UNIT 4 Business notes PDF

Growing economies Chapter 22 DEVELOPED ECONOMIES Eg: USA, Canada, Japan 1. High income levels – average income per capita of $12476 or more 2. High literacy rate – majority can read & write 3. High life expectancy – expect to live for over 60 years 4. Good infrastructure – schools,...

Growing economies Chapter 22 DEVELOPED ECONOMIES Eg: USA, Canada, Japan 1. High income levels – average income per capita of $12476 or more 2. High literacy rate – majority can read & write 3. High life expectancy – expect to live for over 60 years 4. Good infrastructure – schools, colleges, roads, hospitals, internet 5. Highly industrialised – rely more on tertiary sector 6. Low levels of unemployment – people can find work easily, employment laws in place. However, there are some developed countries with high unemployment since 2017  DEVELOPING ECONOMIES There are more than 200 developing or less-developed countries in the world 1. Low income levels – most of the people are in the low or lower-middle income levels (ie: income per capita for low $ 1035, $1036-4085 for middle levels in 2019) 2. Low literacy rate – only a small proportion of the population are able to read & write effectively 3. Low life expectancy – the global life expectancy continues to increase, rising from 69.8 years in 2007 to 72.2 years in 2017, but it is only 53 years in central African Republic 4. Poor infrastructure – lack of roads, schools, hospitals 5. Reliance on primary sector – mainly agriculture or mining 6. High unemployment – few unemployment opportunities 7. High population growth – high rates of population growth – about 3x higher than developed nations  EMERGING ECONOMIES emerging economies are nations that are investing in more productive capacity with rapid economic growth They are moving away from their traditional economies that have relied on agriculture & the export of raw materials They are likely to grow more quickly than more mature markets BRICS: Brazil, Russia, India, China and South Africa MINT: Mexico, Indonesia, Nigeria and Turkey Increasing income per capita allows their consumers to have greater spending on imports & domestic products. This makes their market attractive to foreign firms, & domestic firms grow in market power & more internationally competitive. However, emerging markets will continue to face many risks that might affect overall economic performance.  GROWING ECONOMIC POWER OF ASIA, AFRICA, AND OTHER PARTS OF THE WORLD Most of the BRICS and MINT countries have experienced strong growth over the past few years which increases the overall economic power of many of the countries in Asia, Africa and other parts of the world. Eg: in 2018 & 2019, both China & India are predicted to be among the largest 5 economies in the world. China has been the second-largest economy in the world for several years now. It is often at the top of the rankings as an exporter & as a destination for foreign investment It is also one of the world’s biggest investors in other countries.  It's known as 'Factory Asia’, having dominance of global manufacturing. This is because: It has very efficient supplies and excellent infrastructure, allowing for further cost-effective growth It has access to lower-cost labour throughout South East Asia. Chinese & other Asian consumers are spending more each year, which increases demand & reinforces local production & distribution other emerging markets, such as Central & South America & Africa have big international firms that are challenging the dominance of the firms from the developing counties According to the World Bank, the largest economies in the world include USA, Japan, Germany and the UK. However, the order of leading economies may change repeatedly in the future. Around 70% of the world GDP growth is likely to come from emerging market economies.  IMPLICATIONS OF ECONOMIC GROWTH Trade opportunities As an economy grows, the people have jobs & more disposable income to spend. This increases demand for products & create more business for firms With increased international trade, people can buy cheaper imports There would be more choices which increases the standard of living for individuals. Firms need to assess the employment patterns of the economy The level of unemployment can reveal a lot about an economy: whether consumers have disposable income to buy products however, the time could access cheaper labour in that country. Developed countries tend to have lower levels of unemployment, except for Greece Developing countries have much higher levels Emerging economies – unemployment rates fall as jobs are created quite quickly Future employment trends – new technology may increase factor substitution – capital replacing workers.  INDICATORS OF GROWTH Gross Domestic Product (GDP) per capita: This is a measure of economic activity. It includes all of the goods a services produced in a year, divided by the number of people in the country Healthcare, GDP, education Human Development Index (HDI): combines statistics on life expectancy, education & income for a country (more complete calculation) Life expectancy: This the average number of year a person can expect to live. It is an indicator of the health of a nation as well as the quality of its healthcare and social systems  Mean years of schooling: These help to assess the average amount of education a 25 year old person might have had (implies literacy rate) Gross National Income (GNI): This illustrates the relative wealth of the population (as measured in PPP) NOT CONSIDERED: how income is distributed, quality of products, pollution NOTE: It is important for firms to watch developments in world affairs to identify new opportunities & reduce the impact of threats Some recent world developments: Russia has been having significant economic growth in the past several years. However, due to its military activities, the USA & EU imposed sanctions on Russia, which resulted in a fall in its growth rates from 5% in 2010 to 0% in 2018 In 2018, relations between North & South Korea improved, when North Korea’s leader (Kim Jong-Un) visited South Korea. It was expected to open its economy, thus providing new opportunities. (But, till March 2021, this has not happened) International trade & business growth CHAPTER 23  International trade  Itcreates opportunities for business growth, increases competition and provides more consumer choice  Specifically international trade :  Allows countries to obtain goods that are not available domestically  Allows countries to obtain goods that can be bought more cheaply from overseas  Increases consumer choice  Provides opportunities for countries to sell off surplus commodities  Visible & invisible trade  exports - goods & services sold overseas  imports - goods & services bought from overseas  visible trade - import & export of physical goods  invisible trade - import & export of services  Balance of trade (or visible balance) - the difference between visible exports and visible imports  Exports & imports  Exports  easiest way a firm can access a foreign market  Made easier now with trade liberalization (ie: the removal of trade barriers)  Imports  firms can buy resources / services from other countries, allowing them to lower costs, improve the quality of their products, be more competitive  Government protect local firms against imports with trade barriers  Firms could import / export directly or use import/ export agents  