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Thinking Development

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By Christopher Guta, PhD:

In the last two episodes, I attended to two current affairs issues. First was the linkage between finance and innovation which took advantage of the proposed Financial Services (Amendment) Bill, 2018 discussed in Parliament recently. The second issue, which arose from the observation reported in the Daily Nation newspaper recently, was that while credit to the private sector was growing, its direction favoured the trade sector as opposed to agriculture and manufacturing. In this episode, I return to foundational issues that are at the heart of thinking development under this column by attending to the interesting discussion of what business firms are. Those of you who have studied business must have been surprised, as I was, that there are varied understandings of what firms are. For my readers who have not studied business as an aspect of human endeavour to an appreciable depth, I request you to just believe what follows.

In Malawi, energy regulations require that petrol be blended with ethanol such that the final product sold at the filling station contains 20 percent of fuel grade ethanol. By regulation, therefore, oil marketing companies such as Puma need to have ethanol at their depots to blend petrol with. Given this requirement, Puma has two choices: to make ethanol internally or buy it from the market. An understanding of the firm is that Puma’s resources would be allocated more efficiently by procuring ethanol from the market than by putting up an ethanol distillery to produce it internally. The argument then is that the firm called PressCane Limited exists to make the transaction cost of accessing ethanol on the part of Puma, Total, and other oil marketing companies lower. Thus, in the considerations of PressCane Limited or indeed Ethanol Company Limited, the market has failed to supply ethanol efficiently. Those of you who studied business attribute this so-called ‘in the beginning there were markets’ view to why firms exist to Coase, the British author of the book: The Nature of the Firm. Progressively, however, this simplistic view where the firm is seen as an artifact of the market was nuanced and its key assumption of perfectly competitive markets has been revised. This notwithstanding, its emphasis on the supremacy of markets and appeal to contractual arrangements between the firm and internal agents, employees especially; and external agents notably suppliers and customers, has remained.

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The contrasting view to the contractual perspectives on why business firms exist is that they have an internally driven vantage point compared to markets accounting for their emergence, sustenance and growth. Perhaps inspired, as discussed in a prior episode of this column, by Solow’s acknowledgement that technical change accounted for a greater part of visible economic growth in his growth accounting model, proponents of what are now known as competence based views of the firm, argue that firms are better placed than markets at accumulating and exploiting knowledge and other resources at their disposal. Competence-based perspectives of the firm can be distinguished from contractual perspectives by their emphasis on knowledge as an intrinsic factor of production which is not the case in most of the contractual perspectives of the business firm as they consider knowledge to be exogenous.

Should perspectives on what business firms are matter for our thoughts on development? Yes, yes, yes. Remembering that development comprises, though not limited to, economic and social change; it is highly influenced, at a national, regional and global levels, by the extent to which new ways of production, organisation and consumption emerge. Firms, and these in Malawi and elsewhere can include smallholder households growing tobacco as tenants, are at the centre of productive activities. Thus, it matters for development how an economy organises for production and consumption and nations that are adept at this can out-perform those that are not. Let us take transport routes as an example. Imagine if Malawi had, by now, successfully organised for an operational inland port at Nsanje and that most of imports were passing through the port. My assumption is that a 40ft container of secondhand clothes would land in Blantyre and a fright cost lower than the $2,895 which importers pay from Beira port to Blantyre: a cost with consumers eventually meet together with, I suspect, a markup.

As I conclude: have you wondered why, in time, America overtook Britain as the world’s largest economy coming out of the first industrial revolution? Or why Japan, after its extensive destruction during the Second World War, caught up and surpassed many countries to become number two economy of the world before falling behind to China recently? I know and I ask you to believe me, that the answer to this question has a lot to do with how economic actors, especially policy makers at national, regional and global levels; and business managers view what business firms are and how the policy prescriptions they make foster or deter innovation regarding production, organisation and consumption locally, regionally and globally. If Malawi’s development prospects are to change, the role of knowledge and, therefore; science, technology and innovation at the level of production, especially needs to be reconsidered by our policy makers and business managers. Addressing the implications of doing so not with words but actions that are resourced in both financial and human capital terms would even be better.

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