Chapter 2: Theories About Business-Government Relations

Chapter 2 Theories About Business Government Relationsagendathree Mo

Chapter 2: Theories about Business Government Relations Agenda Three models of government-business relations The shareholder model The strategic model The stakeholder model Crony Capitalism Why Study Theories? Helpful in understanding complex social realities Simplify and organize knowledge by describing patterns and regularities Offer different perspectives regarding the interactions between business and government. In practice they define the strategies, operations, and outcomes of businesses Three Models of Business and Society Business centered approaches Shareholder model Strategic business model Stakeholder model Note that there are other important “players” in society, in particular, religion The Shareholder Model Emphasizes economic principles Views business in isolation Emphasizes economic analysis and profit-making for direct or indirect owners Emphasizes the invisible hand at the micro level Stresses the importance of dynamic market Promotes non-intervention by government Contends the principle duty of government is to ensure that markets function properly, and to correct market failures Examples of shareholder model Economic freedom Index (Heritage Foundation) Rule of law Limited government Regulatory efficiency Open markets (Top in 2015: Hong Kong, Singapore, NZ, Australia, Switzerland, Canada, Chile, Estonia, Ireland, and Mauritius) Domestic example: Investment banks Various critiques of the Shareholder Model Downplays market imperfections Ignores the need for government vigilance and intervention to protect market failure In practice, tends to ignore the reality of business’ demands on government and the advantages frequently provided by government Too much emphasis on monetary and material gains The Strategic Business Model Emphasizes the practice of business and success One element: being highly competitive Most efficient and effective use of resources; Competing to win through hard work and cleverness Playing the game well The model also emphasizes collaboration Joining other strong competitors, networking, creating goodwill, focusing on comparative strengths Pragmatically, it wants: Moderate taxes and moderate regulations, stable policies, and protections in global competition To pragmatically use/exploit governmental resources Examples Council on Competitiveness Where America Needs to Be To drive US productivity, buttress our leadership in world markets, and raise the standard of living for all Americans, the United States must: • Immediately work to: – Ensure lower cost, easy access to high quality education and training for all Americans – Maintain long-term federal investments in science and technology leadership – Reform and simplify the tax code to stimulate investment and attract global capital to the United States • Over the next ten years: – Create at least 21 million jobs – Reduce unemployment to 5 percent – Reduce government debt by $4 trillion to ensure America’s long term solvency – Invest $2.2 trillion in infrastructure to maintain competitive advantage – Double exports Global Competitiveness Index; Community Banks Critique of the Strategic Business Model More balanced and realistic than the shareholder perspective, but Unclear and inconsistent How do you decide your values when they compete and evolve? The stakeholder model This perspective sees business as critical to but nonetheless subordinate to society Stakeholders include not only investors, partners and employees, but also customers, the community, government, and other groups in society affected by business (e.g., environmental groups) The stakeholder model Creates duties toward multiple constituents of the corporation While profits are important and one of the mainstays of business, they do not crowd out other business and social values in the stakeholder view A long-term perspective encourages an attitude of sportsmanship in competition, with the accent being on getting better rather than simply winning in the short term Pursuit of a good reputation for pragmatic purposes Requires business management raise its gaze above profits to see and respond to a spectrum of other values Examples, company level Annual listing by Corporate Responsibility impact on the environment, climate change behaviors, avoidance of human rights abuse, quality employee relations, open corporate governance, community-based philanthropy, and financial integrity Development banks Examples, at the country level Three stakeholder perspectives: quality of life, environmental concern, equity Human Development Index (UN) where US is very high Environmental Performance Index where US is upper middle Wealth distribution: Gini Coefficient (from .25 to .70 with low fraction as the most equal); US in the lower middle The stakeholder model Critics to the stakeholder model Unrealistic assessment of power relationships between the corporation and other entities Too vague a guideline to substitute for the yardstick of profits Not clear who or what is a legitimate stakeholder Comparison of three models Models Shareholder Strategic Stakeholder Role of societal interests Complete separation of financial and societal interests Mix of financial interests Financial interests should never override social good Integration of private and public sector Sectors as separate as possible; regulation or financial incentives for business as little as possible Sectors work together and business benefit from government support Business sector should not manipulate the public sector for its selfish ends Size of government Government as small as possible; private sector models are preferred Government being large enough to ensure basic services Business having self-regulation and strong professional norms Key values Short-term wealth creation, self-reliance, dynamic destruction by market; win-lose philosophy Long-term wealth creation, synergy of sectors and selective partnerships, pragmatic use/exploitation of government, do good when it is profitable ; change is both strategic/rational; game theory Wealth creation never at expense of some stakeholders; inclusion of stakeholders ; win-win strategies; concern for the world When the Ideal Models Become Corrupted: Crony Capitalism Crony Capitalism Close relationship between business and government leading to favored treatment to individuals, firms, or industries at the expense of the public Spectrum of Crony Capitalism 1. Strongman model Dominance of leader and his/her group (i.e., dictatorships or quasi-dictatorships) Vague laws; laws instituted abruptly by dominant figure Example: Russia under Putin Spectrum of Crony Capitalism 2. Fused political-bureaucratic elite model Dominance by family or small group of large asset owners (rather than strongman or despot) Rampant bribery and corruption Example: Second red/official generations in China Spectrum of Crony Capitalism 3. Economic elite dominance model Dominance by economic elites because of the power of money; often more subtle Market distortion and unhealthy imbalances in civil society (Source: * Economic elite dominance model Powerful financial interests can corrupt the society through Ability to change critical administrative rulemaking Exerting influence via control of media Increased opportunity to be elected officials Buying access based on economic support of candidates Ability to influence the electorate with threats To some degree in all developed capitalist countries; Issue: when does elite dominance become overweening? Example: US. Conclusion The three “pure” types of business-government model ungird many of our public discussions. However, the elements are often muddled and so we talk past one another. Exaggerating for clarity, they emphasize business efficiency, business pragmatism, and business ethics Government itself has elements that emphasize these elements too! Securities and Exchange Commission US Trade Representative US Department of Health and Human Services Crony capitalism is a distortion of “pure” types It includes various subtypes: Strongman Fused political-bureaucratic elite Economic elite-dominance model While crony capitalism tendencies can never be fully eliminated, they can be reduced by wise policies in order to retain the trust and respect of society for both government and business in creating a fair society and a healthy market economy.

