Businesses must accept that as members of society they have social responsibilities

As a positive response to the Chinese central leadership's promoting of common prosperity, some large-scale enterprises, particularly the big tech companies, have proposed the action of technology for good. This is welcome, but I prefer to advocate innovation for good, because innovation with a broad definition includes but is not limited to technology innovation. Developing new products, adopting new technologies, finding new markets, obtaining new inputs, and organizing production in new ways can all bring about innovation.

Innovation for good can be defined as both the willingness and ability of enterprises to share their profitability with a wide range of stakeholders. Unlike philanthropy, however, the spillover effects of innovation for good are embodied in the whole process of innovative activities, involving primary distribution, redistribution and third distribution.

Innovation itself is good for enterprises for sure, but not necessarily equally good for other stakeholders. Innovation brings profitability to enterprises and boosts economic growth, but the resultant benefits are not automatically or fairly shared throughout society. That is, there is no such thing as trickle-down effect, as economic history proves. It is more so concerning the zeitgeist of innovation in the digital age. For example, whereas internet platforms create new forms of jobs, they tend to save costs by making those jobs unsecure and workers less protected.

According to the conventional code of conduct, companies are motivated by profits and only responsible for the returns for investors and the dividends for owners, whereas consumers, employees, suppliers, communities, society and environment are not formally included in their objective function and production function. That is why lucrative innovation and income inequality continually coexist, as well as why we should advocate innovation for good.

It is critical for all participants in economic activities to get rid of the notion of trickle-down economics. For three decades since the 1990s, neoliberal economics has dominated in many developed and developing countries. As policymakers have believed that the money made by big companies will eventually spill over to other stakeholders, policies tend to give those companies a privileged position, resulting in a lack of competition. As enterprises adhere to the orthodox principle of "owners first", they do everything to maximize their profits, losing sight of other responsibilities that come with being part of society.

As a result, such practices have helped augment income and wealth inequalities, environmental damage, social divides, and political polarization in many countries at different stages of development. The malfunctioned dogma and practices are in turn responsible for the wide spread of populism, protectionism, decoupling and deglobalization sentiment all over the world. To effectively reverse those trends their micro basis, namely, the business values of companies, must be rectified.

Redistribution is essential for narrowing income gaps and providing social protection. However, the extent to which redistributive measures such as taxation, transfer payments and provision of basic public services are utilized is conditional. First, the financial capability ultimately depends on the development level measured by per capita GDP.Second, an appropriate balance between equality and efficiency requires building governance capacity over time. Third, authorities should strengthen redistribution skillfully to allow innovation to be motivated, entrepreneurship rewarded and allocation efficiency gained.

Third distribution, therefore, should be brought in as a necessary complement to both primary distribution and redistribution. Apart from philanthropy, volunteer activities and social responsibility, another irreplaceable role big techs should play in this domain of distribution is innovation for good. In the wake of the 2008-09 financial crisis and after the outbreak of the COVID-19 pandemic, while more governments have turned to pro-redistribution policy, there is a tendency for companies to reorient their business value. If regulations mean that governments make a negative list for businesses about what not to do, the practice of innovation for good means that companies bear in mind a positive list about what to do.

Since there is no trickle-down effect, or in other words, the profits gained by big firms are not automatically shared among stakeholders in society, how firms make their profits can change distribution outcomes. By resetting business values, reorienting business motives, and revising the objective function, enterprises' profits can be gained in accordance with wider interests. Innovation for good is initially realized through a host of tools such as technology, know-how, algorithms and nudges.

How can we expect firms to have the necessary incentive to innovate with the intention of sharing? What crucially matters is to convince all parties that from both the perspective of the whole of society and individual enterprises, the relationship between equality and efficiency is not one of trade-off, but of mutual promotion. In the long run, efficiency is enhanced not at the expense of equality, and the contribution businesses make to improve social justice will eventually pay off in a tangible manner.

It may be helpful to make a counterfactual scenario－that is, how harmful the consequences may be if enterprises as a whole continue to ignore the interests of other stakeholders in society. First, too large an income gap will prevent the full transformation of the country's huge population into mass consumption, because the low-income group with high propensity to consume will lack the ability to consume. Second, the stagnated wages and increased disparities in social security will catalyze radical, premature redistribution measures that might harm the efficiency of enterprises and social harmony. Third, overwork and underpayment will make it difficult for companies to recruit and keep skilled workers.

None of those scenarios are desirable for companies or society. That is to say, actions such as innovation for good are not only necessary but also essential, as they create a greater chance for society as a whole to avoid any undesired consequences and ultimately benefit companies through enhancing the harmony of business operations, on the one hand; and reducing the costs of production and transactions, on the other.

The author is chief researcher of the National High-end Think Tank at the Chinese Academy of Social Sciences. The author contributed this article to China Watch, a think tank powered by China Daily. The views do not necessarily reflect those of China Daily.

Contact the editor at editor@chinawatch.cn