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Christos N. Christos N.

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Pitelis School of Management University of Bath Governance Innovation for Sustainable Global Value Creation 24 th October 2014 Room 144 Jubilee Building University of Sussex Aims Discuss resource allocation and resource creation perspectives on governance corporate public and supr ID: 339676

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Slide1

Christos N. Pitelis School of Management, University of Bath

Governance Innovation for Sustainable Global Value

Creation

24

th

October 2014, Room 144 Jubilee Building, University of SussexSlide2

AimsDiscuss resource allocation and resource creation perspectives on governance (corporate, public and supra-national) innovation for economic sustainability.Build on extant theory and practice to develop a framework for sustainable economic performance and the requisite governance structures to achieve this.Slide3

Resource Allocation Value Creation is the result of efficient allocation of scarce resources (capital, labour, land, and less often knowledge), brought about through:‘rational’ utility maximizing behaviour by economic agents (such as profit maximisation)‘optimal’ market structures, such perfect or competition or contestability Major Variants– Conventional ‘neoclassical’– Transaction cost3

K. Arrow

L. Robbins

R.

Coase

O. WilliamsonSlide4

Resource Allocation: Building Blocks‘Old’ TheoriesCompetition is type of market-industry structure.Technology is given in the short-run but market structure (such as perfect or imperfect competition) can affect technological change in longer run.Perfect competition and comparative advantage-based free trade can, under conditions of perfect competition, optimise global resource allocation and foster value and wealth creation.4J. Bain

D. Ricardo

A. MarshallSlide5

Resource Allocation: Building Blocks (cont.)‘New’ TheoriesExternal economies (location), increasing returns, innovation and human resources matter (‘new endogenous growth theory’)‘Strategic trade’ policies workable (but could be ineffective and/or undesirable) – ‘strategic trade theory’.Revisit and formalise ideas from Kaldor and Pasinetti5

R. Lucas

P.

Romer

P.

Krugman

N.Kaldor

L.PasinettiSlide6

Resource Allocation and Corporate GovernanceMaximise shareholder value-This follows from the argument that under certain assumptions, maximisation of profits/shareholder value maximises the value of the firm as a whole.-It requires solving the ‘agency’ challenge between managers and shareholders. 6Slide7

Resource Allocation and Corporate Governance: CritiqueNumerous other agencies, archetypically between capital and labour (Marx) and more recently between other stakeholders (Cyert and March) ignored.Coincidence between shareholder value maximisation and firm value maximisation can only be shown under very restrictive assumptions – in other readings static profit maximisation can prejudice inter-temporal profit maximisation. Slide8

Resource Allocation and Public GovernanceMaximise consumer surplus- this follows from the idea that (under very restrictive assumptions) the consumer surplus (a proxy for ‘consumer welfare’) is only maximised under conditions of perfect competition and that departures from perfect competition constitute ‘structural market failure’;- policy prescription is to solve such market failures by fostering perfectly competitive/contestable market structures.Slide9

Resource Allocation Public Governance: Critique The issue of static versus dynamic (inter-temporal) efficiency is underexplored. Link between consumer surplus and sustainable value creation and capture is quite tenuous. Exclusive focus on markets (non-market institutions – organisations are seen as the result of market failure) is limiting. Perfect competition-promoting public policies are subject to problems of ‘second best’, and often naive, and unrealistic (Baumol, Penrose)9

W.

BaumolSlide10

Resource Allocation: Supra-national GovernanceKindleberger’s ‘Hegemonic Stability’ Hypothesis-it states that a Hegemon/imperialist power emerges in order to solve supra-national market failures by providing international public goods.-it underscores ’Washington consensus’-type policies based on perfectly competitive markets and comparative-advantage-based free trade provided under ‘conditionality’ by a Hegemon-inspired and controlled supra-national organisations (IMF, World Bank...).Slide11

Resource Allocation and Relations Between Governance TypesShareholder value-based corporate governance, consumer surplus-maximising public governance and comparative advantage free trade-based supra-national governance are all aimed to correct market failures and to foster ‘rational’ optimising behaviour In the above context, one reinforces the other, and together they create value by achieving efficient allocation of scarce global resources through shareholder value maximising firms in perfectly contestable sectors trading freely on the basis of their comparative advantages. Slide12

Resource Allocation: An Overall Critique…Alas it is all a myth...‘Perfect competition/contestability cannot exist, static ‘rationality’ can diverge from inter-temporal rationality, consumer surplus maximisation in the short run can prejudice consumer surplus in the long run, comparative advantage free trade assumes mythical perfect competition, resource allocation need not lead to sustainable value creation, a Hegemon may pursue hegemonic rents (after all, who hegemons the hegemon?), etc.In short, conventional efficient resource allocation-based governance theory is a horrible mess…But can we do better?Slide13

