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Essays in non-market strategy and entrepreneurship

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Content i

ESSAYS IN NON-MARKET STRATEGY AND ENTREPRENEURSHIP

JAKE B. GRANDY
USC Marshall School of Business
University of Southern California
701 Exposition Blvd, HOH 431
Los Angeles, CA 90089-1424

A Dissertation Presented to the
FACULTY OF THE USC GRADUATE SCHOOL
UNIVERSITY OF SOUTHERN CALIFORNIA
In Partial Fulfillment of the
Requirements for the Degree
DOCTOR OF PHILOSOPHY
(BUSINESS ADMINISTRATION)

August 8, 2017

ii

ABSTRACT

While non-market strategy and entrepreneurship are both well-established fields of research,
there has been relatively little integration between the two. Scholars in both fields have largely
ignored how new ventures influence and are influenced by political actors in their institutional
environment and have only recently begun to examine how they affect and are affected by non-
governmental actors such as social movement activists. This is potentially an important oversight
as entrepreneurial activity increasingly intersects with the institutional environment. The aim of
this dissertation is to answer questions about how the non-market environment affects new
ventures and the strategies they use to enter markets despite significant non-market pressures. I
introduce the concept of regulatory discretion from the political science literature and reveal how
differences between institutional actors can cause regulatory barriers to become malleable, and
can enable or constrain the ability of social movement activists to affect entry. I also develop a
novel typology of strategies that new ventures use to enter regulated markets. Through this
dissertation, I seek to address some of the limitations in prior research and stimulate further
scholarly thinking at the intersection of non-market strategy and entrepreneurship.

iii

TABLE OF CONTENTS
ABSTRACT ................................................................................................................................... ii
LIST OF TABLES ....................................................................................................................... vi
LIST OF FIGURES .................................................................................................................... vii
ACKNOWLEDGEMENTS ...................................................................................................... viii
CHAPTER 1 - INTRODUCTION ............................................................................................... 1
Dissertation Outline ............................................................................................................... 3
REFERENCES .......................................................................................................................... 5
CHAPTER 2 - STATE AGENCY DISCRETION AND NEW VENTURE OUTCOMES:
AN EXAMINATION OF THE U.S. HYDROELECTRIC POWER SECTOR, 1978-2014. . 8
ABSTRACT ............................................................................................................................... 8
INTRODUCTION ..................................................................................................................... 9
Barriers to Entry and Corporate Political Influence ....................................................... 14
New Venture Entry into Regulated Markets .................................................................... 16
Regulatory Discretion and Approval of New Ventures ................................................... 18
Factors Influencing the Effect of Discretion on New Venture Entry .............................. 23
EMPIRICAL CONTEXT ....................................................................................................... 27
METHODS .............................................................................................................................. 29
Data and Measures .............................................................................................................. 29
Predictor Variables .............................................................................................................. 30
Control Variables ................................................................................................................ 32
Analysis ................................................................................................................................. 33
RESULTS ................................................................................................................................. 34
Regulatory Discretion and New Venture Entry................................................................ 34
Regulatory Discretion and Local Concentration .............................................................. 35
Regulatory Discretion and Political Competitiveness ...................................................... 35
Robustness Checks .............................................................................................................. 36
DISCUSSION .......................................................................................................................... 38
REFERENCES ........................................................................................................................ 45
APPENDIX A - Hazard Curves of Interaction Terms ........................................................ 61
APPENDIX B - Hydroelectric Facility License Applications ............................................. 63
APPENDIX C - Hydroelectric Facility Locations in the U.S. ............................................. 64
APPPENDIX D - Hydro License Application Requirements ............................................. 65
iv

CHAPTER 3 - STATE AGENCY DISCRETION AND THE RADICAL FLANK: AN
EXAMINATION OF STAKEHOLER OPPOSITION TO NEW HYDROELECTRIC
FACILITY FOUNDINGS .......................................................................................................... 66
ABSTRACT ............................................................................................................................. 66
INTRODUCTION ................................................................................................................... 67
THEORY AND HYPOTHESES ............................................................................................ 70
Social Movements’ Tactical Repertoires ........................................................................... 70
Positive and Negative Radical Flank Effects ..................................................................... 73
Political Opportunity Structures ........................................................................................ 76
The Role of Regulatory Discretion ..................................................................................... 81
Moderating Effect of the Public Sentiment Towards Social Movement Activism ........ 86
Moderating Effect of Corporate Political Contributions ................................................. 87
EMPIRICAL CONTEXT ....................................................................................................... 88
METHODS .............................................................................................................................. 90
Data and Measures .............................................................................................................. 90
Dependent variable .............................................................................................................. 92
Predictor variables .............................................................................................................. 92
Control Variables ................................................................................................................ 95
Analysis ................................................................................................................................. 96
RESULTS ................................................................................................................................. 96
Positive and Negative Radical Flank Effects ..................................................................... 97
Radical Flank and the Public Sentiment Towards Social Movement Activism ............ 98
Radical Flank and Corporate Political Contributions ..................................................... 98
Additional Analyses ............................................................................................................. 99
DISCUSSION .......................................................................................................................... 99
REFERENCES ...................................................................................................................... 104
CHAPTER 4 - FIGHTING ON TWO FRONTS: MARKET AND NON-MARKET
STRATEGIES FOR ENTREPRENEURIAL ENTRY INTO REGULATED MARKETS
..................................................................................................................................................... 120
ABSTRACT ........................................................................................................................... 120
INTRODUCTION ................................................................................................................. 121
THEORY AND LITERATURE REVIEW ......................................................................... 124
DIMENSIONS OF ENTREPRENEURIAL STRATEGY IN REGULATED MARKETS
................................................................................................................................................. 127
v

Timing of Market Entry.................................................................................................... 127
Timing of Engagement with Regulators .......................................................................... 129
TYPOLOGY OF STRATEGIES ......................................................................................... 131
Collaboration Strategy ...................................................................................................... 132
Pioneering Strategy ........................................................................................................... 135
Latency Strategy ................................................................................................................ 139
Infiltration Strategy ........................................................................................................... 142
DISCUSSION ........................................................................................................................ 146
REFERENCES ...................................................................................................................... 149
CHAPTER 5 - CONCLUDING THOUGHTS ....................................................................... 159

vi

LIST OF TABLES

CHAPTER 2
Table 1 – Descriptive Statistics and Bivariate Correlations...……………………………57
Table 2 – Cox Event History Regressions………………………………………………….59
CHAPTER 3
Table 1 – Descriptive Statistics and Bivariate Correlations………………………….…117
Table 2 – Pooled Cross-sectional Logistic Regressions………………………………….118

vii

LIST OF FIGURES

CHAPTER 4
Figure 1 – Typology of Entrepreneurial Strategies in Regulated Markets……………157
Figure 2 – Attributes of Entrepreneurial Non-Market Strategies……………………..158

viii

ACKNOWLEDGEMENTS
This dissertation would not have been possible without the support of a number of people
over the past 6 years. First and foremost, I would like to thank my advisor, Shon Hiatt. Shon has
been a constant source of intellectual support and encouragement since I began working with
him. I have learned a lot from Shon both about research and navigating this career we’ve chosen.
I would also like to thank the rest of my dissertation committee—Violina Rindova, Nandini
Rajagopalan, and Nan Jia—for their insightful feedback on my research and assistance on the job
market. Their help has been invaluable.
I also acknowledge the Management and Organizations faculty and doctoral students for
their support. The faculty are exceedingly generous with their time and constructive with their
feedback and virtually everyone in the department helped me in some way during the program. I
thank Paul Adler, who was my initial advisor when I joined the program, for his emotional
support and intellectually stimulating conversations early on. I also thank Peer Fiss for his
feedback on my research ideas and advice on managing professional relationships and life in this
profession. The doctoral cohort has also been a great source of inspiration, feedback, and
support, especially during the final years of the program.
Lastly, and certainly not least, I would like to thank my family for their constant
emotional support and encouragement. My wife, Vanessa, was especially patient during my long
and indirect path to a Ph.D. in Management. She supported me as my curiosity and academic
interests meandered from international development, to ecology, economics, public policy and
finally to management. I am also very grateful to my children, who were a constant source of joy
and motivation. Finally, I thank my parents for their emotional support during my degree
program.
ix

I acknowledge financial support for this project from the Lloyd Greif Center for
Entrepreneurial Studies and the Marshall School of Business. This research was funded in part
by the Ewing Marion Kauffman Foundation. The contents of this publication are solely the
responsibility of Jake Grandy.
1

CHAPTER 1
INTRODUCTION

In the modern business environment, firms’ interactions with the public sector are
increasingly common: in the U.S., businesses and industry associations employ the majority of
all lobbyists (Baumgartner & Leech, 2001), and are the primary contributors to political action
committees (Hillman, Keim & Schuler, 2004). Businesses often must also interact with non-
governmental stakeholders, such as social and environmental activists or local communities
(Sasser et al. 2006). A firm’s efforts to improve performance through interactions with these
public sector and non-governmental institutions is known as non-market strategy (Barron 1995;
Baron & Diermeier, 2007).
Market and non-market strategies differ in two key ways (Doh, Lawton & Rajwani,
2012). First, market strategies are mainly directed towards buyers, suppliers, and competitors
whereas non-market strategies deal with the social, political, and legal arrangements that enable
or constrain firm activity. Second, in the market environment firms typically compete for
resources, market share, and profits, but in the non-market environment, firms must consider a
more comprehensive set of features that can impact performance including public policy, social
responsibility, ecological sustainability, and ethical behavior.
In the both non-market environment, firms compete with other firms both just as they do
in the market environment. For instance, in the political arena, firms attempt to maximize both
their relative and absolute influence over regulatory agencies or other institutions that govern the
market through actions such as lobbying, corporate political contributions, lawsuits and
congressional testimony (Henisz & Zelner, 2003). Firms may also undertake defensive strategies
to increase their prosocial image relative to other firms after being targeted by social movement
2

activists (McDonnell & King, 2013), or they may collaborate with social movement
organizations to sponsor activism against rival firms in order to increase their costs and publicly
question their legitimacy (McDonnell, 2013).
The field of non-market strategy is multifaceted, drawing on a number of different
disciplines (e.g. economics, sociology, management, political science), theoretical perspectives
(e.g. institutional theory, agency theory, resource based view, stakeholder theory) and levels of
analysis (e.g. industry, firm, individual). From these multiple elements, two dominant
approaches to the study of non-market strategy have emerged: the corporate political activities
(CPA) approach and the corporate social responsibility (CSR) approach (Mellahi, Frynas, Sun &
Siegel, 2016). The CPA approach sees non-market strategy as a means to influence political
actors (chiefly elected officials or regulatory agencies) in ways that improve firm performance
(Hillman et al., 2004; Lawton, McGuire & Rajwani, 2013). The corporate social responsibility
perspective views non-market strategy as a means to manage the demands of social movement
activists, local communities, consumer groups or the media through actions that appear to
advance social wellbeing or environmental sustainability (King & Pearce, 2010; McDonnell,
King & Soule, 2015). Each approach emphasizes different institutional pressures and different
strategic responses. CPA focuses on public policy and regulatory pressures and responses such as
lobbying and corporate political contributions. CSR focuses on non-governmental organization
pressures and responses such as making prosocial claims or preemptive practice adoption.
While both approaches to non-market strategy have become well-established as areas of
research (Doh et al., 2012), the field of entrepreneurship—which is fundamentally concerned
with the examination of how, and by whom, opportunities to create future goods and services are
discovered, evaluated and exploited (Shane & Venkatraman, 2000)—has largely ignored the
3

corporate political activities approach and has only recently begun to examine the corporate
social responsibility approach (e.g. see Hiatt, Sine & Tolbert, 2009; Pacheco, Dean & Payne,
2010; Sine & Lee, 2009; York & Lenox, 2014). This is likely because historically the market
environment and strategies have been more visible, more developed and more vital to
entrepreneurial identity and success than the non-market environment and strategies (Bruyat &
Julien, 2001; Packard, 2017). However, over the past decade entrepreneurial activity has
increasingly collided with the institutional environment, with many entrepreneurs going so far as
to include changing public policy a central part of their business plan (Barry & Pollman, 2016).
Policymakers also are coming to the realization that the regulatory framework is a critical barrier
to entrepreneurial activity and affects the social and environmental performance of new firms
(Moreno, 2015). The aim of this dissertation is to answer questions about how the non-market
environment affects new ventures and the strategies they use to enter markets despite significant
non-market pressures. In doing so, I seek to address some of the limitations in prior research and
stimulate further scholarly thinking in this area of research.
Dissertation Outline

I examine entrepreneurship in regulated markets both theoretically and empirically in a
series of three essays. In the first, I explore how institutional factors affect entry into regulated
markets. Although barriers to entry in regulated markets are frequently thought of as static
features that must be removed or overcome if firms are to successfully enter, the differences
between the institutional actors regulating markets may render these barriers more malleable than
previously believed. Using data on regulatory approval of hydroelectric facilities in the United
States from 1978 to 2014, I examine how regulatory discretion—that is, the flexibility that
4

regulatory agencies have to interpret and implement public policies created by elected officials—
affects outcomes for new ventures.
The second essay highlights the effect of both political institutions and social movement
activists on entrepreneurship. Much of the research on institutions and entrepreneurship has
highlighted the ability of social movement activists to affect firm entry, performance and
survival by leveraging the state to achieve its goals, yet it has often focused on the impacts of
individual activist tactics and has overlooked the effect of multiple simultaneous tactics on firms.
It has also focused almost exclusively on how activists foment changes to public policy, however
formal policy changes are not always necessary to affect firms. Drawing on the sociological
literature on radical flank effects and political opportunity structures, I explore how multiple
social movement tactics interact to affect firm entry via regulatory agencies even in the absence
of formal policy changes. The empirical context for this essay is also the U.S. hydroelectric
power sector from 1978-2014.
Finally, in the third essay, I develop a novel typology of entrepreneurial strategies in
regulated markets. Although many studies have explored how established firms attempt to
influence institutional actors in their non-market environment, few studies have explored the
strategies that entrepreneurs employ to enter and survive in markets with significant regulatory
oversight. This is an important limitation because entrepreneurial firms often face unique
challenges in confronting the institutional environment. In particular, entrepreneurs often
struggle to gain legitimacy—a key factor for acquiring resources essential to new firms. This is a
conceptual essay intended to provoke further thinking about the strategies entrepreneurs use to
enter regulated markets and to stimulate future empirical research in this area. In the last chapter
of the dissertation, I provide some concluding thoughts.
5

REFERENCES

Baron, D. P. (1995). Integrated strategy: Market and nonmarket components. California
Management Review, 37(2), 47-65.
Baron, D. P., & Diermeier, D. (2007). Strategic activism and nonmarket strategy. Journal of
Economics & Management Strategy, 16(3), 599-634.
Barry, J. M., & Pollman, E. (2016). Regulatory Entrepreneurship. Working Paper.
Baumgartner, F. R., & Leech, B. L. (2001). Interest niches and policy bandwagons: Patterns of
interest group involvement in national politics. Journal of Politics, 63(4), 1191-1213.
Bruyat, C., & Julien, P. A. (2001). Defining the field of research in entrepreneurship. Journal of
business venturing, 16(2), 165-180.
Doh, J. P., Lawton, T. C., & Rajwani, T. (2012). Advancing nonmarket strategy research:
Institutional perspectives in a changing world. The Academy of Management
Perspectives, 26(3), 22-39.
Henisz, W. J., & Zelner, B. A. (2003). The strategic organization of political risks and
opportunities. Strategic Organization, 1(4), 451-460.
Hiatt, S. R., Sine, W. D., & Tolbert, P. S. (2009). From Pabst to Pepsi: The deinstitutionalization
of social practices and the creation of entrepreneurial opportunities. Administrative
Science Quarterly, 54(4), 635-667.
Hillman, A. J., Keim, G. D., & Schuler, D. (2004). Corporate political activity: A review and
research agenda. Journal of Management, 30(6), 837-857.
6

King, B. G., & Pearce, N. A. (2010). The contentiousness of markets: Politics, social
movements, and institutional change in markets. Annual Review of Sociology, 36, 249-
267.
Lawton, T., McGuire, S., & Rajwani, T. (2013). Corporate political activity: A literature review
and research agenda. International Journal of Management Reviews, 15(1), 86-105.
McDonnell, M. (2013). If You Can’t Beat Them, Join Them: Corporate Sponsorship of Social
Movement Boycotts. Working Paper.
McDonnell, M. H., King, B. G., & Soule, S. A. (2015). A dynamic process model of private
politics activist targeting and corporate receptivity to social challenges. American
Sociological Review, 80(3), 654-678.
Mellahi, K., Frynas, J. G., Sun, P., & Siegel, D. (2016). A review of the nonmarket strategy
literature: toward a multi-theoretical integration. Journal of Management, 42(1), 143-173.
Moreno, A. M. Regulation, Innovation, & Entrepreneurship. California Law Review 69.5 (2015):
1256-1377.
Pacheco, D. F., Dean, T. J., & Payne, D. S. (2010). Escaping the green prison: Entrepreneurship
and the creation of opportunities for sustainable development. Journal of Business
Venturing, 25(5), 464-480.
Packard, M. D. (2017). Where did interpretivism go in the theory of entrepreneurship? Journal of
Business Venturing, forthcoming.
Shane, S., & Venkataraman, S. (2000). The promise of entrepreneurship as a field of research.
Academy of Management Review, 25(1), 217-226.
7

Sine, W. D., & Lee, B. H. (2009). Tilting at windmills? The environmental movement and the
emergence of the US wind energy sector. Administrative Science Quarterly, 54(1), 123-
155.
York, J. G., & Lenox, M. J. (2014). Exploring the sociocultural determinants of de novo versus
de alio entry in emerging industries. Strategic Management Journal, 35(13), 1930-1951.
8

CHAPTER 2
STATE AGENCY DISCRETION AND NEW VENTURE OUTCOMES: AN
EXAMINATION OF THE U.S. HYDROELECTRIC POWER SECTOR, 1978-2014.

ABSTRACT
Barriers to entry in regulated markets are frequently thought of as static features that must be
removed or overcome if firms are to successfully enter a market. However, this view is rooted in
a relatively monolithic view of the institutional environment, while in reality, the institutions
regulating markets often consist of multiple levels of sociopolitical arrangements that often exist
in tension with one another. As a result, barriers to entry may be rendered more malleable, and
considering them as relatively stable elements of the institutional environment may obscure
important strategic and institutional factors that affect entry. To address this, I explore how the
tension between governmental actors—specifically, elected officials and regulatory agencies—
affects new venture entry and survival. Using data on regulatory approval of hydroelectric
facilities in the United States from 1978 to 2014, I find that increased regulatory discretion—that
is, the flexibility that regulatory agencies have to interpret and implement public policies created
by elected officials—improves outcomes for new ventures. By reducing the effectiveness of
incumbent firms’ lobbying and financial contributions and creating the opportunity for
entrepreneurs to convince regulators of the value and legitimacy of their new ventures,
regulatory discretion reduces barriers to entry and increases the likelihood of regulatory approval
for new venture entry.

Keywords: nonmarket strategy, institutional theory, entrepreneurship, regulated markets,
regulatory discretion, barriers to entry

9

INTRODUCTION

The institutional environment allows organizations to either flourish or fail by
conditioning access to resources, legitimacy and the support of important stakeholders (Hiatt,
Sine & Tolbert, 2009; Russo 2001). It also affects firms’ market positions by shaping the nature
of competitive interactions (Porter, 1980:28-29; Baron, 1995). Often, the elements of the
institutional environment are treated as fixed—firmly established rules and norms maintain
stability by automatically compelling compliance (Seo & Creed, 2002). Barriers to entry, for
instance, are often thought of as static features. Indeed, the management literature is replete with
studies that show how firms maintain their market position by erecting obstacles that prevent
entering firms from becoming established in a given market (Caves & Porter, 1977; Mainkar,
Lubatkin & Schulze, 2006; Wan & Hoskisson, 2003).
In highly regulated sectors, such as pharmaceuticals, biotechnology, energy and finance,
these obstacles take the form of regulatory policies that influence entry indirectly through
product standards and approval, pricing guidelines, and directly through entry and exit rules
(García-Canal & Guillén, 2008; Aldrich and Ruef, 2006). Firms in these sectors actively seek to
persuade policymakers to erect barriers to protect their market position (McDonnell & Werner,
2016; Mizruchi, 1992; Werner, 2015). By using direct tactics such as formal petitions, public
comments on proposed regulations, or testimony before Congress (Hiatt & Park, 2013; Hiatt,
Grandy & Lee, 2015) and indirect tactics such as informational lobbying, corporate political
contributions (Holburn & Vanden Bergh, 2014; Oliver & Holzinger, 2008; Ridge, Ingram &
Hill, 2016), firms affect policy outcomes that increase barriers to entry, thereby giving them a
competitive advantage over new entrants. Once erected, barriers to entry in regulated markets are
typically treated as relatively static features of the institutional environment that must be
10

removed or overcome if firms are to successfully enter (Gerowski, 1995). Consistent with this
notion, several studies focus on how entry is enabled by the removal of entry barriers—primarily
in the form of deregulation (e.g. Bonardi, 1999; Delmas & Tokat, 2005; Delmas, Russo &
Montes-Sancho, 2007; Russo, 2001; Sine, Haveman & Tolbert, 2005).
One reason for this focus is the common assumption in the business-government relations
literature that the institutional environment is monolithic: regulatory policies are enacted or
repealed by government and firms respond accordingly. However, government institutions often
consist of multiple levels of social and political arrangements that exist in tension or conflict
with one another (Edelman & Suchman, 1997; Liu & Srivastava, 2015; Seo & Creed, 2002). As
a result of this tension, elements of the institutional environment may be rendered more
malleable. In a regulatory context, this suggests that the relationships between the various actors
involved in policymaking and policy implementation may affect firms’ outcomes even in the
absence of changes in regulatory policies. Hence, a focus on barriers to entry as relatively stable
elements of the institutional environment may obscure important strategic and institutional
factors that affect entry, and has prompted calls for a closer examination of the dynamic
characteristics of barriers to entry (Carlton, 2005).
I seek to address this issue by exploring how the tension between key institutional actors
affects regulatory barriers to entry. Specifically, I explore how variation in policy
implementation affects new venture entry and survival. In regulated markets, elected officials
create public policies which are then interpreted and implemented by regulatory agencies
(Kingdon, 1995). While regulatory agencies are assumed to be constrained by the legislative
bodies who monitor them and who may overturn regulatory decisions (McCubbins, Noll &
Weingast, 1987; Cloutier, Denis, Langley & Lamothe, 2016), regulators often have freedom in
11

interpreting and implementing policies (Huber & Shipan, 2002). If the incentives of regulatory
agencies and elected officials are not aligned, policies may be implemented by regulators in a
way that differs from the original intent of the elected officials who crafted the policies (Holburn
& Vanden Bergh, 2008; Potoski & Woods, 2001). Thus, the tension between regulators and
elected officials can create variation in how policies are implemented and can lead to regulatory
barriers to entry that are variable rather than fixed.
My central argument is that regulatory agency discretion—that is, a regulator’s freedom
to interpret and implement public policies—promotes entry by new ventures because it reduces
the effectiveness of the barriers to entry erected by incumbent firms through the traditional tools
of political influence. New ventures often lack the financial resources, political connections, and
legitimacy in the eyes of key constituents to exercise influence over elected officials. However,
regulatory agencies cannot be influenced in the same manner as elected officials; therefore, their
discretion in implementing policy may level the playing field for new ventures relative to
incumbent firms. Thus, by considering the state to be a pluralistic rather than a monolithic entity,
I show that barriers to entry are not always fixed and this has differential effects on different
types of firms.
Empirically, I examine regulatory approval of new facilities in the U.S. hydroelectric
power sector from 1978 to 2014. This market provides a useful setting to explore the impact of
regulatory discretion on new ventures because while the Federal Energy Regulatory Commission
ultimately grants all licenses to operate, individual states have the authority to place restrictions
on federal regulatory approval, resulting in significant variation across states in how regulatory
policy is implemented with regard to new facility licensing. In addition, the passage of the
National Energy Act in 1978 granted entrepreneurs the ability to construct nonutility facilities
12

free from the constraints of traditional utility regulation. Since passage, scores of entrepreneurs
entered the power sector with new generating facilities (Sine et al., 2005) making this an ideal
context in which to explore new venture entry and survival in regulated markets.
This paper offers several theoretical contributions. First, it contributes to the institutions
and entrepreneurship literature (Gurses & Ozcan, 2015; Hiatt, Sine & Tolbert, 2009; Pacheco,
York & Hargrave, 2014) by examining the mechanisms by which institutional actors
substantively shape the success of market entry of new ventures and incumbent firms. Little
research to date has examined the institutional factors that enable entry, particularly in regulated
markets. The management literature’s predominant logic is that incumbent firms use their
political influence to erect regulatory barriers that prevent entrance. Nevertheless,
entrepreneurship studies have found that new entrants do in fact enter these markets (Gurses &
Ozcan, 2015; Sine & Lee, 2009; Sine et al., 2005); yet, research has thus far not theoretically nor
empirically examined the institutional factors that facilitate new venture entry into regulated
sectors. This study finds that the tension that sometimes exists between institutional actors within
the state can have a significant effect on market entry.
Second, it contributes to the business-government relations literature by highlighting a
common but inaccurate assumption about the workings of the state as a single uniform entity
(Bonardi, Holburn & Vanden Bergh, 2006; Hillman & Hitt, 1999; Mizruchi, 1992; Werner,
2012). While insightful, this literature has focused largely on how firms affect and are affected
by public policy outcomes at the legislative level. How firms affect and are affected by the
implementation of public policy by regulatory agencies has received significantly less attention
(Hiatt & Park, 2013; Holburn & Vanden Bergh, 2008). This is an important area of investigation
because public policies are interpreted and executed by regulatory agencies rather than elected
13

bodies, and regulators are often the primary and more frequent point of contact for businesses
(Sabatier & Mazmanian, 1980; Yackee & Yackee, 2006). Furthermore, unlike legislators,
regulators are less likely to be influenced by the traditional tools of political influence because
regulatory agency bureaucrats are not elected (Alesina & Tambellini, 2007; Besley & Coate,
2003), cannot legally receive financial contributions (Dal Bo, 2006), and often have job
protections associated with civil-service policies (Gailmard & Patty, 2007). Yet, business-
government relations research has only begun to explore the possible mechanisms by which
firms influence and are influenced by policy implementation by regulatory agencies. The
findings of this study enhance our understanding of these mechanisms by illustrating how
variation in policy implementation differentially affects new and established firms.
Finally, it builds on the strategic management literature by examining the institutional
conditions under which corporate political activities are more or less effective. Prior work in this
area has examined how firms obtain political resources in different types of institutional
environments across national boundaries (Bonardi, Hillman & Keim, 2005; Khanna & Palepu,
2000). Studies have also examined how political pluralism, in which the orientations of national
and subnational policymaker towards policy differ, may make it more difficult for firms to
influence policy (Kozhikode & Li, 2012). This study adds to this literature by examining how
variation in the institutional arrangements across multiple states within a single country influence
political strategies and resources. Thus, this paper has implications for policymakers, regulatory
agencies, and both new and established firms in regulated markets.
The following section summarizes the literature on barriers to entry and corporate
political influence in regulated sectors. Next, I review the literature on how new ventures attempt
to overcome these barriers to successfully enter regulated markets. I then describe the origins of
14

regulatory discretion and offer a theoretical framework for how discretion affects both incumbent
firms the new ventures and suggest moderating factors that may increase or decrease this effect. I
then describe the empirical context—regulatory approval in the U.S. hydroelectric sector—and
use quantitative analysis to test my arguments. I conclude with a discussion and suggestions for
future research.
THEORY AND HYPOTHESES
Barriers to Entry and Corporate Political Influence

