactive political behavior corresponds to what Baysinger (1984) has calleddomain management. Domain management designates the efforts deployed bya firm to obtain government intervention in pursuit of “its own parochial inter-ests, usually at the expense of other firms or society at large” (Kotter 1979,cited in Baysinger 1984). The effects of these influence attempts and their out-comes on “society at large” are open to debate. This author, while not reject-ing the possibility of harmful societal effects of proactive political behavior,tends to believe that any sweeping statement can be seriously misleading.Indeed, societal consequences are likely to be contingent on the goals pursuedby lobbying firms, the targets of influence attempts and their response, thedefinition of “society” (worldwide or national), and so forth.Moreover, thedetermination of these effects is beyond the scope of the present paper andbest left for another investigation. For the purposes of this study, proactivepolitical behavior is viewed as a strategy or substrategy formulated to gaincompetitive advantage (Boddewyn 1988; Morrison & Roth 1992).

In sum, whether reactive or proactive, the political efforts deployed bybusiness firms aim at controlling their external environment (Pfeffer & Salannick1978) and reducing the uncertainty created by institutional actors (Baysinger1984).

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The Lobbying Decision

In accordance with previously developed argument, lobbying seems not somuch a discrete event in time, triggered by an external threat than a commitmentto pursue a political strategy. In other words, lobbying is first and foremost aneffort in building corporate political resources. The political ability is a comple-ment rather that a substitute for traditional firm capabilities. Indeed, lobbyingrequires considerable sunken costs, and larger firms may be better able to with-stand large investments with uncertain returns. Given the high threshold foreffective lobbying (Salamon & Siegfried 1977), size measured by total annualsales is expected to positively influence the lobbying decision. Large firms canspread the costs of political activity and capture a higher return for these endeav-ors (Salomon & Siegfried 1977; Yoffie 1987; Rehbein 1995).

The first hypothesis, therefore, states:

H1: There is a positive relationship between firm size and the likelihoodthat a firm will be active in lobbying (directly or through representation).

Firm size as measured by annual sales has been consistently shown in theliterature to affect political behavior. This being the case, it may be arguedthat this variable is of limited value in achieving a better understanding of thelobbying phenomenon and is best used as a control variable. In acquiescenceto the above stated view, in the latter part of the analysis (predicting lobbyingintensity) size is used as a control variable.

As will be recalled, a few authors have considered the influence of prod-uct diversification on corporate political behavior (Grier et al. 1994; Zardkoohi1985). Product diversification has been shown to have an ambiguous effect onPolitical Action Committee (PAC) formation. Some aspects of PAC activitydo not necessarily correspond to lobbying situations. For example, mobiliza-tion and organization of employees (Keim & Zeithaml 1986; Zardkoohi 1985)have little relevance to lobbying registration although they certainly affectPAC formation. However, Zardkoohi’s “portfolio effect,” or the likelihoodthat a diversified firm will draw at least some benefits from political activity,is linked to the supply of political favors: it is thus applicable to all forms ofthe demand for political intervention, including lobbying. Indeed, a higherprobability of some success can be expected to translate in a higher likelihoodof lobbying activity. Thus:

H2: There is a positive relationship between firm degree of product diver-sification and the likelihood that the firm will be active in the lobbying.

Although geographical diversification has also been evoked in the liter-ature (Esty & Caves 1983), no researcher has to date addressed interna-tional geographical diversification, an aspect of firm internationalization.

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Internationalization has many dimensions; in the present paper, two salientinternational characteristics will be considered: geographical diversificationand export propensity. The former is measured by the number of world geo-graphical segments where the firm is active, and the latter by its share ofexport sales relative to total sales. The expected effect of these two variableson lobbying activity will depend on the conceptualization of corporate politi-cal action. As a reactive measure against such external threats as foreignimports, firms that are more present in international markets are less likely toresort to political means (i.e., protectionist intervention), since they are 1) bet-ter equipped to compete with global rivals, and 2) more vulnerable to retalia-tion in other markets. However, viewed as a proactive activity, lobbying willcomplement a global strategy as a crucial element of the international diplo-macy that is pursued by and sometimes thrust upon global firms. Consistentwith our previous reasoning, we therefore hypothesize that foreign involve-ment (internationalization) will increase the likelihood of lobbying:

H3: There is a positive relationship between degree of firm internation-alization and the likelihood that the firm will be active in lobbying.

Finally, as stated earlier, political activities necessitate large investments inresources. The existence of slack resources within the firm will increase man-agement’s discretion in pursuing a political strategy. Lenway and Rehbein(1991) have suggested slack resources as a determinant of political behavior.Following Chakravarthy (1986), their measures of slack included firm profit-ability and ability to raise long term capital. The latter, reflected in debt-to-equity ratio, proved insignificant (this was also confirmed in the preliminary andancillary analyses conducted by this author), while the former showed somepromise. Both theory and empirical antecedent will thus lead us to expect a pos-itive relationship between firm profitability and lobbying. Formally stated:

H4: There is a positive relationship between firm profitability and thelikelihood that the firm will be active in lobbying.

