To address the issue better, let us first understand the definition of stakeholder. Stakeholder is a term, primarily used in finances, mostly in economies and trade, describing a group of people, company or an enterprise with a particular interest in the business. Mostly, stakeholders comprise of employees, third party institutions and suppliers. Beside this, the modern economy theory identifies additional important stakeholders such as the government, trade organizations and communities.
Today, stakeholders are the base of a nation’s economy. Viewing from the eyes of a stakeholder, private entities eyes for making profits and increase the value for shareholders. As labour costs is a key concern, companies effectively work towards controlling these costs. This makes employees dissatisfied, which is then reflected into output of the company’s deliverable’s and effecting other stakeholders such as government. Most of the successful companies ensures interests of their employees first, their key stakeholders second and then focuses on their profit.
Role of Private Sector
Today,private sector has become a symbol of growth, which effectively contributes in eliminating poverty and work towards improving socio-economic status of individuals. Private sector is credited for over 80% of employment throughout the world and provides critical goods and services; However, the best results will be achieved when all the stakeholders learn to work with each other and understand their level of contribution in the society. Public sector creates better investment opportunities while government open doors for investment in the country.
Role of Corporate Social Responsibility
Corporate Social Responsibility is designed to involve private entities into crucial discussions on social and environmental issues through their modus operandi and further increase their interaction with the stakeholders. CSR is usually understood as a mean to know the private’s opinion in resolving the issues with respect to economy, socio and environmental, while presenting concrete solutions or methods for obtaining solutions for the same. Many of us believe that CSR is a meagre, concept for obtaining business management by doing charity, philanthropism or through sponsoring events. As a matter of fact, these can be helpful in addressing issues such as poverty reduction, will reinforcing the reputation of the company and further strengthening its image in the society, although, the concept of CSR is much larger than that.
However, carefully discussing important socio-economic issues with private entities will efficiently help in resolving the issue, which will then lead to increase in the number of stakeholders, followed by change in the perception and attitude towards the issue, enhanced operational activities, increased productivity, efficient human development, better decision making and better assessment of the program, steps, if taken seriously within the CSR, will positively affect the economy of the nation.
Non-seriousness of private entities in developing economies
There is an exceptional energy to move ahead in developing economies, and all sectors especially the private has responded quite positively. But, inspite of their positive response, the corporate face few major challenges in all the developing nations.
In most of the developing economies, the concept of microeconomics is not yet clear forcing the small and medium enterprises to function informally.Many such small and medium enterprises have issues within its functioning mechanisms.There is no competition within the small and medium enterprises, forcing them to operate in their own pace thus making them less innovative which then hampers their productivity.
Micro-enterprises provides ample of economic opportunities for developing economies to flourish. Most of the micro-enterprises do not operate within the designed legal system in developing economies, which increases informality. Undoubtedly, it has its own benefits. It provides opportunities to labours in finding suitable jobs. But their progress then comes to a halt, when they are unable to identify financiers and later goes out of funds. Because of their non-legal operating mechanism, they are unable to occupy loan. Thus, they end up taking loans from illegal moneylenders who then charge with a higher interest.
This business which runs informally, outside the boundaries of the legal system, has very few benefits. There is an absolute need to change the current legal system or adding additional clauses such as contracts and rights with respect to property. The rules should be reinforced strictly and resolutions with respect to dispute should be introduced, engaging the stakeholders in a more comfortable and agreeable discussion while enabling them to avail better opportunities and required bonuses. In the previous years, entrepreneurs were forced to offer extra payments to officials that compromised their effective working mechanism and decreased productivity and credibility of the organization. This then limited the functional strength and confidence of entrepreneurs.
Those entrepreneurs working within the boundaries of the legal system are deeply affected by the outcomes of informal marketswhich takes place on uneven prosecution and ineffective law enforcement, which creates enormous ripples in the market. This creates an uneven playground forentrepreneurs’ and provides limited access to markets,hampering their productivity.
Entities working in the informal sectors charge less as compared to others because of their non-involvement in the tax and other regulations set up by the government. The productive firms are then involved in a tussle with the informal firms to acquire the marketas the formal firms abide the government regulations, which gives them the right to avail all the benefits plus making profits. These productive firms are unable to drive out the informal firms from the market. It is clearly visible, the need to strengthen enforcement laws, because of such ineffective enforcement laws formal entities are being held from making maximum profits. Inspite of taking all the advantages and availing schemes and abiding laws, the formal entities are forced to hold their share and their grip then further loosens because of the illegal activities carried out by informal entities.
Additionally, besides the work ethics, workers’ rights and benefits are compromised in the informal sector as compared to the entities working in the formal sectors. Stakeholders are involved in producing goods that does not go through a proper quality check, forcing the consumers to buy products that are of poor quality, and without other options or lower price as compared to other goods in the formal markets. In order to enter into the formal sector, the entities have to go through a lot of challenges. In many developing economies, the cost of getting into a formal sector is high. Those entities enrolling in the formal sectors are heavily taxed (over taxed forcing many companies to bail out, leaving them no option but to work informally).
For entrepreneurs to register their business propositions, they have to fill out lengthy paperwork. The compliances for these entities are costly. With such complex compliances the scope for bribery and forgery increases, exposing the smaller entities to defend themselves, in a battle which would ultimately require massive resources, which these organizations don’t have. For entrepreneurs there is not much to benefit in the formal sectors.
Theoretically, the formal sectors give the opportunities for private entities to sell beyond borders,but poor opportunities and heavy custom laws prevent the entities in flourishing in the overseas trade. There is an absolute need for strong bankruptcy laws, which today continues to exist in developed economies and are non-existent in the developing economies. These laws are ineffective in developing economies thus forcing entities in the formal sector move to the informal.
