Governance Innovation for Sustainable
Global Value Creation
24th October 2014, Room 144 Jubilee Building,
University of Sussex
Christos N. Pitelis
School of Management, University of Bath
Aims
• Discuss 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.
Resource Allocation
•
Value Creation is the result of efficient allocation of
scarce resources (capital, labour, land, and less often
knowledge), brought about through:
L. Robbins
• ‘rational’ utility maximizing behaviour by economic
agents (such as profit maximisation)
• ‘optimal’ market structures, such perfect or
competition or contestability
•
K. Arrow
Major Variants
– Conventional ‘neoclassical’
– Transaction cost
R. Coase
O. Williamson
3
Resource Allocation: Building Blocks
‘Old’ Theories
• Competition 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 advantagebased free trade can, under conditions of perfect
competition, optimise global resource allocation and
foster value and wealth creation.
J. Bain
A. Marshall
D. Ricardo
4
Resource Allocation: Building Blocks (cont.)
‘New’ Theories
• External 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
Pasinetti
R. Lucas
P. Romer
P. Krugman
N.Kaldor
L.Pasinetti
5
Resource Allocation and Corporate Governance
•Maximise 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.
6
Resource Allocation and Corporate Governance:
Critique
• Numerous 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.
Resource Allocation and Public Governance
• Maximise 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.
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.
•
W. Baumol
Perfect competition-promoting public policies are
subject to problems of ‘second best’, and often naive,
and unrealistic (Baumol, Penrose)
9
Resource Allocation: Supra-national Governance
• Kindleberger’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-advantagebased free trade provided under ‘conditionality’ by a
Hegemon-inspired and controlled supra-national
organisations (IMF, World Bank...).
Resource Allocation and Relations Between
Governance Types
• Shareholder 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.
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?
Resource Creation
Common themes
• Focus on resource-knowledge creation and
innovation in the context of uncertainty and change.
– Procedural-bounded rationality and learning, selfinterested and altruistic economic agents.
– Imperfect markets and hierarchies, institutional
failures.
H. Simon
D. North
13
Resource Creation: Variants
•
Resource-capabilities-based, Austrian, Shumpeterian,
evolutionary.
•
Behavioural, Marxist.
J. March
K. Marx
14
Resource Creation: Building Blocks
• Competition is a process.
• Innovation can be seen as ‘creative destruction’.
• Co-operation matters.
• Competition and co-operation (co-opetition) may
foster innovation.
J. Schumpeter
• Technology and innovation are key sources of value
and wealth creation.
15
Resource Creation: Implications
• Co-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.
E. Penrose
16
Resource Creation and Corporate Governance
• Not directly linked in literature.
• Could be suggested that it is in line with co-opetition
and innovation, hence value creating stakeholderbased governance.
Resource Creation and Corporate Governance:
Critique
• Unclear who are the stakeholders, how they add
value, precise mechanisms of coordination-conflict
resolution, etc.
• In all, still rather imprecise and not fully developed.
Resource Creation and Public Governance
• Developmental-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.
19
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”.
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Resource Creation and Supra-national Governance
• Not 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 ‘Genevaconsensus’-type developmental and trade policies, are
more in line with resource creation view.
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...
Resource Creation and Governance Types
• Not 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...
Overall Conclusion: Critique
No 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.
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Governance for Sustainable Global Value Creation
Objectives
•
Develop 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.
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Main Tenets
Innovation, 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.
26
Determinants and Actors of Value Creation at
Firm, Meso and National Levels
NATION
Public
Institutional and Macroeconomic environment Governance and Policy mix
Polity
SECTOR-REGION
Industry Conduct- structure and regional locational milieu
FIRM
Infra-structure
& Strategy
Unit Cost
Economies,
Returns to
Scale
Value AddedCreation
Human
and other
Resources
and
Capabilities
Technology &
Innovativeness
Private
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Value Capture
• The appropriation of created value by economic
agents
– Extensive literature on value capture at the level of
the individual, firm and industry, but little on
strategies for regional, nation-wide and supranational appropriation of value/wealth.
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Creating and Capturing Region and Nation-wide
Value/Wealth
• Similar 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.
29
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.
30
Supra-National Governance for Economic
Sustainability
• Sustainability: when the satisfaction of an objective in
the present does not undermine the longer-term
satisfaction of the same objective
• and/or where the pursuit of one group’s interests
does not undermine the pursuit of system-wide
interests – the two often related.
31
Dimensions of Sustainability
 Economic, Social, Environmental
• Sustainability
greenness;
here
equals
goodness,
equals
V. Pareto
• Sustainable Global Value Creation (SGVC)
alternative welfare criterion to Pareto efficiency
(neoclassical
economics)
and/or
nationwide
innovation (“systems of innovation”).
32
Constraints on Economic Sustainability
• The 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.
E. Phelps
33
Constraints on Economic Sustainability (cont.)
• Instances:
– Intra-County: Monopoly, Regulatory capture –
corruption;
W. Baumol
– 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.
G. Stigler
34
A Hierarchy of Agencies
Economic 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.
35
Some Requirements for Sustainability
General
• Put in place requisite governance structures at all
levels (corporate, public, supra-national)-pro
competition (Hayek)
Specific
• Intra-Country (Hegemon included)
– Fight corruption (e.g., regulatory capture, MNEs
capture, rent seeking)
36
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-off
37
Possible Solutions to Governance for
Economic Sustainability
• Enlightened self-interest-based corporate governance
-but in short supply
• Public policy-regulation (but regulatory capture)
• Global hegemony (but failures of hegemony–topdown, thus limited sustainability)
• Pluralism and diversity-stakeholding – more bottomup and sustainable (thus preferable) – but adequate?
• An accountable supra-national monitor (international
organization), modelled on the Blair and Stout
corporate Board – but trust, capture?
38
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.
39
Comparative Advantages of PPPs
• Private – 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?
40
Proposition
In the context of:
• Co-opetition and Innovation-knowledge promoting
governance, and
• Recognition 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 supranational governance.
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Summary – Conclusions
• Enlightened 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).
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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…
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