International Business

1. Why do state-owned companies usually perform poorly? How to improve their performance?

Introduction

State-owned companies mean that the company is created by government in order to participate in commercial activities. Government-owned corporations are focused on natural monopolies and infrastructure such as railways and telecommunications, strategic goods and services (mail, weapons), natural resources and energy. Generally, this kind of company always operates poorly. I will list some reasons later.

Reasons

Appointment of Executives

The first reason is that state-owned enterprises business decisions influenced by political representatives. A study by Chang and Wong (2002) provides evidence in support of the theory that having government and political representatives as outside directors negatively impacts the performance of a company. The outside director is exercising independently over management; it may have negative impacts because they just chase personal political objectives instead of effective monitoring by stakeholders.

Ignorance of stakeholders

The second reason is that stated-owned stakeholders have big ignorance about their rule in governance. The ideal governance function occurs between the owner (stakeholder), steward and independent oversight. In a government corporation, whether the decision is made by government representative to for their own purpose, the stakeholder is widely ignored. Therefore, the motive for effective governance will be dramatically lost.

Ineffectiveness watchdog institutions

The third reason is that there are no effective watchdog institutions to supervise nationalized corporations. Firstly, the supervision departments in government are often overstretched and invisible. Hence, their investigation reports are usually delayed. If they deal with this situation quickly, the credibility of this finding is low. Secondly, the oversight institutions are also controlled by government. Therefore, it is a big possibility for them to conceal incriminating findings.

Suggestions

In order to change this bad situation, I suggest some solutions to solve this problem.

Separation board action from daily operation

The board rule is to set limitations for the top management to implement. If they involved in operational running, they will easily lose the control to do overmuch management. In addition, they make a decision which is not considered the long term of companies’ development. Therefore, it must set a clear regulation to let board know what their role in corporation. In this way, it makes companies operate orderly.

Permission of stakeholders

In this case, actually, stakeholders have the motivation for the success of company. What’s more, they can play a role in doing a change in companies operation. When the company makes a decision, it needs to get the permission of shareholders. At this rate, the decision will be healthy and better for companies’ long term development.

Effectiveness of watchdog institution

The effectiveness of oversight institutions must be recuperative.There must have watchdog institutions which are independent from government. In this way, they can manipulate smoothly to confirm the censorial findings are correct.

2. Compare three types of economic systems. Command which is the best (with supporting reasons)

Market economy

Market economy also named market- oriented economy. Resources are allocated by supply and demand of the market. In a pure market economy, government does nothing in this economy. In this way, goods and services are produced most efficiently. The most efficient producer will get more profit than less efficient ones.

However, there are many people get competitive disadvantage, such as the elderly, children and disabled people. Thus, it requires government’s assistant to protect them.

Also, there are some areas that government must involve. For example, for social benefit and welfare policy, if the poor need to see doctor, government should pay due to basic human right and the responsibility of the society.

Moreover, rich people could dominate the resources. Therefore, government regulation such as anti-trust law should be set up.

Command economy

An economy is almost completely opposite to market economy. Government plays a dramatic role in all business activities. They plan the quantity and price of goods and services. Thus, if a country wants to carry on massive projects and create industrial power, it will be quickly. Nonetheless, command economy often produce too much of a thing and not enough to another. The reason is that they do not update the information of customers’ needs.

During Cold War, two parties, Soviet Union and the United States compete with each other based on two different ideal – Market Economy verse Command Economy. History proves that a pure Command Economy is a failure. The major reason is that the law of allocation of resources is based on the demand and supply; not by the control of the central government. The central government can never predict the actual price and quantity of the market. Also, another reason is workers are not as productive as the workers in Market economy. This is because their rewards are always the same no matter how hard they work.

Mixed economy

A mixed economy includes both the private enterprises and a degree of state monopoly. Most business and industries are private. It will be more efficient than government interference. This economy has advantages of market economy. What’s more, mixed economies can carry out government regulation in some areas when it has a market failure. For example, it regulation on the abuse of monopoly, such as prevent mergers and prevent exclusively high price.

In theories, there are no pure market economy and not much pure command economies left in the world. Most of the countries are run in a mixed economy. A mixed economy has the advantages of both the market economy and command economy. By Keynesian economic theory, government intervention is needed. At the same time free market can benefit the society a lot. In Macroeconomic theory, GDP is a combination of C+I+G+X-M. Therefore, both market consumption and government spending is necessary.