adms 1000

Sessions 9: Political Context of Business Chapter 7: The Political Context Notes The Canadian Business Enterprise System: Fundamental Features • The Canadian economic system has been described as a mixed system. This refers to the notion that while we possess a capitalist economy, government nonetheless plays an important role. • All developed countries have some sort of economic or business enterprise system that essentially determines the following: 1. What goods and services are produced and distributed to society 2. How the goods and services are produced and distributed to society • Capitalism is a type of economic system that is based on a number of fundamental principles, including the following: 1. Rights of the individual. The notion of capitalism is based on the view that it is the individual who takes precedence in society, as opposed to institutions or the overall society. This implies that individuals have every right to pursue their own self-interest, which includes seeking to make a profit from business enterprises. The notion of the individual as the most important element of society is not entirely representative of the ideology present in Canadian society. There are limits placed on individuals’right to pursue their self-interest. Government regulations enforce rules that affect how business owners conduct their affairs. 2. Rights of private property. As opposed to state ownership, capitalism asserts that individuals have the right to own land, labour and capital. In Canada, certainly, individuals are permitted to own their means of production, whether land, labour or capital. However, because there has been an uneven distribution of wealth in society, the government has intervened in a number of ways. For example, taxation is one approach that can be partly aimed at redistributing wealth among members of society. Much of the natural resources in Canada have still been retained by federal or provincial governments. The government may also decide that where a product or service is of a national interest, this product or service should be nationalized – e.g. government control of health care. 3. Competition. Capitalism advocates competition. The belief is that sufficient competition among business enterprises will ensure that business provides the goods and services required by society at a fair cost. Competition is the “invisible hand” that ensures the market works in this manner. In Canada, the notion of “perfect completion” does not exist in practice – there is no guarantee that an adequate supply of competitors exists across all industries. 4. The role of government. The view of government is reflected in the French term lassiez faire, which means “let people do as they choose”. This suggests minimal government interference in the business enterprise system. This notion of capitalism has also been referred to as the “free enterprise system” reflecting the notion of the right to private ownership of property, competition, and restricted government involvement. • Communism is whereby the responsibility for the allocation of society’s resources falls into the hands of the government The Guardian Roles • There are a variety of ways the government can influence business activities Government as Guardian of Society Government as Guardian of Business • Collecting taxes from businesses • Spending money on private business • Acting as business owners • Assisting private business - Bailouts - Subsidies • Regulating the business sector • Safeguarding Canadian business in the global context • Safeguarding Canadian interests in the global context Government as Guardian of Society The Tax Collector Role • There are two broad forms of taxes: revenue taxes and regulatory or restrictive taxes • The intent of revenue taxes is to collect money in order to help fund government services and programs. Revenue taxes include individual taxes as well as corporate income taxes, along with property taxes and sales tax. • There are two main types of regulatory taxes, referred to as excise taxes and customs duties and tariffs. Restrictive taxes are primarily aimed at controlling or curbing the use of specific products or services. • Excise taxes typically are applied to goods or services that the government desires to restrict, such as products deemed to be potentially harmful (including tobacco and alcohol products). Excise taxes have been used as prevention to potential excesses. The Business Owner Role: Crown Corporations • Acrown corporation or public enterprise is an organization accountable, through a minister, to parliament for its operations • Crown corporations can be federal or provincial • Number of crown corporations has been decreasing along with the number of employees • LCBO – is a successful crown corporation business & a regulatory system on alcohol consumptions • Governments establish crown corporations for a number of possible reasons: o To nationalize industries that were considered to be “natural monopolies” including the generalization and distribution of electricity o To protect industries deemed to be vital to the economy or that private enterprises might not wish to pursue o Allow for more government control o To implement public policy that includes protecting or safeguarding national interests The Regulator Role • Imposes constraint to modify economic behaviour in the private sector, e.g. energy, health and safety, labour, food, consumer etc • Imperfect Completion o Intervention ensures appropriate provision of goods and services • Public Interest o Protects consumers through regulation, limitations imposed on business (e.g. foreign ownership, management, pricing etc) Regulating Marketing Practices • Federal & provincial regulation ensures a fair, efficient & completive marketplace e.g. product safety, labelling, guarantees • Competition Bureau, Health Canada & Environment Canada are key players Government as Guardian of the Private Business Sector GovernmentAssistance to Private Business • Government offered direct incentives for industrial and resource development. Incentive programs were established to encourage management to conduct business in a manner desired by the government. For example, it may be desirable for managers to invest in a new product development, or engage in greater export activities, or locate in an undeveloped region. • The largest customer for goods and services in Canada. It may favour Canadian businesses in purchasing (within the bounds of NAFTA) • Bailouts o Refers to government assistance given to prevent an organization or industry from financial collapse o Is when bankrupt, or nearly bankrupt, business is given more “liquidity” in order to meet its financial obligations • Subsidies o Have been identified as either cash payments, low-interest loans or potentially reduced taxes o Are intended to assist domestic industry to compete against foreign businesses, whether in the home country or through exports o To prop up business, provide financial support to make it more competitive or encourage further development • What are the problems with government bailouts and subsidies? o Market decisions (i.e. business investment) should be made by investors not politicians o Subsidies are unfair – diverts many away from more successful businesses but less successful business (i.e. those in financially troubled conditions) o Subsidies are contrary to the notion of capitalism – i.e. profitable companies should stay in business; companies that cannot compete should not be permitted to continue o Subsidies lead to higher taxes o May be viewed as violating fair trade agreements (i.e. unfair to foreign competitors who must compete against government subsidized businesses) Government as Guardian of Business in the Global Context • Maintaining domestic labour force • Protecting against unfair trade • Subsidizing global business activity • Encouraging FDI • Nurturing young industries • Keeping a trade balance Why should government not play the role of guardian of business? • Market decisions should be made by investors, not by politicians and bureaucrats. The proper function of the private capital market is to direct investment to projects, industries or firms that offer investors the best and/or most secure rate of return. The difference between a sound and poor investment for an individual can have profound implications yet there is no similar discipline for government officials when using other people`s money. • Corporate welfare is not driven by market imperatives. Investment decisions should be based on financial reward versus risk. Government investment decisions are driven by political imperatives. The top concern for profitability or sustainability. • Picking market winners and losers is not a job suited for government officials. Corporate welfare decisions are most often made by individuals with little experience in private investing; moreover, decisions are often made in a politically charged environment.As a result, ensuring that taxpayer-financed projects meet geographical, industrial equity, and politically saleable criteria often become an end in itself. • Corporate welfa