To sum up, the model includes four predictors of the likelihood of a firmbeing registered as a lobbyist, namely:

• Size, measured by total sales (SALES)• Product diversification, measured by number of business segments that a

firm is active in (BUSSEG)• Internationalization, measured by the number of geographical segments that

a firm is active in (GEOSEG) and its share of foreign sales in total sales(FSTS)

• Profitability, measured by gross profit ratio (GPR), return on equity (ROE)and return on assets (ROA)

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Therefore, Model 1, predicting the likelihood of a firm being registered asa lobbyist is written as:

LOBBY = f (SALES, BUSSEG, GEOSEG, FSTS, GPR, ROE, ROA)

In addition, in order to capture the effect of what Zaheer (1995) has calledthe “liability of foreignness” we have used two dummy variables: one forJapanese firms and one for non-Japanese foreign firms.

Resource Commitment to Lobbying

After having decided to become involved in lobbying, the firm must deter-mine its resource commitment to this course of action. It will be recalled thatour second research question was formulated as: “What are the determinantsof lobbying intensity among politically-active firms?”

Not only larger firms are more likely to lobby, they are also more likely tocommit more resources. Since lobbying expenditures are directly related to size,including this variable among the predictors is so little incremental value for theunderstanding of political strategy. In contrast to previous researchers, we willconsider lobbying expenditures not in absolute terms, but rather as a percentage oftotal annual sales. Our dependent variable, henceforth, with be what we call lobby-ing intensity, that is, lobbying expenditures relative to sales. Lobbying intensity isa reflection of a firm’s commitment to a politically active strategy. The questionthen becomes: what are the determinants of firm lobbying intensity?

Most factors influencing the lobbying decision can also be expected toaffect lobbying intensity. However, we will introduce additional predictorvariables that have been shown in the past to affect expenditures in politicalresources, in particular industry characteristics. We will proceed below to abrief review of the model’s variables.

Profitability: As a reflection of corporate slack, profitability is expectedto increase the ability of the firm to control its environment. Following pastpractice, profitability will be measured by gross profit margin (GPR), returnon equity (ROE), and return on assets (ROA). Consistent with argumentsdeveloped earlier, it is hypothesized that:

H5: Corporate profitability is positively associated with lobbying intensity.

Product Diversification: As has been seen previously, the effect of corpo-rate diversification on the likelihood of success in political endeavors isexpected to be positive (the portfolio effect). According to this perspective,diversification is a position determinant of lobbying. On the other hand, it hasbeen pointed out that diversification is associated with heterogeneity of theworkforce, thus impeding organizing efforts at the grass root level (Zardkoohi

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1985). Given the lack of transferability of the latter concern to lobbying initia-tives, it is believed that if diversification will indeed affect lobbying intensity,it will have a positive influence. Thus:

H6: Degree of firm diversification is positively related to firm lobbyingintensity.

Internationalization: The effects of internationalization on the decisionwhether to lobby has been hypothesized to be positive. A firm that is presentin international markets will need to maintain and nurture channels of commu-nications with legislators and the executive branch. This ability is needed aspart of corporate international diplomacy and as a sine qua non for managinga heterogeneous legal environment. The decision to be active in lobbying is,however, distinct from a commitment to a lobbying strategy. The latter wouldbe reflected in a high degree of lobbying intensity.

An international firm benefits from a higher degree of strategic flexibility.It may have strategic options other than lobbying, which leads to lower levelsof resource investments in lobbying compared to other, similar firms. Thus:

H7A: Firm internationalization is negatively associated with lobbyingintensity.

On the other hand, multinational firms may enlist their home govern-ments in an effort to influence foreign environments as well as the domesticsphere. Moreover, the interests of these firms are likely to be more consistentwith home country policy orientations, especially regarding bilateral and mul-tilateral trade. Therefore, an alternate hypothesis is stated:

H7B: Firm internationalization is positively associated with lobbyingintensity.

Foreign versus Domestic Firms: Although the model predicting lobbyingintensity is expected to be valid for all firms, it is worthwhile to compare thebehavior of foreign and domestic firms. To date, only one study has addressedthis issue (Rehbein 1995). Rehbein found that cultural distance and foreignownership are negatively associated with the likelihood of a firm funding aPAC. Given the controversial nature of foreign participation in electoral cam-paign contributions, this result may not seem surprising. It is reasonable toexpect that foreign firms will also be more reluctant to invest heavily in high-profile political activity in the form of lobbying. This relationship is tested inthe present study. Our last hypothesis states:

H10: There is a negative relationship between a firm foreign incorpora-tion and its lobbying intensity.