Generally speaking, barriers to entry either lower incumbent firms’ costs, raise entrants’
costs, or both. For example, learning or experience advantages (Lieberman & Montgomery,
1988), vertical integration (Caves & Porter, 1977), and economies of scale (Harrigan, 1981) can
lower incumbents’ costs relative to entrants and hinder their ability to successfully enter a
market. Incumbent firms may also raise entrants’ costs and deter entry by developing consumer
loyalty (Porter, 1980), by forming strategic networks among incumbent firms (Gulati, Nohria &
Zaheer, 2000), or through product differentiation (Robinson & McDougall, 2001). By lowering
incumbents’ costs or raising the costs of potential entrants, barriers effectively restrict the ability
of new firms to enter the market and allow incumbent firms to maintain their market position.
In regulated markets, government regulation can create substantial obstacles for all
regulated firms (García-Canal & Guillén, 2008, Wholey & Sanchez, 1991). Compliance with
regulation, such as pollution abatement (Helland & Matsuno, 2003), or labor and zoning laws
(Bertrand & Kramarz, 2002) imposes significant financial and organizational costs on regulated
firms. Similarly, government may impose costs directly via entry and exit rules, such as those
associated with antitrust regulation and permitting or licensing requirements (Porter, 1980;
15

Schmalensee, 2004). However, these costs often disproportionately burden new firms and allow
incumbent firms to use regulations to their advantage (Dean & Brown, 1991).
Scholarship on business-government relations argues that firms in regulated markets
attempt to manage these obstacles by maximizing both their relative and absolute influence over
the institutions that govern them through corporate political activities (Henisz and Zelner, 2003;
Bonardi et al., 2006). These activities center around three broad strategies: informational,
financial and constituency-building (Hillman & Hitt, 1999). An informational strategy seeks to
influence public policy through providing policymakers information about preferences for and
the implications of different policy outcomes. This includes activities such as lobbying, testifying
before Congress, and sharing research reports, position papers and technical reports (Hiatt, et al.,
2015; Mars & Lounsbury, 2009). A financial strategy aims to influence policymakers with
financial incentives such as campaign contributions and support for political action committees
(Schuler, Rehbein & Cramer, 2002). Constituency-building targets policymakers indirectly by
mobilizing the support of voting citizens and special interest groups who, in turn, express this
support to elected decision makers (McDonnell, 2015) often in ways that disguise the true source
of the mobilization in a tactic known as ‘astroturfing’ (Lyon & Maxwell, 2004; Walker & Rea,
2014). Research on non-market strategy has shown that these traditional tools of political
influence are important determinants of incumbent firm performance (Hillman & Hitt, 1999;
Hillman, Keim & Schuler, 2004, Lawton, McGuire & Rajwani, 2013).
Outside of directly targeting policymakers, firms also target competitors’ political
markets, for instance, by preemptively acquiring regulated resources such as permits or licenses
(Capron & Chatain 2008), by attacking the legitimacy of those resources (Hiatt & Park, 2013) or
by framing their practices as serving the public interest and public policy goals (Kaplan, 2008;
16

Hiatt et al., 2015). Empirically, direct and indirect influence tactics have been shown to be
effective both individually and when combined (Schuler et al., 2002). Together, these tools help
maintain market dominance and erect barriers to entry for new firms at the policy-making level
(Capron & Chatain 2008; Klapper et al., 2006; Wholey & Sanchez, 1991).
While these corporate political influence strategies are available to all firms, new
ventures are often disadvantaged relative to incumbents in their ability to implement them.
Unlike incumbent firms, new ventures are often too resource constrained to finance political
campaigns and hire lobbyists and, because of their newness, they also tend to lack political
network connections, leaving them at a disadvantage relative to incumbent firms (York & Lenox,
2014). Thus, entry by new ventures in regulated markets is particularly challenging as they face
strong opposition from both incumbent firms and powerful institutional actors, such as elected
officials (Aldrich & Baker, 2001; Gurses & Ozcan, 2015).
New Venture Entry into Regulated Markets

Given that the literature treats barriers to entry as relatively fixed, studies that examine
entry into regulated markets tend to focus on how exogenous changes in the regulatory
environment affect entry. For instance, studies have shown that regulatory changes influence
how and where firms compete, prompting incumbent firms to adjust their product and market
scopes as new firms entered the market (Bonardi,1999; Delmas & Tokat, 2005). Deregulation
has also been found to affect both the amount of entry and its specific character. For example,
prior research found that deregulation in the electric utility industry facilitated both entry and
product differentiation (Delmas, Russo & Montes-Sancho, 2007). Similarly, Russo (2001) found
that entry and technological differentiation were common outcomes of deregulation. In another
17

study, Wade and colleagues (1998) found that regulatory changes both directly affect entry and
survival of regulated firms, but also indirectly affected non-regulated firms.
Relatively few studies, however, have examined how new ventures enter regulated
markets without exogenous changes to regulatory policy. Some scholars have begun
investigating this area by identifying how the attributes of entrepreneurs or founding teams help
facilitate entry. For example, entrepreneurs who were formerly employed at firms in downstream
industries that use the new venture’s products as inputs have better knowledge and experience in
navigating regulatory hurdles and are more likely to recognize opportunities in regulated markets
than entrepreneurs without such experience (Adams, Fontana & Malerba, 2016). Other research
has suggested that an entrepreneur’s ability to recognize and exploit weak regulatory
enforcement may lead to more successful entry into a regulated market, particularly when
institutional actors lack incentives or expertise to adequately monitor or enforce regulations
(Webb, et al., 2009).
A few studies have explored the strategies new ventures use to overcome barriers and
enter regulated markets. For instance, one study on the U.S recycling industry showed how new
ventures leverage the support of social movement activists to delegitimize the practices of
incumbent firms and legitimize those of new entrants (Lounsbury, Ventresca & Hirsch, 2003).
Another study found that new ventures affiliate themselves with high status institutional actors—
such as senior figures in the media, prominent political figures, and social movement leaders—to
accumulate resources and legitimacy in the eyes of key stakeholders (Tracey, Phillips & Jarvis,
2011). These strategies are unconventional and less resource intensive relative to those typically
used when interacting with the institutional environment, but they can effectively reduce
obstacles erected by incumbent firms and facilitate entry (Pacheco et al., 2010).
18

More recently, Gurses & Ozcan (2015) examined how new ventures shaped regulated
markets in their favor in the face of incumbent opposition. Entrepreneurs initially framed their
ventures as complementary to incumbent firms and in alignment with regulatory agency interests
in order to buy time to grow and develop with little opposition. Once the new ventures had
accumulated resources, they engaged in framing contests with incumbent firms to sway
regulatory approval in their favor, leveraging multiple interest groups to garner public support.
Hence, this study demonstrates one avenue by which new ventures can leverage tensions that
exist in the institutional environment in order to overcome entry barriers.
Regulatory Discretion and Approval of New Ventures

While prior research has explored how the removal of regulatory barriers helps new firms
enter regulated markets, or how new ventures’ strategies help them overcome entry barriers, little
work has explored the various characteristics of the institutional environment which may
facilitate entry. I propose that regulatory discretion may promote entry by new ventures for two
reasons: First, it reduces the effectiveness of the barriers to entry erected by incumbent firms
through their corporate political influence; and second, it allows entrepreneurs to take advantage
of the tensions that exist among institutional actors in a pluralistic institutional environment. This
creates the opportunity for entrepreneurs to persuade regulators of the value and legitimacy of
their ventures on a more level playing field with incumbent firms, which could increase the
likelihood of regulatory approval and new venture entry.
Regulatory discretion refers to the freedom that regulatory agencies have in interpreting
and implementing the law (Skocpol, 1985; Skocpol and Finegold, 1982). According to the
political science literature, discretion stems from several sources. First, legislators who craft
public policy often have less information about the subject matter of their policies than
19

regulatory agencies charged with implementation (Huber and Shipan, 2002; Potoski and Woods,
2001). Agencies are staffed with technical experts with more complete information about firms
being regulated; therefore, legislators are more likely to grant more discretion to more
knowledgeable regulators. Second, because writing detailed public policy is costly in terms of
time and effort the tendency is to write policies with vague goals and broad mandates, leaving
decisions about implementation up to the discretion of regulatory agencies. The degree of
discretion granted to agencies varies across states and is conditioned by factors including
historical norms, how professional and well-staffed legislatures are, and various characteristics
of the state (Pires, 2011).
The tension that exists between these two institutional actors—the legislators who craft
policies and the regulatory agencies who implement them—can result in policies being
implemented differently than legislators intended. This tension stems from the different
incentives legislators and regulators are likely to have when considering regulatory policy.
Legislators are fundamentally motivated by their desire for re-election, whereas regulatory
agency officials are not elected and often have job protections associated with civil service
policies and, therefore, may make decisions based on different criteria (Gailmard & Patty, 2007;
McCubbins et al., 1987). While incumbent firms leverage legislators’ incentives for re-election
by using corporate political activities, such as financial and informational lobbying, to persuade
legislators to craft policies in their favor, these policies may not translate to substantive changes
when implemented by regulatory agencies. Thus, while incumbent firms have the financial
resources and political connections to influence the policies crafted by legislators, regulatory
discretion may reduce the effectiveness of these corporate political activities.
20

Hypothesis 1: The positive effect of corporate political activities on regulatory approval
of incumbent firms will decrease as discretion increases.
Situations in which regulators have more discretion may, in fact, favor entrepreneurs over
incumbent firms due to an “institutional logic of public service.” Institutional logics are “the
socially constructed, historical patterns of material practices, assumptions, values, beliefs, and
rules by which individuals produce and reproduce their material subsistence, organize time and
space, and provide meaning to their social reality,” (Thornton & Occasio, 1999: 804). Regulatory
agencies have developed a unique institutional logic because of their distinct position between
legislators and the firms they regulate: they are government agents, yet they more directly
interact with and serve the public than elected officials or other government agencies which do
not directly interact with the public.
In the absence of oversight, evidence suggests that the regulatory decisions of agency
officials are likely to be more reflective of organizational norms, their own personal judgement,
career objectives than the preferences of the elected officials responsible for creating policy
(McCubbins et al., 1987; Pires, 2011). Public administration research supports this notion and
suggests that regulatory agency bureaucrats often consider a broader set of criteria when making
decisions than formal policy dictates (Lipsky, 1980). For example, research on Michigan’s
welfare administration showed that agency bureaucrats’ goals, knowledge, beliefs,
predispositions, and organizational norms were more influential in determining outcomes than
formal policy to the extent that legislative attempts at policy change were often undercut at the
implementation stage (Sandfort, 2000). Similarly, research at California’s Employment
Development Department demonstrated that when regulatory agency bureaucrats had more
discretion, their own individual views on fair distribution and social justice had a significant
21

effect on the final implementation of public policy (Kelly, 1994). Hence, regulatory agencies
with more discretion are likely to make decisions based on different criteria than the policy
objectives outlined by legislators. Distributional justice and fairness concerns are also often key
attributes that entrepreneurs promote when entering regulated markets. For example, prior
research on entrepreneurship in regulated markets demonstrated that when entering the pay TV
market, entrepreneurs framed their ventures in ways that suggested their products served the
public interest through improved consumer welfare and fair distribution (Gurses & Ozcan, 2015).
In addition, regulatory agency officials tend to view themselves as more responsive to the
individuals they serve than to formal policies and procedures created by the legislative officials
(Lipsky, 1980). Unlike elected officials who view citizens as abstractions, regulators view the
citizens they serve as individuals: “Their relationships with these various citizen clients are
personal and emotional, rarely cold and rational” (Maynard-Moody & Musheno, 2000:334).
Furthermore, as government agents who control access to resources and opportunities, regulators
often manage their relationships with citizens such as to exercise and enhance their power. One
way they can do this is by implementing policies in ways that (Maynard-Moody & Musheno,
2000).
Finally, much of the public administration literature highlights a motivational
predisposition of public servants towards furthering the common good and serving the public
interest (Crewson, 1997). Evidence suggests that the actions of public servants tends to be guided
by an ethos of altruism and prosocial behavior (Perry & Hondeghem, 2008). This predisposition
is reinforced and shaped by the sociocultural context of the public organizations in which they
work. Individuals in these organizations interact and influence each other in the context of an
22

institutional environment which reinforces conformity to organizational norms (Moynihan &
Pandey, 2007).

Furthermore, consistent with the notion of a logic of public service, regulators may
engage in “policy sabotage.” Policy sabotage occurs when regulatory agencies use their
discretion to actively undermine policies which they believe do not benefit the constituents they
serve (Brehm & Gates, 1997). It may also occur when regulatory agencies try to counteract what
they consider to be undue influence on policymakers—such as corporate political pressures by
large incumbents—and adapt policies accordingly (Cloutier et al., 2016; Maynard-Moody &
Musheno, 2000; Riccucci, Meyers, Lurie & Han, 2004). This too would lead regulators to favor
new entrants over incumbent firms who actively lobby for favorable policies at the legislative
level.
A logic of public service, therefore, may motivate and shape regulatory decision making
towards serving the public welfare, which may favor new entrants relative to incumbent firms
when regulators have discretion in interpreting and implementing public policies. When
regulatory agencies have little discretion, legislators can better monitor regulatory decision-
making and enforce alignment with formal policies, for instance, by further limiting their
autonomy or restricting agency budgets (McCubbins et al. 1987). This favors incumbent firms
who use their corporate political influence at the policymaking level to steer the rules of the
game in their favor. Consequently, the ability of new ventures to convince regulators to make
decisions that their legislative overseers would not necessarily otherwise endorse is restricted
when agencies have less discretion, which is detrimental to venture entry and survival. On the
other hand, more agency discretion may create the opportunity for entrepreneurs to convince
23

regulators of the value and legitimacy of new facilities based on public interest criteria to which
regulators are sympathetic. This places new ventures at least on more equal footing with
incumbent firms, and possibly at an advantage over incumbent firms, which could increase the
likelihood of regulatory approval and new venture entry. Thus, while incumbents have the
financial resources and political connections to influence policymaking by legislators, regulatory
discretion may level the playing field for new ventures relative to incumbents when policy is
implemented.
Hypothesis 2: Greater regulatory discretion will increase regulatory approval of new
venture entry.

Factors Influencing the Effect of Discretion on New Venture Entry

A number of factors may increase or decrease the effect of regulatory discretion on firm
entry and survival. I explore two key factors: how locally concentrated the firm is and the
competitiveness of political markets. I suggest that local concentration should enhance the effect
of discretion on entry and survival, whereas the competitiveness of political markets should
diminish the effect.
Regulatory Discretion and Local Concentration. The degree to which a firm is viewed
as ‘local’ by the regulatory agency may increase the positive effect of regulatory discretion on
approval of new venture entry. Prior research has found that regulatory agencies’ decisions and
actions are often grounded in local conditions and driven by their own particular interests
(Maynard-Moody & Musheno, 2000). Agency bureaucrats interpret and translate the meaning of
public policies in the context of their local environment. Furthermore, research has found that
local governments favor locally concentrated firms in order to promote growth in local
jurisdictions (Jia & Mayer, 2016). This is especially true in situations of greater regulatory
24

discretion, where legislators have intentionally left policy details to local experts (Hill, 2003).
They do this because they believe that their specialized local knowledge allows regulatory
agencies to adapt policies to the realities of their local environments and create innovative
solutions resulting in better outcomes for the populations they serve (Durose, 2011; Cloutier et
al. 2016). Local firms benefit from this for two reasons. First, regulators are more likely to
believe that local firms, as familiar elements of their local environment, merit having policies
adapted and modified to suit their particular needs more so than non-local firms. Second, local
firms are more likely to have specialized local knowledge in common with regulators and can
better communicate the advantages of their new facilities. Therefore, firms that are
headquartered within the jurisdiction of regulatory agencies may be more likely to successfully
convince regulators of the legitimacy of their new facilities than firms that are headquartered in
states or regions outside the agency’s jurisdiction and are therefore viewed as outsiders by
agency officials.
Furthermore, studies on organizational communities, economic geography and social
networks show that local firms reap benefits associated with geographic proximity. Geographic
proximity leads to greater formal and informal information and resource flow (Krugman, 1991;
Owen-Smith & Powell, 2004), which can generate rapport with regulatory agencies (Marquis,
Glynn & Davis, 2007; Marquis & Batillana, 2009; Hiatt & Kim, 2016). Regulators and firms
located in geographic proximity will have better information about each other such that firms can
tailor regulatory filings to meet regulatory agency preferences and regulators can adapt policy
implementation to favor local firms. Local firms are also more likely to obtain key resources
from sources regulators consider more legitimate, such as a local Chamber of Commerce, or
25

important external stakeholder groups (such as the media, consumers, social movement activists)
(Freeman & Audia, 2006).
The local concentration effects on regulatory discretion are particularly important for new
ventures for several reasons. For entrepreneurs, choice of location is among the most important
decisions taken. Because entrepreneurial activity takes place within a web of social relations,
new ventures are often founded where they can become embedded in local social structure in
order to acquire knowledge and build social ties with important institutional actors (Sorenson &
Audia, 2000). New ventures also select geographic environments where similar norms provide
them with legitimacy, and these environments tend to be local rather than geographically distant
(Zimmerman & Zeitz, 2002). Lastly, local concentration affects new ventures’ regulatory
environments: entrepreneurs are generally more effective at influencing the local public opinion
and local government agencies than those that are geographically distant (Romanelli &
Schoonhoven, 2001). Thus, local firms should disproportionately benefit from increased
regulatory discretion:
Hypothesis 3: Greater regulatory discretion will increase regulatory approval of local
ventures.
Regulatory Discretion and Political Competitiveness. The competitiveness of
legislative elections may also affect the ability of new entrants to achieve regulatory approval by
indirectly affecting regulatory discretion (Hiatt & Park, 2013). Political competitiveness is an
important determinant of the effectiveness of corporate political activity because it makes elected
officials more receptive to corporate political influence strategies (Hillman et al., 2004). When
an elected official is opposed in an upcoming election, the incentive of each candidate is to
become more responsive to the needs of organized interests because their support, often in the
26

form of financial contributions, increases the likelihood of election (Bonardi et al. 2005; Lawton
et al. 2013). Prior research has shown that the effectiveness of these activities is greatly increased
with electoral competitiveness (Lord, 2000). For instance, in 2002, U.S. steel producers sought
increased tariffs on steel imports. The intense political competition between Democrat and
Republican candidates for House of Representatives seats that unfolded in that election year
significantly strengthened the steel producers’ bargaining power and ultimately resulted in the
implementation of a 30 percent tariff (Bonardi et al. 2006).
Increased responsiveness to financial contributions and informational lobbying by
incumbent firms may prompt legislators to examine more closely the decisions made by
regulatory agencies, particularly if those decisions favor new entrants. Closer monitoring can put
pressure on regulatory agencies to act in alignment with legislators’ policy objectives, effectively
decreasing the amount of regulatory discretion. Therefore, elected officials facing tight re-
election campaigns may be more likely to be influenced by lobbying & financial contributions
from existing firms and may increase scrutiny of regulatory agencies, indirectly reducing the
level of regulatory discretion and the positive effect it has on new ventures (McCubbins et al.
1987; Calvert, McCubbins & Weingast, 1989).
As regulatory discretion is decreases, the ability of regulators to act in a manner
inconsistent with legislators’ policy objectives also decreases. The tension between institutional
actors is reduced and the institutional environment again resembles a monolithic entity. As a
result, previously malleable obstacles become rigid and common predictions of the business-
government relations literature about barriers to entry should hold true. Thus, increased
competitiveness in the political market in general should decrease the likelihood of new entry by
indirectly affecting the level of regulatory discretion.
27

Hypothesis 4: Increased competitiveness in the political market will decrease agency
approval of new entry.

