Corporate strategies inevitably have to consider the political environment in which a firm operates. In federal systems the situation can be complicated because one political party may rule at the national level and another at the state or provincial level, indicating political pluralism, or one party may control both, indicating hegemony. New research finds that the difference spills over into business, with companies more likely to expand when there is pluralism.

Rajiv Krishnan Kozhikode and Jiatao Li look at banks in India, which has a federal system. The central government formulates bank branching policies but each state has a major say in implementing them. This has given rise to variation in branching policies, demonstrating the impact of political pluralism on organizations.

"Organisations should enjoy greater latitude of action because political pluralism results in less government intervention," they say. "Though power over public policy is unevenly distributed between the national and sub-national governments, the need to win elections in politically plural locations ensures neither branch enjoys unbridled control and each may discipline the other."

Data from 843 commercial banks in India between 1948 and 2003 confirms this hunch. There were 16 per cent more bank expansions in states where the ruling party was different from that of the national government.

However, there is also a downside to pluralism. If a state's voters are unlikely to change their party preferences, then the balance is upset. The federal government sees no point in trying to curry favor there and may withdraw resources from the state. In this case, intense political competition can be harmful to organizations. Supporting that, the authors found banks were less likely to expand under such circumstances.

Moreover, organizations that are dependent on the government, such as state-owned firms, may hesitate to expand in pluralistic locations so as not to earn the wrath of either or both levels of government. Various governments have majority ownership shares in 32 per cent of India's banks. The authors find state-owned banks were 57 per cent less likely than private ones to expand in states with political pluralism.

All told, a one standard deviation in political competition in a state with political pluralism predicted a six per cent decrease in the bank expansion rate.

"Our results show that in pluralist economies such as those with federal systems, in order to get a clear picture of the influence of government it is not sufficient simply to examine one government level. It is essential to examine the interactions between the different levels of government and any competition that might result. Most [other] studies on the role of government have not focused on this issue," the authors say.

"Organisations also differ, however, in their propensity to respond opportunities that arise from political pluralism. Our study reaffirms the need to consider government's national and sub-national branches separately and the power struggle between the political elites controlling these different branches."

They add that the findings have implications beyond India as they could also apply to other fragmented, or federal, systems such those in the European Union, the U.S., Canada and Switzerland.