Organizations in democratic societies often encounter detrimental public policies that are later reversed due to rather predictable political cycles. The standard organizational responses to detrimental public policies that we know of include exiting the market altogether, attempting to change the public policy through various political strategies, or passively complying with the policy. But these responses might not be suitable when a detrimental public policy is likely to be reversed. In a paper paper that is forthcoming in Organization Science, I proposed organizational dormancy as, a temporary reduction in an organization’s level of activity, as a viable alternative response. I tested this idea in the case of Indian Private banks that were exposed to a detrimental banking policy that was enacted in 1980 and reversed in 1990.
While commercial banks are epitomes of capitalist organizations in developed economies, the government of India has used the banking industry to promote several of its socialist agendas, such as unemployment reduction and poverty alleviation. One such policy was the rural banking policy initiated by the government of India in 1980.The policy require private banks to open four branches in rural areas for every branch a bank opened in a urban location. This measure was taken to increase private participation in rural areas,which were virtually without banks until the late 1960s. But the challenge for private banks was that they could no longer grow bigger without serving the rather unprofitable rural areas. But expansion in rural areas meant that a bank had to undertake substantial risk and reorganization of their lending activities as they had to deal with poor credit histories and borrowers who lacked collaterals. In the view of many business historians, the new banking policies therefore had a detrimental impact on private banks.
To avoid this risk, several private banks reduced their branching activities substantially. By foregoing the opportunity that came with opening new branches in the lucrative urban areas, private banks were actually able to reduce their exposure to rural areas. This strategy of reducing their expansion activity in response to the detrimental policy indeed paid off for the private banks. The detrimental policy was eventually relaxed in 1990.
While the enhancement of rural credit delivery was welcomed by the Indian electorate, industry associations and Chambers of Commerce voiced concerns about it. These parties criticised rural credit delivery and other similar detrimental policies that were imposed on private corporations during the 1980s. For example, the Confederation of Indian Industry’s theme paper in April 1991 urged Indian policy makers to implement liberal economic policies and lift several trade barriers that were hindering economic growth. With respect to the banking industry in particular, various industry associations recommended that the branching restrictions imposed on private banks be lifted and that the banking sector be liberalized. These issues were only addressed when the economy took a toll in the late 1980s due to the Indian government’s socialist policies.
The weak economy also resulted in an unstable political order and no party was able to gain a majority in parliament. Following a balance-of-payment crisis in 1990,appealed to the IMF and the World Bank for hefty loans, which were granted by these agencies with a clause that the Indian economy will be liberalized. The new government appointed several committees to get input from industry associations and Chambers of Commerce to kick-start the sluggish economy. These committees revealed that liberalization was unavoidable if the Indian banking industry was to be globally competitive. The Government of India responded to this call by introducing several banking sector reforms in 1991. Although the government was still monitoring rural credit delivery, private banks were no longer required to open four rural braches for every new urban branch.
After the Indian economy was liberalized, the growth rates and profits of private banks increased due to their newfound legitimacy. Other areas of the Indian economy also witnessed tremendous growth. The manufacturing and service sectors, which were concentrated in the country’s urban and metropolitan areas, played a specifically strong role in triggering India’s economic progress. This sustained growth of the Indian economy also helped revive private banks in India. However, private banks that already had a strong focus in urban areas were best suited to cash in on their revived legitimacy and the growth opportunities in the Indian economy.
The response of Indian private banks to the detrimental government policy that was later reversed reassembles the notion of dormancy from physiological ecology. Dormancy (also called torpor, aestivation, and hibernation) describe the flexibility of an organism’s metabolism in response to predictable changes in the physical or biological characteristics of the environment – which eventually help the organism to increase its rate of reproduction. During dormancy, organisms remain only minimally active, insulating themselves from adverse climatic conditions while remaining able to resume their normal metabolic rate when the environment returns to a favorable state.
I theorized that organizations might emulate organisms in dormancy when organizations reduce their activity to buffer against a detrimental public policy and become active again when the policy is reversed. I formally define organizational dormancy as a temporary reduction in an organization’s activity following the onset of a detrimental public policy that allows it to avoid unwanted radical adaptation and rejuvenate when a favorable policy returns. Remaining dormant enables organizations to avoid the damage caused by full compliance and conserve their routines. It promises some of the benefits of exit, without a loss of legitimacy, and allows for voice tactics in the quest for a policy reversal.
I drew on extant research on corporate political activity to identify four important sources of organizational heterogeneity that determine if an organization can use dormancy as a response to a detrimental change in public policy: a) political awareness and capability, b) discretion in making strategic choices, c) fitness to the detrimental policy, and c) capacity of limited activity to sustain the organization. I also theorized that remaining dormant while the detrimental public policy is in place increases an organization’s performance when a favorable public policy is implemented. I found support for my theory of organizational dormancy by examining the shifts in branch banking activities in an unbalanced panel of 35 private commercial banks in India that were subject to a detrimental change in branching policy in 1980 and the reversal of this policy in 1991.
Here is an SSRN link to the article: http://papers.ssrn.com/sol3/papers.cfm?abstract_id=2655260