EMPIRICAL CONTEXT

The empirical context of this study is the U.S. hydroelectric power sector from 1978-
2014. Hydroelectric power is the largest source of renewable electricity in the U.S. (USEIA,
2011) and employs over 300,000 people (NHA, 2010)
.
The U.S. is also one of the largest
producers of hydroelectric power in the world, behind China, Canada and Brazil (USEIA, 2011).
Although hydropower is most frequently associated with very large dams, not all hydropower
facilities use dams and not all dams produce electricity: in the United States, only about 3
percent of all dams produce electricity (USDOE, 2014). Other types of hydropower facilities
include ‘diversions’ (also known as run-of-river) which channel just a portion of a river’s water
through a canal which contains a turbine to generate electricity, ‘pumped storage’ which utilizes
an upper reservoir to store kinetic energy during non-peak load times, and tidal generators which
use the rising and falling of the ocean tides to drive turbines near the ocean floor. The
Department of Energy also classifies hydropower facilities by size (large, small, and micro) in
terms of the amount of electricity they are capable of generating (USDOE, 2014). The majority
of new hydroelectric license applications during the study period were for non-dam facilities in
the small or micro classification.
The Federal Energy Regulatory Commission (FERC) regulates all non-federally-owned
or -operated hydropower facilities in the US. To limit private exploitation of public rivers, FERC
grants utilities 30–50 year licenses, and is mandated to give equal consideration to energy and
non-energy interests, such as recreational opportunities and environmental quality (FERC, 2014).
28

Although all hydroelectric facilities must ultimately be granted a license at the federal
level by FERC, individual states have the authority to create their own requirements for licensing
and relicensing (FERC, 2014). Under the Clean Water Act of 1972, states must certify to the
federal government that an applicant complies with all state water quality standard before a
license can be granted. This provides states with the authority to affect licensing in two ways:
first, they can indirectly deny a license by withholding certification and second, they can impose
conditions on federal license by placing additional limitations on certification (Copeland, 2015).
Some states such as California take advantage of this power and create additional restrictions on
licensing, while others such as Texas specifically craft legislation to prevent regulators from
creating restrictions greater than applicable federal requirements. This creates significant
variation across states in the discretion that regulatory agencies have to interpret and implement
licensing legislation.
The study period begins after the passage of the National Energy Act of 1978. Prior to its
passage, independent energy entrepreneurs were not permitted to sell electricity to the grid.
Instead, electricity was generated by vertically integrated public and private utility companies
that controlled generation and distribution in specified geographic areas. Under section 210 of
the Act, known as the Public Utilities Regulatory Policies Act (PURPA), entrepreneurs were
enabled to construct non-utility facilities from which utility companies were required to purchase
power at the utilities’ generation cost (USDOE, 2015). This created a new market for
independent power producers and resulted in scores of entrepreneurs entering the electric power
sector (Sine, et al., 2005; Sine & Lee, 2009).
29

METHODS
Data and Measures

My dependent variable is license approval of a new hydroelectric facility project by
FERC (based on recommendations by state-level agencies). My data contains all hydroelectric
facility licenses applications and licensees from 1978, when energy markets in the United States
were deregulated allowing entry of independent power ventures, through 2014. These data were
obtained from FERC’s docket library. During this period, 525 license applications were
submitted by 413 potential licensees. Of these, 91 percent were licensed and 5 percent were not
and 4 percent were still awaiting approval at the end of the study period. The data includes
license application, issue and rejection dates, operational start-up/shut-down dates, project size
(in MWh), facility location and type (hydroelectric dam, run-of-the-river, or pumped storage)
and waterway used.
The FERC docket library contains data on license applications by public and for-profit
firms, cooperative firms, and municipal and tribal governments. The license application process
is identical for both firms and governments; however, governments likely employ qualitatively
different strategies (e.g. they do not lobby with campaign contributions) and have a level of
access to other public agencies that firms do not, therefore I excluded them from the sample.
Only public and private for-profit firms and electric cooperatives were included in the sample.
The firms in the data set range from large multinational corporations to very small
partnerships and individuals applying for small scale hydroelectric licenses. The majority of the
firms in the sample are not publicly-held and, due to the longitudinal nature of the data, many no
longer exist. Therefore, much of the demographic data ordinarily used in this type of analysis
was unavailable for many firms. Information on firm type (public for-profit, private for-profit or
cooperative), founding dates and headquarters location was obtained from firm websites where
30

possible and supplemented from the OpenCorporates
1
database when firm websites were
unavailable.
Predictor Variables

My predictor variable was regulatory discretion. In operationalizing this measure, I
borrow a scale from the political science literature. Specifically, I use a weighted index of
various private property rights acts (PPRAs) by state and year. PPRAs discourage regulations
that limit the owner’s use of private property. They attempt to balance the necessity of some
legitimate regulation with the possibility of excessive government interference in an owner’s
ability to use their private property. In general, PPRAs require that state rule-making agencies
evaluate whether a rule will cause a taking,
2
and to implement safeguards to ensure that agency
actions do not cause this to occur. This serves as a good proxy for discretion, which is often
difficult to measure directly, because it measures the flexibility that regulatory agencies have in
interpreting and implementing public policies (Hecht, 2004; ELI 2013). More PPRAs implies
regulatory agencies are more constrained in implementing laws according to their own judgment.
Fewer PPRAs allow regulatory agencies more flexibility to implement laws without being
hindered by private property considerations. This particular index (from Hecht, 2004) is specific
to environmental policy-making rather than state-wide agency discretion, therefore serves as an
appropriate measure of discretion for my empirical context.
3
The index distils 20 different
property rights acts, including laws that make lower the threshold for defining a regulatory
taking, the degree to which it affects regulatory agencies and local government decision-making,

1
www.opencorporates.com
2
A regulatory taking is when a regulatory policy deprives the property holder of economically reasonable use of the
property
3
This measure is an accepted construct that has been used previously in the economics and political science
literatures.
31

and if decisions require external review into a single index that weights rules according to their
severity. The scale ranges from 0 to 100; a high score indicates that the state has little discretion
in preventing property owners from using their property in any way they see fit and a low score
indicates a great deal of flexibility in making regulatory decisions. For purposes of analysis, I
reverse coded this variable.
For my analysis, I interact discretion with new venture entrants. There is no universally
accepted age limit that defines new ventures; prior research has defined the age limit of new
ventures to be anywhere between three and seven years (Tornikoski & Newbert, 2007). Other
studies consider the age limit of new ventures to be between six and ten years (Baron, Hannon &
Burton, 2001; Hiatt and Sine, 2014). For this study, I define new ventures as entrants with less
than seven years of age.
4
Entrants is coded as a dummy variable: 1 for entrants, zero otherwise.
To examine incumbent firm actions to influence the license process, I use data on
financial contributions and informational lobbying from the National Institute on Money in State
Politics,
5
a non-partisan non-profit organization which collects comprehensive lobbyist and other
information from government disclosure agencies. This database provides annual financial
contributions to state-level legislators as well as number of lobbyists hired per state per year. The
data includes lobbying and financial contributions from 1990 through 2014.
To examine the effect of local concentration on regulatory discretion and new ventures, I
created a dummy variable, local firm, for firms which operate only in the state of application. On
FERC license applications, all firms listed in-state office addresses, so each firm is at least
present in the state of application and therefore might be considered local to state regulators.
However, firms that have past or current licenses or license applications in multiple states are

4
Results are consistent for entrants between 5 and 10 years of age.
5
http://www.followthemoney.org/
32

likely to be considered as outsiders relative to those firms that were established and operate only
in the state of application. I consider firms with out-of-state licenses to be non-local relative to
those seeking licenses only in-state. Furthermore, I consider firms which are subsidiaries of out-
of-state parent firms to be non-local.
To test the impact of political competitiveness I create several variables. At the house and
senate level I use percentage of seats by which the dominant party holds a majority and for
gubernatorial elections I use the margin of victory. Following prior research, I code the political
competitiveness as intense if the margin of victory is less than 5 percent for gubernatorial
elections (Bonardi et al., 2006). I extend this logic to house and senate seats and code the
political competitiveness as intense if the margin by which the dominant party holds a majority is
less than 5 percent. These are dummy variables coded as 1 if competitiveness is intense and zero
otherwise.
Control Variables

I use several control variables in this analysis. At the firm-level I control for firm type
(coded as a categorical variable: zero for public for-profit firms, 1 for private for-profit firms and
2 for cooperatives). As a proxy for firm size, I use the total size of all electric facilities (measured
in MWh). These data were obtained from the FERC docket library and from the Energy
Information Administration database.
I also control for specific characteristics of the state and its regulatory environment. I
control for the dominant political party at state-level upper (senate party) and lower houses
(house party) as well as the governor (governor party). I also control for pro-environmental
sentiment using the League of Conservation Voters Scorecard (LCV) which scores annually the
pro- or anti-environmental sentiment in state legislatures. Controls for state population and per
33

capita gross state product are also included. The state hydroelectric potential, average
commercial energy price and the number of hydroelectric specific energy incentives for each
state are also controlled for.
Finally, I control for formal objections made by incumbents (incumbent objections),
external stakeholders, such as environmental activists (stakeholder objections), and objections
made by others (other objections) including various state and federal regulatory agencies with
shared responsibility for waterway protection (e.g. state Fish and Wildlife departments, EPA). I
obtained detailed information on all formal objections from FERC’s docket library.
Analysis

For this study, I use event-history analysis because it allows me to take advantage of the
richness of the panel data and is the standard technique used in research on similar phenomena
surrounding regulatory approvals.
6
Specifically, I model project approvals using a Cox
proportional hazard model because, unlike parametric regression models, it does not require
assumptions about the shape of the baseline hazard, giving greater flexibility in analysis. The
hazard rate is defined as:
hi(t)= h0(t) exp (β’χ)
where h0(t) is the baseline hazard function and β’χ are the covariates and unknown regression
parameters. To minimize collinearity on interaction terms between the regulatory discretion
variable and predictor dummy variables, the regulatory discretion variable was standardized. I
tested for multicollinearity and found that all variance inflation factors in the analysis were less
than 5 and the majority were near 1, suggesting an acceptable level of multicollinearity.

6
For instance, see Carpenter (2002) and Hiatt & Park (2013) for application of event history analysis on agency
approval of on pharmaceuticals GMOs, respectively.
34

RESULTS

Descriptive statistics and bivariate correlations appear in Table 1 and the results of the
Cox proportional hazard models appear in Table 2. Model 1 of Table 2 shows the effect of
control variables only and Model 2 adds the effect of regulatory discretion. Model 3 adds
political contributions by incumbent firms and the interactions of these variables with regulatory
discretion to test Hypothesis 1. This analysis was conducted only for the years in which political
contributions data were available (1990-2014). Model 3 adds entrants, regulatory discretion and
their interaction to test Hypothesis 2. Model 4 adds local concentration and its interaction with
regulatory discretion to test Hypothesis 3. Model 5 adds political competitiveness and its
interaction with regulatory discretion to test Hypothesis 4.
Several control variables had a significant effect on facility licensing. The type of firm
applying for a license was significant; this result suggests that publicly held corporations are
more likely to be granted a license. Formal objections by other regulatory agencies had a
negative effect on the likelihood of licensing, as would be expected. Surprisingly, objections by
external stakeholders and incumbent firms had no effect on licensing. Per capita gross state
product had a negative and significant effect on the probability of licensing. State hydroelectric
potential was positive and moderately significant, but the effect size was very small.
Regulatory Discretion and New Venture Entry

The results provide support for Hypothesis 1 which predicts that the effectiveness of
incumbent firms’ lobbying activities will decrease as discretion increases. Consistent with prior
research (Hillman et al., 2004; Lawton et al., 2013) corporate political contributions improved
firm outcomes; however, this effect was reversed when interacted with regulatory discretion. The
results also provide strong support for Hypothesis 2 which predicts that regulatory discretion will
35

increase the likelihood of new entry. As expected, regulatory discretion alone has no significant
effect on the probability of licensing nor did new entrants. However, when interacted, the results
are positive and significant. New entrants are 29 percent more likely to be licensed for each
standard deviation increase in the level of regulatory discretion.
Regulatory Discretion and Local Concentration

The results indicate some modest support for Hypothesis 3. There is no significant effect
of local firms on licensing in the absence of discretion. When local firms are interacted with
discretion, however, the result is positive and significant. For every standard deviation increase
in discretion, local firms are 30 percent more likely to be licensed. This result affects new
entrants disproportionately. In my data set, the majority of firms coded as new entrants are also
local firms. This is likely to be true more broadly in other contexts since new ventures are more
likely to enter a market in their home state and are unlikely to enter markets in multiple states
simultaneously. Therefore, in general, the effect of discretion on local concentration would be
expected to disproportionately benefit new ventures over incumbent firms.
Regulatory Discretion and Political Competitiveness

The results show support for Hypothesis 4 which predicts that the competitiveness in the
political market will decrease the probability of licensing for new entrants by indirectly reducing
the amount of regulatory discretion. Political competitiveness in the house, senate and executive
have no effect on licensing in the absence of regulatory discretion, as would be expected. For
new entrants, however, the probability of licensing is greatly reduced under increased
competitiveness in the senate. When interacted with entrants, political competitiveness in the
senate reduces the likelihood of obtaining a license by 22 percent. Although the coefficients on
house and executive competitiveness are also negative, they are not statistically significant. The
36

lack of significance on executive competitiveness may be because the executive branch has very
little responsibility in overseeing regulatory agencies and therefore electoral competitiveness will
be less likely to indirectly affect regulatory discretion, and consequently, licensing of new
entrants. Support for this hypothesis in the senate but not the house may be due to both formal
and informal factors. In a formal sense, senators are elected for longer terms than house
representatives. As such, the political stakes are higher in a given election, and their longer
tenure likely gives them a greater ability to monitor regulatory agencies. In an informal sense,
both because of their longer terms and fewer numbers (most states have 4-5 times more
representatives than senators)
7
, senators likely enjoy higher status and greater power than house
representatives.
Robustness Checks

As a robustness check on hypothesis 5, I examine whether or not political
competitiveness in more than one elected body affects the impact of regulatory discretion on new
venture entry. In most U.S. states, there are three elected bodies involved in policymaking for
regulatory agencies to enact: the executive, the house and the senate. For a policy change to be
made, it must be approved both the house and senate and be signed by the executive. Firms are
more likely to target their corporate political activities at the elected body most likely adapt its
policy position to that of the firm (Holburn & Vanden Bergh, 2008). Since political
competitiveness incentivizes elected officials to become more responsive to firms’ demands,
firms will target the elected body with the greatest degree of political competitiveness. However,
when political competitiveness exists just one of the elected bodies but not the others, it may not
create sufficient pressure to affect the level of regulatory discretion because the other bodies may

7
National Conference of State Legislatures, http://www.ncsl.org/
37

act as bottlenecks, hindering discretion-reducing oversight. When all three elected bodies face
political competitiveness, their incentives are aligned and bottlenecks are removed; this may
create sufficient pressure so as to reduce regulatory discretion and decrease new entry.
In results not shown here, I find that alignment in all three elected bodies resulted in
increased the likelihood of licensing for incumbent firms. Contrary to expectations, the
interaction of alignment and regulatory discretion is negative; however, the result was not
statistically significant. This suggests that even when there is high political competitiveness in all
three elected bodies, the pressure is insufficient to overcome the effect of regulatory discretion
on licensing. A possible explanation for this is that the measure of regulatory discretion used in
this study is highly institutionalized, which is often the case in environmental policy-making
(Hecht, 2004). As such, it may not be easily influenced by the relatively short-term pressures of
political competitiveness.
In addition to Cox proportional hazard models, I ran analyses with parametric survival
models with Gompertz, Weibull and exponential distributions. Results held across parametric
survival models. I also ran piecewise-constant hazard rate models using 4- and 5-year time
intervals and results remained generally consistent with Cox proportional hazard models. I also
ran analyses using a pooled cross-sectional logistic regression, as prior research suggests (Fiss &
Zajac, 2004). Results held for H2 to H4, but would not converge for H1. I also ran the logistic
regressions with U.S. state fixed-effects. Results generally held, however, 21 states were
eliminated from the analysis due to lack of variation. Hence, effect sizes and statistical
significance were affected.
38

DISCUSSION

This paper explores an under-examined area of non-market strategy and entrepreneurship
research by addressing the question: How can new ventures overcome barriers to entry in highly
regulated sectors? Although a number of studies have shown how powerful incumbents can
accrue competitive advantages by persuading officials at the legislative level to erect barriers to
entry that protect their market positions (García-Canal & Guillén, 2008; Aldrich and Ruef,
2006), these barriers may be much more malleable than previously believed. By looking at the
tensions that exists among actors in the institutional environment—elected officials and
regulatory agency bureaucrats in this case—I have highlighted a common, but incorrect
assumption that the institutional environment is monolithic. Instead, it consists of multiple,
sometimes competing interests that can enable or constrain new venture entry and survival.
I show how variation in the discretion that state regulatory agencies have in interpreting
and implementing policies crafted by elected officials differentially affects incumbent firms and
new ventures. The results suggest that, although incumbent firms seek to maintain barriers to
entry through corporate political activities, increased regulatory discretion reduces the
effectiveness of these activities. Regulatory discretion also allows entrepreneurs to take
advantage of the tensions that exist among institutional actors and persuade regulators of the
value and legitimacy of their new ventures on a more level playing field with incumbent firms.
As a result, the barriers to entry erected by incumbent firms and elected officials become less
fixed and more flexible, leading to greater entry by new ventures.
This paper also explores two factors that moderate the effect of discretion on entry: local
concentration and political competitiveness. The findings suggest that because regulatory
agencies base their decisions on local conditions and their particularistic interests, firms that are
39

more local to regulatory agencies are more likely to gain regulatory approval when there is more
regulatory discretion. Political competitiveness, on the other hand, indirectly reduces the effect
of regulatory discretion on new venture entry because it makes elected officials more receptive to
corporate political influence strategies. Facing tight re-election campaigns, elected officials more
closely monitor regulatory agency decisions and enforce alignment with their policy objectives.
This study makes three primary theoretical contributions. First, it contributes to the
institutions and entrepreneurship literature (Eberhart, Eisenhardt & Eesley, 2014; Eesley, Li &
Yang, 2016; Pacheco, et al., 2014; York et al., 2016) by exploring the institutional factors that
affect new venture entry and survival in regulated markets. The management literature offers
numerous examples of how incumbent firms use their political influence to erect regulatory
barriers that prevent entrance; yet, new entrants do in fact enter these markets (Gurses & Ozcan,
2015; York and Lenox, 2014). Despite emerging research, we know relatively little about the
factors that help entrepreneurs directly or indirectly influence regulatory agency decisions, nor
has this research theoretically articulated the mechanisms by which the institutional environment
can facilitate new venture entry into regulated markets.
Second, it contributes to the business-government relations literature by highlighting that
the state consists of multiple social and political interests that often exist in tension with one
another. Extant literature frequently treats the state as a single, uniform entity (Bonardi, Holburn
& Vanden Bergh, 2006; Hillman & Hitt, 1999; Mizruchi, 1992; Werner, 2012). However, this
notion neglects potentially important strategic and institutional factors that may be derived from
a pluralistic view of the state. By moving beyond this work that has viewed political influence as
a dyadic interaction between suppliers and demanders of public policy and focusing on the
40

implementation of public policy by regulatory agencies, this study highlights an important and
under-studied area of investigation (Holburn & Vanden Bergh, 2008; Trumbull, 2012).
Third, this study adds to the strategic management literature by enhancing our
understanding of the effectiveness of firms’ political activities. Recent research has begun to
question whether simple measures of number of lobbyists or campaign contributions are
sufficient to explain firm outcomes (Hadani & Schuler, 2013; Hill et al., 2013). For example,
Ridge and colleagues (2016) suggest that understanding how firms target their lobbying activities
as well as their political connectedness are important factors to consider when exploring the
theoretical mechanisms underpinning corporate political activities. This study adds to that
literature by suggesting that the effectiveness of corporate political activities may also be
dependent on institutional factors, such as the relationship between elected officials who craft
policy and the regulatory agencies who implement it.
This study also answers calls to improve our understanding of the relationship between
regulators and regulated firms by looking beyond simple asocial exchanges. While a large body
research has modeled the behavior of firms, legislators and regulatory agencies as self-interested
and atomistic market actors seeking to maximize their personal utility (Buchanan, 1987; Bonardi,
Hillman & Keim, 2005; Holburn & Vanden Bergh, 2008), others have questioned this approach
because it ignores the important roles of social influence on regulatory decision-making (Hiatt &
Park, 2013; Hiatt & Kim, 2016; King, Felin & Whetten, 2010). By directly examining the
discretion of regulatory agency officials, and the moderating effects of local concentration and
political competitiveness on policy implementation, this study takes a more nuanced approach to
the study of business-government relations.
41

This study opens several avenues of future research. For example, studies might directly
examine the strategies used by new ventures when entering regulated markets in which multiple
institutional actors influence entry. Although recent studies have examined the unconventional
and less resource intensive strategies of entrepreneurs in regulated markets (Gurses & Ozcan,
2015; Pacheco et al., 2010; Tracey et al., 2011), all conceive of the state as a single entity rather
than as multiple, often competing interests. This literature has yet to theoretically or empirically
explore the differences between the strategies and tactics used by new ventures and incumbent
firms to influence their regulatory environment, nor their relative effectiveness with the various
institutional actors who control entry.
Future studies might also explore the effect of regulatory discretion in circumstances in
which public policy favors entrants (Armanios & Eesley, 2016). While much of the non-market
strategy literature focuses on regulation that restricts entrants, public policies can also lower
barriers to entry and provide resources that make entry more viable. However, empirical studies
in this area have found mixed results of such reforms. When the U.S. government passed laws
that allowed for the sale of power to the electric grid by independent energy firms, it prompted
the founding of a whole new class of ventures (Sine et al., 2005). Similarly, deregulation in the
U.S. electric utility industry induced large incumbent firms to focus their energy portfolios on
low-cost conventional energy sources to the benefit of new entrants into the emerging renewable
power sector (Kim, 2013). However, other studies find evidence that entry does not significantly
increase following regulatory reforms (Klapper & Love, 2010). It is possible that regulatory
discretion is an important moderating factor. On one hand, increased discretion in these
circumstances might further favor entrants; on the other hand, regulatory agency officials’
distributional justice concerns may lead regulators to seek balance and favor incumbent firms.
42

How regulatory discretion affects the ability of external stakeholders, such as social
movement activists, to support or constrain new ventures’ activities may also be an important
area of future research. While studies have a link between stakeholder activism and
entrepreneurial activity (e.g. Hiatt et al., 2009; Sine & Lee, 2009; York et al., 2016), much of this
research takes a relatively static view of the political opportunity structures that enable activist
influence. Regulatory discretion may allow activists to shape the institutional environment by
questioning the legitimacy and reputation of regulatory agencies, making political opportunity
structures more dynamic features of the institutional environment. Thus, the variation in
regulatory discretion across states may both trigger and pattern the ability of external
stakeholders to affect new venture outcomes.
The sensitivity of these results under different types of regulatory discretion may also be
a fruitful area of future investigation. In the field of environmental policymaking, regulatory
discretion is often institutionalized through private property rights and no-more-stringent laws
which span multiple regulatory agencies and are not readily changed (Organ, 1995; Hecht,
2004). In other contexts, regulatory discretion is linked more closely to organizational norms
(Kelly, 1994) and may be more easily changed due to social or political pressures. How
discretion unfolds in the long term, how it is affected by political competitiveness and how it
affects entry may be of interest to future scholars.
This study has a couple limitations worth noting. First, due to data availability, I was not
able to control for size and profitability for all firms in the sample due to many of them being
privately owned. I attempt to control for size using the use the output of all electric facilities
owned by each firm. While this likely correlates with the size of the organization, it is not a
perfect substitute. In addition, since profitability data is available for only a sub-set of the firms
43

in the sample, it is not included in the analysis. Second, although I examine what is arguably the
most important influence strategy that incumbent firms use—financial contributions—this is just
one of many tactics firms can use. Future studies could examine other tactics, individually and in
combination, are affected by regulatory discretion.
This study provides some practical implications for entrepreneurs, managers, and elected
officials. First, it informs entrepreneurs about how they might better navigate regulatory-agency
interactions and achieve positive outcomes. Few studies have explored how entrepreneurs
navigate markets with significant regulatory oversight (Gurses & Ozcan, 2015). This is an
important limitation because entrepreneurial firms often face unique challenges in confronting
their regulatory environment. They lack the resources, legitimacy and political connections
which large, established firms use to create positive outcomes and therefore they must resort to
unconventional and less resource intensive strategies. Understanding how different
characteristics of the regulatory environment help entrepreneurs overcome these limitations is
valuable for entrepreneurs seeking to launch new ventures in regulated markets.
Second, this paper informs managers of incumbent firms about how best to direct their
corporate political activities. The results suggest that despite ample research that demonstrates
the effectiveness of lobbying activities and corporate political contributions (Hillman et al. 2004;
Lawton et al. 2013), regulatory discretion may undermine its effectiveness. Firms, therefore,
would be wise to dedicate their resources to pursuing other means of corporate political influence
that are not weakened by regulatory discretion.
Finally, my results have implications for elected officials. Promoting innovation and
entrepreneurship has become a key element of many state and federal policy agendas. However,
the discretion granted to regulators by legislators may positively or negatively affect the ability
44

of such policies to achieve their stated goals. Therefore, this study has implications for the
institutional design of regulatory agencies and creation of laws governing regulatory discretion
over policy implementation.
45

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57

TABLE 1 - Descriptive Statistics and Bivariate Correlations
Variable Mean S.D. 1 2 3 4 5 6 7 8 9 10 11
1 Entrant 0.142 0.349

