Practical aspects of international trade

Stakeholders are all those people who have an interest or 'stake' in a particular business. Stakeholder groups include customers, employees, suppliers, shareholders, government, pressure groups & local communities. Sometimes the environment is reffered to as a stakeholder as well.

There are 2 wars of looking at how a business might operate in terms of responsbility.

The shareholder model

The traditional business model rests on the idea that the shareholders' interests are the most important. The other groups are secondary importance (if at all).

• Profit maximisation is the main priority of the managers.
• Everything that managers do should be directed towards the best interests of the shareholders.
• If shareholders want short-run profit maximisation at the expense of long-term growth, then it is the responsibility of business manangers to deliver.
• managers are employed to manage on behalf of the shareholders. the needs, desires & aspirations of other interest groups should not take precedence over shareholder interests.

However, this approach has been criticised as being too short-term. The immediate pursuit of profit is not always in the best long term interests of the business. Sometimes UK businessses are described as being prone to short-termism, meaning that decisions are based on short-term profitability. this can lead to missed opportunties. sometimes, a signifcant investment now will take some time to become profitable but will, over a long period, be very profitable indeed.

The Stakeholder model

more & more businesses are now widening their scope beyond theinterests of the shareholders.

The stakeholder approach to business decision making means that managers have a responsibility to take account of the interests of all the stakeholder groups that are affected.

The benefits might include:

• improved image perception by consumers, leading to greater sales & increased competitive advantage
• improved retention & motivation of staff
• closer relationships with suppliers, leading to a better quality & more reliable service
• a reduction in the disruption of commercial activities by pressure groups
• improved public relations, resulting in more favourable media coverage

DIAGRAM

However reconciling the differing demands from stakeholder groups can be hard if not impossible. The demands of 1 group can be completely opposed by another group.

Shareholders vs Stakeholders

Inevitably there is a trade-off between these competing interests.

• The shareholders want to maximise profits
• The employees want better pay & conditions
• Customers want lower prices & better service
• The government wants tax revenue
• the local community wants min disruption & help with local infrastructure developments
• the environment needs protecting from business activity.

In the short term at least, developing the interest of other stakeholders may have negative impact on profit & dividends. Businesses vary in the extent to which they are prepared to consider the needs of all stakeholders. Their attitudes depend on the corporate culture that they have adopted. This can be affected by leaderhsip styles & shareholder attitudes.

Corporate culture is the set of important assumptions that are shared by people working in a particular business & infleunce the ways in which decisions are taken there.

CSR

Corporate social responsibility (CSR) means taking decisions in a way that takes into account all stakeholders' interests. Treating employees, customers & suppliers fairly, avoiding polluting activities & contributing positevly to lives in the local community might all be part of this.

Nearly all businesses have a CSR policy in place but they vary greatly in their commitment to the stakeholder model. the reaons for implementing a CSR policy are varied.

• a genuine desire to behave responsibly (altruism)
• a wish to show a positive public image
• a positive marketing ploy
• a smokescreen to hide behind
• wanting to fit in with everyone else

For many businesses there are positive spin-offs from implementing a CSR policy:

• it can help foster a good public image & reputation
• it can increase sales
• it improves stakeholder relationships & reduces potential conflicts

Do not asssume that because a business has a CSR policy it will be an ethical one. The businesses at the bottom of the Ethical Companies Ranking List 2011 all have CSR policies in place. What matters is how much they use them

Ethical decision making

Ethical decision making means following codes of practise that embody moral values. The objective is to do the right thing, acting with honesty & integrity & taking into consideration the interests of everyone affected by the decision.

• the stakeholder approach involves considering the interests of stakeholders, but ethical business goes further in using clearly defined moral values as a basis for a consitent approach, based on what is right
• ethical business involves basing decisions on a set of clearly defined moral principles, & striving to do the right thing regardless of purely commercial considerations
• this does include many elements of CSR but it goes beyond that in a deliberate attemot to operate on the basis of declared moral values
• CSR may go no further than scrupulously obersving the law in the country of operation. Ethical decisions would recognise that the law may not neccessarily protect the interests of all stakeholders & therefore the business must set its own standards
• businesses that follow this approach will be rigorous & consistent in their approach

Ethical decision making & stakeholder conflict

What to manufacture?

• should businesses make controversial products?
• the arms trade is particularly lucrative as is cigarette manufacturing but both attract considerable critiscm & dispute

Where to manufacture?

• should businesses stay within their country of origin or move production overseas to reduce costs?
• Dyson moved to Malaysia in 2002 to take advantage of lower labour costs, this means that UK workers lost their jobs.

Capital or labour?

• Should a business use more capital?
• there is a trade-offf between capital & labour, more capital means less labour & more unemployment

Pay & working conditions

• should businesses improve pay & conditions?
• there is a trade-off between standards of pay & conditions & employee morale & productivity. this has to be weighed against increased costs.

