Economic perspectives on public relations

Public Relations Review 35 (2009) 340–345 Contents lists available at ScienceDirect Public Relations Review Economic perspectives on public relations Klement Podnar 1 , Marko Lah 2 , Urša Golob ∗ University of Ljubljana, Faculty of Social Sciences, Marketing Communication and Public Relations Department, Kardeljeva pl. 5, 1000 Ljubljana, Slovenia a r t i c l e i n f o Keywords: Public relations Economic theory Neoclassical theory Post-Keynesian theory Transaction costs a b s t r a c t This paper explores the relationship between economic theory and public relations, in order to explain how public relations management contributes to companies’ overall economic gains. It uses a “blend” of economic theories to explain the role and contribution of public relations from the economic point of view. The paper sees a link between the strategic management of public relations as a function, and portions of neoclassical theory, as well as to alternative economic approaches relating to investments and transaction costs. © 2009 Elsevier Inc. All rights reserved. 1. Introduction There is a need to include economic concepts such as costs and revenues. in the public relations domain (Likely, 2000). As with any other strategic function of the modern corporation, public relations activities need to be budgeted and measured in terms of effectiveness. Public relations expenses, defined as the money spent by the public relations department (Kim, 2001), are often criticized on the premise that the future benefits of such expenditures are uncertain and may not result in higher sales or company growth (Rayburn, 1986). If public relations do not deliver the required return on investment, they are unnecessary costs. That is why public relations cannot afford to ignore the importance of justifying its budget in terms of its contribution to revenues, profits and the overall growth of the company. As suggested by Hon (1998), evaluating the effectiveness of public relations continues to be a topic of critical importance, because measuring the outcomes of public relations programs provides the data needed to demonstrate that public relations helps organizations and clients meet their performance goals. Hence, over the past few years, scholars and practitioners have increased their focus on public relations evaluation and effectiveness (e.g. Guth & Marsh, 2003; Likely, 2004; Xavier, Johnston, Patel, Watson, & Simmons, 2005). Taking this into the account, it is obvious that the public relations of the firm has an economic dimension which is an important research perspective for public relations (Lah & Golob, 2008; Prior-Miller, 1989). It is appropriate to study public relations characteristics within a management or broader economic theoretical framework because public relations is a management function (Verčič & Grunig, 2003). However, most scholars have failed to make connections between economics and public relations, although it has been suggested that even the widely used situational theory of publics and the models of public relations have roots in microeconomic theory (Verčič & Grunig, 2003). The literature linking public relations with economic theory is still sparse. This paper examines how to theoretically connect public relations with some of the most prominent economic theories in order to explain how public relations management contributes to a company’s overall economic gains. This is important, ∗ Corresponding author. Tel.: +386 1 5805 244. E-mail addresses: [email protected] (K. Podnar), [email protected] (M. Lah), [email protected] (U. Golob). 1 Tel.: +386 1 5805 244. 2 Tel.: +386 1 5805 262. 0363-8111/$ – see front matter © 2009 Elsevier Inc. All rights reserved. doi:10.1016/j.pubrev.2009.08.006 K. Podnar et al. / Public Relations Review 35 (2009) 340–345 341 because, as argued by Culbertson, Jeffers, Stone, and Terrell (1993), economics directly affects public relations programming and decision making. Further, economic way of thinking and economic concepts can be useful for public relations practice (Culbertson et al., 1993). The paper first discusses different views of the relationship between public relations and economics from the public relations perspective. This link has been implicit and unarticulated. Then it turns to the economic view of public relations. First it analyzes the neoclassical optimization approach to public relations, within the modern neoclassical structure–conduct–performance paradigm. Then the alternative to the neoclassical approach to public relations is discussed, based on post-Keynesian economics and transaction cost theory, stressing the importance of the investment protection role of public relations and transaction costs. 2. Economics in public relations literature The “relations” between public relations and economics may be categorized in five groups. One group of authors, who propose that “public relations is the active participation in the social construction of meaning” (Hutton, 1999, p. 202), search for the roots of their definitions in different disciplinary fields and social scientific theories, such as symbolic interactionism, exchange theory, conflict theory and structural–functional theory (Prior-Miller, 1989). The exchange theory, for example, is also rooted in microeconomic theory (Prior-Miller, 1989). On the other hand, Lawniczak (2007) links public relations with certain socioeconomic models of a market economy in transition, and believes that public relations should promote those models. A second group of researchers explores how the country’s socioeconomic and political environment impacts the practice of public relations. In the context of contextual or environmental research (Taylor, 2001) in public relations, authors view socioeconomic factors as important determinants of the development and practice of the profession (e.g. Culbertson & Jeffers, 1989; Molleda & Moreno, 2006; Sriramesh & Vercic, 2003). Political economy approach similarly argues that it is important to consider broader political and economic factors that affect the public relations process in a country (Duhé & Sriramesh, 2009). The third view consists of public relations scholars who believe that public relations needs an interdisciplinary approach, which