Swayed by prior interactions? How government contracting acts as a substitute for lobbying activity

Abstract

We argue that because one of the key intentions of lobbying is to develop knowledge about the inner workings of the government, a crucial type of governmental interaction—government contracting—is associated with firms’ level of lobbying activity. We argue that firms’ contract scope (the number of governmental agencies in which they contract) is negatively related to firms’ lobbying activity because it provides firms with broader knowledge of the government. We further argue that the relationship between government contract scope and firms’ lobbying activity is moderated by the extent of government contract dispersion (distribution of contracts across government agencies), firms’ government contract dependence (proportion of firms’ revenue that is derived from the government), and firms’ industry contract scope (availability of new government agencies for contracting). We find support for most of our theoretical arguments in a sample of S&P 1500 firms for years 2008–2018.

Keywords

lobbying nonmarket strategy organizational learning political strategies

Introduction

Through their power to shape the rules of the game in the competitive environment, as well as the power to allocate key resources, governments play a substantial role in a firm’s strategic outcomes (Hillman et al., 1999). Given this reality, firms allocate scarce resources toward managing government relations through corporate political activities (CPAs)—corporate attempts to sway government officials toward public policies that are beneficial to the firm (Bonardi, 2011; Hillman et al., 2004). Among the types of CPA employed, firms primarily rely on lobbying or “expending resources in an attempt to sway government officials to make decisions beneficial to a firm” (Ridge et al., 2017: 1138). Lobbying allows firms to monitor government activities, seek knowledge about potential regulatory policies, and inform public officials (Drutman, 2015; Hillman et al., 2004; Nownes, 2006). The Center for Responsive Politics (CRP, 2021) estimates that in 2021 alone corporate lobbying expenditures in the United States surpassed US$3 billion with business outspending non-profit and other interest groups by a multiple of 10. Thus, unsurprisingly, CPA scholars predominantly focus on these lobbying investments as a stimulus for firms to obtain beneficial governmental outcomes (Abdurakhmonov et al., 2022; Barber and Diestre, 2019; Ridge et al., 2017).

Yet, alternate firm-government ties may suggest a decreased firm need for such formal lobbying investments.1 For instance, the knowledge-based theory of the firm defines a firm as “a body of knowledge about the organization’s circumstances, resources, causal mechanisms, objectives, attitudes, [and] policies . . .” that change as a firm learns about its environment (Spender, 1989: 185). So, if a firm has alternate ways to learn about the government or acquire knowledge of better ways to approach the government, the organizational learning literature would suggest that its need for formal lobbying activities may abate. In fact, the organizational learning literature evidences how firms learn through multiple mechanisms and carry these lessons over from one situation to another (Argote et al., 1990). While insightful, extant literature in CPA largely remains silent about these learning dynamics that may relate to the extent of formal resources devoted to lobbying. Perhaps, lamenting this lack of progress, Bonardi (2011) calls attention to the need “to really develop a theory of political resources” (p. 252) and examine whether and how “firms effectively learn” (p. 253), “create and utilize [political] resources” (p. 250) or knowledge.

To address this paucity of research and to heed this call, we develop a theory suggesting that lobbying objectives may be partially accomplished through alternative governmental ties. Specifically, drawing from the organizational learning literature (Huber, 1991), we argue that as firms gain greater exposure to the government through an increased number of governmental agencies in which they contract—government contract scope (Abdurakhmonov et al., 2021), the need for lobbying activity is partially avoided as the firm develops knowledge about governmental agency initiatives, its inner workings, and, builds critical ties with government officials in the process of meeting contracting demands. This is particularly important as firms rely on learning to develop knowledge resources (Uhlenbruck et al., 2003), which is often accomplished through intentional and unintentional firm experiences—such as in government contracting (Huber, 1991). Consequently, this benefits firms as stored knowledge can be invoked for future interactions (Anand and Khanna, 2000; Dekker and Van den Abbeele, 2010; Mayer and Argyres, 2004), and by doing so, firms can avoid and/or be more “efficient” in their formal lobbying investments.

We also consider boundary conditions that are relevant to our theory of government contract scope as a learning mechanism. Since the amount of multifaceted learning about government is pivotal to taper the need for formal lobbying investments, government contract dispersion or more equal distribution of contracts across government agencies should ensure greater heterogenous learning, thereby strengthening the relationship between government contract scope and lobbying investments. Yet, if government contracting entails a significant percentage of firm revenue, that is, a firm government contract dependence is high (Abdurakhmonov et al., 2021), government contracting scope should have a weaker relationship with lobbying activity. Likewise, potential opportunities for further growth within government contracting arena may also induce further investments in lobbying. Thus, we expect that availability of new government agencies for contracting or a focal firm’s industry contract scope should weaken the relationship between a firm’s government contract scope and its formal lobbying activities.

In a sample of S&P 1500 firms, we find robust support for most of our hypotheses. In so doing, our article makes several contributions to research in CPA and learning literature. Our study contributes to the CPA literature by suggesting that governmental ties, such as government contract scope, are an important substitute for formal lobbying investments. In doing so, we propose that through government contracting, firms may acquire and process knowledge about the government which they can reference in their use of formal lobbying channels (Grant, 1996). Thus, although previous research recognizes the potential benefits of government contracting in the form of revenue inflow (Hadani et al., 2017; Lux et al., 2011; Schuler et al., 2002), we advance a complementary, yet overlooked benefit of government contracting—the opportunity to learn about government. Relatedly, we also uncover an overlooked antecedent of firm CPA (i.e. government contract scope) and help broaden the understanding of specific firm characteristics associated with a firm’s decision to allocate scarce resources toward CPA. Finally, we contribute to the learning literature by proposing government contracting as an additional knowledge avenue for the firm. Organizational learning scholars largely acknowledge contracting relationships as avenues to learn (e.g. Dekker and Van den Abbeele, 2010; Lumineau et al., 2011). However, they have failed to consider a potentially key firm contracting partner in the form of government. Thus, through our study, we offer a novel avenue through which firms can learn from their interactions. Collectively, our theory suggests that government contracting is a phenomenon at least partially concerned with learning about government (Nownes, 2006), which may allow efficient future lobbying investments.

Literature review

Scholars suggest that firms may interact with government primarily through two means: lobbying and campaign contributions (Ridge et al., 2017; Tahoun, 2014). Lobbying enables firms to monitor government activities, seek knowledge about potential regulatory policies, and inform and persuade public officials in the policy making process (Drutman, 2015; Nownes, 2006), whereas campaign contributions involve seeking a “a quid pro quo” tie with candidates running for governmental offices so once elected, they can benefit a firm (Tahoun, 2014: 102). Thus, as Hillman and colleagues (2004) argue, campaign contributions can be “entry fees that enable corporations to utilize other forms of CPA” (p. 849), such as lobbying. Lobbying is not only the primary (Milyo et al., 2000) but also is argued to be the “most effective” (Ridge et al., 2017: 1140) way firms influence government because firms cannot use campaign contributions with unelected government bureaucracy, which has both immense regulatory authority over industries and controls access to governmental resources, such as government contracts (Tahoun, 2014) and subsidies (Haley and Schuler, 2011). Furthermore, there are little if any limits to the use of information to influence government decision-making (Ridge et al., 2017), leading to immense resource allocations to firm lobbying activities. Interestingly, while campaign contributions are disallowed in many countries throughout the world, lobbying faces very few obstacles (Shleifer et al., 2010). Thus, given the dominant position of lobbying in terms of firm resource investments as the tool to influence government officials, firm lobbying activities are considered the primary way to interact with government, attracting immense interest from media, scholars, and practitioners alike (e.g. Baumgartner et al., 2009; Godwin et al., 2013; Hadani et al., 2017).