The environment

• should businesses protect their environment?
• all businesses affect the environment in some way by their activities. there may be a trade-off between controlling such problems as emissions & pollution & keeping costs down

Ethical behaviour & profitability

There would appear to be a straightforward trade-off between ethical behaviour & profitability:

• behaving ethically is likely to increase costs which will reduce profitability
• some of the most profitable companies are way down the list of the most ethical
• yet the high ranked ethical companies all make good profits.

In reality it is not always so clear cut. reputation is often a key factor contributing to the image of a business. Nestle acquired a reputation for unethical policies because it promotes baby milk in poor countries where bottle feeding is not appropriate. It has tried to improve its rep by advertising less aggressibely but still inspires some very angry pressure groups & individuals. this has not stopped it from making good priofits

cutting costs does not just benefit shareholders, it also enables firms to cut prices which can help to raise real incomes & standards of living

Drawbacks to behaving ethically

• labour costs are increased as fair wages & conditions are implemented
• supplies & materials which are ethically sourced may be more expensive
• minimising damage to the environment can means increased costs
• changing an existing method of production & corporate culture can be expensive
• competitors may be less ethical & have lower costs/ prices

Advantages to behaving ethically

• favourable media attention
• improved public image can lead to increased sales & brand loyalty
• ethically produced products can carry a premium price without damaging sales
• more motivated workforce & possible increases in productivity
• improved relationshops with suppliers leading to better quality service
• can actually be profitable

Social cultural differences in doing business

When a business begins to trade internationally it is crucial that all concerened are aware of any social & cultural differences between themselves & the new country. Being well informed about cultural differnces can reduce the risks. Without this awarness costly mistakes can be made or at best, sales will not be maximised

Social & cultural differences come from the fact that indivudal socities & groups within them may have a distinctive way of life. this will affect their pattersn of consumption & the products they favour. but will also affect the way they do business with one another.

These differences can include...

Language

• an obvious part but effective & accurate communication is vital to avoid misunderstandings
• businesses need bilingual people who can advise them on how to avoid the pitfalls that may be a factor in unfamiliar markets

Business meetings

it is important to understand the culture of your potential business colleagues

• some cultures believe in directness rather than diplomacy whereas other cultures put diploymacy before directness (often happens In Japan)
• some culture are emotional whilst others are more reserved

• some are very literaly in what they sat whilst others are more likely to use coded lamguage
• failure to appreciate such differences can lead to poor relationships when 1 side gets the wrong impression

An appropriate marketing mix

• the traditional marketing mix- the 4P's- may need adapting for different countries
• it is important to get all elements for the marketing mix in place when entering a new market & this is especially so far an overseas market

diagram

Pricing strategies for different countries

• price & pricing strategies can be particularly important in merging markets, where levels of disposable income are lower than in developed markets. here price differentials can be crucial
• McDonalds have several lower priced items on their Indian menues along with their standard offerings
• tata, the Indian carmaker, launched the Nano Car to hit a distinctive low price pont for the Indian market

But...

• it would be misleading to think that low prices are the key to expanding into emergin markets
• consumers are well aware that cheap can also mean poor quality
• there are also large groups of v.rich consumers in economics such as India, China & Brazil who value the statues that buying premuim luxury goods can bring

• in such cases prices need to be kept high, otherwsie the product will not sell
• in china there is sometimes the danger that cheaper prices signify 'fake' rather than the higher priced 'genuine' items
• a recent survey found that 33% of Chinese consumers though that expensive meant quality; only 21% of Americans thought this

The product itself may need to be adapted to suit local culture & conditions. what sells well in developed economies may not do so well in developing ones

• adaption of food & drink products is clearly neccessary to suit countries with different dietrary requirments. meat may need to be kosher or halal & beef is no good for Hindues. MCDS and other fast food chains are v.good at adapting their products to suit local tastes
• technical / safety regs may be differerent
• products such as cazrs may need to adapted; in v.hot countries air con must be able to operate under much hotter conds than are prevalant in cooler areas
• clothing manufacturers need to consider sizing; many Asian consumers a smaller size than their Western counterparts

Promotion

• great care has to be taken in promoting products & services. some promotions will cross borders but others have a narrow appeal

• language has to be accurately translated. when pepsi first started to sell in in the Chinese market, they used the slogan that was current at the time, 'Pepsi brings you back to life'. the drink didn't sell well, translated directly into Chinese the slogam meant 'Pepsi brings your ancestors back from the grave'
• images have to be suitable as well and not be offensive to religious, social & cultural norms
• the use of celebrities, images & music must also strike a chord with consumers
• time & effort are needed to find the most effectie promotional messages in a new makret

Place

Traditional distrubution channels are sometimes inappropriate

• in emerging economies many potential consumers are isolated & distant from shops & other methods must be found
• in some countries interenet use is much lower & reduces the scope for online retailing
• distrubution of perishable goods can be a problem in hot countries with poor infrastructure
• poor infrastructure can mean supply chains are unreliable
• new markets may have very different methods of distribution. In Mexico, most beer is sold through 'mom and pop' affairs that are little more than private houses with a kiosk on the side or a cubby hole where customers knock for service.

