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Report n°2: An integrated approach to economic and social contestability in business

conclusion

The economic analysis of transactions between economic agents is a question generally treated as a separate issue from the research into the means available to communities to act on issues involving public health and the quality of the environment. The first arises naturally as a field of investigation in the private economy, while the second is traditionally associated with public economics. The concepts of contestation and, deriving from it, of contestability, provide a unified framework that brings together issues it makes increasingly less sense to separate. This is because empirical research has demonstrated the interaction between the two, especially when economic activities are at stake from the point of view of community issues.

In a market economy, the central form of contestation is competition between economic agents. The competitive process constantly destabilises established economic positions, in particular when innovation lowers costs, or introduces new products and services. For the top management of businesses exposed in this way, the competitive process means that nothing is ever taken for granted. This leads to a variety of strategies to ensure the continuity of the threatened activities. These strategies include, among others, market segmentation, quality differentiation, innovation races and seeking both physical and regulatory advantages.

Modern market economies are also highly regulated and highly supervised economies that ensure the social and environmental viability of economic activities. The firms' stakeholders are not only its customers, suppliers and competitors, but also actors with whom it has no direct economic relationship. They include residents, elected officials and non-governmental organisations, and also the supervising public administrations and public authorities who play a regulatory role. The presence of these other players, with concerns very different from those of the profit-driven firms, and with divergent evaluation principles when judging business performance, fosters other forms of contestation to the activity or the choices of the latter. This other type of contestation may be as important to the development of a business or to the future of some sectors as the competitive process that normally gets the attention. It has also its own phenomenology, and a rationale of its own that firms need to understand and in-corporate. For this reason, it is wise for a firm or a conglomerate to make an integrated management of contestability, in all its senses, one of the major bases from which to re-examine its development strategy.

This strategic positioning is all the wiser since the economic and social contestations are not simply juxtaposed, each appearing in its own clearly-defined forms, but are interrelated. A given degree of economic contestability will be quite closely linked to a particular exposure to social contestation rooted in environmental and health risks. The research presented in this paper has demonstrated some of these links, using two variables: the nature of the assets used by the firm, in terms of their specific function and the horizon for commercial involvement that acquiring them implies; and the incentive mechanisms used in the transactions, in both the upstream and downstream markets.

A stylised approach of an empirical study of scrap-metal recycling has been used to examine how economic and social contestability work together, when business relationships are marked by a central problem of asymmetric information and expertise. Theses problems are generally considered as sources of market failures.

This examination has confirmed the general thesis of the theory of contestability, that is, that strategies and choices that relax the grip of economic contestability lead to an increased objective exposure to social contestation on public health and environmental grounds. It has also established a direct link between, on the one hand the ability of economic agents to ensure the quality of their economic transactions and overcome market failures, and, on the other hand their level of exposure to environmentally-based social contestation. This result clearly argues for an integrated approach to understand and manage these issues. Finally, the study has shown how developing a forward-looking and proactive approach to threats of contestation that may affect the firm's activities causes it to enlarge its frame of reference, so that it analyses the risks to which it is exposed, and convert it, to some extent, into a regulator of branch it is part of. However, the study also shows that there are limits to this regulatory role, and that it cannot wholly replace the public authorities in their active role as guardians of Common Good. The internalisation effect of contestability is generally not sufficient in practice to reach the required dynamic intensity and formto comply with all the requirements of the different stakeholders. If the firm succeeds in controlling threats of defection of commercial partners through an appropriate transfer of information and expertise avoiding full transparency, analogous approach prevent it disseminating private information it may have, or acquire, on the potential risks in its activity to good health and a high-quality environment, in order to avoid social contestation.

These different results now require to be confirmed through an examination of other economic configurations than the one examined in this study. This would possibly identify other solutions to the problem of asymmetry of expertise, and would also examine the forms taken by the relationship between economic and social contestability for community issues other than those of the environment and health.