Corporate Communication and Economic Theory: An Institutionalist Perspective

Abstract

We offer a framework for the economic analysis of corporate communication (CC) by relying on the concept of dynamic competition and the post-Keynesian theory of the firm. The concept of dynamic competition, based on rivalry between companies, encompasses the importance of information flows and CC in the environment, characterized by fundamental uncertainty. We contribute to the literature by developing a CC matrix used for classifying various CC practices on the basis of firms’ imperfect cognition processes and their attitude toward the stakeholders. Within the post-Keynesian theory of the firm, which has institutionalist origin, we show that transparent CC activities are a potentially powerful tool for the improvement of firms’ performance. We also show that, in Slovenia, the deceptive and non-transparent CC of many large firms and banks has negatively affected the business climate, consequently leading to the decline of the Slovenian economy.

Keywords:

• competition
• corporate communication
• institutionalist theory of the firm
• post-Keynesian economics

JEL Classification Codes:

• B5
• D8
• D21
• M14

Notes

¹ Analyzing the economic implications of advertising has a long tradition, beginning with Edward H. Chamberlin ([1933] 1946) (see Lah, Sušjan and Ilič 2006-2007). The economic analysis of public relations began at a later date (see Podnar, Lah and Golob 2009). The need for an econo-centric approach to public relations is emphasized also by Ryszard Ławniczak(2009).

² See George Stigler (1957).

³ The origins of the neoclassical approach can be traced back to the work of the French, midnineteenth century economist, Antoine Cournot, who mathematically analyzed the effects of competition, and found that the competitive effects reach their limit with perfect competition a static situation with an infinite number of producers and assumptions related to perfect information, i.e., a given set of information needed for "rational decisions."

⁴ See Paul J. McNulty (1968).

⁵ See also David Reisman (2004) and Steven Horwitz (2008).

⁶ Malcolm Sawyer (1990, 58) claims that competition in the Austrian tradition is a process and that the neoclassical concept of perfect competition "does not involve competition in any meaningful sense."

⁷ See Blandine Laperche, James K. Galbraith, and Dimitri Uzunidis (2006) for a reconsideration of John Kenneth Galbraith’s views on dynamic competition and corporate capitalism.

⁸ See also Nina Shapiro (2003) and Jamee K. Moudud (2010).

⁹ See Fernando J. Cardim de Carvalho (1988), Paul Davidson (1991, 1996), David Dequech (1999, 2001), and Marc Lavoie (2014, 72-82). From post-Keynesian perspective, as claimed by Stephen P. Dunn(2002), the transaction cost approach to the firm (Oliver Williamson) is misleading. It is focused on exchange and not on production and strategic decisions related to it. The firm should be viewed "as a means of coordinating production from one centre of strategic decision making in a non-ergodic environment" (Dunn 2002, 70).

¹⁰ See, for example, Hodgson (1988, 141-143).

¹¹ For a critique of such position, see Davidson (1991) and Dequech (1999).

¹² For the definition of unbounded (or substantive) rationality and its role in neoclassical economics, see Lavoie (1992, 51-55; 2014, 83-84).

¹³ Lavoie (2014, 75) basically distinguishes between (i) ontological approach to uncertainty, related to the concept of ergodicity of some economic processes in the short run and general economic processes which are non-ergodic, and (ii) epistemological uncertainty, where he divides fundamental uncertainty into substantive and procedural uncertainty. He also calls fundamental uncertainty irreducible, radical, and true uncertainty. Intractable uncertainty is related to the sensation of economic agents that their foresight is imperfect. Giovanni Dosi and Massimo Egidi (1991, 148) differentiate between weak and strong substantive uncertainty. The first is analogous to risk, where the list of occurrence of events is known, and the second is related to cases involving unknown events or impossibility of defining probability distributions of events.

¹⁴ See also Lavoie (1992; 2014),Dequech (2006), and Fernández-Huerga (2008).

¹⁵ The role of information in economic decision-making was emphasized already in James E. Grunig’s pioneering analysis (in the 1960s) of the relations between theory of public relations and economic theory (see Ławniczak 2009, 347).

¹⁶ The concept of "known and knowable environment" should be considered with reservation since post-Keynesian economics views some economic processes as ergodic in the short run, while economic processes in general are non-ergodic, implying that the environment could not be known and knowable.

¹⁷ Until then, in Grunig’s opinion, public relations were "a field without a body of knowledge" (Grunig 1992, 5; see also Grunig, Grunig and Dozier 2002, 5). According to the four-model typology, which was first presented by James E. Grunig and Todd T. Hunt (1984), the evolution of public relations went from lower level to higher level models: (i) press agentry publicity model; (ii) public information model; (iii) two-way asymmetrical model; and (iv) two-way symmetrical model

¹⁸ For example, Joseph Fernandez (2004, 28).

¹⁹ In an empirical study of communication between investor-relation managers of the largest companies listed on the Stockholm Stock Exchange and financial analysts, Susanne Arvidsson (2012, 104) finds that top incentives for this communication are "teaching the financial analysts/market about the company," "maintaining a 'fair' valuation of the company," and "correct/clarify misunderstandings." According to our CC matrix (Table 2), these incentives point to the intention of the companies to achieve trustful and transparent communication (Type 4). But there still remains the problem of the relevance of information and knowledge of investor-relation managers.

