Effects of regulatory uncertainty on corporate strategy—an analysis of firms’ responses to uncertainty about post-Kyoto policy

Abstract

Abstract A better understanding of corporate strategy under regulatory uncertainty enables policy makers to improve policy making efficiency and enhance regulations’ effectiveness. Based on a review of the literature on policy formulation, we propose that regulatory uncertainty is characterized by a dependence on political negotiation, a discrete scenario structure, and a discontinuous resolution. Data from a worldwide survey show that firms pursue response strategies to regulatory uncertainty that address these characteristics by participating in policy making and increasing strategic flexibility. Surprisingly, the results also show that regulatory uncertainty only partly causes firms to postpone strategic decisions. We find that existing regulation and a need to act quickly despite regulatory uncertainty are opposed to the pursuit of a postponement strategy. We conclude that improving the mechanisms by which firms participate in early stages of the policy making process could enable them to operate in a more target-oriented manner, allow for more efficient policy implementation, and increase a regulation's effectiveness.