should include economics alongside other disciplinary fields, such as mass communication, interpersonal/speech communication, psychology and sociology (Ihlen & van Ruler, 2007). In this view economic conditions are important in the context of integrative thinking in public relations, especially when dealing with costs and resource availability. Culbertson et al. (1993), for example, try to link public relations to economic concepts. The fourth view relates public relations more precisely to a specific economic paradigm. Tracing the origins of public relations in economics, Verčič and Grunig (2003) incorporate public relations into management theory and follow Mintzberg’s rationalization of management theory, rooted in neoclassical microeconomics. The authors argue that transaction costs and especially Coase’s work are the most relevant entry points for public relations research (Grunig & Grunig, 2005). The fifth view consists of scholars who, in their definitions of public relations, use components with direct economic implications (Hutton, 1999). For example, seeing public relations as a business “lubricant” or “catalyst” might be connected with lowering the firm’s transaction costs. In this view a cost–benefit analysis is used which directly assigns monetary values to public relations goals (Bruning, Dials, & Shirka, 2008). In order to avoid subjectivity in assigning a monetary value to public relations, a two-stage model is proposed for evaluating the effect of public relations expenses on reputation (Kim, 2001). The focus is on the economic impact of reputation on companies’ bottom line (Hutton, Goodman, Alexander, & Genest, 2001; Kiousis, Popescu, & Mitrook, 2007; Yang, 2007). Understanding public relations as a “persuader,” or “a builder of goodwill,” or “image perception,” makes it similar to advertising in its economic (profit) impact (Hutton, 1999). It is interesting that most researchers do not start out from an economic point of view, but rather look into economics from the public relations field. However, for a deeper understanding of the link between the two disciplines, an economic perspective on the role of public relations within the firm is important and valuable. There are several competing economic theories which have different consequences for public relations. Among them are the neoclassical approach and its alternatives: post-Keynesian and transaction costs approaches. 3. A neoclassical optimization approach to public relations The theoretical foundation for the neoclassical theory of public relations is a hypothetical and unrealistic situation—a market structure of perfect competition, where a firm needs no communication with (economic) agents. In a perfect competition model, economic agents are perfectly informed. In order to optimize its revenues, a firm in perfect competition does not need to engage in any sort of communication. As Dorfman and Steiner’s (1954) theorem suggests, there is no need for advertising in perfect competition. Mutatis mutandis, in perfect competition there is no need for public relations. The market(s) in perfect competition is transparent per se—a firm does not need strategic communications to build relationships with stakeholders; the publics do not need to be informed by the firm, and there are no issues generated by the publics which might harm the business of the firm. In such a setting, public relations activities cannot change a demand curve. Public relations is a needless cost for the firm that can worsen its economic position. If a firm were to employ public relations, costs of such activities would change the assumed equilibrium position of a firm but they would not bring any revenues just higher costs. 342 K. Podnar et al. / Public Relations Review 35 (2009) 340–345 The role of public relations changes in an imperfect competition market structure. The beginnings of the neoclassical theory of promotion, public relations included, can be traced back to Chamberlin’s classic work on imperfect competition (Chamberlin, 1946/1933). He does not explicitly use the term public relations, but some public relations vocabulary is part of his argument about the factors of organizational differentiation, such as the general tone of the establishment, a reputation for fair dealing, courtesy, efficiency, and personal links (Chamberlin, 1946/1933, p. 56). According to Chamberlin, public relations costs can be categorized as selling costs and can potentially alter the demand curve. The most typical selling cost is advertising. However, there are a few differences between public relations and advertising. Advertising costs arise when an organization chooses its markets, while public relations costs arise because a firm is chosen by various publics and incurs “costs” to communicate with them, when/if issues arise. A firm may control its advertising costs, but it cannot control its public relations costs, since it is not always possible to predict the publics “touched” by the dynamics of successive generations of new issues. Hutton (1999) defines the functions and tactics/tools (and hence indirectly the costs) of “serving publics and issues” more precisely. His approach implies that, from the economic point of view, the costs of public relations can be divided into two groups (Hutton, 1999). First, there are costs of the “basic” or primary functions of public relations, such as research, image making, counseling, management, early warning, interpreting, communicating, and negotiating. Second, there are the costs of public relations tactics/tools, such as publicity, product placement, news releases, interpersonal communication, web sites, publications, trade shows, and corporate identity programs. All of these generate costs for a company, costs which should, when translating public relations aims into the language of economics, ultimately contribute to the company’s profits. Turning back to public relations literature, Hutton’s (1999) persuasion model is very close to the neoclassical view of public relations in imperfect competition. A promotional campaign with different communication tools might be used “to place the client-organization’s product on consumers’ mental agendas with the goal of increasing awareness and ultimately sales of the product” (Hutton, 1999, p. 205). Grunig and Hunt’s (1984) model of propagandist public relations, which primarily benefit the organization, is also relevant to explain the neoclassical view of public relations in imperfect competition. 