2 Discretion 0.001 0.999 0.053

3 Contributions 7711.013 64522.790 -0.045 -0.034

4 Local firm 0.637 0.481 0.166 -0.020 -0.081

5
Pol. Comp.
(house) 0.122 0.328 -0.032 -0.036 -0.040 -0.012

6
Pol. Comp.
(senate) 0.286 0.452 -0.052 0.048 -0.061 0.048 0.296

7
Pol. Comp.
(exec) 0.264 0.441 0.034 -0.020 -0.041 -0.015 0.042 -0.017

8 Firm size 44761.414 146000.000 -0.097 -0.042 0.100 -0.015 -0.037 -0.020 0.013

9 Firm type 1.070 1.130 0.003 -0.082 -0.109 0.422 0.020 0.072 -0.008 -0.019

10 Firm age 63.385 44.802 -0.557 -0.050 0.088 -0.082 -0.018 -0.001 -0.027 0.090 0.214

11
Incumbent
Objections 0.174 0.456 0.005 0.002 -0.019 0.029 -0.023 -0.015 -0.007 0.002 -0.055 -0.025

12
Stakeholder
Objections 0.618 3.191 -0.050 0.019 0.180 -0.124 -0.019 -0.037 0.008 0.061 -0.090 0.062 -0.025
13
Other
Objections 0.597 0.854 -0.067 0.015 0.071 -0.139 0.034 0.042 -0.010 0.062 -0.082 0.034 -0.027
14
Gross state
product 0.026 0.012 -0.048 -0.267 0.127 0.004 -0.016 0.086 0.018 0.057 0.004 0.081 0.102
15
State
population 15.414 1.205 -0.008 0.074 0.064 -0.135 -0.086 -0.249 0.051 0.118 -0.098 0.067 0.038
16
State hydro
potential 1132.242 1208.550 -0.021 -0.047 0.063 -0.087 -0.080 -0.024 0.037 0.147 0.016 0.068 0.010
17 Energy price 6.962 1.300 -0.051 -0.320 0.141 -0.021 0.052 0.047 0.048 0.050 -0.004 0.087 0.068
18
Energy
incentives 0.561 1.569 -0.014 -0.361 0.032 0.035 0.025 0.094 0.003 0.049 0.028 0.070 0.015
19 House party 0.097 0.288 -0.015 0.246 -0.050 -0.038 -0.122 -0.170 0.035 0.081 -0.043 -0.018 -0.032
20 Senate party 0.064 0.308 -0.033 0.217 -0.022 -0.009 -0.091 -0.129 0.001 0.095 -0.048 -0.002 -0.092
21 Exec. party 0.053 0.224 0.064 -0.189 0.052 0.069 -0.020 0.021 0.012 0.046 0.063 -0.022 0.004
22 LCV Score 58.536 29.118 0.000 0.095 -0.033 -0.099 0.130 0.096 0.038 -0.032 -0.043 -0.012 -0.037

58

12 13 14 15 16 17 18 19 20 21
13 -0.022
14 0.024 0.127
15 0.018 0.126 0.201
16 -0.021 0.134 0.120 0.356
17 0.068 0.124 0.839 0.074 -0.023
18 0.007 -0.017 0.453 -0.042 -0.033 0.425
19 0.063 0.076 -0.079 0.346 -0.046 -0.162 -0.064
20 0.070 0.063 -0.154 0.167 0.031 -0.149 -0.033 0.783
21 -0.008 0.026 0.444 0.076 0.056 0.464 0.265 0.064 0.054
22 -0.090 0.124 0.114 0.291 0.043 0.081 0.088 0.385 0.294 0.131

59

TABLE 2 - Cox Event History Regressions

Variables Model 1 Model 2 Model 3 Model 4 Model 5 Model 6
Entrant

-0.343* -0.027 0.001 0.061

(0.207) (0.124) (0.119) (0.125)
Discretion

-0.028 -0.128 -0.134 -0.123 -0.051

(0.067) (0.089) (0.089) (0.080) (0.081)
Contributions

0.003***

(0.00)

Contributions x
Discretion

-0.001***

(0.000)

Entrant x Discretion

0.257**

(0.130)

Local Firm

-0.022

(0.111)

Local x Discretion

0.260**

(0.104)

Pol. Comp (senate)

-0.073

(0.110)
Pol. Comp. (senate) x
Entrant

-0.242*

(0.134)
Pol. Comp (house)

-0.112

(0.176)
Pol. Comp. (house) x
Entrant

0.121

(0.101)
Pol. Comp. (exec)

-0.051

(0.099)
Pol. Comp (exec) x
Entrant

0.158

(0.136)
Firm Size 0.000 0.000 0.000 0.000 0.000 0.000

(0.000) (0.000) (0.000) (0.000) (0.000) (0.000)
Firm Type 0.259** 0.251** 0.554*** 0.224* 0.214* 0.246**

(0.116) (0.119) (0.188) (0.119) (0.122) (0.118)
Firm Age -0.002 -0.002 -0.004 -0.002 -0.002 -0.001

(0.002) (0.002) (0.004) (0.002) (0.002) (0.002)
Stakeholder Objection -0.136 -0.141 -0.294 -0.135 -0.167 -0.109

(0.109) (0.111) (0.202) (0.111) (0.115) (0.110)
Incumbent Objection -0.030 -0.029 0.086 -0.038 -0.035 -0.051

(0.071) (0.071) (0.130) (0.073) (0.073) (0.074)
Other Objection -0.334** -0.334*** -0.152 -0.335*** -0.328*** -0.331***

(0.087) (0.087) (0.111) (0.084) (0.087) (0.088)
Gross State Product -32.811*** -31.925*** -24.569 -33.466*** -35.82*** -30.87***

(11.271) (11.617) (17.478) (11.915) (12.500) (11.530)

60

State Population -0.098* -0.100* -0.115* -0.111* -0.106* -0.126**

(0.056) (0.056) (0.123) (0.059) (0.058) (0.058)
Energy Price -1.972 -1.979 -0.612*** -1.803 -1.930 -1.960

(3.627) (3.633) (0.232) (3.475) (3.540) (3.611)
State Hydro Potential 0.000* 0.000* 0.000 0.000* 0.000* 0.000*

(0.000) (0.000) (0.000) (0.000) (0.000) (0.000)
Energy Incentives 0.048 0.042 0.044 0.047 0.019 0.059

(0.049) (0.053) (0.048) (0.057) (0.052) (0.058)
Executive Party -0.472 -0.488 -0.475 -0.517 -0.503 -0.496

(0.335) (0.342) (0.363) (0.363) (0.350) (0.373)
House Party 0.244 0.239 0.736 0.265 0.284 0.309

(0.317) (0.318) (0.765) (0.324) (0.329) (0.315)
Senate Party -0.202 -0.187 -0.008 -0.185 -0.243 -0.206

(0.238) (0.242) (0.520) (0.242) (0.254) (0.238)
LCV Score 0.003 0.003 0.000 0.003 0.002 0.003

(0.002) (0.002) (0.003) (0.002) (0.002) (0.002)
Wald Chi-squared 66.80*** 66.84*** 77.92*** 78.11*** 67.23*** 68.89***
Number Observations 1273 1273 513 1273 1273 1273
Robust standard errors in
parentheses

*** p<0.01, ** p<0.05, * p<0.1

61

APPENDIX A - Hazard Curves of Interaction Terms

1. Entrant X Discretion

2. Contributions X Discretion

Above mean Below mean
Below mean

Above mean

62

3. Local Firms X Discretion

4. Political Competitiveness X Discretion (Senate competitiveness only)

Below mean

Above mean

Below mean

Above mean

63

APPENDIX B - Hydroelectric Facility License Applications

0
10
20
30
40
50
60
70
1978
1979
1980
1981
1982
1983
1984
1985
1986
1987
1988
1989
1990
1991
1992
1993
1994
1995
1996
1997
1998
1999
2000
2001
2002
2003
2004
2005
2006
2007
2008
2009
2010
2011
2012
2013
2014
Number of Applications
New License Applications Applications Under Review

64

APPENDIX C - Hydroelectric Facility Locations in the U.S.

Source: Washington Post, https://www.washingtonpost.com/graphics/national/power-plants/

65

APPPENDIX D - Hydro License Application Requirements

66

CHAPTER 3
STATE AGENCY DISCRETION AND THE RADICAL FLANK: AN EXAMINATION
OF STAKEHOLER OPPOSITION TO NEW HYDROELECTRIC FACILITY
FOUNDINGS

ABSTRACT
Research on institutions and entrepreneurship has highlighted the ability of social
movement activists to affect firm entry, performance and survival by using the state as a fulcrum
to achieve its goals. However, most of this literature has examined how individual activist tactics
lead to policy changes that affect firms but neglects the effect of multiple simultaneous tactics on
firms. Furthermore, changes to formal policy are not always necessary to affect firms. The way
in which policy is implemented by regulatory agencies may also affect both firm behavior and
social movement tactics. In this chapter, I explore how multiple social movement tactics interact
to affect firm entry via regulatory agencies and without formal policy changes. I draw on the
sociological literature on radical flank effects and political opportunity structures to show that
regulatory discretion creates a political opportunity structure that has a differential effect on the
radical flank. More regulatory agency discretion leads to a positive radical flank effect which
augments the impact of social movement activism on firm entry and less regulatory agency
discretion leads to a negative radical flank effect which diminishes the impact of activism on
firm entry. I test this empirically using data on the regulatory approval of new facilities in the
U.S. hydroelectric power sector from 1978-2014.
Keywords: social movements, institutional theory, entrepreneurship, radical flank, political
opportunity structures

67

INTRODUCTION

Research at the nexus of institutions and entrepreneurship has highlighted the role of
social movement activists on firm entry, performance and survival. Activists can cause
organizations to flourish by championing their legitimacy (Pacheco, York & Hargrave, 2014;
Sine & Lee, 2009), or to fail by tarnishing their reputations through boycotts and protests
(McDonnell & King, 2013; Vasi & King, 2012). They create settings for new organizational
forms to emerge by identifying and drawing entrepreneurial attention to market failures (Rao,
Morrill & Zald, 2000), and they foster the adoption of new practices and technologies by raising
their visibility and engaging in public discourse to shape customer preferences (Briscoe, Gupta &
Anner, 2015; Maurer, Bansall & Crossan, 2011).
Particular attention has been paid to how social movement activists use the state as a
fulcrum to achieve movement goals and affect changes in firms (Amenta et al., 2010, Soule &
King, 2006). Through tactics such as protest, boycotts, lawsuits and lobbying, social movement
activists induce changes to public policies that enable or constrain firms’ economic activities and
promote new organizational practices (Haveman, Rao & Paruchuri, 2007; Russo, 2001; Wade,
Swaminathan & Saxon, 1998). For instance, studies suggest that activist protests can cause
policymakers to change or eliminate contested policies, especially when they raise the political
costs of maintaining the policies (Della Porta & Diani, 1999; den Hond & Bakker, 2007).
Empirically, studies have found that lobbying tactics are also effective; for example, activists
lobbied for anti-alcohol policy changes in the early twentieth century, which led to both the
failure of breweries and the establishment of new soft drink firms (Hiatt, Sine & Tolbert, 2009).
Social movement organizations may also detect opportunities in the political environment that

68

make established firms vulnerable to policy changes (King, 2008) and create fertile conditions
for entry by new firms (Vasi, 2009).
Most of the research in this area focuses on how a single social movement tactic
(primarily protests or lobbying) leads to policy change, yet often multiple social movement
organizations form coalitions that use multiple tactics to enhance the power of their collective
action towards firms and policy makers. For example, the ‘environmental movement’ consists of
a variety of different groups that employ different tactics—for example, Greenpeace focuses on
non-violent direct action, and Friends of the Earth focuses on lawsuits and lobbying—yet all
maintain the same overarching goal of preventing environmental degradation (Carmin & Balser,
2002). Prior research has suggested that when multiple organizations with the same goal
combine their efforts, it increases the likelihood of success because different groups can apply
different tactics to strategically apply and sustain pressure on policy makers (Stearns & Almeida,
2004). However, relatively little research in the management literature has explored how
movements use multiple tactics simultaneously and how those tactics interact to enhance or
hinder their efficacy.
Furthermore, this literature is largely focused on how activists foment policy change.
Little research to date has explored how activists influence firm outcomes via the state in the
absence of changes to formal policy. This is potentially an important oversight: by focusing only
on the final or imminent adoption of a particular law and its impact on firms, many prior studies
have overlooked the effect that the implementation of public policy by regulatory agencies may
have on both firm behavior and social movement tactics. Some recent studies have begun to
explore this issue. For example, Hiatt and Park (2013) find that activists influence regulatory
agency approval of firms’ genetically modified food products by challenging the legitimacy of

69

regulators. Hiatt, Grandy and Lee (2015) find that by using tactics that raised the threat of
potential regulation, environmental activists were able affect substantive changes in oil and gas
firms even though their tactics never actually resulted in public policy changes. While their study
does examine multiple social movement tactics, much remains unexplored.
In this chapter, I create a theoretical framework, drawing on sociological literature on
radical flank effects and political opportunity structures, to explain how multiple social
movement tactics interact to affect firm entry via regulatory agencies and without formal policy
changes. While prior research has theorized about both positive and negative radical flank
effects, little empirical work has examined the latter, nor the conditions that lead to one effect
over the other. I argue that regulatory discretion—that is, the freedom that regulatory agencies
have to interpret and implement public policies—creates a political opportunity structure which
has a differential effect on the radical flank. I test this empirically using data on the approval of
new facilities in the U.S. hydroelectric power sector.
This chapter makes several contributions to the literature at the intersection of institutions
and entrepreneurship. First, this study enhances our understanding of the effect of multiple,
simultaneous movement tactics on firm entry. The management literature generally does not
distinguish between different types of activists or examine multiple simultaneous tactics (Eesley,
DeCelles & Lenox, 2016). By looking directly at how multiple tactics interact, this study
answers calls to pay closer attention to the interdependencies between movement tactics and
explore how the connections between movement tactics can drive systemic change (Banaszak &
Ondercin, 2016; Baron, Neale & Rao, 2016; Wang & Soule, 2016).
Second, I add to a burgeoning literature that explores how social movements use the state
as a fulcrum to affect firm outcomes without changing formal policy. Relatively few studies have

70

examined how social movements use the state to affect other targets (Amenta et al., 2010; Baron
& Diemeier, 2007; Hiatt, Grandy & Lee, 2015). Fewer still have examined how social
movements target regulatory agencies to affect firm entry (Hiatt & Park, 2013). By placing the
regulatory agency center stage, I seek to enhance our understanding of how activists affect
change in firms via the state.
THEORY AND HYPOTHESES

Social Movements’ Tactical Repertoires

The role of social movement organizations in affecting social or environmental
sustainability related changes in firms is increasingly of interest to management scholars. When
movements oppose firms’ activities based on social or environmental concerns, they typically
engage in activism aimed at drawing the attention and influence of firm management, public
policy makers, consumers and the general public. Social movement organizations have a variety
of tactics at their disposal including: cultural expressions like performance art, films and music;
moderate political strategies such as lobbying and petitioning; confrontational and disruptive
tactics such as protests or strikes; and much more radical and violent tactics that cause direct
economic damage or loss of life (such as eco-terrorism) (Taylor & Van Dyke, 2004). So central
are social movements tactics to their identity that movements are often remembered more for
their tactics than their goals (Wilson, 1973).
Social movements engage in these tactics because conventional market or institutional
channels of change are often closed off to them. They lack a direct voice in corporate decision
making because they lack substantive control of shareholder wealth (King, 2008) and some
corporate targets are simply unsusceptible to conventional market influence, leading activists to

71

engage in non-market tactics (Baron, 2005). Activists also often have less access to and influence
over policy makers than corporate interests (McAdam & Snow, 1997).
The management literature largely categorizes social movements’ tactical repertoires into
two broad categories: public politics and private politics (Baron, 2001, 2005; King and Pearce,
2010, Reid & Toffel, 2009). Public politics refers to social movement tactics which seek to
leverage the state to exert coercive and economic influence on firms (Amenta, Caren & Olazky,
2005, Olzak and Soule 2009). These tactics are aimed at public institutions, including: elected
officials, through lobbying and congressional testimony; regulatory agencies, through petitions
or public comments; or the courts through lawsuits. Public politics can be effective because
government policies significantly effect industry structure and resource flows by changing the
distribution of opportunities and constraints for different kinds of firms (Wade, Swaminathan &
Saxon, 1998; Wholey & Sanchez, 1991). Regulations may also have a normative influence since
regulations both shape and reflect societal beliefs about how firms should behave (Russo, 2001;
Sine & Lee, 2007).
Private politics, on the other hand, refers to social movement tactics that don’t rely on the
law or government, but instead directly target firms by influencing public sentiment (Baron,
2001). These tactics aim to make salient and call public attention to social or environmental
problems through actions such as protests, rallies, sit-ins, strikes, and boycotts to ultimately
cause economic damage to firms via consumer behavior. Private politics can be effective to the
extent that they create a credible threat to a firm’s image and reputation which can impede
hiring, make it more difficult to attract capital and decrease sales revenue (Baron 2003; Bartley
& Child, 2011). These tactics may also threaten the moral authority or legitimacy of the targets
which limits access to institutional resources that enhance competitiveness (King, 2008)

72

A small but significant body of research on public and private politics illustrates the
impact of public and private politics tactics on firms. For instance, in the realm of public politics,
lobbying and congressional testimony have been found to cause changes in firms’ environmental
accounting practices and technology adoption by creating uncertainty about potential regulation
(Baron & Diermeier, 2007; Hiatt et al., 2015; Reid & Toffel, 2009). In terms of private politics
tactics, other studies have shown how activist protests can negatively affect a firm’s stock price
(King & Soule, 2007) and media-covered boycotts make firms more likely to concede to
movement demands (King 2008). Protests have been found to result in firm responses that vary
from symbolic, such as making prosocial claims or framing activities as consistent with
movement goals (Hiatt et al., 2015; McDonnell & King, 2013), to concession to movement
demands (Briscoe and Safford 2008; Eesley & Lenox, 2006).
However, despite increasing scholarly interest in the effects of social movement
organizations’ tactical repertoires on firms, few studies have examined the effect of multiple
consecutive or simultaneous tactics (Baron & Diermeier, 2007). Some studies find spillover
effects between consecutive public and private politics tactics that increased the likelihood that
firms would acquiesce to movement demands (Reid & Toffel; 2009) and some recent research
has suggested that simultaneous public and private politics tactics may lead to radical flank
effects. For instance, when the Rainforest Action Network, a more radical environmental group,
targeted Staples with protests and a consumer boycott for purchasing from companies that
caused deforestation in Indonesia, the company decided to cooperate with the Environmental
Defense Fund, a more moderate group who was viewed as a more acceptable partner (Barnett &
Hoffman, 2008; Baron, Neale & Rao, 2016). In another study, when radical activist tactics were

73

introduced to firms already under pressure from moderate tactics, firms were found to be less
likely to concede to the demands made through radical tactics (Hiatt et al., 2015).
Positive and Negative Radical Flank Effects

The concept of a radical flank effect has its roots in sociological literature on the civil
rights movement which observed that larger social movements often divide into multiple factions
ranging from moderate to radical, yet sociologists had neglected to examine how these multiple
factions altered the ability of the larger movement to achieve its goals (Haines, 1984). In the
context of the civil rights movement, the National Association for the Advancement of Colored
People (NAACP) functioned as a moderate group whose primary tactics were legal and political.
Eventually, more radical factions emerged, including the Black Panther Party whose tactics were
distinctly more militant. Thus, this literature began to question: did the emergence of radicals
make it easier or more difficult for moderates to accomplish their goals?
This literature theorizes both a positive and a negative radical flank effect. Prior to
Haines’ (1984, 1988) seminal work in this area, the prevailing view was that the legitimacy of
moderates would be undermined when both radical and moderate factions coexisted within a
larger social movement. Radicals would discredit movement activities and goals and weaken the
ability of moderates to gain resources and legitimacy from sympathetic third parties. This
became known as the negative radical flank effect: the coexistence of radicals and moderates in a
social movement will inhibit the ability of moderates to attract resources and cede their position
to radicals who more easily attract public attention (Haines, 1984; Gupta, 2002).
The positive radical flank effect, on the other hand, suggests that the position of
moderates is enhanced by the presence of more radical factions within a broader social

74

movement (Haines, 1988; Schock, 2013). There are two possible, non-mutually exclusive,
explanations for this. First, because radicals’ tactics are extreme and sometimes violent, or
because they advocate for politically unpalatable changes, they are perceived by both the targets
of activism and third parties (such as the media, the general public, or the state) as particularly
threatening (Gupta, 2002). Hence, radicals may provide a foil against which moderates are
viewed as more reasonable. While targets would prefer not to concede to moderates, they do so
to preempt potentially more radical concessions should radical tactics succeed. Second, through
their tactics, radicals can spawn crises which moderates then resolve through their own more
restrained tactics (Haines, 1984). For instance, violent attacks (armed attacks, riots and
bombings) during contentious politic al uprisings in Latin America were not effective at
achieving movement goals, but helped moderates’ strikes and non-violent occupations succeed
(Franklin 2009).
While both positive and negative effects have been theorized, the preponderance of
literature on the subject has focused on the former. Haines’ seminal works on the subject (1984,
1989) find evidence that the presence of radical civil rights groups caused increased monetary
contributions to moderate groups like the NAACP, primarily from elite white organizations who
were increasingly worried about radical groups’ tactics and who became “enlightened” about
civil rights issues by the crises that unfolded from riots and other violent tactics. More recent
research also finds evidence of a positive radical flank effect: strong opposition to a radical
group led Texas lawmakers to make legal concessions to a more moderate group which led to a
sequence of policy changes in line with movement goals (McCammon, Bergener & Arch, 2015).
In the management literature, an examination of different occupational groups within a car-
sharing startup finds that when facing threats from radical members of a challenger occupational

75

group, moderate members of the dominant occupational group were more likely to collaborate
with other moderates within the challenger group (Truelove & Kelogg, 2016). Similarly, Baron
and colleagues (2016) in a lab experiment find that cooperation with moderate activists provides
corporate targets with a shield against radical activists.
While empirical research provides evidence of a positive radical flank effect, there is
limited empirical support for a negative effect. This is somewhat surprising, as early theorizing
conceived of radical flank effects as exclusively negative—based on observations that moderate
activists feared that radical activists would create a backlash against the movement’s activities
and goals (Haines, 1984). The notion of a positive effect wasn’t introduced until much later.
Only a few notable studies have found empirical support for a negative radical flank effect. An
examination of animal rights activism in the UK finds that moderates were tainted with the same
brush as radicals by the media (Munro, 2005). Similarly, the reputation of Earth First, an
environmental group, was damaged when former radical animal liberation activists joined the
group (Wall, 1999). Finally, a study of religious nationalists in Israel found that the inclusion of
radical religious activists squeezed moderate activists out of the movement, leading to further
radicalization (Shelef & Shelef, 2013).
Limited empirical support for a negative radical flank effect may be due to inattention to
institutional features that create opportunities for such effects to occur. A potentially important
institutional feature is the discretion of regulatory agencies. As discussed in the previous chapter,
regulatory discretion refers to the freedom that state regulatory agencies have to interpret and
implement the laws created by elected officials. The amount of discretion that regulatory
agencies have may be an overlooked feature of the institutional environment that differentially
affects movement tactics, resulting in either positive or negative radical flank effects.