Research suggests that both institutional and firm-level characteristics are important determinants of whether a firm engages in lobbying and the intensity of this engagement (for a review, see Hillman et al., 2004). While insightful, studies on firm lobbying activities omit how alternative firm ties to government relate to firm’s lobbying calculus. In other words, the literature on CPA lacks a consideration of ties between a firm and the government that might facilitate learning and knowledge accumulation about the government and how it relates to future firm lobbying investments. This omission is surprising given that the organizational learning literature has reliably established prior ties (i.e. contractual arrangements) as a critical consideration for a firm’s strategy (e.g. Dekker and Van den Abbeele, 2010; Lumineau et al., 2011).

Indeed, Roome and Wijen (2006) note that being “an active member of several of the trade associations [allows firms] to exchange information on ‘best practices’. . . . The trade [associations] network also gives advice on company-specific technical, legal or organizational problems” (p. 247). For example, as a member of a trade association, firms may learn about specific industry policy issues (Coopey and Burgoyne, 2000). Similarly, membership in special interest groups such as trade associations allows firms to collectively influence the government (Oliver, 1990). Alluding to this possibility, Bonardi (2011) notes that “firms that find their industry association provides access to sufficient political resources may find it unnecessary to develop their own political resources” (p. 248). In the same vein, firms regularly testify in Congress and provide expertise and information to “uninformed” legislators that may lack sufficient resources to conduct their business (Ridge et al., 2019), allowing a form of informal channel of lobbying with government. In addition, having former government officials or revolvers (i.e. “group of individuals [who move] between politics and corporate lobbying”) as members of the top management team (Luechinger and Moser, 2014; Tyllström, 2021: 596) and/or the board (Faccio, 2006) may allow for greater knowledge about governmental work and more “efficient” ways for how to approach government. Relatedly, while firms lobby through formal means to gain government contracts (Goldman et al., 2013) and subsidies from the government (Haley and Schuler, 2011), once these contractual ties between the firm and government are established, they open immense opportunities for information flow between a firm and government that can constitute informal lobbying channels.

That is, lobbying allows firms to gain an understanding of how the government works, its current and future policy positions, and inform it of firm capabilities and needs (Drutman, 2015; Nownes, 2006), yet if a firm has alternative mechanisms in which learning about the government may occur, such mechanisms may alleviate some need for formal lobbying activities since the purpose of lobbying in essence is to acquire knowledge of government, inform, and potentially persuade (Nownes, 2006). In other words, alternative means of government knowledge may be associated with changes in a firm’s behavior in the form of decreased dependence on lobbying or more “efficient” use of formal lobbying channels. Perhaps, recognizing the knowledge that firms may develop from interactions with government, Bonardi (2011) calls for “a good theoretical understanding of the specificities of political arenas” (p. 247). We suggest that insights from the organizational learning literature may inform us on these “internal processes” of learning about the government (Bonardi, 2011: 250), thereby showcasing how government contracting relates to a firm’s lobbying calculus. We briefly review the organizational learning literature next.

The process and benefit of organizational learning

The knowledge-based theory of the firm argues that firms acquire or create organizational knowledge through organizational learning (Dekker and Van den Abbeele, 2010; Grant, 1996). This knowledge development process typically originates from the experiences of firm members and may ultimately lead to changes in firm behavior and potentially lead to improved firm outcomes (Fiol and Lyles, 1985; Slater and Narver, 1995). Huber (1991) describes the organizational learning process as the following four steps: (1) firms acquire new knowledge; (2) employees within the companies distribute the knowledge within firms; (3) employees within firms develop an understanding of the knowledge; and (4) the new knowledge is stored within the organization and employed for future benefits.

Interestingly, organizational learning scholars propose that firm contracting relationships with other entities are a major source of firm knowledge that may play a key role in determining future firm behaviors, as it may introduce firms to valuable knowledge about their partners (Lumineau et al., 2011; Mayer and Argyres, 2004). This is highlighted in Huber’s (1991) propositions that many organizational actions are ripe for gaining “information and knowledge” (p. 105), and one of such actions is firm exchange relationships. As an exchange relationship, contracting allows firms to intentionally and unintentionally acquire knowledge during the fulfillment of contract obligations and may influence its interactions with their contracting partners in the future (Mayer and Argyres, 2004). Specifically, contracts often entail unique contents such as “safeguards, penalties, and auditing rights” that are aimed at limiting opportunistic behaviors (Lumineau et al., 2011: 10). In other words, firms include proactive measures to protect themselves from partners who may seek to not meet their contractual obligations or partners who may seek to engage in exploitative behaviors. Therefore, by repeatedly engaging in contractual relationships, firms may gain knowledge about the processes of completing their contractual obligations and knowledge about the specific contents of contracting with partners (Mayer and Argyres, 2004).

Importantly, knowledge gained from contract alliances are likely not attached only to firm managers (Huber, 1991). Instead, acquired knowledge is distributed within firms, and may be recalled for future transactions. Therefore, managers’ interface with firm’s partners and managers’ knowledge gained from those partners may lead to “knowledge spillover” to other members of the firm, and in doing so helps improve organizational processes needed to conduct future firm-partner transactions (Holmqvist, 2004: 2; Tzabbar et al., 2022). For example, a manager who experiences hurdles in a contracting process may through formal and informal processes, communicate those experiences to the rest of the firm (Dyer and Nobeoka, 2000; Parent et al., 2007). As such, firms that possess knowledge about dealing with contracting parties may employ such knowledge to better engage those parties in the future (Mayer and Argyres, 2004). Importantly, the learning benefit of contract relationships is a function of the scope of contract relationships or number of contract partners (Khanna, 1998). Specifically, the scope of contract alliances determines the knowledge sources from which a firm may learn (Wu and Cavusgil, 2006). For example, relative to a firm with a narrow scope of contract alliances, a firm with a broader scope of contract alliances will be better positioned to derive the benefits of learning from alliances.

Organizational learning scholars have investigated the impact of prior contract experiences on future firm behaviors (Mayer and Argyres, 2004; Weber and Bauman, 2019). First, because prior experiences allow firms to build trust with contracting parties and allows firms to gain and provide firsthand information to partners, it allows for more efficient contracting relationships in the future (Ryall and Sampson, 2009). Specifically, scholars have proposed that prior alliance experiences reduce the need for control mechanisms in contracts, and more importantly, reduces the need for new information in the organizational learning process (Dekker and Van den Abbeele, 2010). For example, continuous interaction with familiar partners may enable firms to employ relational means of interactions as they may be able to achieve their goals at lower costs (Ryall and Sampson, 2009). Indeed, though not directly tied to the organizational learning literature, Bonardi (2011) notes that “there is a large heterogeneity among firms regarding . . . the knowledge and skills” (p. 250) that might influence their ability to deal with government. This suggests that prior firm ties with government may become political knowledge and may “be deployed for different issues and in different political environments” (Bonardi, 2011: 250), which we argue will be the case with firms in government contracting arena.

