Theme 4

Implications of Economic Growth for Businesses

• New export opportunities- As developing countries see incomes rising, UK businesses may discover new markets to which they can export
• Offshoring production- leads to lower production costs. Offshoring is moving a business function to another country, generally to lower costs.
• Increased domestic competition- As countries develop entrepreneurs will start up businesses that may be so successful they can start exporting to countries such as the UK

Indicators of Growth

• GDP per capita- GDP is a measure of the total output of a country's economy.
• Literacy- illiteracy rates
• Health- Life expectancy of a country
• Human Development Index (HDI)- An attempt to provide a single measure of economic development encompassing income, education and health.

Imports- Products and services produced abroad and consumed domestically.

Exports- Products and services which are produced domestically and consumed overseas.

Business specialisation- Choosing to produce only one product or products for a single market.

Foreign Direct Investment (FDI)- When a busines purchses non-current assets in another country.

Outward FDI- Takeover of foreign businesses

Inward FDI- When foreign companies buy british assets

Benefits of FDI:

• Lower operating costs
• Avoiding trade barriers
• Avoiding transport costs
• Avoiding problems involved in exporting

1. Trade liberalisation- Removing trade barriers such as tarriffs, quotas and regulation.

2. Political Change

3. Reduced cost of transport and communication- technological development has led to more efficient engines, reducing fuel consumption and therefore cost.

4. Increased significance of transnational corporations- Global giants seek growth by entering new markets in order to boost sales year by year and make shareholders happy.

5. Increased Investment

6. Migration

7. Growth of the global labour force

8. Structural change in the economy

Protectionism- Giving preference to domestic producers by making it harder for foreign companies to export to your country.

1. Tariffs- A tax imposed on an imported product to allow it to enter a country. Goverments tend to use tariffs in decling industries and to protect 'infant' industries.

Benefits:

• As tariffs help firms to survive, they protect jobs of firms whose rivals are being taxed
• Also indirectly protect the other businesses that rely on these firms for trade
• Raises tax revenues, allowing goverments to increase spending on public services

Drawbacks:

• Tariffs tend to push up price, reducing consumer's ability to buy the product
• Helps inefficient firms to survive, potentially harming competitiveness. Without tariffs, there is more of an incentive for firms to improve

Quota- A physical limit on the volume of a product that can be imported in a year. Once the quota is used, only domestically produced goods will be available. Designed to protect and encourage producers.

Benefits:

• Domestic firms face less competition, improving their competitiveness.

Drawbacks:

• No extra tax revenue is gained by the goverment
• Pushes up prices domestically for consumers

Subsidy- A payment made by the goverment to a business producing a certain product or located in a partivular area that the goverment wishes to support.

Benefits:

• In effect stimulate demand. allows investment in more efficient production
• They have a positive effect on the balance of payments by reducing imports and boosting exports from firms recieving the subsidies

Drawbacks:

• Artificially inflating profit margins of inefficient businesses can prevent them pushing for efficiency gains that would allow them to compete without the subsidies
• Subsidies must be funded meaning the goverment must increase taxation

Trading bloc- A group of countries that sign up to free trade between them, protected by a tariffwall against imports from the outside.

Dumping- The practice of selling off excess production in a foreign market at an exceptionally low price which destroys sales for local producers.

Attractions of trading blocs:

• Harmonisation of laws allows one product to made that meets the legal requirement in all member countries. Allows companies to benefit from economies of scale
• Countries working together within a trading bloc have more power than individual nations to stand up to non-member countries using techniques such as dumping
• Competing in a larger home market incentivises the boosting of efficiency for firms in member states.

Push Factors- the reasons driving a firm away from its domestic market

• Saturated markets- If everyone in a domestic market that wants the product has already bought, growth can be achieved either by widening the product range or selling to new markets.
• Competition
• Extending product life cycle- Entering new international markets could be a viable extension strategy.

Pull Factors- Reasons to attract a business to a new foreign market

• Economies of scale
• Possibility of offshoring or outsourcing- 
• Risk spreading

1. Market Attractiveness- Companies considering overseas expansion are likely to set a range of criteria that will apply across potential markets.

