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Report n°2: Summary
An integrated approach to economic and social contestability in business: the problems facing a scrap metal recycling firm
The observation of economic reality highlights a paradox. Private enterprises, unlike not-for-profit associations, are usually profit-driven but sometimes, in the general interest, undertake costly initiatives such as environmental protection when such efforts are not required of them by the law. The direct benefits derived from those efforts are not always obvious. Not all companies make such efforts, in fact many do not, but a sufficient number of large industrial corporations fall into this category for the phenomenon to be of interest (Holliday et al., 2002; Delaporte & Follenfant, 2002).
For a standard economic analysis, companies should view environmental impacts as external costs to be borne by society as a whole. To ensure consideration of these impacts, public authorities should intervene by bringing in regulations, providing incentives or attributing new rights of use and ownership. In a market economy, competition acts like a regulating mechanism, dissuading companies from shouldering their external costs. Should a willing spirit or ethics drive a socially responsible management to economic deadlock? Or does today's economy obey a more subtle logic than the conventional wisdom of the economic theory of external effects might suggest?
Economic analysis of environmental problems has followed various lines of exploration to account for this disconcerting empirical reality (David, 2003):
- verifying the genuineness of voluntary efforts,
- emergence of brand and product differentiation strategies based on their image in terms of quality and safety,
- the plays companies use with public authorities around changes in regulations or public policy.
This concept studies what happens when a producer is exposed to a threat: the contestation of his business, his products, the techniques he uses, his management style or perhaps what the firm represents in terms of, say, the field of activity (for instance, weapons manufacturing) or size (for instance a large multinational corporation).
This concept of contestability ties together phenomena that are traditionally analysed by different disciplines, some (market competition and entry deterrence) by economics and others (collective action, social movements or opinion movements) by sociology, social psychology or political science.
It broadens our understanding of industrial dynamics by taking into account the impact of the relations developed on important issues for the community such as environmental protection or health and safety issues by specific activities or business firms with various organised groups from the civil society (NGOs) and the public, through the media, public inquiry procedures and the political mechanisms of representation.
The main thrust of the study herein is the development of an integrated approach to a company's contestability. This idea of integration must be understood in two ways. On the one hand, the aim is to show the relations that exist between the different forms of threats of contestation, particularly between those weighing on the company's usual economic relations, whose aim is the exchange of goods and services, and those resulting from relations with the various stakeholders in its activity, even those with whom no contract has been agreed. On the other hand, the aim is to show how contestability management is closely interwoven with other economic characteristics of business management, particularly ways of overcoming market failures resulting from uncertainty regarding the quality of the goods exchanged and situations characterized by asymmetric information and unequal expertise among the economic agents.
To do this, we decided to study the process in a specific context yet one that has generic value.
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 form to comply with all the requirements of the different stakeholders.
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.