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: golubeva@som.pu.ru

– 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?