class 1 class 1 the world of business- government relations: introduction and overview snr. lect....
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Class 1Class 1 The world of business-government relations:
introduction and overviewSnr. Lect. Anastasia A. Golubeva
March 3
St-Petersburg State University Graduate School of Management
Master of International Business Program Business-government relations
Course overview
The main objective of the course
To provide students with comprehensive view of the multi-faced and multi-dimensional relationships between business and government in modern economic environment.
Course format
Seminars (Discussion topics, case-study analysis, presentations in
groups)
Lectures (Slides on theoretical framework, explanation of analytical tools for business-government relations investigation and examples of their application to decision-making in business and government)
Interactive style of delivering in both course formats!
The structure of the course: main topics
Part 1.1. Introduction to business-government relations. Market
and nonmarket environment of business.2. The context of business-government relations: legal,
political and social environment3. The context of business-government relations:
governments and markets4. Business regulation: purposes and instrumentsPart 2. 5. Business-government cooperation6. Development and implementation of nonmarket strategy7. Prospects and challenges in business-government
relations under globalization processes8. Business-government relations around the world
Course materials, consultations
• Required readings in students’ course pack on GSOM site and in the library– Course syllabus– List of required and additional literature;– Slides for classes;– Discussion questions for seminars;– Home assignments.
• Recommendations:– To have printed version of slides by the class– To organize individual course folder (for all printed materials)
Consultations
• Consultations:– By e-mail: [email protected]
– After classes and by the appointment
Public administration
department, office 417
Dekabristov per., 16
“Rules of the game”
• In-class assignments, home assignments
• Final evaluation: A) Participation (20 %) B) Group project (20 %) C) Final exam (60 %)
Topic 1. The world of business-government relations
Economics of institutions,
government and business as institutions
The notions of institutions
T. Veblen: Institutions - settled habits of thought common to the generality of man.
Institutions determine the framework and style of humans behaviour.
New Institutional EconomicsD. North:• Institutions - set of the formal and informal rules
and mechanisms of enforcement that constrain human economic behavior
• the rules of the game, restrictions, created by the individuals, which structure political, economic and social interaction.
North, D. (1991), Institutions, Institutional Change and Economic Performance. Cambridge University Press, Cambridge.
The notions of institutions
Institutions are structures and mechanisms of social order and cooperation governing the behavior of a set of individuals.
Institutions are the conventions, norms and legal rules of a society. They provide expectations, stability and meaning essential to human existence and coordination. Institutions regularize life, support values and protect and produce interests.
The economics of institutions (O. Williamson)
Level Frequency Purpose
Embeddedness: informal institutions
100 – 1000 years Noncalculative, spontaneous
Institutional environment: formal rules of the game
10 – 100 years Get the institutional environment right 1-st order economizing
Governance: play the game
1 – 10 years
Get the governance structure right
2-nd order economizing
Resource allocation Continuous
Get the marginal conditions right
3-rd order economizing
Why institutions matter?
People can be engaged in prosecution of their own interests without fear, that it will damage society, not only because of the restrictions ordered by the law but also because they are products of the restrictions following from morals, religion, customs and education.
(A. Smith, the Theory of moral feelings)
Why institutions matter?
Situation X Action Y
“Rules of the game”
New institutional economics
• Economic agents should take into account the influence of institutions,
• Institutions - mechanisms of governance structures management (Williamson),
• Institutions - the rules of the game, created restrictions (North). Have compulsory character.
• Institutions limit a set of alternatives of a choice• Institutions are exogenous variables, are
examined through their influence on decisions made by economic agents
• Universality of NIET - application of the analytical approach to the analysis of various aspects of economical, social, political life
Classification of institutions
• On a way of fixing: formal (written and oral) and informal
• On a level of hierarchy (4 levels)• On scope: global and local • On sphere of action: economic, political,
social institutions• Constitutional and operational (general
and specialized) • On a way of origin: arisen spontaneously
or designed meaningly
The functions of institutions
• Determine a level transaction costs. The main function of institutions - economy of transaction costs.
• As restrictions determine an economic choice and direct economic behaviour
• Provide stability and continuity of society development
• Reduce uncertainty • Provide stimulus for organizations • Promote cooperation and resolution of conflicts• Institutional structure - the basic source of
economic growth or an inefficiency
The notion and classification of transaction costs
Transaction costs - the costs incurred in making an economic exchange.