Theory and hypotheses

Government contracting as a source of knowledge

Government contracting offers ample opportunity for the experiential learning described by Huber (1991) because government contract administration involves several processes beyond the contract agreement process, such as monitoring, performance evaluation, contract modifications, contract dispute resolution, and finally contract close out (Kelman, 2001). This is also because the contracting process generally allows a fair amount of socialization to learn about the key decision makers within partner firms as well as the proper ways to deal with such parties (Lumineau et al., 2011), with these acquired knowledge spilling over to the whole firm through informal (such as “email exchanges” and “memos”) and formal means (such as “training”); thus, making the acquired knowledge more valuable (Drutman, 2015: 143; Heimeriks, 2010: 68). Specifically, owing to government contracting relationships, firm managers may develop both knowledge that may be employed for future government contracting process (Berrios, 2006) and information on policy changes.

This is because firms with government contracts often serve as a source of knowledge for lawmakers during policy formation stage (Thai, 2001). For instance, Berrios (2006) notes that firms with government contracts develop a deep understanding of the government contract award and fulfillment process. Particularly, given “the specialized nature of many goods and services required by the government” firm employees develop “[increased] expertise and specialization” in “procedures of the government agencies that award [future] contracts” (Berrios, 2006: 121–122). Perhaps most critically, by developing knowledge of government agencies or “their way in and out of government,” firms with government contracts develop “intimate knowledge of government policies affecting their business,” knowledge that “may provide an advantage in accessing information that [other firms] do not have” (Berrios, 2006: 122).

Indeed, the scope of government contracting—that is, how widely spread these contracts are across the government (Abdurakhmonov et al., 2021)—may suggest the number of knowledge sources from which a firm may experientially learn (Wu and Cavusgil, 2006). This means that as a firm scope of government contracts increases, the firm engages in a greater number of interactions with multiple government agencies. We expect that due to the idiosyncrasies of government agencies and the greater interaction with more agencies, firms with higher government contract scope will have access to broader information and learning opportunities which, ceteris paribus, will likely be associated with a tapered firm lobbying investments for two related reasons.

First, as the scope of government agencies with which the firm has secured contracts increases, the interactions with a more diverse group of governmental personnel also increases, allowing for broader learning about governmental policy and needs. This increase in contacts with diverse information about government agencies, reduces the need to formally engage each agency—a task of firm lobbying (Ridge et al., 2017). Stated differently, through interactions and relationships developed in the servicing of contracts across more government agencies, the firm gains knowledge of an increasing number of government agencies’ activities, needs, and changing regulatory requirements, effectively scanning, and collecting information on these agencies, without the need for formal lobbying investments.

To illustrate, Drutman (2010) argues that a large chunk of a lobbyists’ time goes to understanding the government and attempting to gain insight into future government actions within various government agencies. Similarly, scholars argue that lobbying involves attempts to understand the different views of government agencies on policy issues and regulation (Heinz et al., 1993; Schlozman and Tierney, 1986). Firm lobbying can also sway the government both in (1) the allocation of greater government funds for government contracting—generate demand for a firm goods and services (Ridge et al., 2017), and (2) the actual securing of those contracts by a focal firm (Nownes, 2006). For example, while directed at generating demand for firm goods, lobbying may also allow politically active firms to gain better insight into both the “price parameters and product or service requirements” (Ridge et al., 2017: 1145) of government contracts than for less politically active firms. In other words, because the underlying function of lobbying is establishing relationships with government agencies, monitoring their behavior so that a firm learns of potential policy implications of their decision, gaining a deeper understanding of what the government needs and how it can source its products to them through government contracts (Nownes, 2006), this greater exposure through increased governmental contract scope are likely to be associated with a reduced need for formal lobbying activity. Indeed, Nownes (2006) argues that lobbyists spend considerable time on non-lobbying activities in their exchange with the government so that contacts are in place when needed. Interestingly, a large percentage of lobbyists’ time is spent on identifying policy positions of different individuals within the government (Heinz et al., 1993; Schlozman and Tierney, 1986).

As such, by maintaining relationships across a larger scope of government agencies during fulfillment of government orders, firms can more fully assess the intentions and behaviors of government officials and reduce information asymmetries between the parties while reducing the necessity for formal lobbying channels (Clawson et al., 1998). For example, Hiatt and Kim (2021: 14) suggest that firms with ties to the government are able to “1) [reduce] the costs of and barriers to interactions and 2) [facilitate] similar worldviews that can enhance relational interactions,” which should translate into circumvention in the use of formal lobbying channels. For example, in an interview with Hiatt and Kim, a defense contractor noted that “[their] guys have drinks with the government folks. Our vice presidents and directors are plugged in with the government and we know what is coming down the [government contract] pipeline” (p. 12), alluding to the possibility of acquiring information through alternate ways bypassing the use of formal lobbying channels. These ties with government officials may even allow “to get [a particular government agency] to write the characteristics of [a firm] product into the requirements, so that when the contract goes out, [a firms] product will fit the [government requirements] the best” (Hiatt and Kim, 2021: 13), further implying to how greater ties within government agencies may substitute the function of formal lobbying channels. Critically, firms with greater scope of ties to government agencies may “continuously evaluat[e] what is required” to win future contracts and “make required adjustments . . . where needed” (Thai, 2001: 31). This potential feedback loop tied to pre-established government contracting ties may also uncover “policies and/or agency procurement standards [that are obsolete] and adjustments [in firm actions] needed” (Thai, 2001: 31) so that necessary technological skills and expertise are refined, and future contract can be secured. Collectively, these governmental agency ties secured either through work with these government agency officials in contract execution (Berrios, 2006; Kelman, 2001) or through formal lobbying investments (Ridge et al., 2017) “aid the firm with the knowledge of government procedures and their insight in predicting government actions” (Agrawal and Knoeber, 2001: 180).

Second, exposure to and relationships developed with broader governmental agencies through governmental contract scope may allow for “obtain[ing] the knowledge to reduce [lobbying] costs” to deliver information to government agencies in a more targeted way—that is, it allows firms to engage the government more “efficiently” (Bonardi, 2011: 253). This is important as firms are incentivized to deliver information to the government that may help advance their interests. Thus, due to an increase in interactions with multiple agencies through governmental contract scope, a focal firm develops a broader knowledge of the activities being engaged across a larger portion of the government, advancing the firm’s scope of learning. Indeed, a firm that contracts with more government agencies will encounter more diverse governmental perspectives than a firm that concentrates on one or a few agencies (cf. Katila and Ahuja, 2002). Contract scope also facilitates engagement with ties of government officials and other regulatory authorities, which increases or accumulates both universal and tacit technical knowledge about government (Lei et al., 1996). The accumulation of this knowledge allows firms to know with greater accuracy the needs of these agencies and better match those needs with the firms’ interests. Interestingly, Kersh (2000) finds that lobbyists at times take advantage of their business clients: “rather than faithfully” acting in the best interest of the firm, “lobbyists act in ways designed to maximize . . . interests of their own” (p. 239) due to their clients’ lack of knowledge about “policy activity and of government decisions” (p. 241). Likewise, Drutman (2015) suggests that lobbyists often “oversell” their value to uninformed executives. Thus, when a firm already knows of the expectations of an increasing number of various government offices through interactions when fulfilling government contracts, it can not only be associated with reduced lobbying activities directed at such purpose but also with a diminished “opportunistic behavior” by self-interested lobbyists that might translate into real “efficiency” and better targeting in firm lobbying investments. Taken together, our arguments suggest that the greater the level of contract scope, the greater is a firm familiarity with government and the lesser need for overall lobbying:

Hypothesis 1. Government contract scope is negatively related to firm lobbying activities.

