Philosophy for Business


Philosophy for Business
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Launched on 2 November 2003, Philosophy for Business is an e-journal published by the International Society for Philosophers, looking at philosophical and ethical aspects of business practice.

We are aiming for a wide circulation to companies and corporations around the world, as well as academic philosophers.

In order to gain the widest possible readership, articles should be written in simple, non-technical language. The target length is 2500 words.

Some themes that we will be looking at:

   Globalization and monopoly
   Is business ethics possible?
   Philosophy of economics
   Practical ethics
   Idea of a code of conduct
   Freedom of speech
   Industrial democracy
   Whistle blowing
   Ecology and sustainability
   Education and health
   Business and the law
   Tax avoidance and evasion

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Geoffrey Klempner


Marco Senatore

Peter S Borkowski

Dena Hurst

Sean Jasso

International Society for Philosophers
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P H I L O S O P H Y   F O R   B U S I N E S S           ISSN 2043-0736

Issue number 50
16th December 2008


I. 'Globalization and localization as feedback mechanisms -- Internalization of
economic externalities' by Subbu Kumarappan and Majd Abdulla

II. The Economics of Corporate Governance and Mergers by Klaus Gugler and B. 
Burcin Yurtoglu, reviewed by Andrew Browne

III. 'Intellectuals -- Knowledge, Power, Ideas' --  Conference in Budapest, 
Hungary May 2009



With today's issue, the Philosophy for Business celebrates its half century. 
Launched a little over five years ago, the e-journal has confounded the critics
who said that business people are too busy making money to care about philosophy,
as well as those sceptical academics who continue to question the idea that 
philosophy can have anything to do with business.

Philosophy matters in business. And philosophy makes a difference to the real 
world. Economic 'necessity' is so-called only when human beings are unable to 
recognize alternatives. Philosophy teaches us to see alternatives. Never has it
been more urgent to see differently than now. When all around are predicting 
doom and catastrophe, the smart money will always be on those who keep their 
brains alert and their eyes peeled.

Subbu Kumarappan and Majd Abdulla are graduate economics students from the USA 
who have addressed the question of competition versus co-operation in the 
global arena with respect to the opposite and complementary processes of 
globalization and localization. They have dared to question traditional 
economic doctrine which the outcome of competition is always superior to the 
outcome of co-operation.

Andrew Browne looks at the latest selection of readings on Corporate Governance,
raising the question, What's the point? The economic benefits in terms of 
increase in economic activity are by no means proved. He concludes that,
'Proponents of corporate governance have had the ethical and moral high ground 
for too long.' How much are you prepared to pay for corporate governance, in an
economic climate where marginal costs can mean the difference between the 
success and failure of a business venture?

What is an intellectual? The organizers of a conference due to be held in 
Budapest in May 2009 are calling for papers on aspects of the social and 
economic role of intellectuals in contemporary society. The key idea is that of
'knowledge production', an activity which, arguably, started with the early 
Greek philosophers. Does that mean that intellectual productions should be seen
as an intrinsic part of economic activity? why? or why not? -- Discuss.

Geoffrey Klempner




While globalization has created changes across the social, cultural and 
economic dimensions by challenging status quo positions, it has also led to a 
call for more localization. This article analyzes how the opposing forces of 
globalization and localization are interlinked with each other. These two 
forces are shown to originate as a feedback to each other. The origin of the 
feedback function of globalization is discussed followed by how globalization 
itself is affected due to the feedback from the localization efforts. How 
globalization and localization efforts would govern a new paradigm of One World
in the future with its philosophical implications are discussed.


Globalization garners huge attention since it transcends the traditional 
barriers across multiple dimensions. Globalization can be viewed as the 
integrating force that reduces socio-economic and cultural differences and 
bridging across political boundaries. The extant literature focuses on these 
issues and how globalization affects nation-state polity, commerce, business 
and trade practices (Aydinli and Rosenau, 2005, Holton, 1998). While many 
interesting questions of direct impacts of globalization have been studied, 
there are many secondary impacts that have 'feedback nature' have not been 
explicitly analyzed yet. To understand these feedback impacts, various other 
questions have to be understood: how and why there were differences to begin 
with and how globalization plays a role of leveling activity? These issues 
deserve attention since globalization effects provide and are a part of 
feedback to socio-economic and political processes that operate now (and in the
past) across the globe.

In the process of uniting and developing common goals, globalization challenges
established norms and status quo positions in almost all spheres of activities. 
As part of the necessity to retain the status quo, one of the reactions to 
globalization is a widespread call for localization -- this can be seen in many
regional economic developmental efforts that try to save their local economy and
associated value systems (Almas and Lawrence, 2003). It also raises another 
question whether localization efforts to improve sustainability is a divisive 
force since it acts against the uniting force of globalization. Hence it is 
imperative to study how these two opposing forces -- globalization and 
localization -- can coexist together. This leads us to another set of questions
-- what kinds of connections exist between the globalizing and localizing forces?
do they move in tandem and how these opposing forces balance each other?

The interactions between globalization and localization forces have largely 
been dealt with from a sociological view point (Almas and Lawrence, 2003). The 
economic dimension of this debate is the focus of this article. We motivate the
differences between globalization and localization through a study of economic 
externalities and how the feedback effects serve to remove those externalities 
through a process of internalization. The two forces are shown to be providing 
complementary feedback to each other. Both the forces keep a check on unbridled
power for each other which explain some of the outcomes including apparent 
conflicts that we see in the world today. The economic basis of globalization 
as an end-result as well as a generator of feedback is stressed to outline the 
philosophical implications of globalizing and localizing forces.

