Topic: Government-Business Relations
Title:
Abstract
This paper attempts to show how the government-business relationship plays an significant and independent role in shaping the cross-national and international variation in the financial system structure. Most publishings on corporate political activity have dwelled mostly on the domestic field. With the dawn od globalization, the business salience of international policymaking has risen which forces firms to be involved in international political processes as well. This paper ….
Introduction
Politics and political influence are carry significant weight and are a major concern for firm managers because of their on the competitive context whereby the strategy of a firm is executed. Over the past 20 years, the globalization of major markets coupled with policies structured to lessen the burden of government on businesses in general, such as liberalization and privatization, have ironically made political influence even more important for business, not less as presumed. There are basically three explanations for this:
First and foremost, as the impact of business on the immediate society and nature expands, firm managers experience higher demands from diverse stakeholders (Donaldson & Preston, 1995; Mitchelle & Agle, 1997). Politics is the stage where diverse stakeholder demands are finally reconciled. Therefore, competitive success requires an active participation in this process.
Secondly, in many industries, strategic reliance on new technology and innovation have become central to the competitiveness of a firm (Tushman & Anderson, 1997). These new technologies more often than not create various regulatory challenges which must be addressed politically that can affect both the viability and profitability of any strategic innovation in the industry.
Lastly, globalization can reduce the transaction costs of doing business beyond borders significantly hence enabling companies to extend their activities internationally, beyond the home market. Firm managers therefore end up encountering several and conflicting regulatory demands which shows the importance of skillful and efficient political management.
As a result of of such trends, management scholars and academics are paying more attention to politics and political influence on business. Research on corporate political activity have shown the extent to which business is impacted by political policies. This has been done through the examination of patterns of political influence, the effect of involvement in politics to business performance and the diversity of political strategies. This line of research has managed to integrate insights from management theory and other economic theories of regulation with insights from the field of political science, a field which is undoubtedly rich in lessons that bear directly on the challenges encountered in business management but which does not enjoy the same coverage and prominence as sociology, economics or psychology.
However, most of the published work on corporate political activity has majorly focused on the domestic market arena (Shaffer, 1995; Hillman, Keim, & Schuler, forthcoming). Even though this makes both theoretical and empirical sense, concentrating solely on domestic activities is a critical disadvantage and limitation, this is so especially as companies scheme their political influence internationally beyond their home markets by direct lobbying on the foreign governments, working closely with international organizations and active participation in diverse international forums.
Conceptual Framework
As shown above, in any modern market economy, companies cannot operate without adhering to government regulation and taxation. Dealing with the government therefore becomes a core part of the corporate business policy. However, the extent of government intervention on business varies from one country to the next. Therefore, government-business relationship claims varying priorities in companies’ decision-making process in the different countries. It can be shown that many differences in financial system structure across different countries can be explained from the point of view of the government-business relationship to a significant extent.
2.1. Private Businesses under an Interventionist Government
It is a standard view that a government that is good for capitalist growth and development is one which protects private property rights, carries out benign regulations and imposes light taxes or just general income redistribution. In other words, a government that is relatively non-interventional is more conducive to capitalist development. In reality however, modern governments normally intervene in the business sector in a scale that is far beyond what is considered justifiable by retaining a level playing field.
For instance, so as to win more votes in a political election, government officials often carry out income redistribution excessively, provide subsidized goods and services to the public and carry out large-scale public provision of goods and services in order to increase the level of employment in state-owned organizations and enteprises. These strategies in turn enable the government to win the confidence and votes of the lower-income groups that often account for a large proportion of the citizens.
Additionally, governments impose various rules and regulations as a response to the political pressure mostly from organized interest groups (Stigler, 2000). For example, governments can set up trade restrictions such as quotas and tariffs on competing imports in order to shield the domestic industry and the country’s economy. Similarly, such policies may help government officials win political support from the industrial groups.
At the same time, the government administrators can also seek rents by giving out such things as import permits. The officials set up several regulations citing overcoming market failures as the reason. However, in most cases, these regulations are overstretched and transformed to become overregulation where interventionist governments go ahead to establish excessive regulations in order to increase their rents. Encountering various challenges to the free conducting of business, the private sector will have to lobby constantly and negotiate with government officials, adhere to layers of regulation, pay irregular fees or sometimes even bribe the officials just to please them (Shleifer and Vishny, 1998).
Bank Financing vs. Equity Financing
In contrast, bank financing can solve many of the integral shortages of equity financing and hence become a viable and important form of external financing for industries under an interventionist government. At first, small investors, depositors mainly, in bank financing usually delegate decision making in regards to their investment to the bank manager. By not scruitinizing the specifics of bank investments, depositors normally do not hold any strong opinions about the advantages of the various investment projects the bank is going to get involved in and additionally, they will not reject the banks’ investment plans as a result of differences in opinion. Typically, government officials could easily direct the investments of banks by giving the banks specific instructions. As shown, bank financing can overcome the difference in opinion challenge quite well, it helps the government to direct banks to invest in government-chosen projects.
secondly, bank financing provides much better insurance to depositors against any potential expropriation and therefore investment losses as compared to equity financing.
2.4. Government Control of Banks and Listed Companies
In most modern economies, governments control banks and other listed companies directly by owning a considerable share of stakes in them. A positive correlation is expected between the proportion of bank assets controlled by the government in the national banking system and the level of government intervention. First and foremost, government control of banking institutions enables the governments to achieve more discretion on how financial resources are allocated in the society. Secondly, government control and ownership of the bank assets can help lessen the potential moral hazard challenge of bankers under government insurance for bank solvency. Any bankers’ reckless investment strategy will endanger the banking system’s stability. More importantly, any cost brought about by the instability can be transferred from banking institutions to the government under explicit and implicit guarantee schemes.
So as to control the bankers’ agency cost, the government will most likely impose both restrictive regulations on banks and own a significant proportion of bank assets. Bank regulation and supervision are very costly for the government to implement under asymmetric information. To act as reinforcement, government bank ownership can play as a significant role in disciplining bankers. In a bank owned by the government, private bankers become government employees hence eliminating banker’s incentive to carry out risky lending. Therefore, by owning the bank, the government is able to control the banks’ direct investments and minimize the agency costs.
Conclusion
The above arguments have clearly shown the important role that politics and political influence play in the day to day running of businesses in an economy. It is also undeniable that globalization stretches the competitive playing field for doing business hence availing new opportunities abroad and new challenges in the local market. There is also significant evidence that the political arena is getting bigger as most political and regulatory matters transcend national boundaries and as a result, require international attention.
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