Firm Lobbying by Political Regime Type

• In Event: The Political Economy of Trade Revisited

Abstract

When considering how economic policy outcomes differ in democracies compared to autocracies (as stylized regime types), our theories tend to rely on the greater voter pressure that exists in former regime type. But differences in terms of voter pressure may not be able to explain the systematic regime type variation on issues that most citizens do not understand or consider as salient (e.g., why democracies have more flexible exchange rate systems) or on issues like international trade, where voters appear to have a general preference for import restrictions despite the fact that democracies tend to have lower tariff rates (contrary to the preferences of the median voter). However, there may also be important regime type differences in terms of the special interest channel, where organized groups and firms lobby the state for their preferred economic policy outcomes.

This paper thus explores regime type differences in terms of firm lobbying, first developing an argument about how the special interest channel is wider in democracies (compared to autocracies) due to reduced repression and increased access points, thus allowing more societal actors (e.g., firms) to lobby the democratic state for their preferred economic policies. This simple argument leads to two testable hypotheses. The first is that one should observe a higher probability of a firm lobbying the state in a democracy compared to a non-democracy. Second, given a more competitive special interest channel where more firms lobby the state, one should also observe that the marginal effect of lobbying on the firm’s ability to influence policy should decline in a democracy (compared to a non-democracy where fewer firms lobby the state and there is thus less competition to influence policy through the special interest channel).

These hypotheses are tested using firm-level data from the World Bank Enterprise Survey conducted across 42 developing countries from 2002 to 2005. Conceiving of democratization as a non-randomized treatment on firm behavior, we first balance the democratic and non-democratic subsamples on a variety of firm characteristics using coarsened exact matching. With this matched sample, we find support for both hypotheses. First, the probability of a firm lobbying the state is significantly greater in the democratic subsample. Second, firm lobbying is significantly associated with a greater reported ability to influence policy in the non-democratic sub-sample, while this same significant relationship does not appear in the democratic sub-sample: firms that lobby the democratic state do not report as significantly more able to influence policy than those who do not lobby.

We then discuss how these results may help to explain regime type differences in terms of exchange rate systems (democracies tend towards more flexible exchange rates) and trade openness (democracies tend towards lower tariffs) by examining what types of firms engage in lobbying (i.e. access the special interest channel) in democracies versus non-democracies. With evidence that the special interest channel in democracies is more occupied by service (i.e., non-tradable) firms that favor exchange rate flexibility (for domestic monetary autonomy), we have a lobbying-based explanation for why democracies tend towards more flexible exchange rates. And with evidence that the special interest channel in democracies is more occupied by exporters that favor trade openness, we also have a lobbying-based explanation for why democracies tend towards lower tariffs.

Authors

• David H. Bearce, University of Colorado, Boulder

• Megan Roosevelt, Montana State University, Bozeman