We prescribe a re-interpretation of economic externalities, from a 
philosophical standpoint, where competition can lead to increased transaction 
costs and may be interpreted as a welfare loss (compared to cooperation). We 
show how the feedback functions of globalization try to reduce these costs by 
redefining competition through the process of internalizing the externalities. 
This is followed by a discussion on the development and mode of functioning of 
the said Feedback Mechanism (FM). The coexistence of globalization and 
localization forces is shown to be logically inter-related under our 
re-interpretation of externalities.

 1. Externalities Re-interpreted

Externalities are the consequences (costs and benefits) of an activity that are
not fully borne by the agents involved in the production of consumption of that 
activity. Although they are generally known to be unintended, they could even 
be intentional where the involved parties deliberately shun the responsibility 
for the externalities. Externalities are common to all aspects -- economic, 
political, societal and environmental. For a detailed classification of 
economic externalities, see (Bromley, 1986).

There are two major types of economic externalities -- positive and negative. 
When any economic activity generates a positive (negative) outcome elsewhere in
the economy, then it is said to be a positive (negative) externality. The 
negative externalities are problematic because the agents who own and use an 
asset do not pay for the indirect costs arising due to their usage. The most 
straightforward illustration of negative externalities relates to pollution. 
The power plant burning coal would pay for the raw materials, generation and 
transmission costs. These form the components of 'private costs' which are paid
by the asset owners (power plant) and ultimately by the consumers. But burning 
coal causes pollution (such as greenhouse gas and toxic emissions) which lead 
to indirect medical expenses for all people in the society, including those who
do not consume the power generated from that coal. These indirect expenses are 
not paid for by the coal plants (or the final consumers who demand it from the 
producers) but are borne by the society to a larger extent. Hence, they become 
'social costs' referring to the fact that these costs are not borne by the 
asset owners.

The above illustration is the typical way how externalities are traditionally 
expounded in economic literature. It can also be extended as following: 
Consider a case where two states or regions (X and Y) in a country (A) that are
involved in the same economic activity. Their actions would be deemed
'externality-creating' only if there are observable, (un)intended, social, 
environmental or other consequences. The activity of competition between X and 
Y itself would never be viewed as an activity that creates externalities. This 
is mainly due to the traditional economic notion where the competition is 
viewed as a valid economic activity and the eventual results of competition are
acceptable economic outcomes.

The validity of competition is established based on the fact that no other 
outcome would be more preferable (Mises, 2008). The energy, costs, time and 
resources expended to compete with each other are considered to be valid 
economic activities along with their outcomes. To compete with each other, the 
firms have to expend certain amount of effort, energy and incur certain costs. 
These costs that enable more competition are also a type of transaction costs
(e.g. advertising and strategizing expenditures). Thus X and Y have to expend 
some resources in the process of competition between themselves. The success of
X in acquiring an economic asset or investment could lead to the outcome of Y 
losing that same asset or investment. Consider an outcome where the result is 
such that all benefits are delivered in favor of only one agent, X. When X 
triumphs the losses suffered by Y are not considered as an economic externality
according to the traditional economic notions, since these losses are a result 
of inefficiency of Y to compete and thus their losses are economically 

The above outcome is justified on the grounds that no other outcome is superior
to the competitive outcome -- this seems to underestimate or invalidate the 
benefits from a cooperative outcome. We call to redefine the implicit losses 
and transactions costs associated with competition as externality creating 
activities. Although the interpretation is different, the transactions costs 
that are considered here are similar to those developed by Coase (Coase, 1960, 
Williamson, 1981, Williamson, 1979). If our goal is to find a socially optimal 
outcome, then it is not enough if only the production costs and direct costs 
are taken into account. The indirect costs such as externalities, transaction 
costs and losses suffered from the results of competition should also be taken 
into account. The inclusion of these indirect costs will reduce externalities --
such an inclusive process is known as the process of internalization and it 
promotes cooperation (Brandenburger and Nalebuff, 1996).

The composition of competition and cooperation would be determined by the 
extent to which internalization can occur. As per our modified definition, the 
competition causes unintended effects such as loss of livelihoods of people in 
the victimized state or region and thus become externalities. Philosophically, 
one man's freedom or success would be another man's failure (Schmid, 2006).

 Countering externalities -- A philosophical answer

We conceptualize the philosophical answer as one that will be mutually 
acceptable to both X and Y; irrespective of competition or cooperation, the two
agents X and Y would require no further changes once the best outcome has been 
established and achieved. When the self-maximizing economic individual 
encounters positive externalities, he or she would tend to avoid sharing the 
benefits; this could lead to sub-optimal provision of that activity that 
generates positive externalities. If they were negative externalities the same 
agent would use existing social and institutional mechanisms to reduce those 
externalities (Bromley, 1986). This shows the contradicting behavioral 
difference of the same individual when posed with two different situations.