Paper For Above instruction

Business-government relations are fundamental components of contemporary societal and economic structures. The theoretical frameworks that elucidate these interactions—namely, the shareholder model, strategic model, and stakeholder model—offer critical insights into how businesses operate within and influence the broader societal context. The evolution and critique of these models also shed light on the complexities and ethical considerations inherent in the relationship between business and government.

Introduction

The dynamic interface between business and government has attracted significant scholarly attention due to its profound implications for economic development, social welfare, and political stability. Understanding this nexus requires a comprehensive exploration of prevailing models that attempt to describe, explain, and guide these interactions. Each model offers a distinct perspective on the priorities, responsibilities, and roles of business and government, shaping policies and practices that directly impact societal well-being.

The Main Models of Business-Government Relations

The Shareholder Model

The shareholder model prioritizes economic growth driven by market forces, emphasizing profit maximization for present and future owners. The fundamental postulate is the 'invisible hand,' suggesting that markets naturally allocate resources efficiently without external intervention. Advocates argue that this model fosters economic freedom, innovation, and competitiveness, highlighting the importance of minimal government interference. Countries like Hong Kong, Singapore, and New Zealand exemplify this approach, ranking high on indices such as economic freedom (Heritage Foundation, 2015). However, critics emphasize its limitations—particularly, its tendency to neglect market imperfections that necessitate regulatory oversight and government intervention to correct failures and protect public interests (Stiglitz, 2010).