Resource CreationCommon themesFocus on resource-knowledge creation and innovation in the context of uncertainty and change.– Procedural-bounded rationality and learning, self-interested and altruistic economic agents.– Imperfect markets and hierarchies, institutional failures.13H. Simon

D. NorthSlide14

Resource Creation: Variants Resource-capabilities-based, Austrian, Shumpeterian, evolutionary. Behavioural, Marxist.14K. MarxJ. MarchSlide15

Resource Creation: Building BlocksCompetition is a process.Innovation can be seen as ‘creative destruction’.Co-operation matters.Competition and co-operation (co-opetition) may foster innovation.Technology and innovation are key sources of value and wealth creation.15

J. SchumpeterSlide16

Resource Creation: ImplicationsCo-opetition and innovation foster value and wealth creation and economic performance.Transient monopoly can be incentive for, and a reward to, successful innovators – it allows value appropriation/capture.Big business competition (alongside small firm creation and growth) is best for innovation.16E. PenroseSlide17

Resource Creation and Corporate GovernanceNot directly linked in literature.Could be suggested that it is in line with co-opetition and innovation, hence value creating stakeholder-based governance.Slide18

Resource Creation and Corporate Governance: CritiqueUnclear who are the stakeholders, how they add value, precise mechanisms of coordination-conflict resolution, etc.In all, still rather imprecise and not fully developed. Slide19

Resource Creation and Public GovernanceDevelopmental-industrial policies by the government promoting maximisation of nation-wide value and wealth creation through resource creation (not just efficient allocation).– It follows from idea that innovation and other factors can help create value, in addition to value created through efficient resource allocation.19Slide20

Resource Creation and Public Governance: Critique Limited focus on determinants of value and wealth creation (other than innovation), little consideration of value capture “agency” – “regulatory capture”.20Slide21

Resource Creation and Supra-national GovernanceNot directly linked.It could be suggested that plurality of supra-national entities and organisations (such as G20, the BRICs bank), alongside ‘Beijing consensus’ and/or ‘Geneva-consensus’-type developmental and trade policies, are more in line with resource creation view. Slide22

Resource Creation and Supra-national Governance: Critique…Quite underdeveloped mostly because not directly linked.Beijing consensus criticised for neo-imperialism, Geneva consensus in infancy, both in need for proper conceptual foundations... Slide23

Resource Creation and Governance TypesNot coherent yet.It could be argued that stakeholding at the firm, public and supra-national levels is best for global value creation though co-opetition, innovation, pluralism and diversity...Slide24

Overall Conclusion: CritiqueNo agreed framework on nature and determinants of value creation, no consideration of value capture, of economic sustainability and of the role of corporate, public and supra-national governance within such a framework.24Slide25

Governance for Sustainable Global Value Creation ObjectivesDevelop a conceptual framework for Value Creation by exploring its nature and determinants.Address the issue of value capture.– Discuss the link between value capture and sustainable value creation;– Discuss sustainability – compatible governance (corporate, public, supra-national);– Discuss types of advantages-capabilities required for each objective, and actors in determining the division of

labour

between them.

25Slide26

Main TenetsInnovation, knowledge and resource creation (including efficient resource allocation), in the context of:Procedural-bounded rationality and learning, socially embedded phronesis, decency, dignity, and self/mutual-respect; Imperfect markets, hierarchies and institutional failures.

26Slide27

Determinants and Actors of Value Creation at Firm, Meso and National Levels 27PrivatePublic

Polity

Institutional and

Macroeconomic environment -

Governance and

Policy mix

Unit

Cost

Economies,

Returns to

Scale

Technology &

Innovativeness

Infra-

structure

& Strategy

NATION

SECTOR-REGION

Industry Conduct- structure and regional -

locational milieu

FIRM

Value

Added- Creation

Human

and other

Resources and CapabilitiesSlide28

Value CaptureThe appropriation of created value by economic agentsExtensive literature on value capture at the level of the individual, firm and industry, but little on strategies for regional, nation-wide and supra-national appropriation of value/wealth.28Slide29

Creating and Capturing Region and Nation-wide Value/WealthSimilar factors as at firm level, appropriately reinterpreted and applied (plus institutional, macroeconomic and regional-sectoral milieu);– Require appropriate public-private-polity/civil society interactions and co-ordination.29Slide30