This is a classic case of an ethical dilemma -- if agent X wins, agent Y 
suffers consequences, but if agent Y wins, X suffers the same consequences; the
attitude of X (and Y) would be different in these two cases where X (or Y) would
prefer winning every time irrespective of the losses suffered by Y (or X). The 
self-maximizing attitude (as conceived by competition) loses sight of the 
losing agent's plight. Hence, the contradicting behavior of the self-maximizing
individual, as proposed by the economic competition theory fails to yield a 
valid unique outcome. Since there is no unique outcome, the competitive outcome
between X and Y may not be relevant given the interpretation of philosophical 
outcome above.

Globalization processes may help achieve that unique behavior; in fact, it 
helps us move towards that unique situation by providing repeated feedbacks 
about the costs and losses of externalities which are not internalized yet. 
Globalization reveals the contradictory and inconsistent behaviors by providing
feedback and makes the systems reevaluate their status quo choices.

 2. Globalization and feedbacks

There are various reasons for a feedback mechanism to develop: (i) it helps 
ameliorate negative externalities or capture benefits from positive 
externalities and develops sustainable functioning of economic systems; (ii) 
the feedback responses guide the globalizing process in a particular direction;
(iii) it helps create a systemic way to account for the rights and privileges of
all agents in the system. Without these feedback mechanisms, the externalities 
would go unaccounted for, and the remaining imbalances in the system make it 
unsustainable. These imbalances lead to accrual of 'social costs' causing the 
overall (socio-economic) welfare to decline. In case of positive externalities,
the stakeholders who create them can be properly rewarded only with the proper 
operation of these feedback mechanisms. If those positive externality benefits 
are not shared properly then it would result in the gradual erosion or decline 
of those services that provide positive externalities leading to social welfare

 Localization and feedbacks

Current globalization efforts are found to trigger two distinct kinds of 
feedback responses -- one supporting the evolving changes (globalization trend)
and the other significantly opposing it (localization). Localization is the 
process where the economic growth within a country's domestic boundaries is 
favored compared to importing of goods in a globalized world. Localization may 
be favored when there are diseconomies due to large scale operations or 
clustered production practices, higher transactions and coordination costs 
under globalization regime. Whenever the effects of globalization reach an 
extreme with negative impacts, the feedback generated tends to reverse the 
trend of globalization. Localization becomes the favored solution. In this 
sense, globalization gives rise to localization. Hence the function of 
providing feedback is critical to maintain the balance between globalization 
and localization.

An illustrative economic example would be the loss of livelihoods in the 
western countries due to Business Process Outsourcing (BPO) to developing 
countries such as India, and China. Many businesses in the developed countries 
strive to achieve efficiency by exploiting cost advantages and shifting 
production and services to India, China and other Asian countries where the 
labor costs are low. This is the process of globalization where the trade, 
goods and services flow across the political boundaries at a higher frequency 
with relative ease.

This response of globalization tries to correct the inconsistencies in the 
valuation of labor (i.e. relative price of labor compared with capital) across 
countries -- thus the differences in relative prices of labor are leveled. 
Globalization results as part of different relative prices of inputs (labor, in
this case) -- with unfettered globalization, the labor would be valued according
to their marginal productivity which would be the same all across the globe in 
the absence of artificial barriers; the intellectual property (IP) right 
barriers can be considered to be artificial, in a philosophical sense, since 
its interpretations are significantly different across the countries -- it has 
to be unique according to our earlier description of philosophical outcome. 
When many jobs are lost in the developed countries due to BPO, the local (or 
domestic) labor and livelihood issues becomes important and thus there will be 
a growth in localizing forces. Hence, globalization gives rise to its opposite,

This also shows that globalization is capable of generating two-way responses. 
If the localization were to prevail, it would be a direct effect of the 
negative effects (externalities) of exporting jobs due to globalization. If 
globalization were to prevail, it would be geared directly to inform and engage
the local communities of the positive influences (externalities) possible due to
globally devised actions. Either way, the importance of feedback mechanism is 
obvious (Lucas, 2003).

 3. Feedback functions of globalization

The globalization process itself is a feedback response of incorporation of 
externalities that were not incorporated previously in the global context. The 
political disparities across the regions (communism vs. socialism vs. 
capitalism) have been the major factor for people of different nationalities to
lead different levels of quality of life. Globalization enables better 
information flow resulting in mass human action to counter negative outcomes or
enhance positive outcomes (Sen, 2002, Smith, 2007). Globalization serves the 
purpose of questioning and modifying many status-quo perspectives -- for 
example, the political disparities across the countries were brought upon 
because of the leaders and influential personalities in the past in those 
countries -- they need not be desirable in today's world of increased 
international interaction.

Sen (2002) discusses the role of information flows in reducing the poverty in 
developing countries; his key observation is that the type of political 
governance is affected by the amount of information flow to and from the poorer
groups of peoples. If the information (and thus feedback impacts) is allowed to 
flow more freely, globalization can be expected to spread a governance form 
that favors democracy across countries and regions. The positive impacts of 
human entrepreneurial nature have favorable externalities thus resulting in a 
widespread rapid adoption of capitalism advertently as opposed to communism
(Schramm, 2006). Hence, part of the successes of capitalism and democracy at a 
global level can be attributed to globalization; we may also surmise that the 
lack of democracy can be attributed to the reduced impacts of globalization or 
a blockage in the operations of feedback mechanism. Thus democracy and 
capitalism would spread around the world due to their positive impacts
(increased social welfare) and favorable externalities created by sharing the 
economic benefits of entrepreneurialism.

