Questions below

Question

To what extent ought businesses be responsible for different kinds of social problems?

To what extent does business have a productive and positive role to play in addressing those social problems?

Who does the informal economy affect the most?

Why is innovation important for business and how can this influence new business models?

Answer 1

To what extent ought businesses be responsible for different kinds of social problems?

There are primarily two primary, normative approaches to viewing the socially optimal responsibilities of businesses. The first, and older, approach shared by Milton Friedman and other Chicago/freshwater economists is the shareholder rights approach. Published formally in the early 1970s but really a feature of modern economic thought since Smith/Ricardo, this theory maintains that the only responsibility of a firm is to maximize its long-term profitability, bound by the existing rules and regulations enacted by state, local, and federal governments. The shareholders (owners) contribute the entirety of the risk capital and are thus entitled to the totality of the rewards/costs of the business. In addition, proponents of this view claim that owners/managers cannot rationally optimize among multiple conflicting and exclusionary ends (beyond just maximizing long term profitability). This is the dominant paradigm taught in business schools and is consistent with (neo)classical economics. Shareholder theory = businesses are not responsible for social problems

The second theory, stakeholder theory, takes a more expansive view of business in alleviating social problems and borrows intellectually from John Rawls' A Theory of Justice. Proponents of this view claim that business should consider other group interests that impact, or are impacted by, the activities of the business. These groups include, employees, suppliers, customers, tax payers, governments, environmental concerns etc. This theory is seeing increased interest in modern economies and sees its practical manifestation in ESG rankings and the Balanced Scorecard. Stakeholder theory = businesses are a key force in addressing social problems.

To what extent does business have a productive and positive role to play in addressing those social problems?

This depends on where one lands between the two theories mentioned above. Cultural adherence to these to theories can be thought of as being on a spectrum and can vary widely by time period and country. For instance, the US more closely aligns with shareholder theory relative to Europe. Furthermore, the US is evolving to more of a middle ground on this issue. Personally, I align with Jensen's Enlightened Value Maximization approach that blends the two theories and accepts the single objective of long-run value maximization for the business overall.

Who does the informal economy affect the most?

The informal economy refers to the largely unregulated markets that arise either spontaneously or in response to an external catalyst. This impacts the most economically vulnerable within a country that often do not have political power.

Why is innovation important for business and how can this influence new business models?

Innovation is the destructively creative process by which standards of living improve and business profitability is sustained or even grown over the long term. In fact, regardless of industry, businesses that do not innovate lose market share and eventually become obsolete. Obviously, the level of innovation required is HIGHLY dependent on competitive forces and industry lifecycle. Tech/Biotech/Pharma are by far the leaders in R&D/capex spending for this reason.

Innovation impacts go-to-market strategy, free cash flow generation, and earnings volatility as untested products/services ramp up. The business model needs to be robust to the rapid cash burn required for successful innovation and management needs to communicate clearly regarding financial expectations.