25 Jan 2012  Research & Ideas

A Few Firms Have Outsized Influence in D.C.

New research by Harvard Business School Associate Professor William R. Kerr suggests the number of companies affecting government policy through lobbying may be smaller—but more powerful—than previously thought. Key concepts include:

  • Relatively few companies lobby, larger firms are more likely to lobby than smaller ones, and firms that do lobby are likely to do so year after year.
  • The findings can be explained in part by high fixed costs to enter the lobbying club—both in the costs of hiring well-paid lobbyists and in complying with reporting requirements.
  • The small number of corporations that are consistently influencing government policy do so on a whole host of issues—some of which may be important to them, and some of which may be tangential.

 

It's a truism for many that in American politics money buys influence. In one recent poll, 75 percent of respondents said they believed "money buys results in Congress." But the question of whose money and what results is not so easy to answer. There's hardly a straight line to be drawn in the twisted web of Washington fundraising and lobbying that can definitively prove dollar x bought result y.

Perhaps that's why there has been such little empirical research among economists on the issue.

"The whole perspective of how firms influence policy environments is a relatively new question to economists," says Harvard Business School Associate Professor William R. Kerr. "It's uncharted territory."

Kerr's interest in the topic came from studies he's done on immigration issues—in particular, looking at how the importation of highly skilled workers affects a firm's capacity for innovation.

"The whole perspective of how firms influence policy environments is a relatively new question to economists."

It would stand to reason that the companies lobbying most on a particular issue would be those with the most to gain for changing policies. As he began to delve into the issue, however, Kerr found that wasn't necessarily the case.

Collaborating with William Lincoln of the University of Michigan and Prachi Mishra of the International Monetary Fund, Kerr tapped into a database of lobbying activities kept by the Senate Office of Public Records, which requires all firms to register not only how much money they spend on lobbying, but also what particular issues they address. The database has improved over time, to the point where it is useful as a research tool.

The results are reported in their working paper, The Dynamics of Firm Lobbying .

For their sample, the researchers looked at a representative cross section of 3,260 firms between 1998 and 2006 that are publicly traded and have their headquarters in the United States. Their first finding was that—contrary to the image of hordes of companies fielding teams of lobbyists in the halls of the Capitol—relatively few firms lobby. In fact, they found that only 10 percent of firms in the sample lobbied in any given year, and in some years that number was closer to 5 percent. Secondly, the researchers found that the probability of lobbying was heavily correlated with company size, with larger firms more likely to lobby than smaller ones. And lastly, they found that the firms that did lobby were consistent over time. For a company that lobbied in one year, for example, there was a 92 percent chance it had lobbied in the previous year.

Applying a complicated statistical model to the data, the researchers determined that all of the findings can be explained in part by high fixed costs to enter the lobbying club—both in the costs of hiring well-paid lobbyists and in complying with reporting requirements. Furthermore, Kerr speculates that lobbying depends on building up relationships over time to be effective.

"Lobbying appears to be something you need to be serious about," says Kerr. "It's not something companies can engage in halfheartedly and expect returns."

Kerr takes for granted that spending money through both campaign contributions and lobbying can buy results in Congress and the White House. "I have regular contact with Microsoft's chief lobbyist," he says, "and while there are sometimes issues Microsoft feels it can't influence, there are many issues it can."

When the researchers looked at the subject of high-skilled immigration, they found further evidence to bear out those general findings. For the past two decades, firms have lobbied to raise the cap on so-called H-1B visas, which allow companies to offer jobs to skilled foreign workers. Back in the late 1990s, that cap rose from 65,000 to 195,000 in part due to lobbying by high-tech firms. In 2004, however, the cap expired, and the limit fell back to 65,000. As might be expected, there was an increase of lobbying on the issue following the decrease as companies tried to get the cap raised once again.

To quantify these dynamics, the researchers constructed a second sample of 171 major firms for which accurate measures of H-1B dependency could be constructed. Following the cap decrease, the percentage of firms in the sample lobbying on the H-1B issue doubled from 6 percent to 12 percent between 2003 and 2004.