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METHODOLOGY

Data and Sample Selection

Three major sources of secondary data are used. The first two, Standard andPoor’s Compustat database and the US Census of the Manufactures, disclosethe most recent firm and industry-level data available and are widely used inthe management literature.

The Compustat database has constituted the basis for constructing firm-specific independent variables that are used in the two models. Such variablesmeasure corporate profitability, geographic diversification, annual sales, stan-dard industrial classification (SIC), share of foreign sales relative to totalsales, product diversification, and country of incorporation of the firm. Inaddition, some other corporate ratios, such as measures of equity structure,were collected initially and manipulated in preliminary analyses.

The US Census of Manufactures is another major source of data. The1992 census data, for which most complete information was available, is thebasis for constructing industry-level variables for this study. In addition, datafrom the 1987 census and the 1982 census were collected and used in prelimi-nary analyses.

Finally, lobbying data were obtained from the Senate Office of PublicRecords. Sixteen microfilm rolls containing lobbying registration informationas well as lobbying expenditures released as of October 28, 1996 were pur-chased. Lobbying information has recently become available as a result of thepassage of the Lobbying Disclosure Act of December 1995. It must be notedthat these records include all entities engaged in lobbying the legislative andexecutive branches of government. Lobbying can be done directly, with theregistrants being the firm (or other organization’s) employees, or indirectly,through a public relations firm. In the latter case, the name of the client firm isstated along with the income imputed to lobbying on its behalf. Often, a firmuses both in-house lobbyists and public relations firms, in which case both arerecorded in the lobbying data.

Sample Selection

A list of 1,964 manufacturing firms (SIC 2000 to 4000) with annual sales of$50 million or more, was generated by the Compustat database. Among these1,964 firms, 403 are registered as lobbyists, either directly or indirectly. Thestudy uses two groups for testing our first set of hypotheses, built around thefirst research question, “What Are the Determinants of Firm Lobbying?” Rel-evant data were collected for all of the firms.

The second research question, “What Are the Determinants of LobbyingIntensity Among Politically Active Firms?” was analyzed based exclusively

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on the sample of 403 politically active firms. Additional data needed to testthe second set of hypotheses were collected for those firms.

Construction of Dependent Variables

Two dependent variables were used. The first one (LOBBY) is a categoricalvariable, which takes a value of 1 for lobbying firms and 0 for others. Themeasurement of this variable is straightforward: a firm registered as a lobbyistis considered a lobbying firm, non-registrants are non-lobbying firms. It mustbe noted that a few registered lobbyists did not report any activity (expendi-tures = 0) during the period. These corporations were nevertheless consideredlobbying firms because they have filed registration documents, indicating areadiness or intent to engage in lobbying.

The second dependent variable, lobbying intensity, is defined as the ratioof lobbying expenditures to the annual sales of the firm. Lobbying expendi-ture data were compiled and computed as described below.

A record number on the listing generated by the Public Records Officeindicates the location of microfiches recording lobbying activity. These recordnumbers have a prefix denoting whether the record contains registration orlobbying expenditures reports. Each corporation (or any other organization)may file as many separate documents as needed, continuously updating regis-tration and expenditure information. For each of the 403 firms registered aslobbyists, this data was checked and manually transcribed record by record.Expenditure data was thus collected for each firm and the reported expensesadded together and consolidated to obtain a total lobbying expendituresamount for the individual firm over the period under consideration.

According to the rules established by the Lobbying Disclosure Act,amounts of less than $10,000 do not have to be specified. In these cases, whenthe firm (or its representative) reported an exact amount, this figure wasretained. Whenever the firm simply indicated “$10,000 or less,” the expendi-tures were rounded up to $10,000. Next, the individual firm’s expenditures onlobbying were divided by its sales to obtain a measure of the dependent vari-able lobbying intensity (SUMOVERA). As will be explained below, the salesamount is an average of annual sales for several years.

Construction of Independent Variables

Firm Size: Firm size (SALES) is measured by the average annual total salesfor the firm over the 1992–1995 period.

Profitability: Three measures of profitability were used, namely return onassets (ROA), return on equity (ROE) and gross profit ratio (GPR).

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ROA = Operating Income/Average Total Sales

ROE = Net Income/Average Shareholder Equity

GPR = (Gross profit – Cost of Goods Sold)/Gross Profit

These accounting measures of profitability were also averaged over the1992–1995 period.

Internationalization: As explained earlier, internationalization is measuredby two variables, namely geographic diversification (GEOSEG) measured bythe number of world geographical segments served and share of foreign salesin total sales (FSTS) measured by the ratio of foreign sales to total sales.

Product Diversification: Product diversification (BUSSEG) is measuredby the number of business segments served by the firm.