Is there an extent to the spread of (unregulated) capitalism or opportunistic 
entrepreneurial behavior? This question can be interpreted as to what extent 
one form of governance would be spread across the world by globalizing forces. 
The answer lies in the amount of externalities created by the globalizing 
forces. The feedback impacts of globalization have caused the initial move 
towards capitalism and any reversal in the role of capitalism is possible only 
through the feedback that it may not be suitable for certain situations or 
market conditions. Hence globalization provides a common framework to compare 
and contrast alternative outcomes -- be it in economic, social, political or 
cultural framework.

It is important to note that when all possible alternatives are evaluated, in 
many cases there will be unique outcomes which can be termed as philosophical 
according to our earlier definition since it will be acceptable to all 
stakeholders irrespective of power, economic or governance structure. The key 
implication of this unique outcome is that the world will start to look more 
similar. Hence, the feedback impacts of globalization will lead us to the 
concept of 'One World' as propounded by (Singer, 2002). One World may be 
defined as a single integrated entity that exhibits a consistent mix of various
social, economic, cultural elements where the consistency is achieved through 
the feedback mechanism (both globalization and localization) among competing 
ideologies, theories and practices.

 One world -- illustrations

The following are some instances where the world looks more similar 
irrespective of the present differences. The following examples are not 
exhaustive but are provided only to motivate the idea of One World through 

 Global financial markets: The growth of global markets and financial 
instruments in developing countries resembles that of the well developed 
economies in the western hemisphere (Picciotto and Haines, 1999). Thus, the 
achievements of one economic system in or in one part of the world are fed into
other economic systems across the globe. The recent global financial crisis has 
called for a global effort to restore confidence where the countries and their 
central banks have each to play a role that is consistent with that of others. 
Such coordinated efforts to stem the financial crisis are the hallmarks of 

 Global climate change: One of the most pressing problems of our times is coping
with greenhouse gases (GHG), global warming and climate change. As the name 
suggests it is a global issue; it has been well perceived that participation of
all nation-states (as one whole community or as one-world) is a crucial 
requirement for the control of global warming problems (Kuik and Mulder, 2003, 
Nordhaus, 2007).

 Business strategy: In business competition, globalization has enabled
'co-opetition' where the companies that compete in the one country (US) work 
together elsewhere in the world (Brandenburger and Nalebuff, 1996). The 
companies (for example, Intel and One Laptop Per Child) that were initially 
competing against each other to market their product (inexpensive laptops for 
children in the developing world) have decided to work together recently, 
apparently in an effort to reduce the negative effects of competition and 
delaying development (Krazit, 2007). Both companies have taken the welfare 
losses suffered by the other company into account leading to 'internalization.'
Globalization can be viewed as internalization occurring at global level.

 Integration across spheres: Globalization forces multinational businesses to 
engage in political issues in the countries that they operate in cause a 
merging of economic, environmental and social issues. A problem along 
environmental dimension may be partly resolved through another dimension, say 
economic. The need to find an amicable solution along different dimensions is 
necessitated because of the merging of interests across the traditional 
dimensions. Globalization serves that purpose through generating feedback 
generation and helps us understand the relevance of unified governance 

 International investments: The concept of mass marketing (e.g. Walmart stores 
in the U.S.) has forced populous economies like India to reevaluate their 
policies on foreign direct investment (FDI) (The Hindu, 2006). The impacts of 
such global companies have generated more similarities between India and China 
in spite of their differences in political and socio-economic structures. If 
the Indian economy were liberalized to accept more FDI, then it will make 
Indian economy look similar (with respect to investments) to that of the 
Chinese economy which is already open to foreign direct investments. These are 
the two most populous nations on the globe with one-third of population 
accounted for. This is another sign that the world governance systems and 
supporting systems begin to look similar due to the incorporation of feedback 
impacts generated from globalizing forces.

 4. Internalization at global scale

Globalization forces gather momentum from externalities and differences that 
exist in various dimensions of international trade and commerce. Thus, these 
externalities at global scale require a solution (such as internalization) at 
the global scale as well -- more often the integration occurs across multiple 
dimensions. For instance, the negative externalities in using a country's 
environmental resources have been responded with positive externalities in 
economic, social and political improvements of a broader geographic region
(Woods, 2006).

 European Union and Internalization

In its truest sense, the removal of divisions and differences suggests a 
unitary economic system leading to 'One economy, One law, One atmosphere, One 
governance structure, One social culture, and One community' (Singer, 2002). 
Formation of this One World would naturally lead to global-level 
internalization and contribute to reduction in transactions costs in multiple 
ways. One remarkable existing example of such a global unique body is the 
European Union (EU, 2007a).

The European Union is an integrated economic, political and social identity 
with 27 countries (currently) in the European continent. The formation of EU 
helps coordinate activities which need to be coordinated at a continental level.
The purposes of EU are to enhance 'peace and prosperity' among member nations
where the members delegate 'some of their sovereignty' to the continental body. 
The EU achieves its purpose by taking 'joint action' whenever they are called 
for. Some of its actions have enabled one currency (Euro) for member nations 
which has established itself as a major global currency, and one climate action
plan through the global cap-and-trade program for GHG emissions (UNFCCC, 2007a).