76

Political Opportunity Structures

Political opportunity structures are the constraints, possibilities and threats that are
external to social movements, but which affect the strategic repertoires available to them and
their ability to achieve their collective interests and goals (Koopmans, 1999). Political
opportunity structure theory was developed to explain why seemingly similar social movement
organizations developed differently and enjoyed different levels of success (Meyer, 2004). The
term first appears in the literature in Eisinger’s (1973) study which sought to add theoretical
rigor to analysis of the external environment in which social movements operated, and to identify
factors which increased the likelihood of success of citizens’ political activities. Subsequent
studies examined a number of political variables, such as local political institutional capacity,
electoral instability and sponsorship by external political organizations (Jenkin & Perrow, 1977;
Lieske, 1978; Piven & Cloward, 1977). Seminal work by McAdam (1982) and Kitschelt (1986)
further developed the concept to include a process model that moved beyond compiling a list of
the effects of specific environmental variables on social movement activity. These authors
argued that political opportunity structure theory lacked a widely accepted typology, was
inadequate to investigate the diverse phenomena surrounding social movement activity, and did
not adequately distinguish between organizational forms. They emphasized the importance of
several key processes that enabled or constrained the ability of social movements to achieve their
goals. These included the policy cycle,
8
mobilization structures that provide access points for
social movement activism to be included in the policymaking process, and the state’s capacity
for institutional change. Moving to a process-oriented theory broadened the theoretical scope of

8
i.e. the stages of policy development from agenda setting to implementation—see Kingdon (2003)

77

political opportunity structure research to be capable of evaluating the diversity of phenomena
and organizations related to social movement activism.
Early work on political opportunity structures conceived of political constraints,
possibilities and threats very broadly to include the political system, societal moods, economic
conditions, cultural narratives, and the behavior of the public, firms, and other supporting social
movements or counter-movements (Kitschelt, 1986; Meyer & Staggenborg, 1996). Because of
this broad notion, many scholars warn that the vague definition and broad applicability
diminished the utility of the concept (Einwohner, 1999; Goldstone, 2004; Koopmans, 1999;
Meyer, 2004; Meyer & Minkoff, 2004). Some critics went so far as to lament, “The concept of
political opportunity structure is… in danger of becoming a sponge that soaks up every aspect of
the social movement environment” (Gamson & Meyer 1996, p. 275) and that “Political
opportunity may be discerned along so many directions and in so many ways that it is less a
variable than a cluster of variables…” (Tarrow, 1988, p. 430). Perhaps as a result, many studies
began to differentiate themselves by focusing more narrowly on individual elements of social
movements’ external environment, defining the opportunity structures accordingly. Thus,
attention to cultural variables of social movements’ external environment led to the study of
cultural opportunity structures. This field focus heavily on the distribution of meaning in society,
including shared framing, language and repertoires (Koopmans, 1999; Halgrimsdottir & Benoit,
2007). Similarly, research on a more micro-scale examines social and psychological variables
affecting social movement activism under the umbrella of social opportunity structures. This
field is primarily concerned with information exchange, linguistic framing, social networks,
behavioral incentives and communication between social actors (Leifield & Schneider, 2012;
Yanitsky, 2012). Additionally, studies focusing issues and policies relevant to women have given

78

rise to the concept of gendered opportunity structures (McCammon, Campbell, Granberg &
Mowery, 2001). Research in this area examines how public and legislative changes in attitudes
towards women facilitated the passage of laws and policies surrounding the role and rights of
women in society (Soule & Olzak, 2004).
In the management literature, a small number of studies have begun to focus on the
attributes of firms that made them more or less susceptible to social movement activism as part
of a corporate opportunity structure (McDonnell, King & Soule, 2015; Soule, 2009). When
considering to target firms with activism, social movements must determine whether their effort
and risk will pay off, and if they do, will they be resisted and punished (Briscoe, Chin &
Hambrick, 2014). Firms vary in their willingness and ability to respond to movement demands;
for instance, established firms often have a strong interest in maintaining the status quo, so they
will resist movement tactics and actively suppress or evade movement demands (Fligstein &
McAdam, 2011). Young and less resource rich firms, on the other hand, may be more susceptible
to movement demands because they lack the resources, capabilities and legitimacy to resist. In
addition, some firms may embrace activism or act as activists themselves depending on the
nature of their vested interests. For example, McDonnell (2015) found that firms who collaborate
with movement activists are able to co-opt movements and their allies and thereby reduce future
activism against the firm. Hence, scholars of corporate opportunity structures seek to identify the
corporate features that signal vulnerabilities or opportunities, and which trigger activist behaviors
toward firms.
Regardless of the specific type of opportunity structure, the mechanisms are similar.
Elements of social movements’ external environment present opportunities, threats, constraints,
and vulnerabilities to movement activism. Regardless of the focal structure, they influence

79

activists by shaping their perceptions of whether, when and which decision makers are receptive
to their demands (Briscoe et al., 2014). Along these lines, activists periodically scan their
environment for changes in opportunities and assess whether to mobilize and to make decisions
about participation, support and leadership based on their perceived odds of success (Gamson &
Meyer, 1996; Meyer & Minkoff, 2004).
In terms of political opportunity structures, while early work conceived of constraints,
possibilities and threats very broadly, more recent research views them as derived more narrowly
from political institutions and the relationships between political actors (Wahlstrom & Peterson,
2006). Within this more limited view of political opportunity structures, several important
attributes have been identified, including the relative openness or closure of the political system
to social movement influence, the stability of power relationships between political elites
(primarily political parties), and the government’s capacity and propensity to repress activism, all
of which can have a profound influence on the ability of social movements to achieve their goals
(McAdam, 1996). Thus, not all the variation in collective action can be explained by the
strategies and resources available to social movement activists; at least some may be explained
by political opportunity structures.
Much of the initial research viewed political opportunity structures as the effect of static
institutional variables associated with government structures. For example, research on the anti-
nuclear movement found that social movement strategies were largely determined by relatively
static structures, such as the number of political parties, and government capacity to develop and
implement public policies (Kitschelt, 1986). Similarly, research found that the environmental
movement’s success across countries was largely determined by the centralization or
concentration of political power and the nature of the electoral system (e.g. proportional

80

representation vs. winner-take-all) (Van Der Heijden, 1997). Consequently, political opportunity
structures were viewed less as a theoretical construct and more as a set of inert structures that
explained why certain movement tactics worked in some settings but not in others (Meyer,
2004).
More recent research on organizational impacts of movement activists, however, views
the relevant aspects of the political opportunity structure as pertaining more to the nature and
diversity of activists as well as the particular issues with which they are concerned (Meyer &
Staggenborg, 1996; Sawyers & Meyer, 1999). Under this view, social movements are seen as
powerful actors capable of modifying political opportunity structures to affect changes in the
institutional environment (Meyer & Minkoff, 2004). Research on Palestinian activists, for
instance, found that collective framing of structural events—in this case, occupation by Israeli
soldiers—helped create new structural conditions that enabled uprisings (Alimi, Gamson &
Ryan, 2006). Other research illustrates how activist efforts to shape the institutional environment
can foreclose opportunities and create constraints even when larger structural conditions are
favorable: the Czech environmental movement inadvertently changed a favorable political
opportunity structure to an unfavorable structure when leadership changed tactics, fragmenting
the movement’s identity (Shriver & Adams, 2013). Work on competing social movements finds
that while political opportunity structures can trigger both movements and counter movements,
the dynamic interactions of competing movements affects the nature of political opportunities by
changing collective action frames—a mechanism by which movements identify sources of their
problems and develop methods to address their concerns—that shift policy and policymaking
discussions (Meyer & Staggenborg, 1996). Similarly, work on women’s rights activists in Latin
America highlights their informal and non-traditional power to create collective action frames

81

that shape political opportunity structures (Noonan, 1995). Movement-countermovement
dynamics also affect political opportunities by creating crises that give rise to institutional
change (Andrews, 2002). Hence, although early work considered political opportunity structures
to be relatively fixed and external to social movements, evidence suggests that activists can play
a role in constructing possibilities, threats and constraints from within a larger, more static
structure.
The Role of Regulatory Discretion

Despite more recent research taking One way to harmonize the static and dynamic
perspectives of political opportunity structures may be to consider the diversity of institutional
actors within the state: in the U.S., for instance, there are elected officials in upper and lower
houses and the executive, regulatory agency bureaucrats, and judicial officials (Walker, Martin
& McCarthy, 2008). Each of these actors has their own set of institutional logics and incentives
to which external stakeholders can appeal. For example, elected officials are chiefly motivated
by their desire for re-election (McCubbins, Noll & Winegast, 1987), whereas regulatory agency
bureaucrats are often motived by a public service logic to further the common good and improve
societal welfare (Crewson, 1997; Perry & Hondeghem, 2008) and the desire to maintain agency
budgets and independence (Skocpol, 1985). Hence, while broader institutional structures may
remain relatively static, the differences between institutional actors within those structures may
create some fluidity in the way policies are implemented, thereby affecting the political
opportunity structures relevant to movement activism. This broadens the notion of political elites
in prior literature on political opportunity structures to include not just members of different
political parties but also regulatory agency officials. Furthermore, a political environment with
multiple institutional actors may allow movement activists to shape political opportunity

82

structures by taking advantage of the differences between actors, for example, by framing
regulatory decisions and decision making in ways that remove constraints and create new
possibilities for action.
In regulated markets, social movement activists can affect firm entry by seeking to
influence the licensing process, obstruct permitting, or directly affect firm entry and exit rules
(Aldrich & Ruef, 2006). Because it is primarily regulatory agencies who oversee and implement
these entry requirements, I suggest that regulatory discretion is a key factor that enables social
movements to shape the institutional environment and affect firm entry. Greater regulatory
discretion allows regulators to rely on their own judgment, organizational norms, values and
institutional logics when making decisions. Thus, they are more accountable for regulatory
decisions, their outcomes and how they’re perceived by relevant third parties. Less discretion, on
the other hand, suggests that regulators make regulatory decisions based primarily on the
directives of formal policies crafted by elected officials, and therefore are less accountable for
their decisions. This difference allows movement activists to threaten regulators because
agencies who have discretion would prefer to keep it (Huber & Shipan, 2002; McCubbins et al.,
1987). Furthermore, the success of regulatory agencies depends, in part, on their reputation for
capable execution of their regulatory duties (Carpenter, 2010; Gilad & Yogev, 2012). If activists
can credibly threaten their discretion and agency reputation, it can create a more favorable
political opportunity structure for activists to achieve their goals of impeding the ability socially
or environmentally harmful firms from entering the market.
In terms of the radical flank, variation in regulatory discretion may allow activists to
shape the political opportunity structures that lead to either positive or negative radical flank
effects. Greater discretion augments the ability of social movement activists impede entry in

83

several ways. First, activists may directly call into question the legitimacy and reputation of
regulators. If movement activists disapprove of a potential regulatory outcome, they can leverage
their organizing and mobilizing capabilities to challenge the legitimacy regulatory decisions
(Hiatt & Park, 2013; Trumbull, 2012). For instance, when the Federal Communications
Commission (FCC) was considering loosening net-neutrality rules, activists sought to tarnish the
agency’s reputation by highlighting the FCC Chairman’s ties to lobbyists and accused
commissioners of being industry shills.
9
In addition, by framing pending regulatory decisions as
harmful and politicizing regulatory decisions, activists can make regulatory agencies seem less
independent, professional, and competent (Peretti, 2004). Second, activists may indirectly call
into question the legitimacy and reputation of regulators by questioning their ability to manifest
the values of their public service logic. Objections to potential regulatory decisions are often
based on concerns about social or environmental issues, which appeal to regulatory agencies’
institutional logic of public service. As such, questioning an agency’s ability embody this logic
and prevent socially and environmentally harmful activities through its regulatory decisions may
both damage its reputation and its ability to effectively carry out its duties. Finally, social
movement activism can draw the attention of the elected bodies who oversee regulatory agencies
and who are in control of important resources, such as agency budgets (Olson, 1997; Carpenter,
2004; 2010). Consequently, elected officials may more closely monitor regulatory agency
decision making. Given that regulatory agencies seek to maximize their resources and autonomy,
this is an important concern (Skocpol, 1985).
These mechanisms would suggest that greater regulatory discretion would lead to a
positive radical flank effect. While moderate social movement tactics targeted at regulators, such

9
https://www.theatlantic.com/politics/archive/2015/02/how-a-ragtag-band-of-activists-won-the-battle-for-net-
neutrality/456606/

84

as lawsuits, formal complaints on regulatory filings or objections during the public comments
period of regulatory hearings, might sway regulatory decision making, they may be insufficient
alone. Indeed, empirical evidence on this subject is mixed, and it is unclear whether social
movements are the causes or consequences of institutional change (Burstein & Linton, 2002;
Soule, McAdam, McCarthy & Su, 1999). Some studies find a positive effect (Wade,
Swaminathan & Saxon, 1998; Hiatt, Sine & Tolbert, 2009) while others find the use of activist
tactics to have little or no effect on regulatory outcomes (McCammon et al., 2001; Olzak &
Soule, 2009). The presence of a radical flank may be one factor that may explain these
inconsistent results. Regulatory agencies facing moderate tactics will be more likely to acquiesce
to movement demands when radical tactics, such as protests, draw increased public attention to
regulatory decisions, threatening agency legitimacy, reputation and autonomy.
Hypothesis 1: Greater regulatory discretion will be associated with a positive radical
flank effect: the introduction of radical social movement tactics to moderate tactics will
lead to decreased firm entry.
On the other hand, a lack of regulatory discretion may lead to a negative radical flank
effect.
10
When there is no regulatory discretion, regulatory agencies make their rulings per what
formal policies, crafted by elected officials, dictate. Elected officials, however, are less
vulnerable to reputational damage from social movement tactics: they are concerned for their
reputation only to the extent that it affects their probability of re-election. Given that movement
activists generally only represent a small part of the electorate, and that many other factors
contribute to the likelihood of re-election including corporate political contributions to election

10
It’s important to note that the absence of a positive radical flank effect does not imply the presence of a
negative radical flank effect. It’s possible that neither effect could occur, or that radical and moderate tactics could
be effective individually, or not at all.

85

campaigns, social movement activism has a much weaker effect on elected officials. Hence, a
lack of regulatory discretion limits the ability of social movement activists to shape political
opportunity structures because they have little power to threaten elected officials. Without
discretion, political opportunity structures become relatively static features of social movements’
institutional environment.
Radical social movement tactics are also likely to be ineffective when there’s an absence
of discretion. Indeed, prior research has illustrated that radical tactics in particular seem to have
little direct effect on elected officials (Burstein & Linton, 2002; McCammon, Campbell,
Granberg, & Mowery, 2001; Soule, McAdam, McCarthy & Su, 1999).
11
Elected officials may be
especially unreceptive to radical tactics because they are seen as challenges from outside the
political system, whereas moderate tactics, such as lobbying or congressional testimony, are seen
as actions from within the political system (Zald, 2000). Radical tactics might actually act to
discourage elected officials from considering the demands of activists delivered via moderate
tactics because they provide elected officials with easy cover for dismissing the demands of both
radicals and moderates by portraying all activists as extra-institutional extremists. Moderates
become tarred with the same brush as radicals, leading to a negative radical flank effect. Thus, in
the absence of discretion, regulatory agencies, who rule according to the formal policies of
elected officials, will pay less attention to moderate tactics when radical tactics are introduced,
and this should have a positive effect on firm entry.

11
A notable exception would be at the very early stages of the policy-making process where protest may draw
attention to issues so that they end up on the policy-making agenda (e.g. see King, Bentele & Soule, 2007).

86

Hypothesis 2: A lack of regulatory discretion will be associated with a negative radical
flank effect: the introduction of radical social movement tactics to moderate tactics will
lead to increased firm entry.
Moderating Effect of the Public Sentiment Towards Social Movement Activism

Studies have shown that the level of social movement activism varies significantly by
region (Dalton, 2005) and this can have a significant effect on firms. For example, higher levels
of social movement organization have been associated with more corporate social responsibility
practices (Delmas & Toffel, 2004; Maxwell, Lyon & Hackett, 2000) and voluntary reductions in
environmentally harmful emissions (Welch, Mazur, & Bretschneider, 2000). Research has also
found that while social movement tactics target relatively few firms, higher levels of activism
can cause their impact to spillover to non-targeted firms resulting in widespread diffusion of
movement goals (Briscoe, Gupta & Anner, 2015).
Public sentiment towards social movement activism and goals may affect both the
positive and negative radical flank effects. In the case of a positive radical flank effect, favorable
public sentiment towards social movement activism within a regulatory agency’s jurisdiction
may make radicals seem relatively less radical. Thus, this should weaken the positive radical
flank effect because without a radical foil against which moderates’ tactics seem more
reasonable, the moderates’ position isn’t improved. Similarly, it should weaken the negative
radical flank effect because if radicals aren’t seen as very radical, it harms moderates very little
to be tarred with the same brush.

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Hypothesis 3: More favorable public sentiment towards social movement activism within
regulatory jurisdiction will a) negatively moderate positive radical flank effect and b)
negatively moderate negative radical flank effect on entry.
Moderating Effect of Corporate Political Contributions

In regulated markets, firms often attempt to influence policymakers with financial
incentives such as campaign contributions and financial support for political action committees
(Werner, 2012). Prior research in the strategic management literature has found that corporate
political contributions can be an effective means of gaining an advantage in regulated markets
(Bonardi, Holburn & Vanden Bergh, 2006; Ridge, Ingram & Hill, 2016). I suggest that corporate
political contributions may influence the radical flank because greater corporate political
contributions give firms greater access to policy makers, to whom they may to paint radicals as
more dangerous. This can help firms protect their interests; for example, in the 1980s,
corporations vilified radical activists as ‘ecoterrorists’ during Congressional testimonies in order
to stifle social movement activism which opposed environmentally harmful corporate practices
(Smith, 2008). In the case of a negative radical flank, this may enhance the effect: by portraying
radicals as more dangerous, extreme or disruptive, moderates may also be harmed if they are
tarred with the same brush as radicals. In the aforementioned study, branding radicals as
terrorists eventually led to Federal investigations into moderate environmental groups on
suspicion of having direct ties with radicals (Smith, 2008). It may also enhance the positive
radical flank effect because if radicals are viewed as more extreme, acquiescing to moderates
becomes even more appealing.
Hypothesis 4: corporate political contributions will a) positively moderate the positive
radical flank effect and b) positively moderate the negative radical flank effect.

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EMPIRICAL CONTEXT

Like the preceding chapter, the empirical context of this study is the U.S. hydroelectric
power sector from 1978-2014. Hydroelectric power is the largest source of renewable electricity
in the U.S. (USEIA, 2011) and employs over 300,000 people (NHA, 2010)
.
The U.S. is also one
of the largest producers of hydroelectric power in the world, behind China, Canada and Brazil
(USEIA, 2011). Although hydropower is most frequently associated with very large dams, not all
hydropower facilities use dams and not all dams produce electricity: in the United States, only
about 3 percent of all dams produce electricity (USDOE, 2014). Other types of hydropower
facilities include ‘diversions’ (also known as run-of-river) which channel just a portion of a
river’s water through a canal which contains a turbine to generate electricity, ‘pumped storage’
which utilizes an upper reservoir to store kinetic energy during non-peak load times, and tidal
generators which use the rising and falling of the ocean tides to drive turbines near the ocean
floor. The Department of Energy also classifies hydropower facilities by size (large, small, and
micro) in terms of the amount of electricity they are capable of generating (USDOE, 2014). The
majority of new hydroelectric license applications during the study period were for non-dam
facilities in the small or micro classification.
The Federal Energy Regulatory Commission (FERC) regulates all non-federally-owned
or -operated hydropower facilities in the US. In order to limit private exploitation of public
rivers, FERC grants utilities 30–50 year licenses, and is mandated to give equal consideration to
energy and non-energy interests, such as recreational opportunities and environmental quality
(FERC, 2014). Although all hydroelectric facilities must ultimately be granted a license at the
federal level by FERC, individual states have the authority to create their own requirements for
licensing and relicensing (FERC, 2014). Under the Clean Water Act of 1972, states must certify

89

to the federal government that an applicant complies with all state water quality standard before
a license can be granted. This provides states with the authority to affect licensing in two ways:
first, they can indirectly deny a license by withholding certification and second, they can impose
conditions on federal license by placing additional limitations on certification (Copeland, 2015).
Some states such as California take advantage of this power and create additional restrictions on
licensing, while others such as Texas specifically craft legislation to prevent regulators from
creating restrictions greater than applicable federal requirements. This creates significant
variation across states in the discretion that regulatory agencies have to interpret and implement
licensing legislation.
The study period begins after the passage of the National Energy Act of 1978. Prior to its
passage, independent energy entrepreneurs were not permitted to sell electricity to the grid.
Instead, electricity was generated by vertically integrated public and private utility companies
that controlled generation and distribution in specified geographic areas. Under section 210 of
the Act, known as the Public Utilities Regulatory Policies Act (PURPA), entrepreneurs were
enabled to construct non-utility facilities from which utility companies were required to purchase
power at the utilities’ generation cost (USDOE, 2015). This created a new market for
independent power producers and resulted in scores of entrepreneurs entering the electricity
sector (Sine, et al., 2005; Sine and Lee, 2009).
Although hydropower is considered a relatively ‘clean’ energy technology because it is
renewable and has no harmful emissions, the founding of hydroelectric facilities is not without
controversy. All types of facilities, but particularly hydroelectric dams, draw concerns for their
impacts on local communities, river ecosystems, and water rights. In the U.S, four main
environmental groups are involved in opposing hydroelectric facilities or promoting reforms to

90

make facilities safer for fish, wildlife and their habitats: Audubon Society, American Rivers,
Ducks Unlimited and Trout Unlimited. These social movements warn that hydroelectric facilities
can have number of negative environmental impacts, including damaging riverbanks and riparian
areas, reducing water quality, preventing fish passage, and directly killing fish in power
generation turbines.
12
Taken together, these impacts can significantly harm bird and fish
populations, possibly leading to extirpation or extinction.
Social movement activists have used a number of public and private politics tactics to
oppose new hydroelectric facilities. At the federal level, activists lobbied Congress to strengthen
the Clean Water Act, and FERC to ensure that it is strictly enforced, especially with regard to the
protection of wetlands (Kosnik, 2010). At the state level, activists provided technical information
to regulators and the general public. They have also mobilized members to attend public
meetings and provided formal input during the public comment period of the licensing process.
At both the state and federal level, social movements have utilized the courts to oppose, filing
motions of intervention to further delay or appeal licensing decisions (FERC 2014). Finally,
activists also mobilized to protest new facilities, often calling attention to regulatory agencies’
failures to consider the social and environmental impacts of new facilities (Carmin, 1999);
Sabalow & Doyle, 2015).
METHODS

Data and Measures

My data contains all hydroelectric facility licenses applications and licensees from 1978,
when energy markets in the United States were deregulated allowing entry of independent power

12
http://www.tu.org/conservation/conservation-opportunities/dams; https://www.americanrivers.org/threats-
solutions/energy-development/dams-problem-creators-not-problem-solvers/

91

ventures, through 2014. These data were obtained from FERC’s docket library. During this
period, 525 license applications were submitted by 413 potential licensees. Of these, 91 percent
were licensed and 5 percent were withdrawn or rejected and 4 percent were still awaiting
approval at the end of the study period. The data includes: license application issue, withdrawal,
and rejection dates; operational start-up/shut-down dates; project size (in MWh); facility
location; type (hydroelectric dam, run-of-the-river, or pumped storage); and waterway used.
The FERC docket library contains data on license applications by public and for-profit
firms, cooperative firms, and municipal and tribal governments. The license application process
is identical for both firms and governments; however, governments likely employ qualitatively
different strategies (e.g. they do not lobby with campaign contributions) and have a level of
access to other public agencies that firms do not, therefore I excluded them from the sample.
Only public and private for-profit firms and electric cooperatives were included in the sample.
The firms in the data set range from large multinational corporations to very small partnerships
and individuals applying for small scale hydroelectric licenses. The majority of the firms in the
sample are not publicly-held and, due to the longitudinal nature of the data, many no longer
exist. Therefore, much of the demographic data ordinarily used in this type of analysis was
unavailable for many firms. Information on firm type (public for-profit, private for-profit or
cooperative), founding dates and headquarters location was obtained from firm websites where
possible and supplemented from the OpenCorporates
13
database when firm websites were
unavailable.

