New disruptive industries, also known as nascent industries, are fast growing and fast learning. In less than a decade, they can go from having an uncertain future to completely dominating their respective market.

However, unlike many well-established industries, these new players don’t exactly have it easy when it comes to navigating red tape: Complying with the regulatory environment can be expensive, and influencing policymakers can cost resources that a new business just doesn’t have. Federalism in the United States can add another layer of challenge, causing different levels of government to have confusing, contradictory policies or no policies at all.

The latter fact is the subject of new research from Lori Yue, an associate professor of business at Columbia Business School, and Kate Wang, an assistant professor at Pennsylvania State University. In their paper, “Policy Learning in Nascent Industries’ Venue Shifting,” the researchers found that contrary to popular belief, nascent industries are leveraging these regulatory voids to great benefits by adopting a strategy known as venue shifting. 

Combining their efforts in the form of a trade association, nascent industries have learned how to find political venues, typically state or local governments, that are favorable toward policy proposals that benefit them. As part of their research, Yue and Wang investigated  unmanned aircraft system, or drone, companies and found they use the same venue-shifting strategy as companies in other nascent industries, such as rideshare and e-cigarettes.

In an interview with CBS Insights, Yue explained how nascent industries identify legislators who are more susceptible to lobby efforts and what her findings mean for the future of business and society.

Lobbying Goes Further When Policymakers Can’t Seem to Agree

When a state government is gauged to be ideologically distant from its local governments — for example, a Republican-majority state legislature vs. a Democratic-majority town council — new industries are more likely to commit to lobbying efforts there, according to Yue and Wang’s paper. This is because policymakers in one venue are more likely to believe regulations implemented by their ideological opponents are extreme, rather than objectively analyzing the value of their ideas. For example, when a local ban on fracking was passed in Denton, Texas, in 2014, it was quickly overturned by state legislators, who lambasted local lawmakers for “listening to their liberal, green-minded activists.”

In analyzing the drone industry specifically, the researchers found that industry groups were more likely to hire lobbyists to target a state legislature when more local governments passed restrictive policies on the industry. In the same vein, they discovered that this likelihood was even stronger when the state government disagreed ideologically with local governments, similar to the scenario in the fracking industry.

“The regulatory authority for many new industries is uncertain,” Yue said. “For crypto currencies, for example, it is still unclear which government agencies — the Securities and Exchange Commission, the Commodity Futures Trading Commission, the Federal Trade Commission, among a few others — have the regulatory authority over them. When Uber and Lyft came to the market, it was unclear whether they should be regulated as taxi companies by local governments or as technology companies by state governments. When there is an overlap between the different levels or different divisions of the government, a new industry can seize that opportunity to shape regulations and choose a regulator that they deem would be more favorable toward them. In the commercial drone industry, industry players lobby the state government to rip off the local governments’ regulatory authorities if the latter had enacted a lot of restrictions over drone flights.”

The researchers also determined that if one nascent industry finds success in its lobbying efforts, it’s more likely others will follow suit. They found that drone industry trade associations are more motivated to put resources into lobbying at the state level when an industry peer was able to successfully lobby for the same deregulatory policy in another state. 

The Future of Business in Society

In the short term, venue shifting can help new industries navigate the U.S. regulatory void on the way to massive growth. The drone industry, for example, was valued at $8.77 billion in 2022 and is projected to grow to $10.98 billion by the end of 2023 and $54.81 billion by 2030. Long term, venue shifting can have massive implications for regulators and business leaders alike, according to Yue. The federalist system of government in the U.S. makes for unique conflicts between state and local authorities, creating challenges for business leaders and regulators alike. Yue stressed adopting “a more balanced view” when it comes to policy.

“You can’t always see regulation as something that is good for society, good for business,” she said. “We tend to overemphasize that aspect but underemphasize on conflictual situations — how we should balance the societal demand and the business demand, and how to negotiate this kind of compromise to reach coexistence and take care of each other’s interests and not dominate one another.”