The movement of citizens of the member states has been liberalized to a certain
extent as well. Though the labor markets have not been fully opened yet among 
all member states, the more open economic systems would help attain production 
and allocation efficiency. If some of the citizens of a particular member 
country were to suffer economic hardships, they would be addressed better in 
the presence of EU than in its absence. The social dimension of the EU, on the 
other hand, helps ensure that the continental systems do not exploit the 
resources; they also ensure that the social costs (externalities) are 
internalized at a continental level.

Such a continental coordination benefits all member countries by promoting 
cooperation and limiting competition to an extent. The diminishing of 
competition is not forced upon the member nations but brought upon by a 
realization of all the involved parties. The formation and functioning of EU is
an example of how losing some sovereignty (on part of member nations) will help 
internalization coherent with the integrating forces. In the EU, every member 
nation has its interests accounted for, in principle. This discussion raises 
some related issues such as: 'Can EU experience be replicated at a global level
?' 'What factors made it possible in the EU?' and 'How the changed institutions
of the EU would look like in a globally integrated platform?' -- are important 
questions for future research.

 Limits of Globalization

When globalization suggests integration of activities, there are limits to the 
extent that can be integrated. For instance, it may not be possible to produce 
all of a particular good in a single region or country and deliver it all over 
the world for the sake of reducing costs of managing multiple plants in 
different locations. There are diseconomies to size and lost livelihoods due to
enormous economic operations that are concentrated in certain parts of the globe
(Schumacher, 1989). These diseconomies also show why the same regulatory 
authority in one part of the world may not be able to manage resources in the 
other part of the world because of the unfamiliarity of the problem or the 
inappropriateness of using the same solution to all problems (Hayek, 1945). 
Hence, the suggested solution needs to be a mix of (i) integrated globalization
and (ii) disaggregated localization (eg. local management by local communities).
Globalization will provide feedback to localization forces in a repeated loop on
what level of integration is applicable for a given situation and vice-versa.


Human beings established early civilizations when there was no easy access to 
the information on the nature and quality of another civilization's way of life.
These civilizations later evolved into nation-states that we see today. Each 
and every nation or social group developed and largely built their own values 
and ideas without much of international influence due to the lack of knowledge 
and interaction. In today's modern world, especially since the second half of 
20th century when information technology has advanced rapidly, the information 
flow is so quick and extensive, that it is time to reevaluate every idea or 
value with an equivalent idea or value of other countries or regions.

Over time, the invalid ideas of unsustainable origins, that were imposing 
negative impacts and externalities need to be eliminated. Globalization and 
localization will play the two opposing forces in identifying those valid ideas
by transferring ideas across borders and evaluating them in a global context. 
This is one way how the human beings can acknowledge the impacts and 
externalities of their individual actions. This could help achieve a more 
egalitarian society favored by all human beings irrespective of national 
differences. Hence, globalization and localization will help create 'One World'
characterized by one pluralistic culture. Thus, the internalizing effects of 
globalization and localization themselves can be viewed as a philosophical 
feedback response to the divisive nature that leads to divisions among men.


Almas, R., and G. Lawrence. Globalization, Localization and Sustainable 
Livelihoods, 2003.

Aydinli, E., and J. N. Rosenau. Globalization, security, and the nation-state :
paradigms in transition. Albany: State University of New York Press, 2005.

Brandenburger, A. M., and B. J. Nalebuff. Co-Opetition : A Revolution Mindset 
That Combines Competition and Cooperation. New York Doubleday, 1996.

Bromley, D. (1986) Markets and Externalities, ed. D. Bromley, Kluwer, pp. 37-68.

Coase, R. H. 'The Problem of Social Cost.' Journal of Law and Economics 3(1960):

EU (2007a) United in Diversity; Available at:

Hayek, F. A. 'The Use of Knowledge in Society.' American Economic Review 35, no.
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Holton, R. Globalization and the nation-state. New York St. Martin's Press, 

Krazit, T. (2007) Intel and OLPC kiss and make up; Available at:

Kuik, O., and M. Mulder. 'Emissions trading and competitiveness: pros and cons 
of relative and absolute schemes.' Energy Policy 32, no. 6(2003): 737-745

Lucas, C. 'Localization -- an alternative to corporate-led globalization.' 
International Journal of Consumer Studies 27, no. 4(2003): 261-265

Mises, L. V. Human Action -- A Treatise on Economics. Revised 4th Edition ed: 
Laissez Faire Books, 2008.

Nordhaus, W. D. 'To Tax or Not to Tax: Alternative Approaches to Slowing Global
Warming.' Review of Environmental Economics and Policy 1, no. 1(2007): 26-44

Picciotto, S., and J. Haines. 'Regulating Global Financial Markets.' Journal of
Law and Society 26, no. 3(1999): 351-368

Schmid, A. The Exit Lecture: The Institutional Economics Way of Thinking, April
14, 2006.

Schramm, C. J. The Entrepreneurial Imperative: How America's Economic Miracle 
Will Reshape the World: Collins, 2006.

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Perennial, 1989.

Sen, A. ' Democracy and Sustainability.' New Perspectives Quarterly 19, no. 4(

Singer, P. One World: The Ethics of Globalization. New Haven: Yale University 
Press, 2002.