2. Levels and growth of disposable income- Key reflection of living standards in a country.

3. Ease of doing business- Measured typically via the time taken for many common business activities such as: days to start a business, total tax rate as a % of profit, days to import an item etc.

4. Quality of infrastructure- Roads, railways, running water

5. Political stability- Corruption, tax regulations etc.

1. Costs of production- Cost is often the key driver behind decisions to move production to a new country.

2. Skills and availibility of workforce

3. Infrastructure

4. Location in a trading bloc

5. Goverment incentives- eg grants, tax breaks, investment

6. Ease of doing business

7. Political stability

8. Natural resources

9. likely return on investment

Joint venture- A formal agreement between 2 seperate businesses to work together for a fixed time on a specific project.

Merger- 2 firms agree to come together to create a new, single business.

Takeover- One business buys a controlling interest in another business.

• Spreading risk
• Entering new markets/ trading blocs
• Acquiring national/ international brand names/ patents
• Securing resources and supplies
• Maintaining/ increasing global competitiveness 

Global competitiveness- the ability of a business to succeed against both domestic rivals and foreign competitors in international markets.

Key benefits:

• Dominating their domestic markets with minimal penetration from imports
• Ease of entry and strong competitiveness in foreign market due to global brand recognition

Glocalisation- An approach to global marketing that maintains a consistent brand and image across the world, but makes adaptations to suit local markets.

Strengths of global brands:

• Huge sales provide production opportunities to enjoy significant economies of scale.
• Global brands can be bought for familiarity and reassurance
• Global scale provides strong negotiating power with retailers

Strengths of Glocalisation:

• Tailoring to local tastes and habits should boost market share
• Local buyers can assume you are a local producers which may help sales
• An innovative product designed for local tastes could enf up being a global success
• Localising brands probable means localised production which cut costs and may help establish a greener image for the brand

1. Domestic/ethnocentric: Approach stays focused on the home country. Attitudes of the company's senior managers will be heavily influenced by their national culture. Leads to an approach that expects consumers in foreign markets to welcome the company's products as they are.

2. International/ polycentric: Founded in the belief that all markets are different. Decisions are made at a local level, specifically designed to suit the needs of local customers. Can undo some of the advantages of operating on a global scale

3. Mixed/geocentric: Combines ethnocentric and polycentric approaches. 

Cultural diversity- Describes the differing interests and values of people from different national backgrounds.

Features

• Mainly luxury goods market
• Markets tend to differ by country

Multinational- A company that has branches or manafacturing plants in several countries

Local labour:

+ Western training methods may make the local workforce more employable.

- Western employers may attract over-qualified people possibly ********* local businesses of skilled staff

Wages:

+ MNC's usuallly pay higher wages than local firms

- Some locals may feel bitter they are paid less than westerners

Working Conditions:

+ MNC's have international reputations to maintain so they will provide above average working conditions

Local Businesses:

• Likely to have positive impacts
• Look to local businesses for supplies
• However, could be too much competition

• FDI Flows- Once a MNC is generating profit, it is likely that the profit will be sent out to the countryback to the multinational's company.
• Balance of payment- Countries that import more than they export runa current account deficit. Likely to lead to a fall in the value of currency, which creates a risk of inflation.
• Technology and skills transfer- When multinationals open facilities in a new host nation, they are likely to introduce ideas and method which may be new to the country. Allows local economy to copy techniques improving the efficiency of local business.
• Consumers- As multinationals enter new countries, consumers within those countries gain more choice.
• Business culture- As domestic suppliers deal with the multinational they are likely to adapt a more consistent and professional business culture.
• Tax revenues and transfer pricing- Logical for a multinational to try to maximise their profits in countries where tax rates are lowest, declaring minimal or no profits in high tax countries. Transfer pricing is a technique used by multinationals to adjust the internal prices paid by one branch of their operation to another as a way of minimising the total tax bill paid by the company.

The need to control MNCs

• Safety concerns- MNC's produced in less developed countries with more lenient regulations on factory safety may be able to use unsafe machinery.
• Short-term mineral extraction- When a multinational enters a host country to extract minerals, its crucial that the country recieves appropriate reward.
• Weakening local cultures- Traditional local cultures replaced by global corporate consumerist culture.
• Lack of committment to host country