13
www.opencorporates.com

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Dependent variable

Regulatory Approval. The dependent variable are license approvals of new hydroelectric
facilities. Regulatory approval allows firms to construct new facilities and enter the hydropower
market. For this study, I consider firm entry to be regulatory approval of new facilities owned by
either new ventures or established firms (de novo or de alio entry).
Predictor variables

Regulatory Discretion. In operationalizing this measure, I borrow a scale from the
political science literature. Specifically, I use a weighted index of various private property rights
acts (PPRAs) by state and year (Hecht, 2004). PPRAs discourage regulations that limit the
owner’s use of private property. They attempt to balance the necessity of some legitimate
regulation with the possibility of excessive government interference in an owner’s ability to use
their private property. In general, PPRAs require that state rule-making agencies evaluate
whether a rule will cause a taking,
14
and to implement safeguards to ensure that agency actions
do not cause this to occur. This serves as a good proxy for discretion, which is often difficult to
measure directly, because it measures the flexibility that regulatory agencies have in interpreting
and implementing public policies (Hecht, 2004; ELI 2013). More PPRAs implies regulatory
agencies are more constrained in implementing laws according to their own judgment. Fewer
PPRAs allow regulatory agencies more flexibility to implement laws without being hindered by
private property considerations. This particular index (from Hecht, 2004) is specific to
environmental policy-making rather than state-wide agency discretion, therefore serves as an

14
A regulatory taking is when a regulatory policy deprives the property holder of economically reasonable use of
the property

93

appropriate measure of discretion for our empirical context.
15
The index distils 20 different
property rights acts, including laws that make lower the threshold for defining a regulatory
taking, the degree to which it affects regulatory agencies and local government decision-making,
and if decisions require external review into a single index that weights rules according to their
severity. The scale ranges from 0 to 100; a high score indicates that the state has little discretion
in preventing property owners from using their property in any way they see fit and a low score
indicates a great deal of flexibility in making regulatory decisions. For purposes of analysis, I
reverse coded this variable.
Radical and Moderate Tactics. To examine the effect of a radical flank, I examine both
radical and moderate tactics used by social movement activists. Following recent studies on
social movement tactics (Hiatt et al., 2015; Walker, Martin & McCarthy. 2008), I suggest that
disruptive and confrontational tactics like protests are more radical than moderate tactics like
formal objections, which follow more conventional channels of access to policy makers. They
also frame their objections differently: radicals frequently call for complete denial of license
applications on the grounds that hydroelectric facilities cause unacceptable environmental
damages;
16
moderates, on the other hand, make demands that require significant modifications to
hydropower projects so that they “protect the non-developmental values of the river” and to
ensure that regulatory “decision and implementation with respect to this project are in the public
interest (FERC, n.d., docket #P-176). Both types of demands can lead to significant delay and/or
denial of facility licenses.

15
This measure is an accepted construct that has been used previously in the economics and political science
literatures.
16
https://www.americanrivers.org/conservation-resource/feds-revoke-operating-license-hydropower-dam-ocmulgee-
river/

94

For radical tactics, I use data on protests against hydroelectric facilities that were reported
in local and national U.S. newspapers using the Lexis-Nexis and ProQuest newspaper databases.
Often, protest events are not tied to a particular firm or facility, but more generally target a type
of firm, activity or facility (Yue, Rao & Ingram, 2013). In the case of hydroelectric facility
protests, many events are not tied to specific facilities, but are actions against any facilities on the
waterway in which one or more facilities are located. Even if protests are targeted at a specific
facility, the impact of the protest may spillover to other facilities, especially when located on the
same waterway. Hence, I consider a given facility license application to be affected by protests if
any protest related to the waterway on which the facility is located has occurred in the past two
years. By these criteria, I identified 36 relevant protest events that potentially impacted 105
license applications. For moderate tactics, I use a count of formal objections made during the
public comments period of a new facility license application. During public comment periods,
legislators and/or regulators seek public input into proposed legislation, permitting or licensing
(Yackee, 2006). In the context of hydroelectric facility licensing, the comment period allows
concerned individuals, groups or political entities the ability to express their preferences,
concerns, and suggested changes to license applications. These were obtained from regulatory
filings in FERC’s docket library.
Public Sentiment Towards Social Movement Activism. I measure public sentiment
towards social movement activism in a state via the League of Conservation Voters Scorecard
(LCV) which scores annually the pro- or anti-environmental sentiment in U.S. state legislatures.
LCV scores are on a scale of 0 to 100, calculated by dividing the number of pro-environmental
votes cast by the total number of environmentally relevant votes. This is consistent with prior
research which has used this measure as a proxy for community-level pro-environmental

95

pressures (Delmas & Toffel, 2008; Doshi, Dowel & Toffel, 2013). While other data, such as
membership levels of social movement organizations within the state might provide more direct
measures of public sentiment towards social movement activity, such data are not available over
the entire study period, whereas LCV scores are available.
Corporate Political Contributions. To examine corporate attempts to influence the
license process, I use data on financial contributions from the National Institute on Money in
State Politics,
17
a non-partisan non-profit organization which collects comprehensive lobbyist
and other information from government disclosure agencies. This database provides annual
financial contributions to state-level legislators. The data includes lobbying and financial
contributions from 1990 through 2014.
Control Variables

I use several control variables in this analysis. At the firm-level I control for firm type
(coded as a categorical variable: zero for public for-profit firms, I for private for-profit firms and
2 for cooperatives). As a proxy for firm size, I use the total size of all electric facilities (measured
in MWh). These data were obtained from the FERC docket library and from the Energy
Information Administration database.
I also control for specific characteristics of the state and its regulatory environment. I
control for the dominant political party at state-level upper (senate party) and lower houses
(house party) as well as the governor (governor party). Controls for state population and per
capita gross state product are also included. The state hydroelectric potential, average

17
http://www.followthemoney.org/

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commercial energy price and the number of hydroelectric specific energy incentives for each
state are also controlled for.
Finally, I control for formal objections made by incumbents (incumbent objections) and
by others (other objections) including various state and federal regulatory agencies with shared
responsibility for waterway protection (e.g. state Fish and Wildlife departments, EPA). I
obtained detailed information on all formal objections from FERC’s docket library.
Analysis

For this study, I use a pooled cross-sectional logistic regression, consistent with prior
research (Fiss and Zajac, 2004). This regression estimates discrete-time proportional odds model
analogous to a Cox proportional hazard model. Unlike the Cox model, however, it does not make
assumptions about the exact timing of the event, only that an event occurred during a given
interval (Yamaguchi, 1991). I tested for multicollinearity and found that all variance inflation
factors in the analysis were less than 5 and the majority were near 1, suggesting an acceptable
level of multicollinearity.
RESULTS

Descriptive statistics and bivariate correlations appear in Table 1 and the results of the
logistic regression models appear in Table 2. Model 1 of Table 2 shows the effect of control
variables only Model 2 adds formal objections and protests. Model 3 adds the interaction
between formal objections and protests to test Hypothesis 1. This analysis was conducted only
for those state-years in which regulatory discretion was above the mean value. Model 4 tests
Hypothesis 2 and analysis was conducted only for those state-years in which regulatory
discretion was below the mean. Models 5 and 6 add interactions with LCV scores to test
Hypotheses 3a and b respectively. Model 7 and 8 add interactions with corporate political

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contributions to test Hypotheses 4a and b respectively. Analyses for Hypotheses 4a/b are limited
to the years for which corporate political contributions data are available (1990-2014). All
models include state fixed effects and robust standard errors. Using fixed effects models caused
21 states to be eliminated due to lack of variation. The variable state hydroelectric potential was
also dropped due to lack of variation.
In several models, the type of firm applying for a license was significant; this result
suggests that publicly held corporations are more likely to be granted a license. Firm size is
significant in several models but the coefficient is very small. Objections by other regulatory
agencies had a negative effect on the likelihood of licensing in several models, as would be
expected. Per capita gross state product and state population had a positive and significant effect
on the probability of licensing, as would be expected: wealthier more populous states likely have
higher demand for energy. Energy price and energy incentives were also significant in some
models, as was executive party. Surprisingly, objections by incumbent firms had no effect on
licensing.
Positive and Negative Radical Flank Effects

The results provide support for Hypothesis 1 which predicts that regulatory discretion
creates a political opportunity that supports a positive radical flank effect. Model 3 shows that
when regulatory discretion is above the mean, neither the moderate tactic of formal objections to
license applications nor the radical tactic of activist protests alone had a significant effect on the
likelihood of license approval. However, when the tactics were interacted they had a negative
and significant effect: the interaction reduced the likelihood of licensing by over 90%. The
results also offered moderate support for Hypothesis 2 which predicts that less regulatory

98

discretion creates a political opportunity structure that supports a negative radical flank effect.
Model 4 shows that moderate tactics alone reduce the likelihood of licensing by 46%. Radical
tactics alone have no significant effect. However, when both moderate and radical tactics are
present, the effect on licensing is positive and significant (p=.08): the interaction increased the
likelihood of licensing by 39%. This suggests that when discretion is low, radicals have a
dampening effect on moderate tactics, which is consistent with a negative radical flank effect.
Radical Flank and the Public Sentiment Towards Social Movement Activism

Hypothesis 3a, which suggests that the public sentiment towards social movement
activism will have a negative effect on the positive radical flank effect, is also supported. Model
5 shows that when discretion is above the mean, neither moderate nor radical tactics alone had a
significant effect on licensing. Public sentiment towards social movement activism in the state,
measured via the LCV scores, was negative and significant. More importantly, the interaction of
moderate and radical tactics with public sentiment is positive and significant; however, the effect
size is small: the interaction leads to an increase in the likelihood of obtaining a license of just
2%. Hypothesis 3b, which suggests that public sentiment towards social movement activism will
have a negative effect on the negative radical flank effect is not supported. When discretion is
below the mean, the interaction of moderate and radical tactics with public sentiment had no
significant effect on the likelihood of obtaining a license.
Radical Flank and Corporate Political Contributions

The results do not support Hypothesis 4a or 4b. Models 7 indicates that when discretion
is above the mean and in the absence of corporate political contributions, moderate tactics alone
have a small positive effect on licensing and protests have a negative effect of licensing. The

99

interaction of moderate and radical tactics with corporate political activity had no effect on
licensing. Model 8 indicates that when discretion is below the mean and in the absence of
corporate political contributions, moderate tactics alone have a negative effect on licensing. As
with Model 7, the interaction of moderate and radical tactics with corporate political
contributions had no effect on licensing. A possible explanation for this is that the data on
corporate political activity is relatively thin because it’s only available from 1990-2014. Another
possible explanation is that corporate political contributions is a poor measure of how
corporations paint social movement activism as more radical and dangerous. Future analyses
might test if other measures of corporate political influence, such as testimony before Congress,
provide better results.
Additional Analyses

In addition to logistic regression models, I ran analyses with parametric survival models
with Gompertz, Weibull and exponential distributions. Results held across parametric survival
models for Hypotheses 1, 2 and 3a and b, but would not converge for Hypotheses 4a and b. I also
ran piecewise-constant hazard rate models using 4- and 5-year time intervals and results
remained generally consistent with logistic regressions, but similarly would not converge for
Hypotheses 4a and b. I also attempted regressions with Cox proportional hazards models;
however, Cox models failed to converge.
DISCUSSION

This chapter examines how multiple social movement tactics interact to affect firm entry
in regulated markets. Although the sociological literature has theorized about both positive and
negative radical flank effects, relatively few empirical studies have been conducted. Of the

100

empirical work that has been done, the focus has almost exclusively been on the positive radical
flank effect. Prior studies have also not examined the conditions that might lead to one effect
over the other. In this chapter, I show that regulatory discretion is one such condition. The
amount of discretion granted to regulatory agencies creates a political opportunity structure for
social movement activists that has a differential impact on radical flank effects. The results
suggest that greater amounts of discretion lead to a positive radical flank effect, because it allows
social movement activists to call into question the legitimacy and reputation of regulations and
regulators. Relative to moderate tactics, radical tactics draw more public attention to regulatory
decisions; once radical tactics are introduced, regulators become more likely to acquiesce to
moderates demands. I also show evidence of a negative radical flank effect. When there is no
regulatory discretion, regulatory agencies rule according to what formal policy dictates; thus, the
responsibility for regulatory decisions lies more on the elected officials who craft policy than on
regulators. Elected officials, however, are less vulnerable to reputational damage from social
movement tactics and the presence of radical tactics provides them with an easy way to dismiss
the demands of all activists by tarring moderates with the same brush as radicals. As a
consequence, we see greater firm entry.
I also explore two factors that may moderate radical flank effects: public sentiment
towards social movement activism and goals in a state, and firms’ corporate political
contributions. The findings suggest that public sentiment towards social movement activism has
a slight negative impact on the positive radical flank effect because more favorable public
sentiment towards social movement activism in a region will make radical tactics appear less
radical. Public sentiment towards social movement activism, however, did not have an impact on
the negative radical flank effect. Corporate political contributions also did not have the predicted

101

effect on the radical flank. Corporate political contributions give firms greater access to elected
officials and through this access firms may convince them that radicals are more radical than
they truly are. I theorized that this would positively moderate both the negative and positive
radical flank effects. However, empirical results supported neither prediction.
This chapter makes several contributions to the literature at the intersection of institutions
and entrepreneurship (Eberhart, Eisenhardt & Eesley, 2014; Eesley, Li & Yang, 2016; York,
Hargrave & Pacheco, 2016). First, this study augments our understanding of the effect of
multiple, simultaneous social movement tactics on firm entry. While many studies have explored
the impact of movement tactics on firms, the management literature generally does not
distinguish between different types of activists or examine multiple simultaneous tactics (Eesley,
DeCelles & Lenox, 2016). To remedy this, this study examined how multiple tactics interact and,
in doing so, answered calls to pay closer attention to the interdependencies between movement
tactics and how they affect firms (Banaszak & Ondercin, 2016; Baron, Neale & Rao, 2016;
Wang & Soule, 2016).
Second, I add to a growing body of literature that explores how social movements use the
state as a fulcrum to affect firm outcomes without formal policy change. Relatively few studies
have examined how social movements use the state to affect other targets (Amenta et al., 2010;
Baron & Diemeier, 2007; Hiatt et al., 2015) nor how social movements target regulatory
agencies to affect firms (Hiatt & Park, 2013). This chapter enhances our understanding of how
activists affect changes in firms via the state by looking directly at the role regulatory agencies
play in triggering and patterning social movement activism.
This study provides some practical implications for managers of new ventures, social
movement activists and elected officials. First, it informs managers about how they might better

102

manage their responses to social movement activism in regulated markets and achieve positive
outcomes. While prior research has explored firms’ responses to social movement activist tactics
(Hiatt et al., 2015; McDonnell & King, 2013), few have considered the interplay between
regulatory agencies and social movement activism. This is an important limitation because, as
this study shows, regulatory agencies may play an important role in shaping the political
opportunity structures available to movement activists who seek to impact firm entry.
Understanding how the regulatory environment interacts with social movement activism is
valuable for managers seeking to launch new ventures in regulated markets.
Second, this chapter informs social movement activists of the promise and perils of
dividing movements into factions. While the positive and negative impacts of social movement
activists on organizations has been well studied (Amenta et al., 2010; Bartley & Child, 2011;
Wade, Swaminathan & Saxon, 1998), the political opportunity structures created by regulatory
discretion may alter their effectiveness once the movement has divided into radical and moderate
factions. Moderate and radical factions, therefore, would be wise to coordinate their tactics
according to the character of the institutional environment.
Finally, my results have implications for elected officials. Promoting innovation and
entrepreneurship has become a key element of many state and federal policy agendas. However,
as recent research shows (Hiatt & Carlos, 2017; King & Pearce, 2010; Sine & Lee, 2009) social
movement activism may positively or negatively affect the ability of entrepreneurs to enter new
markets and flourish. Given the role of regulatory discretion in creating the political opportunity
structures that may enhance or diminish the power of social movement activists to affect target
organizations, elected officials may think carefully about the nature of social movement activism
in their state and the amount of discretion they should grant regulatory agencies in order to

103

achieve their policy goals. Therefore, this study has implications for the institutional design of
regulatory agencies and creation of laws governing regulatory discretion over policy
implementation.

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TABLE 1: Descriptive Statistics and Bivariate Correlations

Variable Mean S.D. 11 12 13 14 15
12 Energy Price 6.962 1.300 0.074

13 Energy Incentives 0.561 1.569 -0.042 0.425

14 Executive Party 0.053 0.224 0.076 0.464 0.265

15 House Party 0.097 0.288 0.346 -0.162 -0.064 0.064

16 Senate Party 0.064 0.308 0.167 -0.149 -0.033 0.054 0.783

Variable Mean S.D. 1 2 3 4 5 6 7 8 9 10
1 Objections 0.618 3.191

2 Protests 0.135 0.374 0.005

3 LCV 58.536 29.118 -0.090 0.152

4 Contributions
7711.013 64522.790
0.151 -0.004 -0.039

5 Firm Size 44761.414 146000.000 0.061 0.018 -0.032 0.100

6 Firm Type 1.070 1.130 -0.090 -0.019 -0.043 -0.109 -0.019

7 Firm Age 63.385 44.802 0.062 0.016 -0.012 0.083 0.090 0.214

8 Incumbent Objection 0.174 0.456 -0.025 0.024 -0.037 -0.016 0.002 -0.055 -0.025

9 Other Objection 0.597 0.854 -0.022 0.047 0.124 0.066 0.062 -0.082 0.034 -0.027

10 Gross State Product 0.026 0.012 0.024 0.035 0.114 0.125 0.057 0.004 0.081 0.102 0.127

11 State Population 15.414 1.205 0.018 0.053 0.291 0.061 0.118 -0.098 0.067 0.038 0.126 0.201
12 Energy Price 6.962 1.300 0.068 0.079 0.081 0.140 0.050 -0.004 0.087 0.068 0.124 0.839
13 Energy Incentives 0.561 1.569 0.007 0.103 0.088 0.030 0.049 0.028 0.070 0.015 -0.017 0.453
14 Executive Party 0.053 0.224 -0.008 0.236 0.131 0.048 0.046 0.063 -0.022 0.004 0.026 0.444
15 House Party 0.097 0.288 0.063 0.117 0.385 -0.050 0.081 -0.043 -0.018 -0.032 0.076 -0.079
16 Senate Party 0.064 0.308 0.070 0.070 0.294 -0.025 0.095 -0.048 -0.002 -0.092 0.063 -0.154

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TABLE 2: Pooled Cross-sectional Logistic Regressions
Variables Model 1 Model 2 Model 3 Model 4 Model 5 Model 6 Model 7 Model 8

(discretion
> mean)
(discretion
< mean)
(discretion
> mean)
(discretion
< mean)
(discretion
> mean;
year>1989)
(discretion
< mean;
year>1989)
Formal Objections

-1.384 -0.697 -0.619*** 0.026 -0.641** 0.043** -0.352*

(0.994) (0.857) (0.181) (0.023) (0.254) (0.018) (0.211)
Protests

-2.235 -4.591 -0.040 -1.009 -1.721 -0.780* -0.415

(2.224) (3.403) (0.747) (0.492) (1.796) (0.427) (1.289)
Objections x Protests

-4.173** 0.335* 1.1166 1.136 -0.303 -20.545

(2.019) (0.191) (0.491) (1.423) (0.206) (1223.38)
LCV Scores -0.021** -0.010*
(0.008) (0.006)
Objections x LCV 0.003* 0.000
(0.001) (0.006)
Protests x LCV

0.006 0.021
(0.111) (0.017)
Objections x Protests
x LCV 0.020*** -0.009

(0.007) (0.016)
Contributions

0.000 0.000

(0.000) (0.000)
Objections x Contrib. 0.000 0.000
(0.000) (0.000)
Protests x Contrib. 0.000** -0.013
(0.000) (0.737)
Objections x Protests
x Contrib. 0.000 0.006
(0.000) (6.977)
Firm Size -0.011 -.0123 -0.015*** 0.000* 0.000*** 0.000* 0.000*** 0.000

(0.009) (0.008) (0.005) (0.000) (0.000) (0.000) (0.000) (0.000)
Firm Type -4.841* -4.431 -1.786 0.326*** 0.668* 0.320*** -0.913 0.585**

(2.525) (0.119) (3.019) (0.111) (0.324) (0.111) -(0.316) (0.293)
Firm Age 0.010 -0.011 -0.008 0.000 -0.003 0.001 -0.006 0.004

(0.019) (0.020) (0.021) (0.002) (0.004) (0.002) (0.003) (0.004)
Incumbent Objection 0.078 -0.564 -0.547 -0.038 -0.139 -0.509 -0.013 -1.010**

(0.624) (0.766) (0.713) (0.073) (0.234) (0.360) (0.233) (0.447)
Other Objection -1.215*** -0.580*** 0.018 -0.467 -0.393*** -0.306 -0.496*** -0.408

(0.523) (0.745) (0.730) (0.357) (0.105) (0.214) (0.109) (0.282)
Gross State Product 293.604* 320.917* 373.875* -47.701 -154.64*** -49.059 246.548*** -99.775*

(166.989) (189.355) (227.099) (46.413) (55.052) (46.959) (46.445) (59.782)
State Population 259.390*** 264.846*** 384.732*** -10.065*** 52.328*** -8.904** 31.395*** -10.005***

(86.405) (83.761) (113.658) (2.772) (9.72) (2.953) (6.013) (3.838)
Energy Price -0.381 -0.504 -0.256 0.525*** -0.309** 0.464** -0.469*** 0.640***

(0.326) (0.348) (0.383) (0.184) (0.125) (0.190) (0.116) (0.225)
Energy Incentives -1.111 -0.955 -0.651 0.086 -0.298*** 0.067 -0.247*** 0.068

(0.837) (0.897) (1.097) (0.074) (0.096) (0.075) (0.085) (0.092)
Executive Party -2.225 -0.551 0.769 -0.705*** 0.389 -0.720 0.624 -1.159**

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(1.682) (2.129) (2.970) (0.363) (0.434) (0.501) (0.426) (0.575)
House Party -5.611 -8.308* -4.641 2.266* 1.441 1.970 -0.476 1.579

(4.916) (4.972) (4.953) (1.727) (1.373) (1.292) (1.311) (1.576)
Senate Party 0.588 0.782 1.220 1.005 0.509 1.257 -0.729 1.633

(1.350) (1.367) (1.431) (1.245) (0.942) (1.251) (0.931) (1.409)
Wald Chi-squared 282.30*** 285.40*** 288.19*** 95.75*** 287.39*** 97.50*** 222.79*** 25.52*
Number Observations 1012 1012 1005 442 1005 442 485 197
Fixed Effects YES YES YES YES YES YES YES YES
Robust standard errors in
parentheses

*** p<0.01, ** p<0.05, * p<0.1

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CHAPTER 4
FIGHTING ON TWO FRONTS: MARKET AND NON-MARKET STRATEGIES FOR
ENTREPRENEURIAL ENTRY INTO REGULATED MARKETS

ABSTRACT
Powerful institutional actors—such as elected officials, regulatory agencies and the
courts—affect virtually every business sector. Although many studies have explored how
established firms attempt to influence these institutional actors, few studies have explored the
strategies that entrepreneurs employ to enter and survive in markets with significant regulatory
oversight. This is an important limitation because entrepreneurial firms often face unique
challenges in confronting the institutional environment. New ventures often face high
uncertainty, ambiguous industry structure, asymme trical power relationships with other firms
and suffer from a fluid or unformed organizational identity. As such, entrepreneurs often struggle
to gain legitimacy—a key factor for acquiring financial resources, personnel and customer
goodwill. To address this limitation, this chapter offers a typology of legitimation strategies that
entrepreneurial firms use to enter markets and to engage institutional actors.
Keywords: entrepreneurship, non-market strategy, market entry, legitimacy

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INTRODUCTION

"The next generation of startups are more likely to emerge in industries where government plays
an active role as a regulator and where existing companies maintain close and longstanding
relationships with elected officials. If startups can't handle the coming fights on the political,
regulatory and media side, they'll have a very hard time succeeding.”
- Bradley Tusk, CEO Tusk Ventures, regulatory strategy consultants
The relationship between businesses and their institutional, or non-market, environment
is an essential element of virtually all business sectors. It is particularly relevant in regulated
industries such as transportation, banking, energy, biotechnology and telecommunications where
public policy and regulatory approval have significant impacts on firm performance, survival,
and entry and exit (Garcia-Canal & Guillen, 2008; Hiatt & Park, 2013; Sine, Haveman, &
Tolbert, 2005). In such industries, government regulation influences firms several dimensions,
including specific safety and testing requirements (Holburn & Vanden Bergh, 2008),
environmental standards (King & Lennox, 2000), the technologies and processes used (Sharma
& Henriques, 2005) and pricing and licensing (Russo, 2001). Prior work in this area has led to a
number of insights about how firms influence their non-market environment. For instance,
studies have explored how large, established firms obtain favorable institutional outcomes
through the traditional tools of corporate political influence: lobbying (Capron & Chatain, 2008;
Kim, 2008), financial contributions to lawmakers (Hillman & Hitt, 1999; Riddel, 2003), and
political connections (Dieleman & Boddewyn, 2012; Peng, 2003). Firms that are larger (Cook &
Barry, 1995; Schuler, Rehbein & Cramer, 2002), older (Hillman, 2003), more experienced
(Bonardi et al. 2005), and perceived as more legitimate (Gurses & Ozcan, 2014; Henisz &
Zelner, 2003) are more likely to favorably influence their non-market environment. In addition,

