The danger of not listening to firms: Government responsiveness and the goal of regulatory compliance

Firms in emerging economies exhibit dangerously low rates of compliance with government regulations aimed at protecting society from the negative externalities of their operations. This study builds on individual-level theories from organizational behavior (procedural justice) and political science (deliberative democracy) to develop new firmlevel theory on the mechanism by which a firm is more likely to comply with a regulation after participating in its design by government. We hypothesize and find supporting evidence that such participation increases the likelihood of compliance by positively shaping the firm's view of government legitimacy, but only if the firm views government as responsive to its input. Without this responsiveness, regulatory compliance is even less likely than if the firm did not participate at all. Our empirical work is novel in its focus on the political activities of firms not only within the authoritarian-ruled emerging economy context of Vietnam, but also through study of a highly representative sample dominated by small and medium sized enterprises. We discuss how our work contributes to nonmarket strategy literatures on corporate social responsibility, self-regulation, and corporate political activity, as well as its implications for public policy.