Matthew Hamilton
Department of Engineering and Public Policy
Program in Strategy, Entrepreneurship, and Technology Change
mhamilto@andrew.cmu.edu
Motivation
Adapting institutions to new economic conditions represents a major challenge for public officials. Even when political actors recognize the need for change, the existing environment can restrict both the extent of change and how it can be achieved. Understanding how political latitude (i.e. the lack of constraint or competition in political institutions) influences these actors is therefore important for evaluating regional efforts to implement institutional changes in response to economic challenges. For example, while latitude may promote favorable conditions for change, it has also been linked to poor program monitoring and rent-seeking behaviors. This has appeared to be particularly problematic for state governments' attempts to enhance regional technology commercialization and entrepreneurship. The goal of this paper is to determine if political latitude enables change, and if this same political environment promotes inefficiency with regards to governmental investments into formal, organization-based institutional changes.
Data and Methods
Using a unique dataset of TBED (Technology-based Economic Development) organizations and programs in U.S. states from 1998 to 2005 I am able to address prior challenges in the empirical investigation of institutional change, and explore how politics influences an emerging area of regional policy. TBED investments are a collection of programs and organizations implemented to directly change the institutions involved with technology entrepreneurship and commercialization. Both theory and observation of enacted programs indicate strong influences from political factors. TBED thus offers an excellent setting to understand if political latitude is required for investment into institutional change, and if this same latitude reduces efficiency of the implemented programs.
The scale of change is evaluated using the total annual state allocation to TBED organizations, while efficiency is measured using the ratio of salary and consulting expenses to overall expenditures and by an assessment of regional fragmentation of organizations. Political latitude is measured through party control of the governorship and representation in legislature. Several panel data regression models are specified to examine the influence of political latitude on the scale and efficiency of TBED investments. In addition to the influences of political latitude, this approach also controls for fixed state effects and yearly changes in economic (e.g. unemployment) and financial conditions (e.g. state debt) of the state.
Results and Discussion
Results of the longitudinal empirical analysis indicate that U.S. states responded to economic challenges regardless of party or political latitude. Efficiency, however, as measured by organizational expenditures, was significantly reduced when elected officials had greater political latitude. The control of the state government by Republicans led to higher monetary investments into institutional change while greater legislative representation by Democrats produced more organizations. Regardless of the party in charge, organizations were susceptible to decreased efficiency when there was greater latitude in legislative control or when a higher ratio of program funding was provided by state government as opposed to private sources. Southern and Western US regions' TBED organizations were formed more recently, and can be characterized as being in a more nascent stage of institutional change. The regional analysis shows the political latitude has a significant and negative influence on organizational efficiency in initial stages of TBED program development.
Our results confirm the general importance of political institutions on economic development and support theories that institutional incentives impact the behaviors of agents initiating change (e.g. institutional entrepreneurs). However, I also find when specific types of political latitude influence the creation of productive institutional change. These findings support the continued use of TBED by state governments, but suggest that private stakeholders should ensure close monitoring of newly formed economic development organizations, especially in locations where party representation in legislatures is unbalanced.