Here is
something that is so well known in business, and so contrary to norms of fair
competition, that we prefer not to teach it in business schools: For a large
established firm, one of the best hammers for beating down competition from new
ventures is influence over legislators. One of the best ways of wielding this
hammer is to help them create cumbersome, expensive, and demanding legislation
for new firms entering the business. Any kind of excuse will do. For example,
societal concerns for safety and the environment can be twisted in ways that
generate legislation with the main purpose of making it harder to establish new
ventures.
How can
that be good for the large firm? After all, they need to expand their business
now and then, and they will face the same legislation. That’s true, but unlike
entrepreneurs, they have friends in the legislature who can create exceptions
when needed. So, is there any way for the entrepreneur to enter a heavily
regulated industry? Research by Jake B. Grandy and Shon R. Hiatt published in Administrative Science Quarterly shows one way this can happen: by receiving
help from regulators.
Why would
regulators help entrepreneurs when legislators help established firms? This is
a question that has two answers. The first answer is because they can: Legislation
is usually written with some leeway, and regulators can interpret it to allow
new entrants. Often, they will do so because strict interpretations can be
challenged through appeals. The second answer is because they can: Legislators
have many issues on their agendas, and they often grant regulators freedom to
act on their own either by legislating some independence or by supervising regulators
only loosely.
Grandy and
Hiatt tested this effect by examining delays in granting permissions for
hydroelectric power plants. For such permissions, the independence of the
regulator has no consequence for established firms – but for entrepreneurs, an
independent regulator makes all the difference. The timing matters because the
application and approval process can take many years. If the regulator is
fairly independent, that period can be reduced by a year or more. But if legislators
have reason to curtail the regulator’s independence, the application period can
instead increase by many months.
These
accelerations and delays are important because they are where costs and
benefits are found in this industry. The regulator can impose conditions that
slow down a project and make it costly, but in the end, nearly all the
applications are granted. Granting an application does not mean that the power
plant will be built, however: The entrepreneur may have exhausted their
financial resources by the time a project is approved, or required
modifications may have made the project unprofitable. All of this means that
help from regulators is necessary for entrepreneurs – and for a healthy level
of competition in regulated industries.
Grandy, J. B., & Hiatt, S. R. 2020. State Agency Discretion and Entrepreneurship in Regulated Markets. Administrative Science Quarterly, forthcoming.
