Relationship Between Business

And Government

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 Chapter Outline
• The Pendulum of Government’s Role in Business
• The Roles of Government and Business
• Interaction of Business, Government, and the Public
• Government’s Nonregulatory Influence on Business
• Government’s Regulatory Influences on Business
• Deregulation
• Summary
• Key Terms

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 Business, Government,
and Regulation
• The government tends to become involved in
business after serious problems arise, and
there has been no shortage of problems.
• The first decade of the 21st century saw the
tech stock plunge, and the Enron, WorldCom
and other scandals. The collapse of the housing
market put the economy on the brink of
collapse.
• That decade swung the pendulum of
government involvement in business from
minimal to major player.
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 The Pendulum of
Government’s Role in Business
• The areas in which government regulates
change, and its varying roles increase the
complexity of its relationship with business.
Government can:
• Determine the rules of the game
• Be a major purchaser with buying power that
can affect a business’ or industry’s chances of
survival
• Strengthen some businesses and weaken others
• Create new businesses and industries through
subsidization and privatization 4
 The Roles of
Government and Business
• For effective management, government’s role as a
stakeholder must be understood.
• What should be the respective roles of business and
government in our socioeconomic system?
• If the role of business were simply production and
distribution of goods and services, business would need
little regulation.
• But other goals also exist – safe working environment,
equal employment opportunities, fair pay, clean air,
safe products – which business does not automatically
factor into the business decision making process.
• As a result, it falls to government to ensure those goals
are achieved.
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 Interaction of Business and
Government
Government-Business relationship -
• Government influences business through
regulation, taxation, and more.
• Business influences government by lobbying,
and more
• Is the protector of various interests in society
against business exploitation.
• Directly manages large areas of private
business.
• Is the repository of the social conscience and
redistributes resources to meet social objectives
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 Government’s Nonregulatory
Influence on Business
Two major non regulatory issues -
• Industrial policy -
• Concerned with the role of government
in a national economy.
• Privatization -
• Whether current public functions (e.g.,
public education, public transit, social
security, fire service) should be turned
over to the private (business) sector?
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 Industrial Policy
Industrial policy -
• Every form of state intervention that affects
industry as a distinct part of the economy.
• A current trend toward stronger industrial
policy is likely to continue while the world
economy works to recover from the global
financial crisis after pandemic (Covid-19).

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 Privatization
Privatization -
• The process of changing a public
organization to private control or ownership.
• The intent is to capture the discipline of the
free market and a spirit of entrepreneurial
risk-taking.
• Two functions a government might perform:
• Producing a service
• Providing a service

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 Other Nonregulatory
Government Influences

Government is:
• A major employer
• A standard setter
• One of the largest purchasers
Government influences business by:
• The use of Subsidies
• Transfer payments
• Loans and loan guarantees
• Taxation
• Monetary policy
• Moral suasion 10
 Government’s
Regulatory Influence on Business

• Government Regulation has become the most

controversial in the business-government
relationship, affecting every aspect of how
business functions.

• Most people agree that some regulation is

necessary to ensure that consumers and
employees are treated fairly, and not exposed
to hazards, and to protect the environment.

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 Regulation - What Does It Mean?

Regulation -
• The act of governing, directing according to rule, or
bringing under the control of law or constituted
authority.
• A central/union regulatory agency -
• Has decision-making authority
• Establishes standards
• Operates principally on domestic business
• Has members appointed by the President subject to
Assembly confirmation
• Has its legal procedures governed by the
Administrative Procedures Act 12
Types of Regulation

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 Economic regulation
• Aims at preventing or tackling market failure.
• This is achieved with rules that prohibit and
punish market distorting behaviour.
• The Foreign Trade (Development and
Regulation) Act, 1992 for facilitating imports
into and augmenting exports from India.
• The Electricity Act of 2003, which allows
State regulators to fix tariffs for power
consumption, thus preventing suppliers from
taking advantage of natural monopolies.

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 Regulation in the public interest
• Covers areas where industries are failing to meet a
standard or uphold something of public importance.
• This is different from market failure.
• A classic case is of health and safety, where firms can
fall short in protecting employees or the general public
from harm.
• Although market competition can make firms more
willing to address such issues, the standards adopted
may not be adequate or uniform across the industry.
• In India, there is very little evidence to suggest that
competition in its existing form has had a positive impact
on quality.

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 Environmental Regulation
• Environmental regulation covers actions to
protect the environment from harm.
• A healthy environment is desirable not just on
aesthetic grounds but because environmental
degradation imposes costs on land, labour and
resources that have important consequences for
economic development.
• Unsafe water, unhealthy air, species and habitat
loss, and degradation of soil are some concerns
with real world effects sought to be addressed
through environmental regulation.
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 Environmental Regulation
• In India, environment protection has been given
constitutional status.
• The Directive Principles of State Policy state that
protecting and improving the environment is the duty of
the State as well as citizens of the country.
• The Government of India has enacted various laws to
protect the environment through the Environment
(Protection) Act, 1986 as the umbrella legislation.
• These set standards for emissions and discharge;
regulation of the location of industries; management of
hazardous waste, and protection of public health and
welfare.

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