18 - Business-Government Relations: Beyond Performance Issues

Summary

Governments have played an important role in business matters ever since the Industrial Revolution. As numerous studies have shown, there has been a very close relationship between the formation of the modern nation state and industrialization. In Germany and Italy, for example, the Second Industrial Revolution, that is, the development of the large-scale production of oil, chemicals, pharmaceuticals, steel, and automobiles toward the end of the nineteenth century, took place at about the same time as political unification. In most industrialized countries, the influence of the state in business matters increased considerably during the twentieth century — even outside exceptional times of war and national crisis. Especially after World War II, many governments in developed as well as less developed countries actively intervened at the industry and firm level.

A reversal of this trend took place only during the last two decades of the twentieth century, when most governments started privatizing previously state-owned companies and public services and deregulating a vast array of business activities. In addition to bringing much needed resources into public budgets, these efforts were based on economic arguments. Thus, according to the so-called agency theory, publicly owned enterprises are likely to perform less well because they are not subject to the discipline of financial markets. In addition, the state as an owner usually pursues other objectives in addition to or instead of profit maximization.