Government contracting dispersion

We have argued that greater government contract scope leads to greater learning and knowledge accumulation about government, thereby allowing for a reduction in the use of formal lobbying channels. However, government contracting is not a uniform process and contingencies of government contracting are likely to influence the relationship between government contract scope and firm lobbying investments. As a case to point, the negative relationship between government contract scope and formal lobbying activity is likely to be strengthened by government contract dispersion or the extent of equal distribution of firms’ contracts across government agencies. Given that firms can learn from each of the multiple agencies they interact with (Drutman, 2010), we expect that the level of effort that these firms devote to their interaction with each agency may play a role in their ability and incentive to learn from the agencies. Specifically, we argue that as firms devote learning efforts more evenly across several agencies because contracts are evenly spread across agencies, they are able to better learn from the multiple agencies with which they interact (Adler and Kwon, 2002), which therefore, allows them to better benefit from a broad contract scope.

To illustrate, Hart (2001) finds that the value of a particular relationship to the firm is a good predictor of the level of effort that a firm may devote toward a relationship. Specifically, researchers have proposed that firms often strive to maintain relationships if they depend on those relationships for key resources (Barringer and Harrison, 2000), and firms find it difficult to learn from other sources when their efforts are devoted disproportionally to a particular relationship (Lavie et al., 2010). For example, Lavie and Rosenkopf (2006) suggest that as firms continue to focus on highly important relationships, they are likely to reinforce their path dependence on such key relationships as they tend to develop specific skills and experience for those relationships. This is important as firms that obtain a disproportional amount of their government contracts from a few agencies may find it more important to focus their learning effort on understanding those few agencies; therefore, limiting their scope of knowledge sources and accumulation (Fichman and Levinthal, 1991). By concentrating on understanding the few agencies from which they derive key resources, these firms are also likely to develop relationship specific skills and experience that may make it difficult for them to learn from a wide array of government agencies.

However, firms that obtain their government contracts evenly from multiple agencies will have less dependency on specific agencies, thereby more chance for heterogeneous knowledge about government (Fichman and Levinthal, 1991). In other words, these firms will likely devote their learning efforts across these multiple agencies, and in doing so, will be able to gain a broad array of knowledge about the inner workings of these agencies. In addition, these firms may be able to avoid the trap of developing relationship specific skills that are not transferable across other contract relationships as they are more likely to balance their learning effort across multiple agencies (Lavie et al., 2010). For example, a firm that obtains US$4 million of its total US$5 million annual government contract value from one agency will likely prioritize understanding the inner working of that agency over the other agencies that supply the firm with US$1 million of annual contract value. The consequence of this is that it may focus the firm’s attention on this key agency and thus limit the array of ties and knowledge that the firm may gain if it were able to devote equal effort toward learning from all the agencies with which it contracts. However, a firm with US$5 million of annual government contracts divided more uniformly across several agencies (i.e. high contract dispersion) will be less incentivized to devote most of its learning efforts on a few agencies.

In summary, while government contract scope likely creates increased learning opportunities; and consequently, a diminished level of firm lobbying, we expect a more even distribution of firm contract values across government agencies will also play a role in firms’ ability to learn from the agencies with which they contract. Specifically, we argue that firms with a more proportional distribution of the dollar value of their contracts across multiple agencies will devote resources toward learning from these multiple agencies, and in doing so, these firms will better learn ways to interact with the government more efficiently. Consequently, these firms will be better equipped to pursue more targeted lobbying strategies. Thus, we hypothesize that

Hypothesis 2. The negative relationship between government contract scope and firm lobbying activities will be stronger for firms with greater contracting dispersion.

Government contract dependence

Next, we argue that the relationship between government contracting scope and firm lobbying activities may be weakened by a firm’s dependency on government contracts or government contract dependence (Abdurakhmonov et al., 2021). This is because one of the widely accepted antecedents of lobbying is firms’ attempt to manage the uncertainties that may arise from the reliance on government for key resources such as revenue (Blumentritt, 2003). Scholars have proposed that firms that depend on governmental agencies for key resources are often pressed to maintain their relationships with government in order to gain favorable business decisions (Clawson et al., 1998). Thus, firms engage in nonmarket activities, particularly lobbying, as a means to strengthen their ties with government, and firms that succeed in establishing relationships with the government often achieve better financial performance than their peers (Hillman, 2005; Hillman et al., 1999; Lord, 2000). Indeed, substantial evidence supports the need for firms to maintain a good relationship with public agencies when they rely on those agencies for key resources. For example, Bonardi et al. (2006) find that utility firms, which are highly regulated by government, are more successful when they engage in CPA. Likewise, Shaffer et al. (2000) study of airline companies—that are also significantly dependent on government regulators—find that these firms gain more financial success when they complement their market strategies with CPA. Indeed, recognizing the salience of government dependence, Burris (2001) argued that “firms that have the greatest economic stake . . . are constrained to seek [more governmental] favors” (p. 363).

Consistent with this view, we argue that firms that are dependent on the government for revenue are likely to increase their lobbying efforts even if they learn to be efficient in their lobbying investments. Indeed, prior research has shown that a key motivator for firm engagement in CPA is the resources they derive from the government (Hansen and Mitchell, 2000; Hillman, 2003). This becomes even more important for firms that rely on contractual relationships in their bid to gain resources from government agencies as those contract relationships often rely on strong ties between the parties, both for the establishment and the successful fulfillment of the contracts (Kelman, 2001). The argument is that one means for firms to establish these strong ties is through robust lobbying activities (Hansen and Mitchell, 2000; Lux et al., 2011). These statements lead us to argue that although firms better understand the inner workings of government agencies when they contract with a broad range of government agencies, firms that obtain high-value contracts from government agencies are also likely to be driven by the importance of their relationship with the government to still pursue aggressive lobbying investments. Thus, we hypothesize that

Hypothesis 3. The negative relationship between government contract scope and firm lobbying activities will be weaker for firms with high government contract dependence.

Industry contracting scope

We also argue that industry contracting scope or the abundance of government agencies available for a focal firm industry for government contracting will weaken the relationship between firm government contract scope and firm lobbying. Indeed, firms do not operate in a vacuum as firms are often affected by characteristics of their operating environment (Dess and Beard, 1984; Goll and Rasheed, 1997; Miller and Friesen, 1983; Randolph and Dess, 1984). Particularly, managers consider key industry factors as they make strategic decisions (Shepherd et al., 2013). One key characteristic of a firms’ industry that likely influences strategic decisions and outcomes is the abundance of additional opportunities in an operating environment (Castrogiovanni, 1991; Dess and Beard, 1984). Industry opportunities have been shown to influence firm behavior in various ways, as well as firm profitability and survival (Castrogiovanni, 1991; Rajagopalan et al., 1993).