Poor competition within SME’s
Today, small and medium enterprises are considered to be job creation units, encouraging younger generation in innovation and entrepreneurship. By encouraging competition, they increase efficiency and further propagates growth which assists in economy development. Experts state that the economic growth of a nation is directly proportional to the growth of formal small and medium enterprises.
In order to support growth and overall development of the nation, SME’s need to interact with smaller entities, some of which work in the informal sector. Some rules with respect to entering the market leaves a strong impression on small and medium enterprises, fearing out of which many smaller entities do not respond well to the SME’s. SME’s are able to compete in small markets, but the advantages are enjoyed well by larger entities who have not only gripped smaller markets but are making the most profits in larger markets. The SME’s because of heavy compliances are unable discipline their accounts, thus becoming productive and working ineffectively. The tax laws further decrease their productivity.
Most of the entrepreneurs are affected by growing informal markets and lack of skills. While being motivated with innovative ideas and untapped markets, SME’s entire productivity depends upon weaker workforce and inferior labour. The overall cost of the business is much higher than the SME’s can afford, thus question their ability to deliver the essential products in the markets.
Undoubtedly, the most important drawback of small and medium enterprises is lack of financing which then results in undelivered products, entities are no longer able to trust SME’s for delivering their units in time, trust is perhaps the base that relationship between entities are built on. Within the SME’s there is an absence of financial assessment instruments. Banks are unable to acquire absolute true information, decreasing the credibility of SME’s. Factors such as these increasing the interest rates, creating major barriers in the path of SME’s.
Absence of competitive pressure
Many institutes create vast groups, creating an ecosystem of private networks. In most of the developing economies, fortune 500 companies began with an entrepreneurial energy and initiative. Most of these organizations make benefits from smaller entities and retain their dominance and position. As local informal markets function without the fear of law and outside the boundaries of the legal system, many matured markets work under inappropriate regulations, calling the need for legal binding.
In order to have growth and economic stability, the financial sector should function in absolute legal environment, which also then open doors for competition within the markets. But most the fortune 500 companies then use this process to show their dominance and engage themselves in lobbying with the government, adversely affecting the governance model and compromising the financial infrastructure for the markets.
Working’s such as these directly effects the poor, as the price of the product increases but the quality of the price decreases. Corruption further compromises the system giving way to the potential power firms and suppressing smaller entities. These power players receive all the benefits, special privileges, licences and are able to sell their cheaper product in a much higher prices directly in the market.
These power players then starve smaller entities by preventing them to enjoy benefits from the direct thus creating an atmosphere of sole dictatorship. These large organizations then share enjoy lavish resources and stagnant the development of financial systems.
Call of the hour: Need for development of private sector
Today, developing the private sector and reinforcing it with concrete strategies is necessary for economic growth especially for developing economies such as India. Reinforcing these enterprises will not only help us in alleviating poverty but will ensure overall development. This can be possible by either involving the entities directly, or by creating organizations which will represent them, or by introducing new policies and to promote competition within markets. Experts believe that concrete policies are the only answer to ensure economic development and stable markets at the same time. Developing the private sector is one of the most effective way in reinforcing our fight against social evils such as poverty elevation.
Essential steps to develop private sector
Involving green initiatives
Many private entities are involved in developing green initiatives to spread the message for climate change and using innovation technologies many private entities are working towards reducing carbon emission in developed and developing economies. If these initiatives are given the required attention it will create economic opportunities for millions.
It is important for entities to analyse local economic opportunities at the municipal levels, and then identify which suits them most. Entities should focus on reinforcing their economic plans, reform their business model, effectively address their chain management, look for better infrastructure development, create new innovation policy, and effective planning and skill development techniques. Entities should also involve local government institutions in building effective economic development programs, and should involve other key partners such as the private sector and consumers for effective monitoring and evaluation of such policies.
Enhancing PPP (Public Private Partnership)
Many think tanks working in the sector of economic and trade policies, state the active need to reinforce trust between the government and private entities which can be effectively addressed by reinforcing the public private partnership model. Such models can be involved in wide range of projects. They directly involve two essential stakeholders into one arena. These programs then open doors for other business entities to invest in the host country, further reinforcing Foreign Direct Investment, and further provide essential technical and performance review of the projects. Through PPP, stakeholders get a chance to interact with the donor directly.
Easy access to finance
It is vital for private entities to have adequate access to the finances, especially when these entities are operating out from developing economies.
Many governments need to reinforce theireconomic sector by structuring industrial policies. Policies should cover manufacturing, agricultural and other service sectors. Many policy makers debate on ways to promote industrial policy within the boundaries of developing private sector.
It is very important for government to increasecompetition within the markets, which then opens the door for growth and development. Now discussing within the boundaries of private sector development, innovation can be either achieved by creating policies effectively and efficiently keeping in mind its growth and development, or by constituting crucial institutional change.Policy makers should focus on creating framework as per the qualification and working of the company. Their focus should be on strengthening business services, skill development and necessary finances.
|Anant Mishra is a former Youth Representative to the United Nations. He has served extensively in United Nations General Assembly, the Security Council along with the Economic and Social Council. He is also a visiting faculty for numerous universities and delivers lectures on political economics and foreign policies.
Disclaimer: The opinions expressed within this article are the personal opinions of the author. The facts and opinions appearing in the article do not reflect the views of The Indian Iris and The Indian Iris does not assume any responsibility or liability for the same.