Country of Incorporation: Country codes of each country as recorded inthe Compustat database are used for measuring this variable. For example, theUnited Sates is coded 0 and other countries are each assigned a two-digitcode. The country of incorporation of each firm is used to compare foreignand domestic firms, and later, Japanese and other foreign firms.

Statistical Methodology

Since the dependent variable is categorical, the logistic regression model toanalyze the binary response – lobby / not lobby is of the form:

Logit {Pr (Y=1/X} = log {(Pr [Y=1/X])/(1-Pr [Y=1/X])} = B0 + X B

Where B0 is the intercept parameter and B is the vector of the slope parameter(Hosmer & Lameshow 1989; Ying 1996).

RESULTS AND DISCUSSION

Model 1:

LOBBY = f (SALES, ROA, ROE, GPR, FSTS, GEOSEG, BUSSEG)

A preliminary t-test revealed difference between lobbying and nonlobby-ing firms along several dimensions: size (SALES), internationalization (FSTSand GEOSEG), diversification (GEOSEG) and profitability (ROA). (SeeTable 1.)

Next, a logistic regression procedure was used to test the hypotheses, fol-lowed by a stepwise regression (Tables 5 and 6). Individual tests were per-formed to test each variable and the full model was then tested.

The second research question addresses a continuous dependent variable,namely, lobbying intensity (SUMOVERA).

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Tab

le 1

.T

-Tes

t Pro

cedu

re B

etw

een

Lob

byin

g an

d N

on-l

obby

ing

Firm

s

LO

BB

YIN

G F

IRM

S

Var

iabl

eN

Mea

nSt

d D

evSt

d E

rror

Min

imum

Max

imum

Var

ianc

esT

DF

Pro

b>T

GPR

393

34.8

9917

.517

0.88

43.

558

93.1

46U

nequ

al1.

188

561.

20.

2365

FST

S35

523

.419

24.3

121.

290

0.00

011

2.56

5U

nequ

al6.

090

514.

40.

0001

BU

SSE

G38

53.

748

0.82

70.

042

3.00

05.

000

Une

qual

8.28

752

2.1

0.00

01G

EO

SEG

385

2.47

81.

660

0.08

51.

000

10.0

00U

nequ

al10

.053

473.

50.

0001

RO

A39

45.

889

6.97

60.

351

−41.

403

52.2

81U

nequ

al4.

267

895.

50.

0001

RO

E39

38.

961

49.4

926.

583

−881

.396

129.

707

Une

qual

−0.3

2318

91.3

0.74

68SA

LE

S39

480

70.2

3816

847.

135

848.

746

55.9

4115

2172

.0U

nequ

al7.

993

417.

80.

0001

NO

NL

OB

BY

ING

FIR

MS

GPR

1567

33.7

4817

.144

0.39

8−1

15.7

1182

.846

Equ

al1.

266

1958

0.20

57FS

TS

1470

14.7

6822

.774

0.59

40.

000

104.

927

Equ

al6.

338

1823

0.00

00B

USS

EG

1499

3.37

00.

674

0.01

70.

000

5.00

0E

qual

9.34

618

820.

0000

GE

OSE

G14

991.

581

1.09

70.

028

1.00

010

.000

Equ

al12

.731

1882

0.00

00R

OA

1577

4.01

010

.530

0.26

5−1

05.3

4984

.850

Equ

al3.

361

1969

0.00

08R

OE

1566

11.2

3526

0.52

76.

583

−563

3.93

771

38.4

14E

qual

−0.1

7219

570.

8633

SAL

ES

1579

1180

.994

5952

.683

149.

803

25.4

3012

8466

.333

Equ

al13

.272

1971

0.00

00

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Model 2:

SUMOVERA = f(ROA, ROE, GPR, FSTS, GEOSEG, BUSSEG, CGROUP)

The regression equation was of the form Y=b0 = b1X = e where bo is theintercept, b1 is the slope and e is the error term. Various versions of this modelwere tested using a stepwise regression procedure. Note that the inclusion of thetwo industry variables results in the loss of many observations and the reduction

Table 2. Results of the Logistic Regression Predicting the Probability of Lobbying

VariableParameter Estimate

Wald Chi-Square Pr> Chi-Square

INTERCPT −3718200 73.9921 0.0001CD1 −2.732100 45.2487 0.0001CD2 −5.606700 11.5569 0.0007ROE −0.000120 0.0975 0.7549ROA 0.001570 0.0416 0.8383SALES 0.000283 75.1900 0.0001GPR 0.007070 2.2424 0.1343FSTS 0.004570 1.0647 0.3021BUSSEG 0.317000 6.0541 0.0139GEOSEG 0.31300 27.0855 0.0001

Table 3. Stepwise Regression Analysis Results Predicting the Probability of FirmLobbying