The researchers were surprised to discover which firms were doing the lobbying. Instead of firms with stakes in the H-1B deciding to enter the fray, they found that nearly all of the companies had already been lobbying on other issues and shifted their resources to the H-1B topic.

"Before we started this paper, if asked who would lobby Congress on the H-1B issue, I'd say it would be the 50 or 100 firms most affected by the H-1B policy," Kerr says. "In hindsight, that's not the case because of this notion of [high] fixed costs. If a firm is always lobbying, it's relatively easy for the company to transition, even if it's a small issue, versus a new firm that is very interested in lobbying on that issue."

While that might make sense, the implications of that fact don't paint the prettiest picture for democracy, since the companies lobbying on an issue may be at odds with the majority of companies affected by it.

"First, they are not going to be representative of all firms in America," Kerr says, "and second, they are not even necessarily going to be representative of the firms most dependent on that issue."

Instead, the researchers' findings suggest there are a relatively small number of corporations that are consistently influencing government policy on a whole host of issues—some of which may be important to them, and some of which may be tangential.

"This is a situation where we can appreciate how things like regulatory capture might occur," Kerr says. "These firms really start to have additional influence when politicians know that the firms have lobbied and helped politicians get elected, say, for 20 years, and they are likely to do the same for the next 20 years." While it may be overly optimistic to think that situation will change any time soon, awareness might be the first step to curtailing undue influence of some companies over other stakeholders, Kerr says.

"Institutionally, you need to make sure you have safeguards in place so that this doesn't happen," he adds. "The first safeguard, which is something that we have taken advantage of, is disclosure."

About the author

Boston-based writer Michael Blanding is a fellow at the Edmond J. Safra Center for Ethics at Harvard University and author of The Coke Machine: The Dirty Truth Behind the World's Favorite Soft Drink.

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Comments

    • Guy Higgins
    • Principal, Performance2

    Interesting, but the work to date doesn't address a lot of potentially influencing factors such as how legislation has changed and is changing over time. The definition of lobbying has been expanded in the past decade and so the number of lobbyists and the investment in lobbying may need to be adjusted to compensate.

    In considering safeguards, I think that there needs to be a great deal of work done in "pre-thinking." What, exactly is it that we are safeguarding against? Does that include Emily's List, government employee organizations, and the AFL-CIO or just business and industry? What are the likely responses to legislation introducing new safeguards? Laws are static and organizations adapt dynamically. As with any legislation, we need to be careful lest be fail to obey Hippocrates' prime directive -- "Do no harm."

    I am, incidentally, NOT a lobbyist.

     
     
     
    • Sheila Kaplan
    • Lab Fellow, Edmond J. Safra Center for Ethics

    I'm curious about how you factored in firms that lobby through trade groups, such as the U.S. Chamber of Commerce and other organizations that represent both large and small businesses. Lobbying disclosure records show that the Chamber's subsidiary, the Essential Worker Coalition, spent at least $800,000 lobbying on immigration issues, including the visa issue, between 2006 and 2011. Thanks, Sheila Kaplan

     
     
     
    • Anonymous

    It's unfortunate that the study did not include industry associations, which, presumably, the smaller companies rely on for lobbying, and probably also larger companies.

     
     
     
    • Kapil Kumar Sopory
    • Company Secretary, SMEC(India) Private Limited

    At present, lobbying is a legitimate business in countries like the United States, United Kingdom, Canada and Germany for enhanced transparency and accountability in the corporate system. Despite this, it is not definite that the letter as well as the sprit of the regulations set up are being followed. The larger companies and those with clout lobby mostly successfully to deciding policy and the price of government treansactions. The effort to influence government policy for corporate ends is a tool which is not now seen as good corporate practice in India. It can sabotage corporate governance and hence stringent punishments like criminal prosecution and financial penalties against those flouting lobbying rules need to be imposed wherever the rules have been laid down. As of now there is no lobbying law in India and it has been suggested that in absence of being registered to be a lobbyist the activity be banned. In absence of such registration, lobbying in some form or the other is an underground unethical activity in India and cannot be permitted.