Public policy is regarded as a powerful tool that can alter the external environment that firms operate in and mark a transition to a new era. Research by HKUST and Harvard scholars cautions, though, against overstating its impact after finding that other environmental factors could influence the success and failure of public policy.

Zhi Huang and Christopher Marquis drew their conclusion based on a study of the U.S. banking industry from 1896-1978 that showed a significant relationship between public policy impacts and technological, economic and cultural conditions.

They focused on branching policy, which stipulated whether banks in a state could establish branches outside their headquarters location. Some states allowed this, some restricted it, and some allowed it in a limited form, but the authors showed this policy alone was not enough for banks to decide to set up branches, a decision that ultimately could influence bank growth and development.

"Previous studies have found policy changes often have powerful effects on organizations by creating fundamental shifts in the external environment. Our results, though echoing these studies, also suggest they might overemphasize the effect of policy change. Organizations face environments that are complex and multifaceted, and a given policy exerts a powerful impact only in the presence of other supporting factors," they said.

The factors they focused on were state rural roadway mileage, urbanization, the number of banks in a state and the number of farms, in addition to state branching policy, and they analyzed 3,893 state-year observations from the 48 contiguous states to determine the impacts of these factors on bank geographic dispersion and bank location size. Dispersion was related to a branching policy, location size to a centralized strategy since it was difficult to sustain several large branches.

Transportation technology was found to be particularly important in whether banks adopted a dispersed strategy because they needed convenient access to branches in other parts of the state in order to monitor them. Economic conditions, in particular business competition (and to a lesser extent urbanization), could affect whether banks were motivated to set up branches. And cultural conditions in the form of resistance from farmers, who favored local banks, could affect the success of branch operations, and thus whether branches were opened.

"We find that there was a trade-off between a centralized strategy of establishing a few large units within a narrow geographic area, and a dispersed strategy of establishing a larger number of smaller units spanning a wide geographic area."

"Furthermore, when a particular state allowed branching, this policy led banks there to pursue a dispersed strategy and the effect of this became stronger when transportation technology, especially rural roadways, was advanced in the state. However, the effect was weaker when interbank competition was intense or agrarian presence was strong."

While the focus in this study was the U.S. commercial banking industry - an industry that underwent dramatic transformation in the 20th century, from having about 13,000 banks and 87 branches in 1900 to 6,500 banks and more than 80,000 branches 100 years later - the authors said their findings also had implications for other service industries and other locations that are useful for policy makers.

Policy makers needed to acknowledge how technological, economic and cultural conditions together could constrain their policies, which they could do through two strategies: divide policy objectives into stages and begin by implementing those supported by existing conditions, or target specialized geographic areas with a supporting environment. China, for instance, has applied both strategies, gradually implementing market reforms in phases starting with "special economic zones" such as Shenzhen.

Policy makers were also advised to pay particular attention to the links between technology and policy, especially in emerging economies, as infrastructure improvements might be needed in order for a policy to succeed. The example of India is cited where, despite extensive regulatory measures to encourage greater rural coverage by banks, more than two-thirds of the rural population still lacks access to a local bank, partly due to the lack of technological infrastructure such as transportation.

Policy and culture interactions should also be considered by policy makers, the authors said, pointing to the 1994 Reigle-Neal Interstate Banking and Branching Efficiency Act which neglected to do so and had the opposite of its intended effect: instead of encouraging large banks, it resulted in a flowering of smaller community banks.

The overall results also suggested the success of firms today should be considered in view of their historical environments. North Carolina, for instance, had a liberal policy in bank branching and today is the headquarters for a number of large interstate chains. "Thus the history of firms' external environments may be essential to understanding their current structure and success," the authors said.