Political Pluralism, Public Policies, and Organizational Choices: Banking Branch Expansion in India

Summary of: Kozhikode, R.K. & Li, J. (2012). Political Pluralism, Public Policies, and Organizational Choices: Banking Branch Expansion in India. Academy of Management Journal, 55(2), 339-359

POLITICAL PLURALISM

Data on the expansion of 94 commercial banks in India from 1948 to 2003 were analysed to test the proposition that political pluralism – wherein competing parties control the state and national governments of a nation – can promote business expansion. The results confirm that such political pluralism reduces the power of either government to constrain business decision making but that pluralism might at times led to unhealthy competition between parties, harming local expansion opportunities. The data show that, in India, banks selectively exploit political pluralism to guide their expansion decisions.

In each subnational unit, the federal (or national) and the local governments share government power between them. Disagreements between policy makers at the different levels of government often lead to a greater variation in public policy outcomes and socioeconomic growth among the subnational units.

Political pluralism: An institutional arrangement wherein the political orientations of national and subnational policy makers differ, in such a way that one political party may dominate the national government while a political party with an ostensibly incompatible creed governs certain subnational units.

Political pluralism makes it more difficult for firms or other organizations to influence public policy or gain preferential treatment, as agents endorsing competing prescription may thwart any such influencing attempt at another government level.

Political pluralism normally tends to check and balance the power of various government factions, thus protecting the interests of citizens and organizations, but in certain situation in which political competition is weak, political pluralism may have negative, albeit indirect, consequences for organizations.

Organizations persuade key agents of governments through efforts such as lobbying and forming coalitions. However, political pluralism makes this more difficult as organization would need support from more than one level. Political competition under political pluralism can differ from one subnational unit to another, requiring organizations to assess a situation carefully as they pursue their interests.

Systems encouraging fragmented government are so designed to avoid concentration of power in the hands of a few and to divide responsibility for governing among different government braches -> check and balance.

This is in federal systems more complex.

Organizations prefer to operate in environments that afford them greater discretion in their decision-making. Hence, political pluralism may signal a healthy investment climate for organizations. If so, they should tend to expand preferentially in locations with political pluralism rather than in those with political hegemony (i.e. where a single party dominates both branches of the legislature or both the state and national governments).

Hypothesis 1: Political pluralism has a positive relationship with organizations’ decisions to expand in a subnational unit.

Political pluralism in a subnational unit might not lead to favourable resource distribution if there is only weak competition from opposition parties. At the extreme, when the national government considers a state’s loyalty impossible to sway, it might even punish the voters there by holding back resources. A lack of political competition in a subnational unit would be expected to negatively moderate any relationship between political pluralism and the expansions decisions of organizations.

Hypothesis 2: The positive relationship between political pluralism and organizational expansion weakens as political competition in a subnational unit decreases.

Organizations that depend heavily on a government apparatus for business opportunities might hesitate to expand in pluralistic locations, as they might earn the wrath of either or both levels of government present in these locations. Organizations owned by or dependent on a government will thus normally be unable to take advantage of many opportunities offered by pluralism. The value of political pluralism will thus be less for state-owned firms than for private ones. Organizations that depend more on a government tend to use a relational approach (avoid opportunistic behavior) and avoid a transactional approach (act opportunistic), as any act by such organizations perceived by the government as opportunism might harm their future prospects.

Hypothesis 3: The positive relationship between political pluralism and organizational expansion is weaker for state-owned firms than for private organizations.

Organizations that are locally embedded have better access to nonmarket information that allows them to respond faster than their competitors to changing political situations, and forge ties with local factions. Similarly, the behavioral perspective on organizational decision making holds that ‘bounded rationality’ leads organizations to simplify their search processes by employing a form of judgmental heuristic called local search (more aware of the local risks). Organizations focus their search efforts on locations where they are already more active, as they are more aware of the risks involved in their decisions there. This should lead organizations that depend more on a particular location for their business to be more likely to expand their operations there when political pluralism prevails.

Hypothesis 4: The positive relationship between political pluralism and organizational expansion in a subnational unit strengthens as the proportion of an organization’s total business coming from that subnational unit increases.

All hypotheses were supported.

When political parties with a pro-capitalist ideology control both the national and state government, business expansion in the state might expect to be encouraged. Yet, the results indicate that political hegemony, irrespective of the ideological orientation of the ruling party, is a less preferred situation for organizations than either type of political pluralism.

Political pluralism results in two outcomes of tactical significance to organizations:

1. Organizations should enjoy greater latitude of actions, as political pluralism results in less government intervention. (Direct consequence)

2. Locations with political pluralism might in certain situations breed and unhealthy power struggle between the competing political parties, indirectly restricting the expansion possibilities of organizations into that location. (Indirect consequence)

An organization’s likelihood of expanding into states with political pluralism is constrained by:

1. Its propensity to act opportunistically toward the government

2. Its alertness to the opportunities that arise out of political pluralism.

-> Not all organizations are mere passive onlookers who are affected deterministically by their governments.

Society at large - the voters - can influence how government behaves and how its behavior affects organizations. Since policy makers depend on society’s mandate to stay in power, they may attempt to appease the voters through policies that they hope will enhance society’s well being.

Taken together, these results show that, in pluralist economies such as those in nations with federal systems, examining one government level is not sufficient to yield a clear picture of the influence of government. It is essential to examine the interactions between the different levels of government and any competition that might result.

The results of this study have shown that in countries with fragmented government power, such as federal democracies, there is a tactical dimension to the influence of government on organizations that stems from political differences between the parties controlling the different levels of government.