Smith, T. (2007) 'Sen, Equity and Sustainable Development.' OECD Available at:

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Available at:

UNFCCC (2007a) Kyoto Protocol; Available at:

Williamson, O. E. 'The Economics of Organization: The Transaction Cost Approach.'
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Woods, E. (2006) Crude Poverty; Available at:

(c) 2008 the Authors:

Subbu Kumarappan
Dept of Ag, Food and Res Econ
Michigan State University
E Lansing, MI 48823

Tel: 515-520-7880

Majd Abdulla
Dept of Economics
Iowa State University
Ames, IA 50010




 The Economics of Corporate Governance and Mergers
Klaus Gugler and B. Burcin Yurtoglu (Eds.)
Edward Elgar Publishing, Cheltenham UK, 2008

 What is the point of Corporate Governance?

Corporate governance has become a hallowed term. By this I mean that it has 
become a 'good thing' in the same way that terms like 'freedom' and 'democracy'
have come to be evaluative terms rather than purely descriptive. Public 
companies now devote considerable financial and personnel resources to jumping 
through the various hoops required of them in terms of directors and audit 
reports and information requirements.

The reasons why corporate governance is a good thing have been widely argued 
both in terms of avoidance of financial scandals and also on a more ethical/ 
moral level. The need for adequate levels of corporate governance is seen as a 
consequence of the division of ownership from management. Firms are held to 
have duties to a range of stakeholders and managing a firm requires an ethical 
acknowledgement of these duties which are taken to be manifested in a set of 
rules and procedures that protect the interest of these stakeholders.

Klaus Gugler and Burcin Yurtoglu -- both of the University of Vienna -- have 
produced a book of readings from a wide international range of academic 
economists that seeks to examine whether corporate governance brings any 
demonstrable financial benefit to companies and whether vertical or horizontal 
mergers bring about an increase in shareholder value. The articles vary between
'review of the literature' overviews to econometric models that ooze with 
statistical equations and there is a commendable international representation 
of views.

In their introduction the editors see corporate governance as 'the design of 
institutions to make managers internalize the welfare of all stakeholders in 
the firm' (p.1). Now, there seem to be a few loaded terms here but it probably 
does not pay to get stuck on definitions. We all know what corporate governance
is even though we may not be able to define it to universal agreement. The 
Editors note various empirical and theoretical research on the benefits of 
specific components of corporate governance (board composition, information 
flow, incentive mechanisms etc.), which have had far from conclusive results.

They do, however, propose that two conclusions can be drawn from the studies in
the book taken as a whole. First, 'corporate governance systems that better 
align shareholders' and managers' interests lead to better corporate 
performance' and, second, that 'there is an important relationship between 
corporate governance structures and the quality of firm decision-making' 
particularly in relation to takeovers and mergers (p.16). What is interesting 
about these claims is that they do not seem to be justified by a careful 
analysis of the papers in the book.

The first paper, 'Legal origin, shareholder protection and the stock market' 
seeks to identify corporate governance in some measurable way, choosing to 
focus on the legal shareholder protection rights enshrined in national law. 
These include such things as the powers of shareholders in general meeting, 
individual information rights for shareholders, performance based remuneration,
disclosure of share ownership, ability to disqualify directors and authorisation
for directors' share dealing. These 60 variables are then analysed against the 
statutory requirements in France, Germany, the UK and the US for the period 
1970 to 2005 with a view to linking national economic welfare to a quantitative
measure of shareholder protection.

Interestingly the research implies that relative positions of the countries in 
terms of the strength of shareholder protection changes in the period. In 1970,
Germany had the highest measure of shareholder protection and the UK the lowest,
but towards the end of the period France climbs to have the highest levels and 
the US the lowest levels of protection. Unfortunately the attempt to link this 
with a measure of economic growth (questionably using surrogate measures such 
as stock market turnover ratio) is not successful: 'Our study casts serious 
doubt on a long-term relationship between laws protecting shareholders and 
stock market activity' (p.45).

The subsequent paper, 'Corporate governance and the public interest: the way 
forward' is one of those rather pompous think-pieces full of high sounding 
moral principles that argues for the democratisation of corporate governance so
that there is greater public involvement. 'It is essential to nurture a civic 
society in which all people develop and penetrate the processes of governance 
that impinge on their lives... It is these citizens that can demand and assure 
that good governance prevails' (p.72). That's fine then. All we have to do is 
nurture a civic society, whatever that means.

Following chapters examine whether Boards of Directors should be reconstituted 
as vigilant monitors or actively participate in day-to-day management of a 
company. It is argued that 'corporate boards have been going from bad to worse'
as a result of their control by management 'which has usurped it [control of 
boards]'. This control has to be returned to shareholders (or maybe even 
stakeholders), where it belongs' (p.97).

'Corporate governance: a review of the role of banks' suggests that having a 
major bank as financier or major shareholder -- a common practice in Germany, 
Belgium and Japan -- may impact positively on corporate governance although 
there is no correlation to profitability.

'Competition between profit seekers and non-profit firms: the case of German 
banking' presents a case study of German banking where these profit seekers 
like the main commercial banks compete with non-profit financial organisations 
such as co-operative banks and local savings banks. The authors argue that 
profit and non-profit seeking organisations can co-exist and compete, but the 
eccentricities of German banking and different cultural norms call into 
question the general applicability of this observation. In any case the 
argument certainly needs revisiting in the light of the financial turmoil in 
banking over the past few months that has seen so much carnage in this sector.