StepVariable Entered Number In Chi-Square Pr> Chi-Square

1 SALES 1 195.00 0.00012 CD1 2 30.43 0.00013 GEOSEG 3 28.43 0.00014 CD2 4 25.22 0.00015 BUSSEG 5 20.26 0.0001

VariableParameter Estimate

Wald Chi-Square Pr>Chi-Square

INTERCPT −3.79 110.58 0.0001CD1 −2.65 46.58 0.0001CD2 −5.42 10.87 0.0010SALES 0.00 76.02 0.0001BUSSEG 0.44 19.79 0.0001GEOSEG 0.29 24.78 0.0001

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of the size of the sample to 236 firms. Indeed, not all SICs have a reported con-centration index. Those firms whose primary SIC, as recorded in the Compustatdatabase, does not have a corresponding concentration index, as reported by theCensus of Manufactures, are dropped from the sample. This explains the differ-ence in sample size according to whether industry data is included or not.

Determinants of Firm Lobbying

LOBBY = f (SALES, ROA, ROE, GPR, FSTS, GEOSEG, BUSSEG)

Prior to analyzing the hypothesized effects of the model’s variables, itshould be noted that nationality (CGROUP) does not predict simple lobbyingbehavior. Whether firm country of incorporation will affect degree of lobby-ing commitment (lobbying intensity) is a different question that will beaddressed later in this paper.

In contrast, size, as measured by total sales (SALES) is a significant pre-dictor of the likelihood of the firm being an active lobbyist (Table 6) , thusconfirming our first hypothesis. Sales, indeed, is also positively associatedwith lobbying intensity (as revealed in preliminary analyses) and will betreated as a control variable in the latter part of this study.

The Logit analysis shows an equally significant relationship between productdiversification (BUSSEG) and lobbying. The more a firm is diversified, the morelikely it is to be an active lobbyist. This result confirms our second hypothesis.

The third hypothesis linked the degree of internationalization with the like-lihood of the firm being an active lobbyist. The analysis reveals a positive rela-tionship between both measures of internationalization (FSTS and GEOSEG)and the likelihood of lobbying. Thus, our third hypothesis is also supported.

The fourth hypothesis posits a positive relationship between firm profit-ability and its likelihood of being a registered lobbyist. This hypothesis is notsupported by the analysis (Table 5). Neither of the three measures of profit-ability (ROA, ROE, and GPR) has a significant impact on lobbying. Althoughaccording to the t-test procedure, ROA could discriminate between the twogroups of firms, it is not a significant predictor of lobbying. The effect of thesevariables on the intensity of lobbying is as of yet unknown, and will be dis-cussed in the contest of the second model.

In the stepwise regression model, tow dummy variables (CD1 and CD2)are included. If the firm is Japanese CD1=1, CD2=0; if the firm is foreign butnot Japanese, CD1=0, CD2=1; in all other cases (domestic firms) CD1 = CD2 = 0.

The regression model retains five variables (CD1, CD2, SALES, BUS-SEG, and GEOSEG), with the first two negatively impacting the likelihood oflobbying and the last three positively associated with the likelihood of lobby-ing (Table 3). The distribution of foreign and domestic firms along the lobby-ing/non-lobbying criteria is shown in Table 4.

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Determinants of Lobbying Intensity

SUMOVERA = f (ROA, ROE, GPR, FSTS, GEOSEG, BUSSEG, HHR93, FEDBUY, CGROUP)

Profitability: Descriptive statistics for ROE, ROA and GPR indicate thatonly GPR has a significant correlation with SUMOVERA (Table 5).

A regression model including these three variables retains GPR as the mostsignificant predictor of lobbying intensity. The relationship between GrossProfit Ratio (GPR) and lobbying intensity is particularly robust, since tests ofmodels including different sets of variables consistently reveal GPR as thestrongest predictor of lobbying intensity (SUMOVERA). The implications andmeaning of this finding will be discussed in a subsequent section. At present, weconclude that hypothesis 5, predicting a positive relationship between profitabilityand lobbying intensity, is partially supported (Tables 6, 7, 8, and 9).

Product Diversification: Product diversification (BUSSEG) does notinfluence lobbying intensity and is dropped in the stepwise regression proce-dure (Tables 6, 7, 8, and 9). When foreign and domestic firms are separated(CGROUP = 0 domestic; CGROUP =1 foreign), diversification seems to have

Table 4. Distribution of Lobbying and Non-lobbying Firms

Domestic Foreign

Lobbying firms 355(88.1%)

48(9+39)(11.9%)

Non-lobbying firms 1.388(88.4%)

182(12+170)(11.6%)

Table 5. Correlation Analysis

SUMOVERA ROE ROA GPR

SUMOVERA 1.0000 (0.0)

ROE −0.04005 (0.5227)

1.0000 (0.0)

ROA −0.00233 (0.9704)

0.47848 (0.0001)

1.0000 (0.0)

GPR 0.18067 (0.0037)

0.08459 (0.0001)

0.38813 (0.0001)

1.0000 (0.0)

Probabilities are given in the parentheses.