Joint ventures

Getting the marketing mix right usually means learning about local cultures & preferences. It is essential to recruit skilled people who know the markets that the businesses wants to break into. Joint ventures are a popular way of doing this, particularly in emerging markets where the foreign firm may be unfamiliar with the language & cuture

Joint ventures involve businesses in a collaborative relationship with a local producer. They are of particular value to businesses that want to produce and/ or sell in an unfamiliar market. They can be used as a way to spread risks.

• a joint venture is formed for that particular project and does not affect the operations of either firm elsewhere
• an agreement & contract is drawn up detailing the terms, such as how costs & revenues will be shared, areas of responsbility, how the project will be managed etc
• the domestic business usually gains from having acess to the expertise & knowledge of the foreign firm, combined with its brands & products
• the foreign firm usually gains from local knowledge of the market & culture along with perhaps established supply chains & outlets

Disadvantages

• joint venture partner may not be suitable/ reliable
• communication problems may arise
• management styles may clash
• cultural clashes can occur
• profits are shared

Advantages

• a way of spreading risk
• gaining local knowledge & expertise
• help avoid cultural & social clashes
• can use existing supply chains & distrubution networks
• it may be a condition of entry into some markets
• costs can be shared

Tariffs, laws & import quotas

So far we have observed a strong connection between liberalisation & economic growth. Yet nearly all governments put some measures in place to restrict/ prevent trade liberalisation. This process is called protectionism & involves slowing / preventing imports coming into their country. The most common form of protectionism are tariffs, quotas & regulation. these are collectively known as trade barriers

Protectionism is the term for government policies aimed at protecting the domestic economy from the effects of imports that might otherwise damage domestic industries & reduce employment

Trade barriers include anything that slows / prevents free trade from taking place, e.g tariffs & quotas

Why create barriers to trade?

• to stop cheaper foreign imports replacing domestic substitutes, leading to businss closures & job losses
• to protect 'infant' industries. these are small businesses that have started up recently & not yet had a chance to grow. if they are shielded from foreign comp they can grow big enough to reach maturity. Again, this protects jobs. It also allows new industries to grow to the point where they can achieve economies of scale. protecting infant indutries may lead to their being able to export in the future
• the balace of trade is import (this is the difference between the amount of imports & amount of exports) reducing imports helps to avoid a trade deficit. if jobs are lost this is a drain on the economy, there is a loss of tax revenue & an increase in benefits paid. It also politically damaging
• tariffs are also a useful source of tax revenue which can help fund public expenditure; this can be particularly useful for emerging economies
• often protectionist measures are put into place as a means of retaliation against other countries' protectionist measures

diagram

Tariffs

tariffs are a tax placed on imported goods which increase their price

• in the diagram the supply curve shifts to the left (the supply curve rises vertically by the amount of the tariff)
• this causes the price to increase. the quanity consumed of the import will fall as consumers either do without, or purchase a domestic subsitute instead
• the effectivness of a tariff depends upon the price elasticity of demand for the import
• if it is price inelastic the reduction in demand for the import may be limited

Quotas are physical limits on the level of specific imports in any 1 year

A quota sets a max quantity fo a specific product that can be allowed into the country in 1 year

Quotas make the supply curve vertical at the quota limit. (supply becomes perfectly inelastic)

• the effect is to raise price & cause quantity consumed to fall
• again the effectivness of this will depend on the price elasticity of demand for the import

• subsidies can help domestic industries lower their prices & remain competitive against imports (& be more successful as exports)
• keeping the exchange rate undervalued makes imports more expensive (& has the added bonus of making exports more competitive) Chine is often accused of keeping its exchange rate artificially low
• impsing regulations such as saftey standards can make it more difficult for imports to enter the country. it is usually to exclude unsafe products, which protects consumers. some countries have used it just to avoid stiff competition from particular imported products.

• all protectionist measures cause a welfare loss. if consumers have to pay more for the imports they buy, then they have less to spend on other things. this reduces their real income & has a negative effect on other domestic spending
• protection reduces comp, which can lead to inefficiency & higher prices being chrged for competing domestic products
• it reduces incomes in the countries that make the imports
• it can provoke retaliation - making it hard to increase/ maintain the level of exports
• some infant industries are allowed to continue producing rather inefficiently for a long time, charging high prices to domestic consumers

the disadvantahes of protectionism are big enough to make most countries want to liberalis trade. over the past few decades, trade restrictions have been greatly reduced, & that is 1 reason why the globalisation process has helped so many countries to grow their economies. Most countries are, or want to be, members of WTO, which means making a commitment to keep most tariffs & other trade restrictions quite low, or eliminating them completely

How protection constrains businesses

On the whole, most businesses favour trade liberalisation because protectionism wil make it harder for them to tap into new markets. however a few industries that have faced strong comp from imports have at time put pressure on govs to increase protection

the great majority of businesses want to reduce import controls. they value the ease with which they can sell within the EU & want to avoid trade wars which might reduce their export sales. Often v.specialised businesses need foreign markets in order to reap economies of scale- the home market just isn't big enough to allow this. exports of scotch whisky want to sell all over the world - the UK marke is not nearly big enough for all of them to survive