The theme of the next few papers is whether mergers and takeovers increase 
shareholder value. In the review of literature included, it is clear that the 
majority of research studies on specific mergers in a number of different 
countries have found no post-merger improvement of relative profitability. This
applies to horizontal mergers, where competitors are joined together and 
vertical mergers, where firms acquire suppliers or customers. In both cases 
there are theoretical benefits from economies of scale, mass production or 
ensuring supply lines but these do no not seem to feed through to profitability.
There is a strong suggestion that corporate activity is stimulated by macho 
empire-building and that cost savings may be illusory: 'firms tend to 
overemphasise the positive contribution of the merger not only to persuade the 
[competition] authority but also to impress investors.' (p.221).

In 'UK corporate governance and takeover performance', the authors note the 
improvements in corporate governance in the UK as a result of The Cadbury 
Report and subsequent governance reforms. They note increasing compliance with 
best practice amongst UK companies in such areas as the role and composition of
the board, remuneration, accountability, audit and relations with shareholders 
and turn to the question of whether this can be linked to better performance in
making corporate takeovers. Their findings suggest no such link. Better 
corporate governance has not manifested itself in more profitable corporate 
takeovers. Interestingly, their findings did suggest one key correlate with 
better performance and this was the CEO of the acquiring company owning a large
proportion of the equity.

The final paper 'The impact of competition on macroeconomic performance' 
involves a research study collecting 13 indicators of the toughness of 
competition from 29 countries. These included the intensity of competition in 
markets, the effectiveness of anti-trust law and so on. The authors then seek 
to link the toughness of competition to the economic growth of the countries 
concerned. Competition is of course another 'good thing' and a hallowed term in
free market economics. The results are far from conclusive and the causal 
relationship between tough competition and economic performance is simply 
assumed. Surely it is equally likely that strong economic performance leads to 
tough competition?

Rather amusingly the authors then go on and choose a 'preferred model' that 
demonstrates an even stronger correlation between competition and performance. 
Their 'preferred model' involves ignoring results which contradict the link for
reasons apparently snatched out of the blue: Germany is excluded because of the 
costs of reunification, Scandinavian countries because of high research and 
development expenditure, Spain because of strong investment in housing. Where 
results more closely conform to the model desired e.g. Ireland, Canada and 
Australia, they are allowed to stand, although anyone could think up isolated 
causes of why a country's economic performance has been impacted over the past 
decade or so and toss them in to invalidate that particular country. 
Australia's economy for example is heavily tied to commodity prices, Ireland 
benefited hugely from EEC grants and farming subsidies and Canada's economy is 
stapled to that of the US.

In my understanding the article leads to the conclusion that economic growth is
more likely to be related to the percentage of GDP spent on research and 
development linked to the degree of financial investment -- in short the degree
of innovation. This does not stop the authors concluding that 'In the long run, 
innovation plus competition [my emphasis] seem to be a good double strategy for
improving performance' (p.344) which really just boils down to a statement of 
opinion. Anyway, as Keynes noted, in the long run the only thing we know for 
sure is that we will all be dead.

The thoroughly entertaining and thought provoking research studies in this 
absorbing book leave the case for corporate governance having a positive impact
on corporate financial performance as unproven. Indeed everything intuitively 
suggests that corporate governance is a gross and net cost to business which 
reduces profits and cash flow. At a time when the worst thing we could all 
imagine was an accounting scandal such as Enron or WorldCom maybe this was a 
price that boards of directors were willing to pay. Given the current gloomy 
economic climate and the prognostications that many firms will be driven to 
insolvency and closure, growing unemployment levels and a fall in everyone's 
living standards, this whole area may be viewed in a new light.

Proponents of corporate governance have had the ethical and moral high ground 
for too long. The world is in the middle of the worst economic crash many of us
have ever known. At one time there seemed a real risk that one of our main UK 
commercial banks could go bust and millions would lose their savings and as I 
write this, the US automotive industry appears on the edge of collapse. Maybe 
companies need to carefully re-evaluate their approach to corporate governance 
in such a climate; at an extreme the costs of corporate governance could be the
difference between going bust and surviving. At best they are a painful overhead
cost and waste of time that could be crucially spent on more critical business 

(c) Andrew Browne 2008




2nd Global Conference
Intellectuals - Knowledge, Power, Ideas

Friday 8th May - Sunday 10th May 2009
Budapest, Hungary

Call for Papers

Following last year's very successful inaugural conference, the Intellectuals: 
Knowledge, Power, Ideas Project will hold its second annual conference in 
Budapest in May 2009. The conference is a keystone of the 'Intellectuals' 
Inter-disciplinary.Net project that seeks to explore the role, character, 
nature and place of intellectuals and intellectual work in contemporary society.

Whilst the 'intellectual' emerges as a particular category with the development
of modernity, the 'knowledgeable' and knowledge producers have been an important
historical agent and social actor since the early Greek philosophers, and 
knowledge production, whether religious, scientific or philosophical, has been 
important in shaping social, political, economic and cultural change. 
Intellectuals and the knowledge they produce have been subject to competing 
representations: from an 'elect' producing knowledge for its own sake to 
different forms of philosopher king, servant of the state or dissenting 
movement intellectuals connecting politically with change in the social world. 
In contemporary 'knowledge' societies, much of the focus on the intellectual as
a 'public' figure, residing within the media intelligentsia or institutions of 
higher learning, but competing theories of intellectuals and their work 
identify elitist, meritocratic and radical alternatives about who intellectuals
are, what they do, how they are connected to and divided from other social 
institutions, and why we understand them the way we do.