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a marginal negative impact on lobbying intensity for the foreign firms (Tables 10and 11). However, given the small sample size, this is not a reliable result.Moreover, the direction of the relationship contradicts our expectations. Insum, hypothesis 6 is rejected.

Internationalization: The two measures of internationalization, foreignsales over total sales (FSTS) and geographical diversity (GEOSEG), proved tobe significant predictors of lobbying intensity (SUMOVERA). Descriptivestatistics indicate a significant correlation between SUMOVERA and FSTS.Stepwise regression models retain FSTS (Tables 6, 7, 8, and 9). Table 12 pre-sents the results for the two major predictors of SUMOVERA.

In addition, geographic diversification (GEOSEG) is also retained in twomodels (Table 6 and 9). Although the significance of GEOSEG is marginal(p = .12), it does have the same sign and effect as FSTS, which is consistently

Table 6. Stepwise Regression Procedure for all Lobbying Firms (Independent Variables:GPR, FSTS, BUSSEG, GEOSEG, CD1, CD2)

VariableParameter Estimate F Prob > F

INTERCPT 129.58 3.07 0.0810GPR 4.12 8.57 0.0038FSTS −2.49 2.39 0.0208GEOSEG −25.92 2.39 0.1233

StepVariable Entered Number In

Partial R**2

Model R**2 C(p) F Prob > F

1 GPR 1 0.0337 0.0337 5.7224 8.0944 0.00482 FSTS 2 0.0244 0.0581 1.7729 5.9812 0.01523 GEOSEG 3 0.0097 0.0678 1.4075 2.3924 0.1233

Table 7. Stepwise Regression Procedure for all Lobbying Firms (Independent Variables:GPR, FSTS, HHR92, HHR92SQ)


INTERCPT 52.95 0.92 0.3372GPR 4.60 11.12 0.0010FSTS −2.62 5.98 0.0152


Partial R**2


1 GPR 1 0.0337 0.0337 4.9367 8.0944 0.00482 FSTS 2 0.0244 0.0581 1.0071 5.9812 0.0152

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significant at the .05 level. In sum, the results clearly support Hypothesis 7A,while by the same token rejecting alternative Hypothesis 7B. Firm interna-tionalization is negatively associated with lobbying intensity.

Discussion of Results

Firm Size: Firm size as measured by sales (Rehbein 1995) or market share(Zardkoohi 1985) has been analyzed as a determinant of PAC contributions.More often, however, industry sales (Esty & Caves 1983; Grier et al. 1991)constitute the unit of analysis. Invariably, sales, whether at the firm or the

Table 8. Stepwise Regression Procedure for all Lobbying Firms (IndependentVariables: ROA, ROE, GPR, FSTS, HHR92)




Partial R**2


1 GPR 1 0.0336 0.0336 4.8384 8.0417 0.00502 FSTS 2 0.0240 0.0576 1.0393 5.8490 0.01643 GEOSEG 3 0.0097 0.0678 1.4075 2.3924 0.1233

Table 9. Stepwise Regression Procedure for all Lobbying Firms (IndependentVariables: GPR, FSTS, FEDBUY, BUSSEG, GEOSEG, BUSSEGSQ)


INTERCPT 128.69 3.07 0.0810GPR 4.02 8.33 0.0043FSTS −2.45 5.31 0.0220GEOSEG −25.53 2.35 0.1265


Partial R**2


1 GPR 1 0.0326 0.0326 7.1951 7.9111 0.00532 FSTS 2 0.0237 0.0563 3.3096 5.8777 0.01613 GEOSEG 3 0.0094 0.0657 2.9680 2.3520 0.1265

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industry-level, has been shown to positively affect political activity, althoughGrier et al. suggest a nonlinear relationship with declining number of PAC’sas industry sales increase beyond a certain threshold ($8671.9 million). How-ever, only a few outlier industries fall above this threshold and the effect isbasically linear (Grier et al. 1991).

