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Corporate response strategies to regulatory uncertainty: evidence from uncertainty about post-Kyoto regulation

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Abstract

A better understanding of firms’ response strategies to regulatory uncertainty enables policymakers to improve policymaking efficiency and to enhance the effectiveness of regulation. Based on a literature review, we categorize responses according to their objective toward regulatory uncertainty into four strategies: avoidance, reduction, adaptation, and disregard strategies. Unique data from a worldwide cross-industry survey show that firms predominantly pursue reduction, and to a lesser extent adaptation and disregard strategies, in response to post-Kyoto regulatory uncertainty. Surprisingly, firms in fact only sporadically pursue avoidance strategies, in contradiction to their own public announcements commonly made during policymaking to realize such strategies. The degree of regulatory uncertainty perceived and its interpretation as a threat increase the pursuit of most of these strategies. In addition, firms’ response strategies to post-Kyoto regulatory uncertainty differ across industries and partly across regions.

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Acknowledgments

This research was funded by the ClimPol project within the Competence Center for Environment & Sustainability of the Swiss Federal Institute of Technology, whose support we gratefully acknowledge.

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Correspondence to Volker H. Hoffmann.

Appendix

Appendix

Survey questions (Text in italics for explanation only, not included in questionnaire)

Corporate strategies to respond to regulatory uncertainty ( All items had five - point response formats )

Please indicate which activities your company currently pursues to deal with the uncertainty related to a possible regulation to reduce the CO2 emissions of your company after 2012 and rate the respective extent of the pursued activities.

Avoidance strategy (α = .63)

  1. 1.

    We postpone our strategic decisions until we have more certainty. [Postponement]

  2. 2.

    We create predictability, e.g., by negotiating contracts or long-term rules with other companies or the government. [Stabilization]

  3. 3.

    We shift our business to markets probably not affected by a regulation. [Withdrawal]

Reduction strategy (α = .66)

  1. 1.

    We systematically search for additional information. [Investigation]

  2. 2.

    We engage in the policy-making process to contribute to the decision making. [Influencing]

  3. 3.

    We select specific issues in our business environment to focus on in order to simplify decision making. [Simplification]

Adaptation strategy (α = .76)

  1. 1.

    We change our organizational structure, e.g., by increasing decentralization or lowering the degree of formalization, to better deal with the uncertainty. [Internal design]

  2. 2.

    We rearrange our portfolio through mergers, acquisitions, or divestures to be less exposed to regulatory uncertainty. [Integration]

  3. 3.

    We prepare for more than one potential outcome of the policy-making process. [Flexibility]

  4. 4.

    We join forces with others, e.g., suppliers, customers, or competitors. [Cooperation]

  5. 5.

    We observe the activities of other companies and follow them if appropriate. [Imitation]

Disregard strategy (α = .71)

  1. 1.

    We agree on the regulation scenario we consider the most likely and focus on preparing for this scenario. [Substitution]

  2. 2.

    We only make investments which have a guaranteed positive return regardless of the outcome of a possible future regulation. [No-regret moves]

Perceived regulatory uncertainty (All items had five-point response formats) = .80)

Please indicate how certain your company is about the following features of a possible regulation to reduce the CO2 emissions of your company after 2012.

  1. 1.

    The existence of a CO2 emission reduction regulation for your company after 2012.

  2. 2.

    The design details of a CO2 emission reduction regulation for your company after 2012.

  3. 3.

    The impact a CO2 emission reduction regulation on your company after 2012.

Perception of regulatory uncertainty as a threat (Respondents had to select one response option)

How does your company view the uncertainty related to a possible regulation to reduce the CO2 emissions of your company after 2012?

The regulatory uncertainty poses a threat for our company’s entire operations.

The regulatory uncertainty poses a threat for major parts of our company’s operations.

The regulatory uncertainty poses a threat for some parts of our company’s operations.

The regulatory uncertainty does not pose a threat for our company’s operations.

CO 2 emissions

Please indicate your company’s total direct GHG emissions (metric tonnes CO2 equivalent) in the calendar year 2006.

Table 5 Results of Harman one-factor analysis (Extraction method: Principal component analysis)
Table 6 Total variance explained (Extraction method: Principal component analysis)

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Engau, C., Hoffmann, V.H. Corporate response strategies to regulatory uncertainty: evidence from uncertainty about post-Kyoto regulation. Policy Sci 44, 53–80 (2011). https://doi.org/10.1007/s11077-010-9116-0

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