4. The post-Keynesian view of public relations In contrast to the neoclassical “perfectly competitive firm,” the starting point of analysis of the firm in post-Keynesian theory is a large oligopolistic company, which is able to “direct” the forces of supply and to predict the demand for its products. The neoclassical optimization procedures of public relations, based on predicting the exact shifts of cost and demand curves, are irrelevant for post-Keynesian theory. Institutional and post-Keynesian economists argue that the goal of a large corporation is not the short-run maximization of profits, but long-term growth (Eichner, 1976, 1985; Lavoie, 1992). An oligopolistic firm can accept lower profits in the short run because it invests in new products, new markets, and advertising campaigns to reach a higher growth rate. Similarly, intensified public relations activities might lower short-term profits but add to growth in the long run. The origins of the post-Keynesian approach may be found in the work of John Kenneth Galbraith (1967). He worked on the dynamics of large corporations and the control, role and influence of a techno-structure which all result in a social and environmental imbalance. In The New Industrial State (Galbraith, 1967), he argues that producers are the main actors and competition is irrelevant. In his works the term “modern corporation” begins to prevail. He opposed neoclassical economics and the myth of perfect competition. He argued that large firms conduct market research and define what consumers like, engaging in advertising so that products can be easily sold (Galbraith, 1967, p. 211). Galbraith’s main idea is that the investment process is central to the post-Keynesian economics of large multinational firms (i.e., decisions to invest in successive investment periods), which means that the role of public relations can be seen from this perspective. The role of two-way symmetric public relations is especially important in the pre-investment period, when public relations absorbs the information from the stakeholders and potential publics and reflects the expectations of a broader society. Hence, public relations channels investment decisions, and potentially may change them if stakeholders oppose the investment plans. Public relations is not seen from the neoclassical cost–profit principle, but rather as an investment that influences the long-term survival of the firm. Both firms and stakeholders need communicators and interpreters in this uncertain and unstable environment (L’Etang, 1994). Public relations explains the methods and goals of organizations to stakeholders, and informs organizations about public desires and interests of publics (L’Etang, 1994). This acts as an investment protection. Or, to put it differently, these activities are treated as complementary/simultaneous investments in the firm’s products (and its reputation) during investment planning periods. The task of public relations as a necessary complementary investment is threefold. First, to “incorporate” previous experience with stakeholders/publics and issues and absorb them within investment decisions. Second, to prepare communication strategies, campaigns, etc. during the planning period. Third, to try and anticipate possible reactions and, as much as possible, to respond to these reactions in advance. In this way, public relations buffers and neutralizes possible unpredictable events. Intrinsic to Galbraith’s (1973) work is the idea that large multinational corporations have enormous power that should be limited. Who should limit the power of big companies and thus minimize negative externalities, and how? Here ethical and responsible public relations can play a crucial role, establishing behavioral relationships and interaction with the organization’s publics, instead of nurturing superficial symbolic relationships and demonstrating power (Grunig, 1993). This 343 K. Podnar et al. / Public Relations Review 35 (2009) 340–345 Table 1 Economic views of public relations. Neoclassical approach Post-Keynesian approach Transaction costs approach Typical firm Time perspective Medium size firm within perfect competition Short-run profit maximization starting from assumed firm’s equilibrium Big corporation within oligopoly Long-term growth Role of public relations One of the production factors in imperfect competition market structures Treated as a necessary investment together with other investments Financing public relations Optimization: in equilibrium according to the marginal cost of public relations and marginal productivity of public relations rule “Propagandist” one-way model of public relations Planned expenditures financed from the revenues from the previous period Substantial rather than symbolic interactions with stakeholders Network of firms Dynamic – network extensions and contractions due to transaction costs Viewed as lowering market transaction costs, adding to network extension Optimization process Public relations concept related to the view Excellence of public relations should be done in an ethical way, so that the corporation will participate in the solution of the publics’ own problems, and thus maximize public good (Grunig, 1993; L’Etang, 1994). 