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Mobilizing Market Power: Jurisdictional Expansion as Economic Statecraft

  • Nikhil Kalyanpur and Abraham L. Newman
Abstract

States with large markets routinely compete with one another to shield domestic regulatory policies from global pressure, export their rules to other jurisdictions, and provide their firms with competitive advantages. Most arguments about market power tend to operationalize the concept in economic terms. In this paper, we argue that a state's ability to leverage or block these adjustment pressures is not only conditioned by their relative economic position but also by the political institutions that govern their markets. Specifically, we expect that where a state chooses to draw jurisdictional boundaries over markets directly shapes its global influence. When a state expands its jurisdiction, harmonizing rules across otherwise distinct subnational or national markets, for example, it can curtail a rival's authority. We test the theory by assessing how changes in internal governance within the European Union altered firm behavior in response to US extraterritorial pressure. Empirically, we examine foreign firm delisting decisions from US stock markets after the adoption of the Sarbanes–Oxley accounting legislation. The act, which included an exogenous compliance shock, follows the harmonization of stock market governance across various European jurisdictions. Econometric analysis of firm-level data illustrates that EU-based companies, which benefited from jurisdictional expansion, were substantially more likely to leave the American market and avoid adjustment pressures. Our findings contribute to debates on the role of political institutions in economic statecraft and suggest the conditions under which future regulatory conflicts will arise between status quo and rising economic powers.

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Footnotes
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We thank Robert Keohane, Marko Klasnja, Inu Manak, Dennis Quinn, Will Winecoff, the participants at our panels at ISA 2017, IPES 2017, and the Georgetown Political Economy working group, the editors, and two extremely helpful reviewers. We especially thank Susan Chaplinsky and Latha Ramchand for sharing some of their data with us. Wharton Research Data Services (WRDS) was used in preparing the manuscript.

Editor's note: IO's conflict-of-interest policy ensures that editors do not make decisions on manuscripts written by authors at the same institution, current or former students, or current or former co-authors.

Footnotes
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