Applied to the opportunities in governmental agencies, we propose that high contracting scope is likely to be associated with increased lobbying investments even if the firms are able to learn from their ties with governmental agencies. This is because industries with an abundance of available contracting agencies are likely to present firms with the opportunity to further grow their contractual ties with additional government agencies. Specifically, an abundance of contracting agencies implies greater opportunity for firms to establish more revenue sources, and one established path to growing these ties is through lobbying (Castrogiovanni, 1991; Hansen and Mitchell, 2000; Lux et al., 2011). In other words, firms in these industries may expend resources toward exploiting these available learning opportunities as they may stand to gain future benefits from them (Keats and Hitt, 1988). Existing research has shown evidence in support of the argument that firms are motivated to pursue new and diverse strategic options when they operate in industries with opportunities for growth (Baum and Wally, 2003; Miller and Friesen, 1983).

However, firms that operate in industries with low contracting scope are less likely to be associated with increased lobbying investments as industries with low contracting scope are likely to offer limited opportunities for firms to grow their contract ties (Castrogiovanni, 1991; Dess and Beard, 1984). Indeed, firms that operate in industries where there are limited contract opportunities are likely to focus their efforts on understanding their existing ties to government agencies rather than creating new contract relationships (Khandwalla, 1973). Therefore, these firms will not be incentivized to increase their lobbying activity but to learn from their current firm-government interface and use that accumulated knowledge for greater “efficiency” in their lobbying.

In sum, these statements suggest that although firms are able to learn from their prior ties with government agencies (Drutman, 2010), the opportunity to further grow government contract relationships in industries that have high contract scope makes it likely that firms will increase their lobbying effort as a means to expand their contract relationships (Castrogiovanni, 1991; Dess and Beard, 1984), whereas firms in an industry with low contracting scope will be more focused on using their accumulating knowledge about government to circumvent formal lobbying channels given they already “know” and for greater efficiency in lobbying (Goll and Rasheed, 2004). These arguments lead us to hypothesize:

Hypothesis 4. The negative relationship between government contract scope and firm lobbying activities will be weaker for firms with high industry contract scope.

Methods

Data and sample

Our study sample includes US firms listed in the S&P 1500 index from 2008 to 2018. We collect data on firm lobbying activities from the CRP, a non-profit organization that tracks the impact of money on policy making. Consistent with previous research, we obtain information on government contracts from a public website, usaspending.gov, the US federal government dataset that consolidates information on all federal government contracts (Abdurakhmonov et al., 2021; Ridge et al., 2017). We also utilize Compustat for our control variables by matching it with the information on lobbying and government contracts. To establish temporal spacing our dependent variable is measured in t + 1, while other variables were measured at time t.

Dependent variable

Lobbying activity was measured as the logarithm of the total value of all lobbying directed at the US government throughout the year (Barber and Diestre, 2019; Ridge et al., 2017).

Independent variables

We follow previous research (Abdurakhmonov et al., 2021) to measure government contract scope as the number of major government agencies with which a focal firm has a contract in a given year. We measure contracting dispersion as the reversed Herfindahl index of concentration of firm’s government contracts, with a value of 0 suggesting that contract value disproportionally comes from one government agency, and a value of 1 suggesting that government contracts are equally distributed across government agencies (Bos et al., 2017; Li and Simerly, 1998). We measure government contract dependence as the value of the firm’s annual contracts with government scaled by firm’s annual revenue. Scaling firm’s annual contract by firm’s annual revenue allows us to capture firm’s dependence on government contracts for its revenue (Hillman et al., 2004). Finally, we measure industry contracting scope as the number of major government agencies with which all firms in a focal firm’s industry have contracted, showcasing a potential for future contracts in various agencies of government. To construct this measure, we identified the number of different government agencies that firms in a focal firm’s Standard Industrial Classification (SIC) code have at least one contract with within each year. For example, in our sample Abbott Laboratories has a contract with 10 major government agencies in 2015 (i.e. contract scope), while firms in its industry have a contract with 15 major government agencies in the same year, representing our measure of industry contracting scope. Likewise, while Gilead Sciences has a contract with 1 major government agency, its industry has a contract with 10 agencies, respectively. We determine a firm industry as all firms within the same four-digit SIC code of the focal firm for each year.

Control variables

We control for firm characteristics that have been known to significantly influence firm lobbying activity (Hillman et al., 2004). Specifically, we included a measure of firm performance, measured as return on assets. Similarly, we also include firm size measured as the total assets of a firm in a given year, and slack, measured as firm cash on hand and other short-term investments, because previous research has identified them as important to account for resources available for lobbying (Ridge et al., 2017). We also recognize that a firm’s interaction with multiple industries may impact our hypothesized relationships. Therefore, we control for diversification, captured through the entropy measure of firm diversification (Palepu, 1985), and industry scope, measured as the number of industries from which a company derives its revenue. We control for the number of lobbying issues that a firm pursues in a year as it can be an important determinant of a firm’s future lobbying activity (Drutman, 2015). Likewise, we control for political action committee expenditure, measured as the natural logarithm of annual firm expenditure on political action committees. We also account for the possibility that a firm’s prior contracting and ability to win contracts over their rivals may influence our hypothesized relationships by controlling for the firm’s contracting power, measured as the ratio of firm’s annual contract to firm’s annual industry contract. To account for industry aspects that might influence a firm’s lobbying activity, we control for regulated industry, which is dummy coded as one if the firm operated in a regulated industry (Werner, 2017), and industry munificence, which we operationalize as the growth rate of the value of sales within a focal firm’s industry (Goll and Rasheed, 2004). We also include dummy variables for two-digit SIC code to account for industry effects and year to account for temporal effects in all our models.

Selection correction

The choice of having a government contract is not a random event and as such may suffer from selection bias. To account for this possibility, we control for the selection process that may lead a firm to pursue government contracts. To do so, we conducted a first-stage Probit model predicting the likelihood of having government contract in a sample of all firms from Compustat and Execucomp for our panel years based upon theoretically meaningful variables (the number of products that a focal firm industry supplies to government, the number of government contracts allocated to a focal firm industry, and the annual number of firms with antitrust violations in a focal firm’s industry as well as year dummies) that may impact the likelihood of a focal firm having a contract with government agencies. We rely on these variables because the number of government contracts allocated to an industry and the number of products that an industry supplies to the government may predict firm’s government contracting. While the antitrust reputation of an industry likely signals the reputation of an industry’s member firms, which may influence firms’ likelihood of government contracting (ACQUISITION.GOV, 2022; Baucus and Baucus, 1997). To account for potential selection bias, thus, we calculate the inverse mills ratio and include it in the second stage. As can be observed in the first-stage analysis included in Appendix 1, the results are consistent with our theorizing: firms that are associated with industries that have greater number of government contracts and greater number of products supplied to government significantly predict the likelihood of a focal firm having government contracts. Relatedly, number of firms with antitrust violations in a focal firm’s industry negatively predicts inclusion of a given firm into our sample.

Analytical approach

Our dependent variable is left-censored because some firms are not politically active (i.e. do not engage in lobbying), and scholars have historically employed random effects Tobit models to analyze censored data (Valentini and Di Guardo, 2012). However, one key limitation of the Tobit models is that there is no option for firm fixed effects specification (Ridge et al., 2017), and this is particularly important as our research questions can be better answered by exploring within firm variations of our independent variable. Thus, we employ firm fixed effects ordinary least squares (OLS) regression with robust standard errors in analyzing our data (as a robustness test, we employ random effects Tobit models in analyzing our data as shown in Appendix 4 and results from this additional analysis are consistent with the results from our fixed effects models).2 Fixed effects regression, which considers within firm variance, is a conservative estimate that also allows us to exclude “any bias that may result from a correlation between the panel-level disturbance and an independent variable” (Certo et al., 2017: 1542).