Economic Performance through Value and Wealth Creation and Appropriation Superior performance requires superior ability to appropriate value – wealth. - Value – wealth appropriation usually requires value creation and co-creation.Possible ‘trade-offs’ – impact on economic sustainability.30Slide31

Supra-National Governance for Economic SustainabilitySustainability: when the satisfaction of an objective in the present does not undermine the longer-term satisfaction of the same objectiveand/or where the pursuit of one group’s interests does not undermine the pursuit of system-wide interests – the two often related.31Slide32

Dimensions of SustainabilityEconomic, Social, EnvironmentalSustainability here equals goodness, equals greenness;Sustainable Global Value Creation (SGVC) alternative welfare criterion to Pareto efficiency (neoclassical economics) and/or nationwide innovation (“systems of innovation”).32V. ParetoSlide33

Constraints on Economic SustainabilityThe Key Constraint:– Differing objectives (such as pursuit of value appropriation) by different groups, organisations, nations  ‘agency’ and need for objective alignment. Also time inconsistencies, mistakes.

33

E. PhelpsSlide34

Constraints on Economic Sustainability (cont.)Instances: – Intra-County: Monopoly, Regulatory capture – corruption; – Inter-Country: Protectionist and strategic trade policies, especially by more powerful countries (not least the Hegemon), market power/structural market failure as a condition for FDI by MNEs.34W. Baumol

G. StiglerSlide35

A Hierarchy of AgenciesEconomic sustainability requires addressing hierarchy of agencies between (at least):Firm and its shareholders-stakeholders;Nation and firm;Individual nations (including the Hegemon) and the world.35Slide36

Some Requirements for SustainabilityGeneralPut in place requisite governance structures at all levels (corporate, public, supra-national)-pro competition (Hayek)SpecificIntra-Country (Hegemon included)– Fight corruption (e.g., regulatory capture, MNEs capture, rent seeking)

36Slide37

Some Requirements (cont.)Supra-National (enlightened Hegemony)– Recognise ‘infant’ entrepreneur, industry, firm cluster and economy argument –as promoters of longer-term value creation– Tolerate ‘strategic trade’ by emerging economies, not by developed ones– Recognise that need for ‘level playing field’ requires tolerance of apparent inequities in favour of worse-off37Slide38

Possible Solutions to Governance for Economic SustainabilityEnlightened self-interest-based corporate governance -but in short supplyPublic policy-regulation (but regulatory capture)Global hegemony (but failures of hegemony–top-down, thus limited sustainability)Pluralism and diversity-stakeholding – more bottom-up and sustainable (thus preferable) – but adequate?An accountable supra-national monitor (international organization), modelled on the Blair and Stout corporate Board – but trust, capture?

38Slide39

Conceptual Basis for a Public-Private-Polity Partnership (PPPP)-based Governance Value creating market, ecosystem and institution creation and co-creation, based on comparative advantages and capabilities, and suitable private, public, and polity (social) entrepreneurship. - Development of supporting institutions, organisations, policies, implementation and regulation capabilities. 39Slide40

Comparative Advantages of PPPsPrivate – comparative advantage to capture (profit) from value creating advantages.Public – comparative advantage in legitimacy, institutional, macroeconomic and overall context for value creation (subject to satisfying value appropriation needs of state principals – functionaries). Polity-‘Civil Society’ (e.g. NGOs, consumer associations) – comparative advantage in creation of “social capital” and sustainability?40Slide41

PropositionIn the context of:Co-opetition and Innovation-knowledge promoting governance, andRecognition of the ‘hierarchy’ of agencies – PPPPs can help generate ‘mutual stewardship’ and ‘monitoring’ and serve as a policy for supranational governance for sustainable value creation.This requires resource/value-creation-focused mutually reinforcing corporate, public and supra-national governance.41Slide42

Summary – ConclusionsEnlightened self-interest-based corporate governance (self-regulation) and national government regulation policies can be helpful, but are not sufficient (given self-interest – value capture).Diversity and pluralism, to include networking, ecosystems and ‘social capital’ and clusters, can help engender ‘mutual stewardship’ and can serve as an approximation for supra-national governance for SGVC (sustainable global value creation).42Slide43

Summary – Conclusions (cont.)Accountable ‘supra-national monitor’, modelled along the lines of Blair and Stout’s corporate Board, might be useful to mould and enable the process to marry direction to democracy – these could include an ‘International Agency for Economic Sustainability’In the long term, however, the critical factors for sustainability are investments, institutions and structures that promote phronesis-based decency, dignity, and self/mutual respect. ‘Globalisation’ and winner takes all-type ideologies undermine this…43Slide44