Authors that have adopted the case study approach (Bauer et al. 1963;Brenner 1980; Schaffer 1992) have come to similar conclusions. Larger firmsare more likely to engage in political activities (i.e., becoming “leaders” intheir industries) and also to commit larger resources in the pursuit of favorablepolitical outcomes. In the light of previous arguments underlying the highfixed costs of effective political action, this result is not unexpected. However,

Table 10. Stepwise Regression Procedure for Domestic and Foreign Lobbying Firms(Independent Variables: GPR, FSTS, FEDBUY, BUSSEG, GEOSEG, HHR92)

DOMESTIC LOBBYING FIRMS



StepVariable Entered

NumberIn

Partial R**2


1 GPR 1 0.0336 0.0336 4.8384 8.0417 0.00502 FSTS 2 0.0240 0.0576 1.0393 5.8490 0.0164

FOREIGN LOBBYING FIRMS


INTERCPT 37.50 1.50 0.2366GPR 1.20 15.42 0.0010FSTS 0.45 4.70 0.0439BUSSEG −14.81 5.44 0.0315HHR92 −0.01 6.54 0.0198


Number In

Partial R**2


1 GPR 1 0.2467 0.2467 13.2871 6.8781 0.01592 HHR92 2 0.1398 0.3865 9.2965 4.5562 0.04543 BUSSEG 3 0.0794 0.4659 7.8944 2.8233 0.10934 FSTS 4 0.1105 0.5764 5.1568 4.6967 0.0439

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Table 11. Stepwise Regression Procedure for Domestic and Foreign Lobbying Firms(Independent Variables: GPR, FSTS, BUSSEG, GEOSEG)

DOMESTIC LOBBYING FIRMS




Number In

Partial R**2


1 GPR 1 0.03 0.03 7.73 9.24 0.012 FSTS 2 0.02 0.05 2.11 7.63 0.01

FOREIGN LOBBYING FIRMS


INTERCPT −23.44 2.84 0.1028GPR 0.78 6.58 0.0159FSTS 0.26 2.84 0.1031


Number In

Partial R**2


1 GPR 1 0.1923 0.1923 2.5550 6.9057 0.01392 FSTS 2 0.0744 0.2667 1.8335 2.8398 0.1031

Table 12. Determinants of SUMOVERA

Variable Foreign Domestic

INTERCEP −23.44(2.84)

51.76(1.38)

GPR 0.784*(6.58)

4.341*(13.96)

FSTS 0.265**(2.84)

−2.783**(7.63)

F-Statistics are given in parenthesesAll variables are significant at the 0.15 level.Domestic: *p = 0.0002; **p=0.006Foreign: *p = 0.015; **p = 0.13

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firm-level action does not preclude industry-level political activities. Indeed,coalitions on the demand side of the government–business interface are betterable to affect the supply of intervention than individual firms. Larger interestgroups are more likely to muster resources that will help legislators, in partic-ular, win the next elections (Hillman & Keim 1995). Organized groups alsobenefit from the asymmetry of information: unorganized voters are unable tomonitor and influence each policy issue given the prohibitive costs of suchinvolvement. In sum, to the extent that firms in large industries organize as agroup, their influence will be proportional to the size of the industry. Thetrend over the past decades has been toward increased mobilization of indus-try resources. The number of industry-based national associations, in particu-lar, has risen sharply (Rauch 1992).

Product Diversification: Product diversification positively affects thelikelihood of a firm being an active lobbyist; it is not significantly associated,however, with lobbying intensity. Researchers of the determinants of cam-paign contributions (Grier et al. 1991; Zardkoohi 1985) have reported thatboth the likelihood of political participation (PAC formation) and the amountof contributions increase with diversification. Our results do not negate thesefindings: diversification does affect political participation, and is positivelyassociated with lobbying intensity although the relationship does not achievesignificance. The “portfolio effect” is thus apparently more potent in politicalparticipation through PACs than it is in direct lobbying.

The fact that diversification increases the probability of lobbying activitywhile not affecting its intensity points to a monitoring, facilitating, and intelli-gence role rather than a commitment to a purely political strategy. Diversifiedfirms are more likely to be active in at least one sector where government’sinfluence is important enough to justify building channels of access and facil-itation. This need for communication does not translate in the commitment oflarge resource to building political assets: the “portfolio effect” offers a partialexplanation.

Internationalization: Internationalization has one of the more significantand interesting effects on political behavior. Geographically diversified firmsand those with a high percentage of foreign sales are more likely than others tobe active lobbyists. These firms, however, commit relatively few resourcesthan do other politically active firms to lobbying public authorities and legis-lators.

The first finding reflects the broader spectrum of interests that interna-tionally active firms are likely to embrace: a multinational firm has numerouspoints of contact with the regulatory environment, and as a result needs tomaintain channels of communications with the authorities. In the domesticsphere, this broader involvement is very similar to the situation of diversifiedfirms. In addition, internationally active firms are likely to use lobbying as asubstitute for market mechanisms. Lower levels of lobbing intensity seem tosuggest that successful exporters are not relying on lobbying as a shield

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against the uncertainties of the market, although the idiosyncrasies of lobby-ing objectives make any definitive conclusion imprudent.