Results

We provide descriptive statistics and correlations for our variables in Table 1. We standardize the predictor variables in our regression models to aid interpretation of regression coefficients (Cohen et al., 2003). A variance inflation factor (VIF) test suggests that multicollinearity is not an issue as the VIF coefficients were below the recommended cut off threshold of 10.

Table 1.

Descriptive and correlation matrix.

		Mean	SD	(1)	(2)	(3)	(4)	(5)	(6)	(7)	(8)	(9)	(10)	(11)	(12)	(13)	(14)
1	Lobbying activity	4.41	6.23
2	Government contract scope	1.36	3.96	0.14
3	Contracting dispersion	0.76	0.40	–0.15	–0.48
4	Contracting dependence	0.01	0.08	0.04	0.21	–0.12
5	Industry contracting scope	17.22	15.07	–0.07	0.15	–0.10	0.07
6	Diversification	0.54	0.59	0.21	0.10	–0.08	–0.00	–0.02
7	Industry scope	5.80	3.71	0.18	0.08	–0.08	–0.00	–0.04	0.70
8	Regulated	0.39	0.49	0.08	–0.05	0.09	–0.01	–0.12	–0.04	0.02
9	Industry munificence	9.37	23.01	–0.04	0.00	0.00	0.03	0.30	–0.02	–0.04	0.01
10	Lobbying issues	1.83	3.73	0.66	0.20	–0.17	0.05	–0.07	0.26	0.25	0.05	–0.03
11	Political action committee expenditure	2.37	4.59	0.67	0.15	–0.15	0.04	–0.11	0.20	0.20	0.10	–0.07	0.72
12	Firm size	7.92	1.77	0.47	0.16	–0.09	–0.02	–0.11	0.32	0.28	0.31	–0.07	0.51	0.47
13	Firm performance	0.03	0.16	0.06	0.03	–0.04	0.00	0.01	0.01	0.04	–0.07	0.02	0.06	0.04	0.11
14	Slack	1.74	14.14	0.15	0.05	–0.06	–0.01	0.01	0.10	0.10	0.07	–0.01	0.22	0.16	0.29	0.01
15	Contracting power	0.02	0.08	0.10	0.32	–0.31	0.24	0.02	0.07	0.06	–0.03	–0.03	0.11	0.11	0.09	0.02	0.02

SD: standard deviation.

N = 15,199; correlations greater or equal to |0.02| are significant at the 0.05 level.

Parameters estimates for lobbying activity are presented in Table 2. Model 1 in the table includes only the control variables. Model 2 in the table provides results for the relationship between government contract scope and firm lobbying activities, while Models 3 through 5 provide results for the moderated relationships. Finally, Model 6 provides results of the full model with all the interactions. In addition, likelihood ratio tests comparing our analytical models indicates that the addition of our independent and interaction variables provides significant explanatory power to the models, except in the case of Model 4 where we test the moderating effect of government contract dependence. Hypothesis 1 states that contract scope is negatively related to firm lobbying activity. The result from the test of this hypothesis in Model 2 provide a significant negative relationship (β = –0.08; p = 0.03) and thus provide support for Hypothesis 1. Practically speaking, a one standard deviation increase in government contract scope is associated with approximately 8% reduction in firm lobbying activity. Hypothesis 2 suggests that government contract dispersion will strengthen the relationship between government contract scope and firm lobbying activity. The results in Model 3 supports this hypothesis as the coefficient for the interaction of government contract scope and government contract dispersion is negative and significant (β = –0.11; p = 0.03). We also graph this relationship in Figure 1 which shows that the negative relationship between government contract scope and lobbying activity is stronger for firms with high government contract dispersion. In practical terms, our results for Hypothesis 2 indicate that at high levels of government contract scope (one standard deviation above the mean of government contract scope), a one standard deviation increase from the mean of government contract dispersion is associated with approximately 27% reduction in firm lobbying.

Table 2.

Fixed effects regression of the effect of contract scope on lobbying.

	(1)	(2)	(3)	(4)	(5)	(6)
Constant	4.58*** (0.00)	4.63*** (0.00)	4.58*** (0.00)	4.63*** (0.00)	4.62*** (0.00)	4.57*** (0.00)
Mills ratio	0.32⁺ (0.05)	0.27⁺ (0.10)	0.27⁺ (0.10)	0.27⁺ (0.10)	0.27(0.10)	0.27(0.11)
Diversification	0.10* (0.03)	0.10* (0.03)	0.10* (0.03)	0.10* (0.03)	0.10* (0.03)	0.10* (0.03)
Industry scope	−0.05(0.24)	−0.05(0.25)	−0.05(0.25)	−0.05(0.25)	−0.05(0.26)	−0.05(0.25)
Industry munificence	0.01(0.84)	0.01(0.81)	0.01(0.80)	0.01(0.82)	0.01(0.86)	0.01(0.86)
Lobbying issues	1.28*** (0.00)	1.28*** (0.00)	1.28*** (0.00)	1.28*** (0.00)	1.29*** (0.00)	1.29*** (0.00)
Political action committee expenditure	1.23*** (0.00)	1.23*** (0.00)	1.24*** (0.00)	1.23*** (0.00)	1.23*** (0.00)	1.23*** (0.00)
Firm size	0.82*** (0.00)	0.81*** (0.00)	0.81*** (0.00)	0.81*** (0.00)	0.81*** (0.00)	0.82*** (0.00)
Firm performance	−0.01(0.79)	−0.01(0.78)	−0.01(0.78)	−0.01(0.78)	−0.01(0.79)	−0.01(0.80)
Slack	0.14(0.31)	0.16(0.25)	0.17(0.21)	0.16(0.25)	0.15(0.27)	0.17(0.22)
Contracting power	0.06(0.27)	0.10⁺ (0.06)	0.13* (0.03)	0.11⁺ (0.06)	0.11* (0.04)	0.14* (0.01)
Contracting dispersion	0.07(0.15)	0.08(0.11)	0.07(0.16)	0.08(0.11)	0.08(0.11)	0.07(0.16)
Contracting dependence	−0.00(0.98)	−0.00(0.99)	0.00(0.99)	−0.03(0.68)	−0.00(0.96)	−0.03(0.63)
Industry contracting scope	0.29** (0.00)	0.29** (0.00)	0.29** (0.00)	0.29** (0.00)	0.28** (0.01)	0.28** (0.01)
Government contract scope		−0.08* (0.03)	−0.24** (0.00)	−0.08* (0.03)	−0.12** (0.01)	−0.30*** (0.00)
Government contract scope × contracting dispersion			−0.11* (0.03)			−0.12* (0.01)
Government contract scope × contracting dependence				0.01(0.67)		0.02(0.62)
Government contract scope × industry contracting scope					0.05* (0.05)	0.05* (0.03)
Observations	15,199	15,199	15,199	15,199	15,199	15,199
Number of firms	1930	1930	1930	1930	1930	1930
R ²	0.11	0.11	0.11	0.11	0.11	0.11
Log likelihood	−33,671	−33,669	−33,666	−33,669	−33,667	−33,663
Change in χ² from Model 1		5.31*	11.06**	5.51⁺	9.87**	17.06**
Change in χ² from Model 2			5.75*	0.20	4.56*	11.75**

Year and industry dummies are included but not shown. Regulated variable drops from models due to time invariance.

p < 0.05; **p < 0.01; ***p < 0.001; ⁺p < 0.1.