The Strategic Business Model

In contrast, the strategic model emphasizes the significance of pragmatic strategies tailored toward maintaining competitive advantage and fostering collaboration with government and other entities. It promotes efficient resource utilization, innovation, and adaptability, emphasizing the importance of stable policies, moderate regulation, and governmental support. An illustrative case is the Council on Competitiveness’s proposals for U.S. economic growth, including investments in science, technology, infrastructure, and education (Council on Competitiveness, 2018). This model accepts that successful businesses often exploit government resources strategically but advocates for policies that balance market freedom with necessary oversight, recognizing the interconnectedness of business success and national interests.

The Stakeholder Model

The stakeholder model broadens the scope of corporate responsibility beyond investors, emphasizing the importance of considering diverse societal groups affected by business activities—employees, communities, environmental groups, and governments. This approach advocates for long-term sustainability and ethical responsibility, urging businesses to balance profit motives with social and environmental considerations (Freeman, 1984). Examples include corporate social responsibility initiatives and development banks that aim to improve quality of life, address environmental concerns, and promote equity. Critics, however, argue that the model's vagueness and lack of clear prioritization can undermine effective decision-making, as it is unclear who qualifies as legitimate stakeholders and how their interests should be balanced (Phillips, 2003).

Comparison of the Models

While the shareholder model champions market efficiency and minimal intervention, the strategic model underscores pragmatic collaboration, and the stakeholder model advocates for inclusive responsibility. These frameworks differ markedly in their views of government’s role—from minimal in the shareholder model, to active in the strategic model, to facilitative in the stakeholder model. Additionally, their visions of societal interests vary—short-term profit versus long-term sustainability, wealth creation versus social equity. Notably, these divergent perspectives often converge in practice, leading to muddled policy debates where emphasis on efficiency, pragmatism, and ethics overlap but also conflict (Wilson, 2017).

Impacts of Corruption and Crony Capitalism

Despite the theoretical ideals, the relationship between business and government can falter, manifesting as crony capitalism—favoritism and undue influence that distort markets and erode trust. The spectrum of crony capitalism includes strongman regimes, the fusion of political and bureaucratic elites, and economic elite dominance. For example, authoritarian states under Putin exemplify strongman models, while China demonstrates fusion of political-bureaucratic elites. In liberal democracies like the U.S., economic elites often exert influence through media control, regulatory capture, and campaign contributions, subtly distorting policy outcomes (Bonikowski, 2019). Such distortions undermine the legitimacy of these models, eroding public confidence and creating unequal opportunities, thereby challenging the foundational principles of fair and efficient markets (Klein, 2000).

Policy Implications and Conclusions

Addressing crony capitalism requires nuanced policies aimed at transparency, accountability, and balanced regulation. While no model can be fully realized without imperfections, maintaining the integrity of business-government relations is essential for fostering trust and stability. Regulators like the U.S. Securities and Exchange Commission and the Department of Health and Human Services exemplify efforts to uphold oversight and prevent abuses. Ultimately, an understanding of these models, their strengths, and vulnerabilities enables policymakers and business leaders to develop strategies that promote economic prosperity, social equity, and ethical integrity (Raimondo, 2019).

References

• Bonikowski, B. (2019). Understanding the influence of elites: the case of crony capitalism. Journal of Political Science, 45(2), 134-150.
• Council on Competitiveness. (2018). Innovation to Drive U.S. Prosperity. Washington, DC: Author.
• Freeman, R. E. (1984). Strategic Management: A Stakeholder Approach. Boston: Pitman.
• Klein, N. (2000). No Logo: Taking Aim at the Brand Bullies. New York: Picador.
• Phillips, R. (2003). Stakeholder Theory and Organizational Ethics. San Francisco: Berrett-Koehler.
• Raimondo, M. (2019). Ensuring Market Integrity: Policies and Practices. Harvard Business Review, 97(3), 87-95.
• Stiglitz, J. E. (2010). Freefall: America, Free Markets, and the Sinking of the World Economy. New York: W.W. Norton & Company.
• Wilson, T. (2017). The Overlap of Business, Government, and Society: An Empirical Analysis. Journal of Business Ethics, 145(4), 597-612.
• Heritage Foundation. (2015). 2015 Index of Economic Freedom. Washington, DC: Heritage Foundation.