The Project seeks to build, by annual conferences and network activity, both an
evidenced and critical understanding of the intellectual and intellectual work 
in the past and a critical understanding of intellectuals and intellectual work
in the present, and its prospects for the future. In doing so, it recognises 
that the interdisciplinary basis of such an analysis will take in the fields of
cultural studies, education studies (with a particular focus on higher education
), history, literature, philosophy, politics, sociology, social theory and open
avenues to wider and more diverse disciplinary connections, and the project 
welcomes interdisciplinary explorations. Some indicative themes are suggested 
below to indicate the types of issues that might be addressed in conference 
papers and workshops. The first of the themes is one we particularly wish to 
emphasise at this conference.

A. The Intellectual, War and Conflict

How do we understand the rights, responsibilities and duties of intellectuals 
in times of conflict and war? To who or what do intellectuals owe duties and 
responsibilities in war and conflict? What constitutes loyalty and disloyalty 
when intellectuals speak to truth? Should intellectuals be detached or 
committed in their approach to conflict and war? What constitutes complicity 
intellectual work about war and conflict and how should we judge both? How do 
we distinguish intellectual honesty from strategic opportunism in intellectuals
' interventions in war and conflict? What is the scope and limits to free 
speech and intellectual commentary during war and conflict?

B. The Making of the Modern Intellectual and Intellectual Work

How do we understand the role and impact of intellectuals and intellectual work
in the past in shaping intellectuals and intellectual work in the present? What 
historical categorisations, roles, models and places in conceiving the 
intellectual influence how intellectuals see themselves and their work today? 
How have the roles, natures and places of intellectuals changed through history?
What do historical understandings of the intellectual tell us about the 
intellectual today?

C. Intellectuals and the 21st Century Academy

What roles, functions and positions do intellectuals take within learning 
institutions and what has the impact of change in learning institutions made on
intellectuals? What overlap and interplay is there between the academy and the 
intellectual? What moral, cultural, political and educational principles 
underpin the academy and the learning institution today? How has the 
association between academy and intellectual been impacted on by recent change 
in society, economy and politics in the 21st century?

D. Intellectuals and the Knowledge Society

How has the intellectual changed in their role, character and place in the 
knowledge society? How have the internet and ICT's changed the way 
intellectuals work and intellectual work is produced, distributed and exchanged?
How has the knowledge society changed our understanding of the intellectual 
in society? Have we moved from the primacy of the mode of production to the 
primacy of the mode of information?

E. Public Intellectuals and the Intellectual in Public and Political Life

What is a public intellectual and how is a public intellectual distinguished 
from other intellectuals and knowledge producers? What roles and places do 
public intellectuals have in past and contemporary societies? Are intellectuals
and is intellectual work always political? What political and public roles do 
intellectuals play?

F. Intellectuals and Cultural Life

How have intellectuals impacted on cultural life, in shaping everyday 
experience, providing frameworks for understanding and producing cultural 
enrichment? In what ways have intellectuals played a role in shaping the 
cultural milieu? What is the relationship between the intellectual and the 
artist or producer of cultural knowledge and products? What is the relationship
between intellectuals and the aesthetic?

G. Intellectuals and the Development of Bodies of Knowledge

How do intellectuals produce and create knowledge? How should we understand the
processes of knowledge production and creation as social and political and well 
as research processes? How should we understand notions of discovery, 
exploration and speaking truth in the context of critical perspectives on 
knowledge creation? How have particular bodies of knowledge developed 
historically and come to play determining roles in social, cultural, political 
and economic change?

These themes are intended as illustrative and proposals on related areas are 
welcomed. Panel proposals, workshops and joint presentations are also welcome. 
The conference aims to bring together people from different areas, disciplines,
professions and interests to share ideas and explore questions in a way that is 
innovative and exciting.

Papers will also be considered on any related theme. 300 word abstracts should 
be submitted by Friday 9th January 2009. If an abstract is accepted for the 
conference, a full draft paper should be submitted by Friday 10th April 2009. 
The draft paper should be of no more than 8 or 9 pages long and ready for a 20 
minute (maximum) presentation during the conference.

300 word abstracts should be submitted to both Organising Chairs; abstracts may
be in Word, WordPerfect, or RTF formats, following this order:

     author(s), affiliation, email address, title of abstract, body of abstract.

We acknowledge receipt and answer to all paper proposals submitted. If you do 
not receive a reply from us in a week you should assume we did not receive your
proposal; it might be lost in cyberspace! We suggest, then, to look for an 
alternative electronic route or resend.

     Organising Chairs
     Paul Reynolds
     Social and Psychological Sciences, Edge Hill University
     United Kingdom

     Rob Fisher
     Network Founder & network Leader Inter-Disciplinary.Net
     Freeland, Oxfordshire OX29 8HR

The conference is part of the Critical Issues programme of research projects. 
It aims to bring together people from different areas and interests to share 
ideas and explore various discussions which are innovative and exciting. All 
papers accepted for and presented at this conference will be eligible for 
publication in an ISBN eBook. Selected papers will be developed for publication
in a themed hard copy volume.

For further details about the project please visit:

For further details about the conference please visit:

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