Figure 1.

Moderating effect of contracting dispersion on the relationship between government contract scope and firm lobbying activities.

Hypothesis 3 posits that government contract dependence will weaken the negative relationship between government contract scope and firm lobbying activity. While the coefficient of the hypothesized relationship in Model 4 is positive as predicted, our results fail to support Hypothesis 3. Our final hypothesis predicts that industry contracting scope will moderate the relationship between government contract scope and firm lobbying activity. The results in Model 5 supports this hypothesis as the coefficient for the interaction of government contract scope and industry contracting scope is positive and significant (β = 0.05; p = 0.05). We graphically present this relationship in Figure 2 which shows that the negative relationship between government contract scope and lobbying activity is weaker for firms in industries with high government contract scope. Practically, the results for Hypothesis 4 suggest that at high level of government contract scope (one standard deviation above the mean of government contract scope), firm industry contracting scope is associated with 35% increase in firm lobbying as we move from mean industry contracting scope to high industry contracting scope (one standard deviation above the mean of industry contracting scope).

Figure 2.

Moderating effect of industry contracting scope on the relationship between government contract scope and firm lobbying activities.

Robustness tests

To alleviate the concern that endogeneity might be influencing both government contract scope and lobbying (i.e. the potential endogeneity between scope with other factors that may also influence firm lobbying activity), we follow prior research (Wiersema and Zhang, 2011; Wowak et al., 2015) and create a first-stage model regressing our independent variable (government contract scope) on our instruments (number of products supplied to government by a focal firm’s industry and firm’s board diversity concerns) along with our control variables as shown in Appendix 2. We chose these variables as instruments as the number of products supplied to the government by a focal firm’s industry likely determines contracting scope while board diversity concern (i.e. firms’ boards of directors with diversity issues) also likely relates to contract scope because firms seeking to obtain contracts from government agencies are expected to show a track record of diversity (Gorelick and Waters, 2020). The information on the number of products supplied to government by a focal firm’s industry is obtained from usaspending.gov by aggregating all the different variety of products supplied by firms in a focal firm’s SIC industry classification code. We operationalize board diversity concerns as using Kinder, Lydenberg, Domini (KLD) data on firm diversity which flags companies with no women on their board of directors (Cook and Glass, 2015). To ensure the relevance and exogeneity of the instruments, we tested their relevance using the first stage F-test and their exogeneity using Sargan–Hansen statistic and found support for our instrument selection.3 Following this, we use the residuals from this model as our revised government contract scope measure, which yield very similar results to our main models as shown in Appendix 3, providing additional confidence in our results and that endogeneity does not detrimentally bias our interpretation of our primary analysis. This residual measure of our independent variable serves as a component of government contract scope that is uncorrelated to our other predictor variables (Yu, 2008).

We also follow prior studies (Ridge et al., 2017) and retest our hypotheses using random effects Tobit models (with year and industry dummies) to account for the censored nature of our data, and results from this additional test are consistent with the results from our primary models. We conduct this additional test because prior studies have suggested that the use of OLS regression with a censored dependent variable generates biased coefficient estimates (Greene, 2000; Ridge et al., 2017). Because fixed effects are not specified for Tobit analyses, we take additional step to replicate a firm fixed effects specification on our Tobit models by following recommendations by Bliese et al. (2020) to employ a hybrid model (Raudenbush, 2009). To do so, we calculate the firm mean level of government contract scope and include it as a control variable (Abdurakhmonov et al., 2022). Furthermore, we subtract the firm level mean from our government contract scope variable before including it in the model. As shown in Appendix 4, this robustness test shows results consistent with our main models.

Discussion

In this article, we borrow insights from the organizational learning literature (Huber, 1991) to demonstrate that firms learn from their prior ties with government, and the knowledge gained from these prior interactions may be associated with their subsequent firm behavior. Specifically, we showcase how government contract scope allows firms to learn from multiple government agencies and how it is associated with a firm’s subsequent lobbying activity. We find that government contract scope is negatively related to a firm’s subsequent lobbying investment. We also find that while government contract dispersion amplifies such relationship, industry government contract scope weakens the effect of a focal firm government contract scope on firm lobbying activity. Collectively, our framework begins to deepen our understanding of firm lobbying activity as well as our understanding of sources of firm knowledge. In so doing, we extend research on CPA and organizational learning and advance a number of contributions to theory and practice.

First, we contribute to the CPA literature through a consideration of how a firm’s government contracting may offer benefits beyond the benefit of contracting revenue (Hadani et al., 2017; Lux et al., 2011; Schuler et al., 2002). We posit that a more accurate view of firm CPA necessitates the consideration of embeddedness of firm CPA in its prior alternative interactions with the government. This follows prior research (e.g. Blumentritt, 2003; Hadani, 2007; Hadani et al., 2015) to extend the conceptualization of the market for political influence in CPA research by focusing on non-economic considerations. Specifically, we theorize how the organizational learning driven by a firm’s government contracts is associated with a firm’s lobbying activity. In so doing, most fundamentally, we extend the current conceptualization of CPA as a market exchange in the market for political influence (Bonardi, 2011), which has overlooked avenues for prior ties with government as a critical contingency for firm political investments. Thus, we do not only better clarify antecedents of corporate lobbying but also attract attention to the internal firm learning processes associated with firm ties to government.

We also contribute to the organizational learning literature by proposing government contracting as a knowledge source for firms. Specifically, prior research (Mayer and Argyres, 2004; Weber and Bauman, 2019) demonstrates how firms may learn from their contracting partners. They show that as firms experience the formation of contract relationship, execution of contract terms, and resolution of contract disputes, they may gain valuable knowledge about the inner workings of their partners’ businesses (Ryall and Sampson, 2009). As such, repeated contract relationships may allow firms to engage their partners more efficiently (Mayer and Argyres, 2004; Weber and Bauman, 2019). We show how one specific contracting form, government contracting scope may serve as a key knowledge form for firms. This is important as populations of firms may rely on government contracting for their critical resources (Abdurakhmonov et al., 2021). Thus, a deeper understanding of the benefits of such interactions is valuable to practitioners and scholars alike.

Firms’ ability to learn from their government contracting partners likely also has some disadvantages. One important downside is the potential to make partners overly dependent on government agencies (Abdurakhmonov et al., 2021). Specifically, prior research shows that firm dependence on government agencies for revenue may lead them to devote their attention toward meeting the specific needs of those agencies overlooking market dynamics (Ocasio, 1997). Consequently, this may lead to firms to rely on exploitative learning in their operations and may subsequently lead to negative firm outcomes as it is important for firms to achieve a good balance of exploitative and explorative learning (He and Wong, 2004). Furthermore, closer embeddedness of firms with government through relational ties may also lead to complicity and potential negative consequences both for a firm and government agencies. One clear negative outcome is increased defaults on government contracts due to overestimation of firm efforts or hubris by either or both embedded government and firm officials (Ferris et al., 2021). It may also lead to inefficient choices both for firms and government. For example, Drutman (2015) notes how once firms engage in CPA to address a particular regulatory challenge, these political investment patterns endure due to rising power of politically connected employees within the firm. Likewise, Abdurakhmonov and colleagues (2021) show that markets are overall pessimistic about firms with governmental contract ties. Thus, future research on alternate firm ties to government should not only focus on positive aspects of these ties but also consider inertial and inefficiencies these may cause.