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firms who have more developed dynamic political capabilities are also more likely to influence
both non-market and competitive environments (Oliver & Holzinger, 2008).
Although prior studies have examined a variety of non-market strategies available to
established firms, few have explored the strategies that young entrepreneurial firms employ to
influence their non-market environment. This is an important limitation because entrepreneurial
firms often lack the size, experience, capabilities and legitimacy to favorably shape their
institutional environment. They also often lack the financial resources required to use the
traditional tools of influence because venture capital tends to avoid new ventures that are prone
to regulatory risk. Furthermore, incumbent firms use various market strategies to hinder
entrepreneurial entry, for instance, by pre-emptively introducing new products (Aldrich & Baker,
2001), and through non-market strategies that maintain strong connections with institutional
actors who protect incumbents by erecting barriers to entry in the regulatory environment
(Edelman & Suchman, 1997; Russo, 2001). As a result, entrepreneurs in regulated markets face
unique challenges, not just in building and entering new markets in the face of incumbent
opposition, but also from powerful institutional actors—such as elected officials, regulatory
agencies, and the courts—who can enable or constrain the ability of new ventures to enter and
succeed. Thus, entrepreneurs in regulated markets must fight battles on two fronts: one in the
market environment to win over customers and other key constituents as they build and enter
markets, and another in the non-market environment to obtain regulatory approval or avoid
adverse legal and regulatory decisions.
Although little research has explored entrepreneurial entry into regulated markets, studies
have identified legitimacy as an important factor that can enable entrepreneurs to acquire key
resources necessary to enter markets and succeed (Aldrich & Fiol, 1994; Low & Abrahamson,

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1997; Rindova & Fombrun, 2001). For example, studies have suggested that legitimacy building
through entrepreneurial storytelling enables capital acquisition and wealth creation at the early
stages of a new venture (Lounsbury & Glynn, 2001). Other work finds that legitimation results
both from the strategic actions of entrepreneurs and from environmental factors such as
evaluations from institutional actors who their credibility and appropriateness (Kennedy, 2008).
As such, government actions, industry associations, consumer associations, and social movement
activists may all have roles in the legitimation of entrepreneurial firms. However, acquiring
legitimacy is often an acute challenge for entrepreneurs due to their nascent identities and lack of
resources (Navis & Glynn, 2010). In regulated markets it is particularly challenging due to the
combined resistance of incumbent firms and regulatory institutions (Gurses & Ozcan, 2016; Shu
& Lewin, 2016). While work has begun in this area, it has yet to receive significant attention,
prompting calls for additional studies that explore how entrepreneurs build legitimacy in
regulated markets (Fisher, Kuratko, Bloodgood & Hornsby, 2017; Überbacher, 2014).
In this chapter, I develop a typology of strategies that entrepreneurial firms use to enter
markets and survive. I explore two orthogonal dimensions of entrepreneurial strategy that affect
entrepreneurs’ ability to gain legitimacy in the eyes of key stakeholders: the rate at which new
ventures build and enter markets and the timing of engagement with key institutional actors. Due
to the limitations associated with their newness, entrepreneurial firms often implement
unconventional and less resource intensive strategies on each of these dimensions that ultimately
aim to overcome resource and legitimacy constraints while operating in regulated markets. On
the timing of market entry dimension, these strategies range from slowly working to overcome
entry barriers (Lilien & Yoon, 1990) or resolving exogenous uncertainties before expansion
(Miller & Folta, 2002), to quickly deploying symbolic and rhetorical tactics to directly create

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cultural resources (Lounsbury & Glynn, 2001) or cognitive legitimacy (Aldrich & Fiol, 1994)
that help them attract financial resources. On the timing of institutional engagement dimension,
strategies range from delaying engagement by operating in regulatory voids or selectively
disregarding regulations while slowly gaining legitimacy (Mair & Marti, 2009), to proactively
engaging regulators to exert cognitive and normative influence in order to obtain favorable
rulings (Oliver & Holzinger, 2008; Hillman, Keim & Schuler, 2004).
By identifying the strategies by which a new venture can overcome resource and
legitimacy constraints, this chapter contributes to literature at the intersection of institutions and
entrepreneurship (Eberhart, Eisenhardt & Eesley, 2014; Eesley, Li & Yang, 2016; York,
Hargrave & Pacheco, 2016). In the sections below, I develop a typology of strategies and
specific propositions to explain how different entrepreneurial non-market strategies are affected
by various factors such as the intensity of the regulatory environment and the presence and
power of incumbents in the market environment. I conclude with suggestions for future research
into effective strategies for entrepreneurs in regulated markets.
THEORY AND LITERATURE REVIEW

Prior research has highlighted the impact of environmental conditions on the availability
of entrepreneurial opportunities and the ability of entrepreneurs to exploit them (Aldrich, 1999;
Baumol, 1996). In particular, a growing stream of research examines how legitimacy—the
general perception that the venture’s actions are desirable, proper or appropriate (Suchman,
1995)—can provide resources which are critical to new ventures, such as financial capital,
personnel, and consumer goodwill. However, in the midst of high uncertainty (Rindova &
Fombrun, 1999), a fluid or uncertain identity (Lounsbury & Glynn, 2001), ambiguous industry

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structures (Ozcan & Santos, 2014) and asymmetrical power relationships with other firms
(Santos & Eisenhardt, 2009), entrepreneurs often struggle to gain legitimacy.
Entrepreneurs also face significant resistance from incumbents whose market position
may be threatened by entering firms (Gans, 2016; Maguire & Hardy, 2009; Zietsma &
Lawrence, 2010). Incumbents oppose entrepreneurial firms in the competitive market using a
variety of strategies, including by pre-emptively introducing new products (Aldrich & Baker,
2001) or investing heavily in technological innovation (Geels & Schot, 2007). In regulated
markets, incumbent firms have additional tools available to oppose entering firms. For instance,
incumbent firms, over time, tend to develop network connections with elected officials, typically
through financial and informational lobbying, which they use to get favorable regulatory policies
passed (Baron, 1995; Bonardi, Hillman & Keim, 2005; Russo, 1991). Incumbents’ market
positions often remain relatively stable over time in regulated markets because of these mutual
dependencies between established firms and policymakers (Geels, 2010; Meadowcroft, 2005).
Hence, incumbents may use their influence to convince policymakers and regulatory agencies
that new entrants are harmful and destabilizing for the market (Gurses & Ozcan, 2016). For
example, when entrepreneurs first introduced LED lighting as a substitute for florescent tubes,
incumbent firms made statements both in public and to policymakers that the entrepreneurial
firms’ technology was not ready for market (Smink, Hekkert & Negro, 2015). Incumbents may
also try to reduce the quality and effectiveness of entrants’ assets through preemptive acquisition
of regulated resources such as permits or licenses, or by lobbying for higher standards which
entrants are unable to meet (Capron & Chatain, 2008). More subtly, incumbents may use their
institutional influence to shift institutional norms such that entering firms are no longer seen as
having acceptable organizational forms, operating practices or products (Bitektine, 2008). This

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further hinders entrepreneurs’ attempts to gain legitimacy, preventing entry or harming
entrepreneurial firms’ competitiveness.
Despite this resistance, entrepreneurs do, in fact, enter regulated markets and recent work
has begun to empirically examine this phenomenon. Notably, Gurses and Ozcan (2016) examine
the pay TV industry and find that an effective strategy for entrepreneurs is to engage in framing
contests with incumbents in an attempt to affect institutional change. In their study,
entrepreneurs initially framed their ventures as complementary to incumbent firms and in
alignment with regulatory agency interests to buy time to grow and develop with little
opposition. Once the new ventures had accumulated resources, they engaged in framing contests
with incumbent firms to sway regulatory approval in their favor, leveraging multiple interest
groups to garner public support. Other studies find that new ventures entering regulated markets
do so by leveraging the support of social movement activists to delegitimize the practices of
incumbent firms and legitimize those of entrants in the eyes of both consumers and regulatory
agencies (Lounsbury, Ventresca & Hirsch, 2003). Studies also find that affiliations with high
status institutional actors—such as senior figures in the media, prominent political figures, or
social movement leaders—helps new ventures build legitimacy in the eyes of key stakeholders
(Tracey, Phillips & Jarvis, 2011).
Yet while insightful, this recent research says little about timing of these legitimacy
building strategies. It also says little about how best to coordinate framing, or other non-market
strategies, with market oriented legitimacy building strategies. Understanding this may be an
important factor for entrepreneurs seeking to enter regulated markets. To help further our
understanding, I explore the timing of two dimensions of entrepreneurial strategy in regulated
markets: market entry and engagement with regulators.

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DIMENSIONS OF ENTREPRENEURIAL STRATEGY IN REGULATED MARKETS

While the timing of market entry has long been understood as a key dimension of
entrepreneurial strategy (Levesque, Minniti & Shepherd, 2009), I suggest that in regulated
markets, the timing of engagement with regulators is a second key dimension. Both dimensions
reflect the paramount importance of the timing strategic actions to the success of new ventures
(Aldrich & Ruef, 2006; Ruef, 2005). The strategies associated with the timing of each of these
dimensions are dependent on factors inherent to the new venture as well as contextual factors in
the institutional and competitive environments.
Timing of Market Entry

The timing of market entry has received significant attention in the management
literature. Much of this literature suggests that earlier entry results in superior performance. Early
entry allows firms to acquire superior resources by selecting the most attractive assets in a
market niche, and entrants often develop more advanced capabilities because they are ahead of
rivals on the technological learning curve (Fuentelsaz, Gomez, & Polo, 2002). Early entry may
allow the new entrant to preempt competitors in physical locations, technological space and
consumer perceptions (Lieberman & Montgomery, 1998) and benefit from recognition and
reputation (Lilien and Yoon, 1990). It may also create switching costs (Gomez & Maicas, 2011)
and network externalities (Schilling, 2002) that decrease consumer mobility among competitors.
On the other hand, later entry may be beneficial under certain circumstances, such as
when entry barriers are high. Strong network connections among incumbent firms raise barriers
which can be detrimental to new ventures who try to enter before first building similar
connections (Hochberg, Ljungqvist, & Yu, 2010). Government regulations, which create entry

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barriers by raising capital costs and increasing the complexity of business operations, may also
cause potential entrants to delay (Dean & Brown, 1995). If regulations are likely to change in the
future, new ventures may wish to delay entry until change occurs; if they are not likely to
change, new ventures may delay entry until they have sufficiently progressed along the learning
curve to adequately navigate regulatory complexities. Therefore, how quickly and effectively a
potential entrant can overcome barriers to entry determines when successful entry can occur.
The amount of uncertainty in the external environment may also delay the timing of
market entry. Under high uncertainty, it is particularly risky for new ventures to commit to
irreversible investments (Miller & Folta, 2002) hence it may be beneficial for potential entrants
to delay entry until new information reduces the uncertainty (Fuentsalaz et al., 2002). Although
firms generally try to avoid uncertainty rather than confront it (Cyert and March, 1963), potential
entrants may actively work to reduce uncertainty. For instance, studies have found that firms
reduce uncertainty by establishing external network ties (for example, to regulatory agency
bureaucrats, or elected officials) in order to gather information (Lee, 2007). If the additional
information reduces uncertainty, potential entrants can accelerate entry to preempt rivals before
they can benefit from reduced uncertainty. Thus, the timing of successful entry is, in part,
determined by the rate at which uncertainties in the external environment are resolved on their
own or through direct action of the entrant.
Finally, the new venture’s legitimacy is an important factor affecting entry timing.
Although prior work has shown that the first firm to enter a market may gain legitimacy benefits
from recognition and reputation, new ventures are generally perceived to have low legitimacy
(Aldrich & Fiol, 1994). As a result, entrepreneurs often have difficulties obtaining support from
key constituencies (such as consumers, employees, and the media) and face opposition from

129

external stakeholders (such as social movement activists). Low legitimacy may also hinder a new
venture’s ability to acquire resources from investors. However, symbolic and rhetorical actions,
such as storytelling (Lounsbury & Glynn, 2001), linguistic framing (Navis & Glynn, 2010) and
seeking certifications and endorsements (Lee, Hiatt & Lounsbury, 2017; Sine, David &
Mistuhashi, 2007; Stuart, Huang & Hybels, 1999) can help potential entrants gain legitimacy,
obtain support and acquire resources. This can affect ideal entry timing since entrepreneurs vary
in their ability to construct identities which legitimate their new ventures: those who are quicker
and more effective at implementing symbolic and rhetorical actions will more rapidly gain
legitimacy and may enter sooner (Lounsbury & Glynn, 2001; Navis & Glynn 2011). Hence, new
ventures may time market entry per their ability to build legitimacy in the eyes of key
constituents and resource holders.
Timing of Engagement with Regulators

Prior research on non-market strategy has demonstrated how engagement with
institutional actors is a key factor affecting firm performance. Access to regulatory decision-
makers is particularly important because it can provide the firm with information and essential
resources and help firms influence public policy outcomes (Hillman et al., 1999). Tactics such as
having an organizational representative in a government position or someone with regulatory
agency experience directly allied to the firm can lead to favorable regulatory outcomes. For
instance, Katic and Kim (2013) found that such tactics are effective at reducing the time it takes
to receive regulatory approval: when firms in the genetically engineered crop industry retained
former regulators as lobbyists or board members, regulatory approval speed improved
significantly. Other research finds that similar tactics lead to favorable pricing decisions and
more lenient oversight by regulators (Dal Bo, 2006).

130

While much has been written about the survival and performance implications of
establishing linkages with regulators, relatively few studies have examined the timing of
engagement. Some studies have found that firms timed their engagement according to salient
external economic circumstances (Hillman & Hitt, 1999; Schuler, 1996). For instance, during
economic recessions firms were more likely seek and obtain a favorable response from
regulatory agencies and under increased foreign competition, domestic firms were more likely to
lobby congress to obtain protectionist measures from legislators. In another study, Bonardi and
colleagues (2005) asserted that firms are most likely to pursue early engagement with
institutional actors when internal political conditions are favorable among those who create and
implement public policy. For example, elected officials are often more responsive to firms’
demands when they face stiff competition in the next election, and favorable regulatory agency
decisions are more likely when responsibility for policy implementation is concentrated in the
hands of a small number of regulatory agency bureaucrats.
Entrepreneurs face unique challenges when timing their engagement with institutional
actors. Because they often lack size, resources and especially legitimacy, they are not particularly
well placed to gain regulatory approval via the tactics typically used by established firms. Even
startups endowed with ample resources often face obstacles: according to one regulatory
consultant, “startups, even those that are well funded, can't spend a lot of money in a political
campaign.”
18
Indeed, research has shown that most entrepreneurs avoid engagement with
institutional actors as long as possible, for instance by delaying applying for business licenses or
filing tax returns (Aldrich & Ruef, 2006). Even when external economic or internal political

18
Seth London, quoted in the New York Business Journal
http://www.bizjournals.com/newyork/news/2015/08/03/bradley-tusk-ventures-bloomberg-uber.html retrieved
12/12/2015.

131

conditions appear favorable, new ventures may find it difficult to influence elected officials and
regulatory agencies due to opposition from a coalition of incumbents and institutional actors
(Aldrich & Baker, 2001). Incumbents with ample resources and strong ties to government
institutions protect their market position by advocating for legal or regulatory restrictions on
entrepreneurs (Gurses & Ozcan, 2014). When strong incumbent opposition is absent, resistance
from regulatory agencies alone can hinder new ventures because endorsing a new venture that
lacks legitimacy risks tarnishing the regulatory agency’s own legitimacy, which they are keen to
preserve or enhance (Bonardi et al., 2006; Hiatt & Park, 2013).
In a regulated environment, however, engagement with regulators cannot be delayed
indefinitely; therefore, entrepreneurs must be strategic in choosing when to engage regulators.
Prior research has suggested that engaging regulators early versus late is dependent on
organizational and environmental context (Ruef, 2005). Starting too early, before the new
venture has the legitimacy and resources to defend itself, risks initiating opposition from
incumbents with strong ties to government institutions. Elected officials and regulatory agencies
who view endorsement of a new venture to be risky to their own legitimacy and reputation may
preemptively enact strict rules to protect themselves from blame if the new venture draws
negative attention (Gilad & Yogev, 2012). On the other hand, if entrepreneurs wait too long to
engage regulators, they risk having regulators solidify unfavorable regulations that hinder new
ventures. Such regulations often come at the behest of incumbents and other external
stakeholders who lobby regulators to act in their favor.
TYPOLOGY OF STRATEGIES

Given that there can be considerable variation along these two dimensions, I propose a
typology of entrepreneurial strategies for regulated markets. Figure 1 provides a summary of the

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different strategies that new ventures can implement in response to various pressures and
uncertainties inherent in the non-market environment. Four types of strategic actions are
proposed here in a 2x2 framework: Collaboration, Pioneering, Latency and Infiltration. Each
strategy varies in its timing across these dimensions.
Collaboration Strategy

Engagement with Regulators. Although research shows that most entrepreneurs avoid
engagement with institutional actors as long as possible, new ventures implementing a
collaboration strategy choose to engage key institutional actors early. They intentionally and
strategically comply with regulation and other institutional demands because they believe them
to be congruent with their own interests. For instance, early compliance with regulation may
signal that the new venture is legitimate, helping it gain support from important constituencies or
gain access to resources (Webb, Tihanyi, Ireland & Sirmon, 2009). Early compliance can also
reduce both the likelihood of opposition from external stakeholders and the possibility of
receiving negative assessments from important audiences (Oliver, 1991). Moreover, early
engagement even before the new venture is fully compliant with regulation may mitigate
penalties or sanctions assessed for non-compliance in their products or services.
Because their approach to the institutional environment is to comply with existing
regulations rather than trying to challenge or influence it, new ventures implementing a
collaboration strategy may be less likely to be hindered by incumbents. In fact, new ventures
often form alliances or otherwise collaborate with incumbents to help them gain regulatory
approval. For instance, many biotechnology startups form strategic alliances with established
firms who have regulatory experience and resources to help them transform a novel, basic
technology into a final drug (Diestre & Rajagopalan, 2012).

133

Market Entry. A collaboration strategy involves entering the market slowly. This may
be so that the new venture can focus on efficient use of resources, and deliberate and methodical
reproduction of existing routines and technologies rather than quick entry with untested novel
innovations (Ruef, 2005). Alternatively, slow entry may be due to the nature of their new
venture: when the innovation or business model is radically different from what currently exists,
new ventures must first educate consumers, employees and other constituents to gain acceptance
before entering the market (Benner & Tripsas, 2012). Rapid introduction of such radical
innovations without first educating constituents about their value risks rejection before
entrepreneurs have the opportunity to establish their innovations as legitimate and valuable.
New ventures implementing a collaborative strategy often operate in highly regulated
industries such as energy, pharmaceuticals or biotechnology where the safety of new
technologies is a fundamental concern. For instance, UPower, an energy startup that produces
nano-scale nuclear batteries for energy generation, approached regulators very early to
understand the safety testing and licensing and licensing requirements because existing Nuclear
Regulatory Commission regulations did not address remote, distributed generation of nuclear
power.
19
UPower has also taken a very slow and deliberate approach to entering the market.
Unlike many technology startups, who quickly build enthusiasm for their products so that they
can gather resources and enter the market quickly, to date they have not actively promoted their
batteries. This is likely because many in the general public would not perceive it as a legitimate
enterprise due to concerns over the safety of nuclear power in general. The lack of regulatory
structures surrounding this new technology exacerbates such concerns.

19
https://news.ycombinator.com/item?id=8195223.

134

Biotechnology startups also tend to engage regulators early to establish health and safety
requirements and fast-track regulatory approval. For example, Vtesse Inc., a startup developing
treatments for rare genetic diseases, partnered very early with the National Institute of Health to
create robust clinical trials. This increased the legitimacy of their operations in the eyes of
regulators and led the FDA to fast-track their review and allow the company to more quickly
submit regulatory documents, granting easier access to agency officials.
20
Only after clinical
trials were demonstrated to be robust and regulatory approval granted did Vtesse make moves to
rapidly enter the market.
In contrast, Theranos, a biotechnology startup that developed blood tests for early
detection of disease, adopted a strategy that delayed engaging with regulators and efforts towards
gaining regulatory approval. Instead, it focused heavily on seeking investors, and generating
media attention through aggressive corporate announcements to build enthusiasm for their
product.
21
During this time, Theranos conducted “stealth research” and clinical trials outside of
peer review and without publishing results (Ioannidis, 2015). Such actions do little to signal
legitimacy to regulatory agencies and consumers and may actually further delegitimize the new
venture. Consequently, Theranos has received intense scrutiny in the popular media and an FDA
investigation into the company’s compliance with safety and testing regulations.
Based on this characterization of a Collaboration strategy, I suggest the following:
Proposition 1a: A collaboration strategy is more effective than other entrepreneurial
strategies in highly regulated markets where public safety if a fundamental concern.

20
http://www.bizjournals.com/washington/news/2016/01/13/just-a-year-in-vtesse-inc-earns-breakthrough-fast.html.
21
http://www.wsj.com/articles/at-theranos-many-strategies-and-snags-1451259629?tesla=y.

135

Proposition 1b: A collaboration strategy is more effective than other strategies when
existing regulations are unambiguous and regulators have a clear understanding of
technological changes within the industry.
Proposition 1c: A collaboration strategy is more effective than other strategies when it is
possible to establish cooperative relationships with incumbents.

