Regulatory Discretion Fosters Clean Tech

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Increased regulatory discretion can improve outcomes for entrepreneurs and enhance the impact of stakeholder activists.

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In many sectors of today’s advanced economies—such as pharma, tech, energy, and finance—government regulation has become more extensive and complex. This regulatory complexity creates difficulties for both new and established firms that want to compete and innovate in these markets, as they face more government intervention and supervision that can influence crucial aspects of their business, such as pricing, product development, and market entry.

Business research, however, has largely overlooked how policy implementation varies across different contexts and how it shapes market outcomes for firms in regulated markets.

To fill this gap, we studied how state-level regulatory discretion affects entrepreneurial entry and incumbent performance in the U.S. energy market. Regulatory discretion is the amount of leeway that agency officials have in applying and enforcing policy. By examining the autonomy of regulators, who are the main actors that firms interact within regulated markets, we can gain a deeper understanding of how regulation works and affects business performance.

In one recent empirical study, we investigated how regulatory discretion affects the entry of clean-tech entrepreneurs into the U.S. hydropower market. We measured discretion as the number of administrative procedures that limit regulators’ ability to apply and enforce policies. When discretion is low, regulators are more likely to be swayed by legislators, who may be influenced by incumbent firms to block new entrants. When discretion is high, regulators are more independent from legislative pressure and can make decisions based on their mission, expertise, and public interest.

We found that greater regulatory discretion enabled the entry of entrepreneurs using innovative hydropower technologies, such as run-of-the-river, pumped storage, and marine (tidal) systems. In places where regulators had more discretion from legislators, entrepreneurs obtained a license 22.5 percent faster than the average wait time of 4.5 years. Faster licensing translated to an average revenue increase of $2.8 million.

Moreover, incumbent firms were less able to sway regulator decision-making in their favor. Where regulatory discretion was high, incumbents’ lobbying influence was reduced by nearly 30 percent. This is a significant finding. Incumbents usually have an advantage over new entrants in regulated markets because they can capture and shape regulation to fit their capabilities, giving them a competitive edge. We found that regulatory discretion helped balance the competition. This study suggests that entrepreneurs should target places where regulatory discretion is high.

In a second study, we examined how discretion influences the impact of stakeholders on regulatory decision-making. Some regulated products provoke strong stakeholder reactions. For example, some groups demand faster approval of new drugs, while others may oppose the approval of contentious products such as genetically modified organisms. Likewise, the energy market has elicited diverse stakeholder responses to activities ranging from oil and gas production and transmission to wind and biomass facilities.

We examined how stakeholder opposition to hydroelectric power facilities from 1987 to 2019 influenced licensing outcomes. Previous studies have shown that activists can affect firms indirectly via the state, but the effects of different activist tactics on regulatory decision-making are not clear. This theoretical gap matters because government institutions have different objectives and incentives than businesses. Studying firms in regulated markets reveals how activists can shape business outcomes beyond private political tactics, such as boycotts or name-and-shame campaigns.

We found that discretion increases the public accountability of regulators and thus enhances the impact of stakeholders filing formal objections and protesting facilities on licensing outcomes. The results of our study show that high discretion allows activists to delay licensing by 90 percent, which means 1,526 days longer than the average wait time of 1,695 days for our sample. This effect does not mean that firms are powerless, but rather that hydropower companies that proactively address the concerns of regulators and moderate stakeholders can reduce the ability of the broader opposition movement to hinder facility licensing.

In other words, companies must pay attention to both the political opportunities arising from the regulatory environment and the composition of the stakeholder coalition and be ready to engage proactively with groups that use moderate tactics.

These two studies, taken together, suggest two policy implications. First, achieving a diverse energy portfolio is a key security and sustainability objective in many state and national policies. The effectiveness of these policies, however, varies across contexts. Rather than exclusively focusing on policy content, elected officials should consider how regulatory agencies are organized and how the policies are implemented.

Second, social activism can have positive or negative impacts on firms’ entry, innovation, and growth in regulated markets. Given the role of regulatory discretion in moderating the influence of social activists on business outcomes, elected officials may need to balance the discretion given to regulators with the degree of stakeholder activism in their states to attain policy goals.

Shon R. Hiatt is an associate professor at USC Marshall School of Business and Director of the Zage Business of Energy Evolution initiative.

Jake B. Grandy is an assistant professor at the University of Arkansas, Walton College of Business.