Classification of TC (1):– Search and information costs – Bargaining costs – Costs of property rights specification and its
defense– Monitoring costs– Costs of contraction– Costs of opportunistic behaviour
The notion and classification of transaction costs
Classification of TC (2):– Market TC– Managerial TC– Political TC
Classification of TC (3):– Fixed TC– Variable TC
Classification of TC (4):– Monetary– Non-monetary
Classification of TC (5):– Explicit– Implicit
The role of transaction costs in institutions development
Think of:
•Theories of state origin (“social contract” concept, John Locke), 17th century
•“The nature of the firm”, 1937 Ronald Coase
The influence of institutions
Institutions
Goals, preferences, stimulus and motivators
Economic behavior of individuals and firms
Economic results
Business, government, institutions
• The major function of the government – establishment of institutions and their development,
• The basic elements of institutional environments such as the property rights, legal restrictions, public administration system (bureaucracy), government policy determine economic choice of the firms,
• With a view of profit maximization firms can adjust and adapt economic behaviour (governance structures) under existing institutional environment.
Private and public sectors.
Business and government as institutions
??? Discussion questions
• Government and business as economic counterparts or enemies? State monopoly of competitive markets? Whether alternatives are perfect?
• Why should government participate in market economy?
• Where should be the borders between private and public sector?
Public and private sectors in modern economies
Various forms of business (joint-stock companies, companies with limited liability, nonprofit organizations
Private sector
Households
Public sector
Set of resources of the economy of which the state disposes and operates. (Public sector organizations,
Government institutions and structures)
Different and common features in goal statement and pursuit
• Individual needs, preferences and purposes
• The price – is the key determinant of market behavior
• Maximization of utility or profit by optimizing
cost/benefit ratio
Private sector Public sector
• Collective purposes (public preferences)
• Variety of determinants of the public policy
• Maximization of public welfare by realization of state policy (set of objectives)
Distinctions in rights and ownership
• Rights are limited to the current legislation
• The property rights determine the organizational - legal form of business
• Private ownership
Business Government
• The exclusive right to establish the rules of the game, the right of compulsion
• State ownership• Deals with the public
goods (the property rights belong to a society), common-pool resources
Introduction to business-government relations:
business – government – society
A range of levels for understanding the business-government-society relationship
Economy/Business
Politics/Government
Society/Culture
Broad conceptual
level
Governments:national, state,local, foreign
Stakeholders
Industryin general;industrysectors
Intermediate level
Specific government agencies and
actors
Primary and secondary
stakeholders
CorporationX
Practical, applied
management level
Relations between a business firm and its primary stakeholders
Business firm
(Managers)
Wholesalers(Retailers)
Creditors
SuppliersCustomers
Stockholders
Employees(Unions)
Investcapital
Lendmoney
Sellmaterials
Buy products
Distributeproducts
Selllabor
Relations between a business firm and some of its other (secondary) stakeholders
Business Firm
(Managers)
TheGeneralPublic
BusinessSupport Groups
ForeignGovernments
SocialActivistGroups
Media
Federal, State
and LocalGovernments
Local Communities
Regulation,taxes
Friendly,hostile
Socialdemands
Image,publicity
Advice,research
Positive,negativeopinion
Jobs,environment
Forces that shape business strategy
corestrategy
political
environmental
competitive social
Economicsystem general env’t trends demand supply technology
Competitive andIndustry systems barriers to entry rivalry among competitors threat of substitutes power of suppliers power of buyers
Public policy system laws, regulations judicial decisions legislative actions/policies
Pressure groups media interest groups public opinion
Social conditions community conditions education condition civil sector strength
Ecological environment pollution, degradation state of awareness
Forces that shape the business and society relationship
Economic competition: strategic and social challenges
Ethical expectations andpublic values
Changing role of government and public policy
Ecological and natural resource concerns
Technology and new knowledge
Business and its
Stakeholders
SEPTEmber environments
Social responsibility of business
Corporate public affairs activities
Federal government relations
State government relations
Community relations
Trade association relations
Local government relations
Contributions/philanthropy
Issues management
Political action
Public interest group relations
Regulatory affairs
Public relations
Media relations
Employee communications
Education affairs/outreach
Volunteer programs
Advertising
International public affairs
Environmental affairs
Stockholder relations
Institutional investor relations
Consumer affairs
What does social responsibility mean?