As with any research, our conceptual framework has limitations that also suggest future research directions. First, our model does not account for variety of all potentially heterogeneous characteristics of government contracting. However, we acknowledge that a government contract is typically complex and may have different relationship with a firm’s CPA depending on the characteristics of lobbying tools utilized. For example, a short-term government contract (e.g. a one-time purchase government purchase of firm product), may have a smaller relationship with a firm’s learning relative to a long-term government contract. In these instances, a firm may be motivated by short-term private benefits that could be acquired through firm CPA and has no concern for long-term implications of his or her decisions. Future research could explore more complex characteristics of government contracting and how those characteristics may relate to firm CPA.

Second, our theory focused on a visible form of firm-government tie (i.e. government contract scope) and it relates to future firm lobbying investments, however other firm-government interaction avenues exist that may also have important implications for firms’ CPA. Because there are many other forms of firm-government interaction, such as trade associations, Congressional testimonies, and politically affiliated employees and lobbyists, future research could productively explore whether and how these other forms of firm-government interface interact.

Finally, we did not focus on dyadic power dynamics in the political market as specific idiosyncrasies that influence a firm’s CPA in the presence of government contracts. In fact, firm CPA may not be only related with learning associated with a firm’s interaction with the government since the decision to engage in CPA may be multifaceted based on a firm’s perceived power (Emerson, 1962), where focal firm executives consider their perceived power before seeking to engage in CPA. For example, a firm’s competitive position in the market arena may be an important factor in explaining CPA. It is quite plausible that monopoly or oligopoly firms may be perceived differently by governments, thus necessitating increases in CPA. Future research may benefit from exploring this and other related political market-specific factors that may broaden or complement the factors that are associated with a firm’s CPA strategies.

Conclusion

We have sought in this article to explore the ways in which government contract scope relates to a firm’s lobbying activity in the political market. The theoretical framework we develop provides insight into how firm government contracts relates to a firm’s subsequent lobbying activity. In so doing, we integrate two key strategic management literatures, organizational learning literature and CPA literature to demonstrate how firms’ learning from government contracting and how such learning may modify firm behavior. We hope this framework offers valuable insights into the complex quest of investigating the nuanced aspect of a firm’s political activity (Hadani and Schuler, 2013) and helps to guide future research.

Footnotes

Appendix

Appendix 4.

Tobit regression of the effect of contract scope on lobbying.

	(1)	(2)	(3)	(4)	(5)	(6)
Constant	−1.18 (0.85)	−0.98 (0.87)	−1.10 (0.86)	−0.98 (0.87)	−0.97 (0.87)	−1.11 (0.86)
Mills ratio	0.81⁺ (0.09)	0.71 (0.14)	0.77 (0.11)	0.71 (0.14)	0.69 (0.15)	0.76 (0.11)
Firm mean contract scope	0.22** (0.00)	0.21** (0.01)	0.19* (0.02)	0.21** (0.01)	0.21** (0.01)	0.19* (0.02)
Diversification	0.22* (0.05)	0.21* (0.05)	0.21⁺ (0.05)	0.21* (0.05)	0.22* (0.05)	0.21⁺ (0.05)
Industry scope	−0.09 (0.42)	−0.08 (0.43)	−0.09 (0.41)	−0.08 (0.43)	−0.08 (0.44)	−0.08 (0.43)
Regulated	3.66** (0.00)	3.65** (0.00)	3.65** (0.00)	3.65** (0.00)	3.66** (0.00)	3.66** (0.00)
Industry munificence	−0.06 (0.56)	−0.06 (0.59)	−0.05 (0.64)	−0.06 (0.59)	−0.07 (0.54)	−0.06 (0.58)
Lobbying issues	1.74*** (0.00)	1.74*** (0.00)	1.75*** (0.00)	1.74*** (0.00)	1.75*** (0.00)	1.76*** (0.00)
Political action committee expenditure	2.06*** (0.00)	2.06*** (0.00)	2.06*** (0.00)	2.06*** (0.00)	2.05*** (0.00)	2.06*** (0.00)
Firm size	4.15*** (0.00)	4.14*** (0.00)	4.13*** (0.00)	4.14*** (0.00)	4.13*** (0.00)	4.11*** (0.00)
Firm performance	0.05 (0.64)	0.05 (0.64)	0.04 (0.67)	0.04 (0.65)	0.05 (0.63)	0.04 (0.65)
Slack	−0.39⁺ (0.06)	−0.37⁺ (0.07)	−0.34⁺ (0.10)	−0.37⁺ (0.07)	−0.38⁺ (0.07)	−0.35⁺ (0.09)
Contacting power	0.22⁺ (0.07)	0.33* (0.01)	0.37** (0.01)	0.33* (0.01)	0.34* (0.01)	0.39** (0.00)
Contracting dispersion	0.15 (0.19)	0.17 (0.16)	0.14 (0.25)	0.17 (0.16)	0.17 (0.15)	0.13 (0.26)
Contracting dependence	−0.08 (0.61)	−0.08 (0.62)	−0.08 (0.59)	−0.08 (0.59)	−0.08 (0.60)	−0.09 (0.59)
Industry contracting scope	0.45⁺ (0.06)	0.46⁺ (0.05)	0.45⁺ (0.06)	0.46⁺ (0.05)	0.45⁺ (0.06)	0.43⁺ (0.07)
Government contract scope		−0.04* (0.05)	−0.11** (0.01)	−0.04* (0.04)	−0.05* (0.02)	−0.13** (0.00)
Government contract scope × contracting dispersion			−0.06* (0.04)			−0.07* (0.02)
Government contract scope × contracting dependence				0.02(0.78)		−0.03(0.63)
Government contract scope × industry contracting scope					0.02⁺ (0.10)	0.03* (0.05)
Observations	15,199	15,199	15,199	15,199	15,199	15,199
Number of firms	1930	1930	1930	1930	1930	1930
Log likelihood	−19,159	−19,156	−19,154	−19,156	−19,155	−19,152
Change in χ² from Model 1		5.96*	9.97**	6.06*	8.73*	14.05**
Change in χ² from Model 2			4.01*	0.11	2.77⁺	8.10*

Year and industry dummies are included but not shown.

p < 0.05; **p < 0.01; ***p < 0.001; ⁺p < 0.1.

Acknowledgements

The authors thank the Coeditor Glenn Dowell and three anonymous reviewers for their insightful feedback and guidance throughout the review process.

Funding

The author(s) received no financial support for the research, authorship, and/or publication of this article.

ORCID iD

Izuchukwu Mbaraonye

Notes

Author biographies

Izuchukwu Mbaraonye is a PhD candidate in the College of Business at the University of Nebraska–Lincoln. His research focuses on business government interactions, business political strategy, and social evaluations.

Mirzokhidjon Abdurakhmonov is an assistant professor of management in the College of Business at the University of Nebraska–Lincoln. His research focuses on the intersection of firm and government, corporate political activity, and strategic leadership. He received his PhD from University of Arkansas.

Jason W. Ridge is a professor of strategic management and chair of the Strategy, Entrepreneurship, and Venture Innovation Department in the Sam M. Walton College of Business at the University of Arkansas. His research focuses on corporate political activity and strategic leadership. He received his PhD from Oklahoma State University.

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