5. The transaction costs view of public relations Transaction costs economics opposes the neoclassical theory of markets and firms in which transaction costs do not exist (Coase, 1937; Furubotn & Richter, 2000; Williamson, 1986). While in the “neoclassical market” it is assumed that Walras’ hypothetical auctioneer brings supply and demand into equilibrium without any friction, the transaction cost approach says that the operations of the market have a price and therefore cost something (Coase, 1937). In this case, lowering transaction costs is crucial to a firm’s operations and growth. We may thus ask: how can a firm lower its transaction costs on both the input and output side with beneficial effects? From the public relations perspective, the answer is obvious: it is public relations which (through detecting and adapting to the interests of the firm’s stakeholders) may lower transaction costs significantly. Furubotn and Richter (2000) differentiate between two types of transaction costs. The first are costs of using the market, such as search and information costs, i.e., the costs of communication among prospective parties, and bargaining and decision costs, especially when informational asymmetry exists and supervision and enforcement costs are needed. Second, managerial transaction costs are the costs of setting up, maintaining or changing an organizational design, such as personnel management, investments in information technology, defense against takeovers, public relations and lobbying. All these costs can be lowered by effective internal or external public relations. Public relations can easily be related to transaction cost theory. On the one hand, a firm’s public relations activities can be perceived as a cost, and categorized as communication or managerial costs. On the other hand, the purpose of investing in public relations is to lower transaction costs. Public relations makes business work more smoothly. Transaction costs would be higher if there were no public relations, or if public relations were less efficient. If we turn back to the public relations literature, the latter viewpoint is very much related to the notion of achieving excellence in public relations (Grunig & Grunig, 2000). When public relations builds relationships with stakeholders, “it saves money by reducing the costs of litigation, regulation, legislation, pressure campaigns, boycotts or lost revenue that result from bad relationships with publics” (Grunig & Grunig, 2000, p. 307). Public relations also helps to make money through building good relationships with shareholders, customers and employees. Although it may seem that economic approaches are controversial in explaining the role of public relations, we argue that they are important to understanding it. The neoclassical approach is especially valuable for understanding the economics of strategic management of public relations, and alternative approaches provide new insights into the strategic role of public relations within a firm. Though in the view of neoclassical economic theory, in conditions of perfect competition, public relations is an unnecessary cost, in a more realistic setting of monopolistic competition, public relations can be seen as tool for gaining competitive advantage. According to post-Keynesian approaches, public relations can be understood as an investment that enables long-term growth. And finally, according to the transaction costs approach we can argue that public relations lowers the costs of the firm. The important characteristics of all three economic approaches to public relations are summarized in Table 1. 6. Concluding thoughts and implications This paper offers three different economic approaches to public relations. Although it may seem that the approaches contradict one another in explaining the role of public relations in the company, we argue that all are important for its understanding. The neoclassical view of public relations poses the question of whether it is possible to apply optimization procedures and search for the equilibrium point between the marginal unit costs of public relations and the marginal revenues it generates. 344 K. Podnar et al. / Public Relations Review 35 (2009) 340–345 This approach clearly has some shortcomings. Its methodology, based on changing static equilibriums, is inappropriate for analyzing public relations effects within a rapidly changing and uncertain business environment. However, it is valuable for understanding the economics of the strategic management of public relations. Alternative approaches provide new insights into the strategic role of public relations within a firm. There is a link between the strategic management of public relations as a function, and those parts of neoclassical theory that deal with the question of how public relations should be practiced to be cost efficient and contribute to an organization’s success (Grunig & Grunig, 2000). Here an important question for public relations practitioners emerges: how much should a firm “spend” to achieve excellence in its practice of public relations and how should a firm determine the public relations costs. These questions lead to an obvious connection between the post-Keynesian approach and a transaction costs approach. The former deals with the strategic role of public relations in a firm, while the second explores how public relations can help reduce transaction costs. Public relations plays an important role in dealing with the environment before the firm’s investments are made (the reflective dimension of public relations), as well as during the investment period. According to Verčič and Grunig (2003), a firm can gain competitive advantage by building successful relationships with different stakeholder publics; hence, public relations contributes to the success of the firm by building such relationships and thus protecting the firm from negative externalities or redundant transaction costs. To conclude, economic approach to public relations may prove to be particularly interesting and fruitful avenues for further investigation. Both public relations scholars and practitioners should take notice of the following: first, in order to fully grasp the implications of the three microeconomic approaches, one should consider a country’s broader economic context. Developed economies tend to favor strategic public relations and public relations that help reduce transaction costs, whereas, in the developing economies, the predominant mindset may still be that scarce resources need to be spent on activities that bring immediate and tangible returns and public relations as a function may even be redundant (Sriramesh & Vercic, 2003). Second, considering the economic context and identifying a particular economic approach to public relations in a firm, practitioners can reconsider how to justify (and strengthen) their existence within the company. And finally, the economic perspective on public relations can become a starting point for research of public relations metrics and performance assessment. 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