Responsibility implies that actors are accountable for their actions. They can be subject to praise, blame, reward, and punishment, but only for voluntary actions that are susceptible to deliberation and choice and of which they are free cause.
Responsibility has internal and external aspects: External: to the laws of society Internal: to values and beliefs
Two views of corporate social responsibility
Andrew Carnegie: “Be profitable to be philanthropic”
Julius Rosenwald: “Find profitable opportunities in meeting society’s social needs”
What are social needs?
Environmental issues Sustainable development Ethical issues …..
Two views on corporate social responsibility The shareholder view
– The only social responsibility of business is to create shareholder wealth.
– Corporate management cannot decide what is in the social interest.
– The costs of social responsibility which do not increase the value of stock, will be passed on to consumers.
The multiple stakeholders view– All customers and employees are treated with dignity.– Relationships with suppliers must be based on mutual
trust.– Belief in fair economic competition.– Business can contribute to social reform and honor
human rights.
Organizational
and
psychological
filters
The impact of three types of responsibility on managerial behavior
Financial responsibility to
shareholders
Legal responsibility to laws and the public
policy process
Ethical responsibility to moral values and social responsibility
Managerial behavior
Market and nonmarket environment of business
Market and nonmarket environment of business
Market environment Nonmarket environment
Market Strategy
Nonmarket StrategyManager
Nonmarket environment shapes business opportunities in the marketplace
Market environment determines significance of nonmarket issues of the firm
Nonmarket strategy of Motorola
“The first step in any defined strategy is writing the rules of the game honorably and fairly in a manner that gives everyone a chance with predictable rules. Our company has started industries. We have helped write standards. We have helped write trade rules. We have helped influence policies. We have helped write national laws of countries where we engaged, always in a respectful way. We have never taken for granted that rules of the game would just evolve in a fashion that would make for the greatest opportunity… With the right rules of the game one's opportunity for success is enhanced.”
Robert Galvin, CEO, Motorola
Nonmarket environment
The nonmarket environment of a firm or industry is characterized by four I’s:
– Issues– Interests– Institutions– Information
Ex: Nonmarket environment of automobile industry
• Issues– Fuel economy regulation– Fuel economy activism– Global climate change– Clean gasoline– Power window safety– International trade– Discrimination– Alternative vehicles– Labor relations
Ex: Nonmarket environment of automobile industry (cont.)• Interests
– Organized interests• Automakers• Insurance industry• Oil industry
– Unorganized interests• Car buyers• Borrowers• Passengers
– NGOs• Environmental groups• Consumer federations• Union of concerned scientists
Ex: Nonmarket environment of automobile industry (cont.)
• Institutions–Legislative
–Administrative and regulatory agencies
–Private regulation
–Judicial
–International
–Nongovernmental
Changes in nonmarket environment
• Nonmarket issues originate from both external forces and firm’s own activity.
• Nonmarket issues have five basic sources:– Scientific discovery and technological
advancement– New understandings– Institutional change– Interest group activity– Moral concerns
The nonmarket issue lifecycle
• Issue identification
• Interest group formation
• Legislation
• Administration
• Enforcement
The public issue lifecycle
publicattention
-time-early late
legislation, voluntary resolution or abandonment
managerialdiscretion
framingshaping
coping/adaptation
institutionalization
politicalactivity(lobbying,trade assoc.advertising,media work)trigger
event
resolved
re-emerges
The nonmarket issue lifecycle
Three types of uncertainty about the business environment
State: incomplete knowledge about environmental components
Effect: uncertainty about the impact of environmental components on the organization
Response: lack of knowledge of response options and/or inability to predict consequences of response choice
Analysis of nonmarket issues
• Systemic – refers to societal systems at large
• Organizational – refers to specific issues that characterize the firm’s nonmarket environment
• Individual - refers to how individuals address nonmarket issues
Croup task
• Describe nonmarket issue (industries and issue area are not restricted) and its’ lifecycle stages
• What opportunities and threats does the issue provide for the companies?