Profitability: Accounting measures of profitability do not predict lobby-ing behavior; however, more profitable firms are likely to commit higher lev-els of resources to lobbying expenditures. The lack of association betweenprofitability and political participation calls into question some stereotypes oflobbying in the popular culture, occasionally reflected in scholarly articles(Heenan 1990; Tonelson 1994). Lobbying is not, indeed, a recourse forunprofitable domestic producers hurt by foreign competition.

Lobbying intensity, on the other hand, is found to be positively associatedwith profitability. Note that the measures of profitability are averaged overthree years (1991–1994), while the lobbying expenditure amounts are basedon the recently released data (1996). The direction of causality is thereforeunlikely to reflect an influence of political involvement on performance. Incontrast, it seems that the existence of slack resources within the firm allowsfor a higher degree of choice in selecting a strategy including a political strat-egy (Lenway & Rehbein 1991). It is interesting to note that among the threemeasures of profitability, Gross Profit Ratio (GPR), which is a “purer” measure,demonstrates high significance, while the more technical measures do not.

Indeed, lobbying expenditures can be included in corporate administra-tive expenses. In general, ROE and to a lesser extent ROA are more prone totechnical manipulations and adjustments, thus diminishing their predictiveability, especially in relation to lobbying. ROA, occupying an intermediaryposition between the “pure” measures represented by GPR and the “technical”one that is ROE, correlates with both (Table 13), while the associationbetween GPR and ROE is not significant.

Firm nationality: Foreign forms are less likely than domestic firms to bepolitically active, however, among politically active firms, foreign nationality(as reflected in country of incorporation data) is not a predictor of lobbyingintensity. The first result is consistent with the findings of Rehbein (1995),pointing to the effect of cultural distance on corporate campaign contributions.It must be noted, however, that SUMOVERA (lobbying intensity) measuresefforts to influence US legislators and executive branch officials. In otherwords, foreign firms that lobby their home governments—or, for that matter,any non-US government—but have not registered as lobbyists in the UnitedStates are considered as politically inactive for the purposes of the study.

CONCLUSION

The main objective of the paper was to investigate the firm specific factorsthat explain a full-fledged corporate political strategy.

The paper built upon on the literature from political science and econom-ics, while firmly anchoring the investigation within the firm perspective. The

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Tab

le 1

3.C

orre

latio

n A

naly

sis

SUM

OV

ER

AC

D1

CD

2G

PRFS

TS

FED

BU

YB

USS

EG

GE

OS

EG

HH

R92

RO

AR

OE

SUM

OV

ER

A1.

000.

00C

D1

−0.0

70.

221.

000.

00C

D2

−0.0

50.

38−0

.04

0.47

1.00

0.00

GPR

0.18

0.00

−0.0

10.

90−0

.01

0.80

1.00

0.00

FST

S−0

.11

0.08

0.49

0.00

0.17

0.00

0.21

0.00

1.00

0.00

FE

DB

UY

0.05

0.36

−0.0

00.

91−0

.04

0.49

−0.0

30.

60−0

.01

0.89

1.00

0.00

.

BU

SSE

G−0

.07

0.24

0.24

0.00

−0.0

00.

900.

260.

000.

670.

00−0

.08

0.17

1.00

0.00

GE

OSE

G−0

.14

0.02

0.14

0.02

−0.0

00.

91−0

.24

0.00

0.03

0.63

0.10

0.12

0.06

0.34

1.00

0.00

HH

R92

−0.0

60.

310.

030.

570.

280.

00−0

.25

0.00

0.06

0.32

0.31

0.00

0.01

0.91

0.07

0.25

1.00

0.00

RO

A−0

.00

0.97

0.05

40.

43−0

.07

0.55

0.39

0.00

0.12

0.05

−0.0

40.

000.

180.

00−0

.12

0.05

−0.1

30.

031.

000.

00R

OE

−0.0

40.

520.

030.

54−0

.01

0.87

0.08

0.17

0.08

0.23

−0.0

40.

540.

100.

100.

020.

69−0

.07

0.27

0.47

0.0

01.

000.

00

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analysis relied on the resource-based view of the firm. It was demonstratedthat political strategies can and should be examined in this mold.To the extent that this study has succeeded in shedding light on a corporateactivity that has been mostly ignored by strategy researchers but embraced bypractitioners, it has contributed to bridge a widening gap and has openeddoors for future investigations. Indeed, this paper may have raised many morequestions that it has answered. It remains that corporate political strategies canno longer be spurned as the manifestation of some dysfunctional aspect of thebusiness environment or a reaction to heavy-handed government intervention.These views are decidedly outmoded and do not reflect the reality of today’smarketplace. It has been that reactive political lobbying seems to be theexception rather than the rule and that firms have integrated political activitiesas an integral part of their business strategies.

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Table 14. Regression Analysis Results for DependentVariable “Lobbying Intensity”

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Documents

Firm-Specific Determinants of Corporate Lobbying Participation and Intensity