²⁰ "In the case of advertising it is difficult, if not impossible, for the neoclassical approach to admit that advertising may be persuasive for that would open the Pandora’s box of the belief that tastes can be moulded. In such cases it would not be possible to maintain to the assumption of a utility function which does not evolve in response to advertising and other pressures" (Sawyer 1990, 46).

²¹ With respect to public relations as an important element of CC, see Marko Lah, Andrej Sušjan, and Tjaša Redek (2010) for a critique of the neoclassical approach and for power-related aspects of public relations in an institutionalist economic analysis.

²² Post-Keynesian theory of the firm builds on the tradition of Michal Kalecki, Josef Steindl, Nicholas Kaldor, Alfred Eichner, and others.

²³ Cf. Lavoie (2014, 123-4).

²⁴ See Steven Pressman (2006-2007).

²⁵ The idea of the growth-maximizing corporation was proposed already in the 1930s by Adolf A. Berle and Gardiner C. Means (1932).

²⁶ For the Swedish case of shareholder activism, see also Lars Nordén and Therese Strand (2009).

²⁷ See Geoffrey M. Hodgson (1999, 247-275).

²⁸ Even at a zero growth rate, certain amount of profit is needed to pay for the interests, dividends, etc.

²⁹ As already mentioned, the tendency of the firms' finance frontier functions to rise in modern "money manager" capitalism can also be attributed to the persistent shareholder activism, performed by large mutual or pension funds. In response to their financial pressures, the firms managers have been putting additional efforts into pushing the expansion frontier functions outwards, using all the available firm potentials. In terms of Figure 1(b), this means that being faced with the shift from f to f', the firms growth rate initially decreases, but after moving e to e3 the firm attains both a higher profit rate and a higher growth rate (cf. Lavoie 2014, 145). However, Lavoie (2014, 146-147) points also to another interesting scenario that can be deduced from Figure 1, and it is very realistic. In a firm, in which the shareholders' activism has led to a change in managerial objectives that is, to the objective of profits instead of growth substantial managerial slack appears, based on the differential between the maximum profit rate and the profit rate needed to finance (now lower) growth. This differential is then the source of extremely high managerial salaries and bonuses, which potentially leads to the downward shift of the firms expansion frontier (because of the managers being seduced into taking overly risky decisions), and consequently to a decline of the firm's performance.

³⁰ The same analytical framework, based on the dynamics of the finance and expansion frontiers, was used also to explain the differences in performance of the ex-socialist firms in the period of transition (see Sušjan 1996).

³¹ See Alfred Eichner (1976, 90-96).

³² Routine financing is typical also in the area of advertising (see Kotler and Keller 2006, 553-554, 569). For institutionalists, repetitive and stable patterns of behavior (which, however, are not unbreakable) are seen as a normal response to the informational uncertainties in the environment (see, for example, Fernández-Huerga 2008, 718). The "breaking" of patterns happens rarely, especially when the institutional environment changes radically, such as, for example, in cases of transition from socialist to capitalist systems, government laws affecting specific industries, and changes in the natural environment

³³ Available at www.dailyfinance.com/2012/03/14/ratings-agencies-ar-always-the-last-to-know/.Accessed May 15, 2015.

³⁴ See Jordi Xifra and Enric Ordeix (2009) for such a case.

³⁵ Bernie Madoffs Ponzi scheme, as well as the top management of AIG and the Royal Bank of Scotland are just some recent examples of such socially irresponsible behavior (c.f. Ławniczak 2009, 349). Joseph Stiglitz illustrates the prevailing practice with the following: "The head of Goldman Sachs, Lloyd Blankfein, made it perfectly clear: the sophisticated investors don't, or at least shouldn't, rely on trust" (Stiglitz 2012, 124).

³⁶ See Dan Bilefsky (2013). It should be noted that the impact of irresponsible CC and the consequent fall of these big companies was devastating also because it led to the bankruptcy of their many subcontracting firms.

³⁷ See Igor Guardiancich (2013).

³⁸ NLB, as the biggest state bank, had been pursuing "open ignorance" CC for years. Only recently, after its contaminated assets had been transferred onto the so-called "bad bank," it has moved toward more responsible and transparent CC practices (www.nlb.si/odziv-slaba-posojilanlb?doc=37378&linkgroupid=0).

Additional information

Notes on contributors

Marko Lah

Marko Lah and Andrej Sušjan are professors of economics and Tjaša Redek is an associate professor of economics, all at the University of Ljubljana (Slovenia).

Andrej Sušjan

Marko Lah and Andrej Sušjan are professors of economics and Tjaša Redek is an associate professor of economics, all at the University of Ljubljana (Slovenia).

Tjaša Redek

Marko Lah and Andrej Sušjan are professors of economics and Tjaša Redek is an associate professor of economics, all at the University of Ljubljana (Slovenia).