Pioneering Strategy

Engagement with Regulators. Like those who implement a collaboration strategy, new
ventures who implement a pioneering strategy engage key institutional actors early. However,
early engagement does not imply simple compliance with existing regulations, but instead
involves a degree of resistance to institutional pressures due to conflicting demands or
incomplete regulatory frameworks. Entrepreneurs in regulated environments often confront
multiple constituent demands, from shareholders who desire greater efficiency or market
expansion, and from regulatory pressures to contribute to social welfare over profitability;
therefore, they must carefully balance and compromise on these competing interests (Oliver,
1991). When entrepreneurs enter nascent markets, legal and regulatory frameworks are often
absent (Navis & Glynn, 2010). Thus, new ventures in nascent markets must simultaneously enter
a market and work with regulators to create a favorable regulatory environment that confers
legitimacy to their enterprise.
Close interaction with institutional actors can also be beneficial because regulators
sometimes lack understanding of technological changes occurring in the industry they regulate.
Consequently, legal systems struggle to adapt existing regulatory standards to new technologies
(Reidenberg, 2005). Ambiguous and constantly changing policy is an ongoing risk for new

136

ventures; hence, entrepreneurs following a pioneering strategy maintain close relations with
regulators to constantly check for new developments and try to steer them in a direction that
serves their interests. However, because new ventures lack legitimacy and resources to develop a
close relationship with regulators, they must compensate for this by increasing their legitimacy
through market building and market entry tactics.
Market Entry. Entrepreneurs following a pioneering strategy are also early market
entrants who attempt to move quickly into market niches opened by legal, technical or
institutional change. By establishing innovative routines and technologies, they can benefit from
rapid growth rates in new venture populations or redefine institutional constraints in mature
industries (Ruef, 2005). Because these new ventures challenge and attempt to influence the
direction of ambiguous regulation, they do not benefit from legitimacy gains associated with
regulatory compliance. They also face more opposition from incumbents and other external
stakeholders. To counter this, new ventures implementing a pioneering strategy use early entry to
quickly build enthusiasm among consumers and other constituents in order to increase their
legitimacy.
Entrepreneurs, particularly those who provide social or environmental value, may also
align themselves with social movement organizations (SMOs) who mobilize important
constituencies to build legitimacy, resources and support (Pacheco et al., 2014; Rao et al. 2003).
By challenging the logics of established industries whose practices are in conflict with
movements’ goals, SMOs help institutionalize new regulatory policies and social norms that
benefit the new venture (Hiatt et al. 2009; Sine & Lee, 2009). Similarly, entrepreneurs may
pursue certifications which signal in social or environmental value order to build legitimacy

137

among consumers (Carlos & Lewis, 2017; Hiatt & Carlos, 2015). Together, these market entry
tactics compensate for the shortcomings new ventures face relative to established firms.
New ventures implementing a pioneering strategy often operate in highly regulated
industries characterized by a rapid pace of technological change which regulatory agencies have
difficulty adapting to. For instance, the emerging cryptocurrency industry operates in the highly
regulated money and banking sector; however, the regulatory framework to oversee these
currencies significantly lags the technological innovations that allow these decentralized
currencies to function. Ripple, a cryptocurrency startup that aims to unite all digital currencies
and the companies who use them under a single worldwide network, works with regulators to
establish rules of operation. Per Ripple’s regulatory consultants,
“There are times when a company wants to work very cooperatively with a
government… they want to be regulated because they want to establish sort of a
government framework that provides a certain amount of oversight and legitimacy to
[them].”
22

Regulators and established financial institutions initially opposed the creation of a
decentralized cryptocurrency money system because it lies outside the control of any one bank or
government, effectively diminishing market power for big banks and reducing oversight by
regulatory agencies. In response to their opposition and to legitimize their innovation, Ripple
began publicly promoting their idea and gathered the support of important constituents including
Microsoft and the World Wide Web Consortium, an industry non-profit that promotes internet
standards. After this support was announced, established banking institutions changed tactics and
expressed interest in partnering with Ripple. Ripple’s founder, who previously founded two

22
http://observer.com/2015/09/bradley-tusk-and-the-bloombergian-effort-to-boost-startups-like-uber/

138

financial startups, stated that “there’s a lot of interest from the big banks in what’s going on here,
I’ve never seen anything like it before.”
23
Regulators have been slower to embrace the
cryptocurrency startup, but have recently clarified which regulations Ripple must adhere to under
the Bank Secrecy Act and Anti-Money Laundering rules.
24

Some biotechnology ventures may follow a pioneering strategy when regulations are
ambiguous or inconsistent. For example, Vasalgel is a biotechnology startup developing a novel
form of male contraceptive that involves a non-surgical treatment that functions like a
conventional vasectomy. However, since the technology does not work on a chemical or
hormonal level like other regulated birth control methods, regulators are unsure of how to
regulate it.
25
Per regulatory experts, “there is nothing like this on the market… the FDA has a lot
of questions.”
26
Because it would harm the lucrative market for female birth control pills,
established pharmaceutical companies strongly opposed this technology. As a result, Vasalgel
was unable to establish a strategic alliance with a more experienced incumbent firm. Instead,
Vasalgel elected to simultaneously conduct peer-reviewed clinical trials and engage in
widespread publicity campaigns to build enthusiasm for their product among potential
consumers. Associated with the publicity campaign were successful crowdfunding efforts to help
the company overcome resource limitations.
The characteristics of a pioneering strategy described above suggest the following:

23
Chris Larsen, quoted in the New York Times, http://dealbook.nytimes.com/2013/11/11/the-rush-to-coin-virtual-
money-with-real-value/?_php=true&_type=blogs&_r=0.
24
https://bitcoinmagazine.com/articles/analysis-ripple-labs-fincen-enforcement-action-1432417986.
25
http://health.usnews.com/health-news/health-wellness/articles/2015/02/26/the-future-of-male-birth-control.
26
Alexander Gaffney, quoted in Vox, http://www.vox.com/2014/9/11/6135199/male-contraceptive-birth-control-
sex-protection-vasalgel-RISUG.

139

Proposition 2a: A pioneering strategy is more effective than other entrepreneurial non-
market strategies in highly regulated markets where the rate of technological change is
rapid and regulations are slow to adapt.
Proposition 2b: A pioneering strategy is more effective than other strategies when it is
possible to establish close relationships with key institutional actors due to constituent
enthusiasm.
Proposition 2c: A pioneering strategy is more effective than other strategies when it is
possible for new ventures to ally themselves with SMOs who help build legitimacy and
support.

Latency Strategy

Engagement with Regulators. A latency strategy involves avoiding interactions with
regulators or hiding nonconformity with institutional pressures by operating in regulatory voids
until conditions for engagement are more favorable. This may involve obscuring regulatory non-
compliance by symbolically rather than substantively adhering to regulations or deliberately
operating in regulatory voids or loopholes. It may also involve moving to jurisdictions in which
inhibiting regulation is absent; for example, many chemical manufacturers relocated their
facilities to developing countries in order to produce and sell chemicals that are banned in the
United States (Oliver, 1991).
One reason new ventures may do this is because they anticipate favorable regulatory
changes in the future and therefore avoid directly challenging or trying to influence the direction
of regulation for fear that it may provoke resistance. Once regulations change in favor of new
ventures, they emerge to engage with regulators and comply with regulation and other

140

institutional demands which have become congruent with their own interests. At this point,
compliance signals legitimacy and allows the enterprise to gain support and access to resources.
Another possible reason is that the entrepreneur believes the new venture would draw negative
attention from regulators if it did not obscure non-compliance or operate in regulatory voids.
Therefore, the new venture tries to obscure its activities until it has accumulated the resources to
be able to directly challenge existing regulation.
When the regulatory environment is hostile to a new venture, incumbents with strong ties
to institutional actors are especially problematic. Incumbents with strong ties can mobilize
government officials and regulatory agencies against new ventures with relatively little effort.
However, because the new venture’s approach to the institutional environment is to avoid
engagement with institutional actors and hide regulatory compliance rather than to challenge or
influence the direction of regulatory policy, they remain less visible to incumbents. Thus, their
activities are less likely to be impeded by a coalition of incumbents and institutional actors.
Entry Timing. A latency strategy involves slow and deliberate market entry. Like
ventures implementing a collaboration strategy, a primary reason for this may be to focus more
on efficient use of resources and reproduce existing routines and technologies. However, a more
likely explanation is that they enter the market slowly because their innovation or business model
is inherently hostile to powerful and popular established firms and to dominant social norms.
Rapid entry into the market under these conditions would likely provoke strong resistance to the
new venture. Instead, new ventures seek consumers and other constituents from among the
minority that is dissatisfied with dominant firms and norms and slowly build their customer base
in hopes that they will gradually gain acceptance as consumer tastes and social norms evolve.

141

Entrepreneurs implementing a latency strategy often operate in regulated industries where
there is currently hostile regulation in the institutional environment and there is a lack of
constituents willing to mobilize resources to affect change in regulatory policy. A prominent
example of a new venture employing this strategy is the Ultimate Fighting Championship (UFC),
a mixed martial arts combat sports promotion. When the UFC was founded, it branded itself as a
no rules competition between different styles of martial arts and was initially envisioned to
supplant boxing as America’s favorite combat sport. Early critics of the UFC, such as Senator
John McCain, however, branded it as “human cockfighting” and actively sought to have the sport
banned.
27
Senator McCain’s intense criticism of the UFC solidified the view in the majority of
the U.S. public that this was a brutal sport. Facing hostility in the regulatory environment, the
UFC retreated to regulatory voids, hosting events on Native American reservations and in Puerto
Rico where U.S. federal regulations on the sport didn’t apply. They slowly built a deep and
passionate fan base and a strong track record of safety despite its characterization as a brutal
sport. Eventually, a critical mass of constituents emerged to support mainstream market entry. A
track record of safety also helped dismantle regulatory barriers: by 2007, the John McCain
acknowledged the legitimacy of the UFC as a sports promotion and now works with the UFC
and other promotions to study fighter safety at the Cleveland Clinic.
28
For incumbent combat
promotions, the UFC did not register as a competitor until it had already gained market
momentum and regulatory approval.
29

27
http://www.forbes.com/sites/robertszczerba/2014/04/03/mixed-martial-arts-and-the-evolution-of-john-
mccain/#165847691a3b.
28
http://my.clevelandclinic.org/about-cleveland-clinic/newsroom/releases-videos-newsletters/Senators-reid-and-
mccain-join-boxing-executives-to-support-professional-fighters-study-at-cleveland-clinic-lou-ruvo-center.
29
http://www.newyorker.com/news/sporting-scene/ultimate-fighting-versus-boxing.

142

Aereo, a startup that provided over-the-air television on internet-connected devices
similarly faced a hostile regulatory environment. Existing regulations prohibited the reselling of
television signals transmitted over the internet without a license and permission to operate from
broadcasters. However, Aereo exploited a regulatory loophole by claiming that it was not
pulling down the TV signals and reselling them itself, instead, its customers were performing this
task remotely using equipment owned and operated by Aereo.
30
Aereo was symbolically,
although not substantively, compliant with regulatory policy which allowed it to operate for
several years while it built a customer base. Aereo ultimately failed, however, because it was
unable to evade the attention of powerful incumbents who used the courts to eventually shut
down the startup.
I therefore propose:
Proposition 3a: A latency strategy is more effective than other entrepreneurial strategies
in regulated industries where hostile regulation exists in the institutional environment
and there is a lack of constituents willing to mobilize resources to affect change in
regulatory policy.
Proposition 3b: A latency strategy is more effective than other strategies when it is
possible to avoid attention of both regulators and incumbents while slowly entering the
market.
Infiltration Strategy

Engagement with Institutional Actors. An infiltration strategy similarly involves
avoiding interactions with institutional actors. However, instead of operating in regulatory
loopholes or voids, this strategy involves active defiance of institutional rules and pressures.

30
http://variety.com/2013/biz/news/why-aereos-free-ride-will-ultimately-crash-1200568247/.

143

New ventures implementing an infiltration strategy strongly reject the rationale behind
institutional pressures, but choose to ignore them rather than actively pursue change. The most
likely reason for this approach is that new ventures believe the likelihood of regulatory
enforcement is low or very slow to come about. Alternatively, if the benefits of ignoring
regulation are high and sanctions or fines are relatively low, noncompliance will be worthwhile
even if there is a high likelihood of enforcement.
Entrepreneurs pursuing this strategy must also assume that incumbents with ties to
regulators are relatively ineffective at increasing the probability and costs of regulatory
enforcement. This may occur if incumbents have weak ties to regulators and therefore
insufficient influence over them to obtain favorable decisions that would hinder new entrants.
Alternatively, it might occur when incumbents have ties to a regulatory agency that does not
sufficiently understand the products or practices of the new venture and consequently struggle to
adapt old regulations to new technologies. As regulatory officials gather information about the
new venture, they provide time for new ventures to establish themselves in the market.
The ability of the new venture to frame its identity and activities as distinct from
established firms and the existing market category is a key element of effectively ignoring
regulations and avoiding engagement with regulators. Along these lines, new ventures may use
linguistic framing to establish themselves as hybrids in a unique new category (Navis & Glynn,
2010). For example, framing a passenger vehicle as a ‘minivan’ distinguishes it from existing
vehicles in the ‘van’ category and creates a hybrid category of much smaller vans. By
establishing itself as a distinct hybrid, the new venture provides external audiences with a
narrative for why avoiding regulation is appropriate.

144

Market Entry. Like a pioneering strategy, an infiltration strategy involves quick entry
into market niches opened by legal, technical or institutional change. New ventures establishing
novel products or services take advantage of high organizational growth rates inherent to new
market niches. Incumbents may lack organizational slack or capabilities to enter a new market
niche as fast as new entrants, thus the new entrant is able to establish its market position quickly
before incumbent opposition can harm it. This rapid entry provides the source of legitimacy to
new ventures following an infiltration strategy. Actively ignoring rules and regulations can cause
a significant loss of legitimacy in the eyes of key resource holders; to overcome this,
entrepreneurs must rapidly build enthusiasm among important constituents such as the
consumers, employees and the media. Positive evaluations from these constituents can help
shield from regulatory scrutiny and opposition from powerful incumbents. Like a pioneering
strategy, new ventures following this strategy may also leverage the capabilities of SMOs to
further mobilize important constituencies to build legitimacy, resources and support.
When sufficient enthusiasm among constituents has developed, the likelihood of
successfully challenging existing regulations is increased. Elected officials and regulatory
agencies may hesitate to confront the momentum and customer excitement achieved from rapid
market entry lest they upset popular opinion. Furthermore, due to their rapid expansion, new
ventures may accumulate sufficient resources to seek regulatory approval, attempt to change to
existing regulations, or fend off regulatory challenges.
Entrepreneurs implementing an infiltration strategy are most likely in to be found in
lightly regulated markets with relatively weak monitoring and enforcement. They are also more
common in markets in which itis possible to quickly build enthusiasm among important
constituents. Technology-enabled startups are particularly well suited to this strategy because

145

they are able to enter many new markets in a short amount of time. Sharing economy standouts
Uber, a ride sharing startup, and Airbnb, an accommodations sharing startup, are prominent
examples. Uber actively ignored taxi medallion and similar licensing laws while it pursued
aggressive expansion. To justify this, Uber framed itself as a technology company rather than a
taxi company. Their mobile application simply connected drivers with passengers, therefore,
rules and regulations governing taxi operations did not apply.
31
Their strategy was to use their
technology platform to rapidly enter new markets, build loyalty among drivers and customers
and then use them to help defend against regulatory scrutiny and opposition from rivals. By the
time of Uber’s much publicized lawsuit in New York City, the company had expanded to dozens
of markets, generated media and consumer excitement, loyal drivers and the financial resources
to fight the lawsuit and lobby for more favorable regulation. Airbnb followed a very similar
strategy of expansion while ignoring short-term rental rules and regulations. They also identified
themselves as a technology company rather than a short-term rental agency. They simply
provided the platform to connect apartment owners with individuals interested in renting the
space. Airbnb’s legal challenges came sooner than Uber’s, but they were in a similar position to
fight it.
In contrast, 23andMe, a biotechnology company that provides direct-to-consumer
personal genome tests, unsuccessfully followed an infiltrator strategy. Like Uber and Airbnb, the
startup expanded rapidly, marketing its product to consumers while it delayed seeking regulatory
approval from the FDA.
32
They quickly build enthusiasm among the media, consumers and
investors.
33
However, FDA is not a regulatory agency that has a low probability of monitoring

31
http://www.latimes.com/business/la-fi-uber-california-20150726-story.html.
32
http://www.scientificamerican.com/article/23andme-is-terrifying-but-not-for-the-reasons-the-fda-thinks/.
33
http://www.fastcompany.com/3018598/for-99-this-ceo-can-tell-you-what-might-kill-you-inside-23andme-
founder-anne-wojcickis-dna-r.

146

and applying sanctions. It ordered 23andMe to stop selling its products until it received
regulatory approval. 23andMe also did not attempt to frame its identity as anything different than
a biotechnology company; therefore, it failed to provide a rationale for noncompliance.
Given the foregoing statements, I suggest the following:
Proposition 4a: An infiltration strategy is more effective than other entrepreneurial
strategies in markets where the risk of enforcement is low or when regulatory sanctions
are not costly.
Proposition 4b: An infiltration strategy is more effective than other strategies when rapid
market entry creates constituents who are willing to mobilize resources to fend off
regulatory and incumbent challenges.
Proposition 4c: An infiltration strategy is more effective than other strategies when the
new venture is able to frame its identity in a way that provides a rationale for
noncompliance with regulatory policies.
DISCUSSION

Given the importance of institutional actors to virtually every business sector, it is
surprising that relatively few studies have explored the strategies that entrepreneurs use to enter
and survive in markets where these actors have significant oversight. This is an important
limitation in the institutions and entrepreneurship literature because entrepreneurial firms often
face unique challenges in confronting the institutional environment. Lessons learned from
studying established firms are unlikely to translate well to new ventures. New ventures
frequently lack the size, experience, resources, coherent identity, capabilities and especially the
legitimacy to favorably influence their institutional environment. Therefore, they must adopt a

147

range of unconventional strategies that help them overcome these constraints and favorably
influence institutional actors.
To address this limitation, this chapter offers a typology of legitimacy building strategies
that entrepreneurial firms use to enter markets and to engage institutional actors. These strategies
allow new ventures who lack the size, experience and resources to overcome legitimacy
constraints and succeed in a range of regulatory environments. The propositions derived from the
typology explain how different entrepreneurial strategies are affected by various factors such as
the intensity of the regulatory environment, the source of legitimacy and the attitude towards of
incumbents in the market environment.
This chapter contributes to the literature at the intersection of institutions and
entrepreneurship (Eberhart, Eisenhardt & Eesley, 2014; Eesley, Li & Yang, 2016; York,
Hargrave & Pacheco, 2016). In particular, it answers calls for additional studies that explore how
entrepreneurs build legitimacy in regulated markets (Fisher, Kuratko, Bloodgood & Hornsby,
2017; Überbacher, 2014). Despite burgeoning research in the area, scholars have yet to explore
how institutional factors associated with regulated markets affect and are affected by
entrepreneurial strategies nor how the timing of market entry and regulatory strategies combine
to enhance a new venture’s legitimacy.
This area of research would benefit from future studies which empirically examine the
performance of each strategy across a broad sample of market sectors. It may also be useful to
conduct in-depth case studies of effective new ventures in order to determine how they choose
among strategies and tactics when facing different market and non-market conditions.
Furthermore, a longitudinal look at these effective new ventures would inform how the lifecycle
of the organization is affected by strategies adopted at startup.

148

Another area of future research could examine more closely how entrepreneurial firms
strategically interact with different institutional actors. For simplicity, this chapter did not make a
strong distinction between the motives and actions of elected officials and regulatory agencies
but, as the preceding chapters suggest, they create different institutional pressures on new
ventures and respond differently to the strategies implemented by entrepreneurs. Elected
officials, for instance, are primarily concerned with re-election and therefore might approach
new ventures differently when they face a very tight election contest versus uncontested race.
Regulators, on the other hand, have different incentives, and enact different institutional logics
that can affect their disposition towards entrepreneurs.
This research has important implications for both entrepreneurs and policy-makers. First,
it informs entrepreneurs of the strategies they might use to achieve positive outcomes when
entering a regulated market. Since future startups are likely to emerge in industries where elected
officials and regulatory agencies play an active role, new ventures must be equipped with
effective strategies to cope with the obstacles presented by a regulated environment. Second, this
study informs policymakers and regulators about how they might better adapt regulations to
changing technology. This chapter suggests that entrepreneurs may use ambiguous regulations
pertaining to their innovations to their advantage which may not always increase social welfare,
something policymakers and regulators should consider carefully when resolving ambiguous
regulations at the behest of entrepreneurs. Given the growing importance of promoting
innovation and entrepreneurship to solve societal challenges, such insights are both timely and
relevant.

149

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FIGURE 1 - Typology of Entrepreneurial Strategies in Regulated Markets

Collaboration Strategy:
- Engage with institutional actors or
begin regulatory approval process
immediately
- Slowly build enthusiasm among
constituents and/or cautiously enter
new markets

Pioneering Strategy:
- Engage with institutional actors or
begin seeking regulatory approval
immediately.
- Rapidly build enthusiasm among
constituents and/or enter new
markets

Latency Strategy:
- Operate in regulatory voids or
loopholes
- Slowly build enthusiasm among
constituents and a favorable
performance record
- Eventually emerge to seek
regulatory approval or fend off
regulatory challenges

Infiltration Strategy:
- Rapidly build enthusiasm among
key constituents and/or enter new
markets
- Leverage those constituencies
when seeking regulatory approval
or fending off regulatory
challenges.

Engagement with institutional actors
LATE EARLY
SLOW FAST
Timing of Market Entry

158

FIGURE 2 - Attributes of Entrepreneurial Non-Market Strategies
Type of Entrepreneurial Non-Market Strategy
Attributes Collaboration Pioneering Latency Infiltration
Nature of the
strategy
Engage with
regulators early;
slowly enter the
market
Engage with
regulators early;
rapidly enter the
market
Delay
engagement with
regulators;
slowly enter the
market
Delay
engagement with
regulators;
rapidly enter the
market
Regulatory
environment
Highly regulated Highly regulated Hostile
regulation

Lightly regulated
Source of
Organizational
Legitimacy
Compliance with
regulatory
pressures
Constituent
enthusiasm and
support, SMO
mobilization
Compliance with
regulatory
pressures
Constituent
enthusiasm and
support; SMO
mobilization
Posture
towards
Incumbents
Non-threatening,
form alliances
with incumbent
firms
Threatening, use
constituent
enthusiasm fend
off challenges
from incumbents
Non-threatening,
avoid incumbent
attention until
after regulatory
approval
Threatening,
enter and expand
quickly, before
incumbents can
react

159

CHAPTER 5
CONCLUDING THOUGHTS

This dissertation seeks to advance our understanding of entrepreneurship and non-market
strategy. In a series of three essays I outlined several institutional and strategic factors that affect
the ability of new ventures to enter and survive in markets with significant regulatory oversight. I
introduced the concept of regulatory discretion from political science and public administration
literatures to place regulatory agencies center stage in my analyses and in doing so revealed how
differences between institutional actors can cause regulatory barriers to entry to become
malleable and enable or constrain the ability of social movement activists to use the state as a
fulcrum to affect firm entry. My final essay offers a novel typology of strategies that
entrepreneurs use to enter regulated markets and engage institutional actors. It is my hope that
this collection of essays is the beginning of a greater conversation, both for myself and for others
interested in the field, on how entrepreneurs navigate regulated environments.
A consistent theme throughout these essays is that in regulated markets, the institutional
structure and relationship between institutional actors plays a significant role in influencing firm
outcomes and firm behavior. Specifically, the various characteristics of the institutional
environment create political opportunity structures can strongly influence firms but which may
be malleable in nature. Although the literature on political opportunity structures emphasizes
how they create constraints, possibilities and threats for social movement activity, the series of
essays in this dissertation illustrate that these structures may be equally relevant for
entrepreneurial firms as they seek to enter regulated markets. New ventures may benefit from
political opportunity structures derived from greater regulatory discretion and may be harmed
when antagonistic social movement activists use discretion to shape new opportunity structures

160

that help them prevent market entry. The political opportunity structures that firms face may also
affect firms’ entry and regulatory engagement strategies. Thus, attention to institutional
structures and the relationships between institutional actors are important considerations for
future scholarship at the intersection of institutions and entrepreneurship.
This dissertation drew inspiration from many different disciplines: management,
sociology, economics, political science and public administration. Although disciplines often
overlap and encroach on one another, integrating different disciplines can be challenging. Each
discipline speaks a different language, has different theoretical perspectives, and utilizes
different methodologies, hence bridging disciplines risks alienating each discipline’s faithful
adherents, leaving the researcher without an audience. However, by integrating different
perspectives, I hope I have augmented our understanding of how different elements of the
institutional environment affect entrepreneurs. I also hope that, in bridging disciplines, these
essays are informative on a practical level to a broader audience of entrepreneurs, managers,
policymakers, regulators, and social movement activists.

Abstract (if available)

Abstract While non-market strategy and entrepreneurship are both well-established fields of research, there has been relatively little integration between the two. Scholars in both fields have largely ignored how new ventures influence and are influenced by political actors in their institutional environment and have only recently begun to examine how they affect and are affected by non-governmental actors such as social movement activists. This is potentially an important oversight as entrepreneurial activity increasingly intersects with the institutional environment. The aim of this dissertation is to answer questions about how the non-market environment affects new ventures and the strategies they use to enter markets despite significant non-market pressures. I introduce the concept of regulatory discretion from the political science literature and reveal how differences between institutional actors can cause regulatory barriers to become malleable, and can enable or constrain the ability of social movement activists to affect entry. I also develop a novel typology of strategies that new ventures use to enter regulated markets. Through this dissertation, I seek to address some of the limitations in prior research and stimulate further scholarly thinking at the intersection of non-market strategy and entrepreneurship.

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Asset Metadata

Creator Grandy, Jake B. (author)

Core Title Essays in non-market strategy and entrepreneurship

School Marshall School of Business

Degree Doctor of Philosophy

Degree Program Business Administration

Publication Date 06/20/2018

Defense Date 06/14/2017

Publisher University of Southern California (original), University of Southern California. Libraries (digital)

Tag entrepreneurship,institutional theory,non-market strategy,OAI-PMH Harvest,regulated markets

Language English

Contributor Electronically uploaded by the author (provenance)

Advisor Hiatt, Shon (committee chair), Jia, Nan (committee member), Rajagopalan, Nandini (committee member), Rindova, Violina (committee member)

Creator Email grandy@usc.edu,jakegrandy@gmail.com

Permanent Link (DOI) https://doi.org/10.25549/usctheses-c40-388462

Unique identifier UC11259166

Identifier etd-GrandyJake-5443.pdf (filename),usctheses-c40-388462 (legacy record id)

Legacy Identifier etd-GrandyJake-5443.pdf

Dmrecord 388462

Document Type Dissertation

Rights Grandy, Jake B.

Type texts

Source University of Southern California (contributing entity), University of Southern California Dissertations and Theses (collection)

Access Conditions The author retains rights to his/her dissertation, thesis or other graduate work according to U.S. copyright law. Electronic access is being provided by the USC Libraries in agreement with the a...

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