Implications of specialisation  Division of labour is when a job is broken into many tasks, handled by different workers who are specialized  Specialisation is focusing on producing what a worker has the skills to produce  Specialisation - ↑ efficiency ↓ mistakes & wastage ↓ costs  Specialisation by countries - countries specialise in the production of certain products due to having the skills / resources to do so. This increases global output & ↑ global prosperity  specialisation by firms - firms gain competitive advantage when they focus in specific production that they have the skills / resources to do so. This ↓ their costs & ↑ their profit margins → business growth  Global expansion  Firms may expand abroad in stages, beginning with exporting & gradually increasing their involvement in foreign markets as they gain knowledge and experience  Options that firms have :  Export to foreign markets  Merge / acquire a foreign firm that is already operating in the country  Become a MNC  Sell online  Some reasons firms become MNCs:  Access to cheaper labour/ materials  Cheaper to transport goods  Overcome trade barriers as MNCs are considered local firms  FDI & link to business growth  Foreign direct investment (FDI) is measuring by setting up operations or buying assets in firms in another country  Reasons firms choose FDI instead of expanding:  To maintain control over operations in the foreign market (s)  To protect its intellectual property, eg: patents, copyrights, management know-how  To be close to its customers  To reduce transportation/logistics costs  To overcome trade barriers or political opposition  Note: usually FDIs are from developed nations, going into emerging/developing nations *China is still a developing nation, however it has many FDIs  Different forms of FDI  A strategic alliance is an arrangement between two firms to undertake a mutually beneficial project , with each remaining independent.  Joint Venture Is a form of strategic alliance when two firms pool resources to create a separate business entity.  Buying through cross-border mergers & acquisitions  Build "greenfield" facilities - building a structure on a piece of land that has never been developed  Horizontal FDI – integrate with another firm producing similar products, in the same stage of production  Vertical FDI forward / backward integration - same industry but different stage of production Factors contributing to increased globalisation Chapter 24 What is globalisation? Globalisation is the growing integration & interdependence of the world’s economies Key features include: Increase of international trade Greater movement of labour across nations – more multicultural societies High level of interdependence between countries Capital flows freely between different countries Greater sharing of technology & intellectual property across borders, eg: brand names  Trade liberalisation & the WTO Trade liberalisation – countries opening up their economies & allowing trade to flow without any barriers Free trade agreement using among countries have increased the volume & international trade Eg: in 2016, Mexico and the EU agreed on a wide-reaching deal to remove tariffs & increasing trade between them WTO – is an intergovernmental organization that regulates &facilitates international trade between nations WTO promotes free trade by persuading countries to abolish tariffs & other trade barriers It also settles trade disputes between government & organises trade negotiations  Political change some radical changes in the political regimes have helped to increase globalisation In 1991 , communist rule ended in the Soviet Union. The countries opened up their economies & developed trading agreements with the world. Some joined the EU. A number of other countries in Eastern Europe had political and economic reform, eg: the coming together of East & West Germany as one nation in 1990 Economic changes in China started in the 1970s, opening its doors to international trade in the late 70s. This increased after China joined WTO in 2001 Reduced costs of transport & communication Transport International transport networks have improved in recent years. The cost of flying has fallen, and the number of flights and destinations has increased Growth of budget airlines – more people can travel for business & leisure, more goods can be transported easily Communication Internet enables easier & better communication across the globe Online shopping allows firms to reach the global markets People can work from home & firms can have operations worldwide Containerisation Containers can be transported on all modes of transport, reduce transport & handling changes significantly  Increased significance of MNCs (Global operation) MNCs are large global firms that have business operations in more than one country. Usually , they build retail stores or factories The growth & significance of MNCs have greatly contribute to the increase of globalisation They make significant contributions to wind GDP to represent ⅔ of global exports They provide employment for thousands Note: due to the internet, not only large MNCs, but small firms also have begun to play a role in globalisation  Increased investment flows Foreign Direct investments (FDI) are investments made by one firm into another located in another country FDI can be made in a variety of ways: opening up a store/distribution centre / factory in a foreign country buying shares in an existing foreign firm forming a merger / joint venture with a foreign firm Most of the FDIs are by MNCs FDI spreads business activity, job creation and wealth all over the world & contributes greatly to globalisation FDI also allows firms to enter markets where trade barrier exists-any?  Migration Migrants import their culture & goods into another country they go to Migrants often provide low-cost labour to the nation, allowing firms to lower their costs & have a greater international competitive edge Migrants increase demand of products in the country. They also remit funds back to their home country, increasing spending in those countries. This increases economic activity around the world Some migrants are highly skilled, helping to fill 'skill gaps’ Migration within a country – usually in search of jobs & new opportunities that are not available in rural areas – there has been a large scale in China Although migration is helping to boost global wealth, some countries are worried that migration might lead to social instability, overcrowding & unemployment  Growth of the global labour force the global labour force has grown substantially, due to : ↑ global population from 4.45b in 1980 to 7.86b in 2020 ↑women entering the workforce people living longer, working longer & migration The ways growth of the global labour force contributes to globalisation: ↑ global demand – as more people have jobs, they have greater spending power for imports & local products The ↑ of supply of labour forces wages down, lowering costs for firms, allowing them to expand Some people begin their own businesses after gaining experience at work. This boosts the number of firms globally  Structural change Over time, the structure of economies is likely to change Most western economies have become de-industrialised, moving away from the primary & secondary sectors The tertiary sector is the highest contributor to their GDP, services such as biotechnology, R&D, education, software, pharmaceuticals, aerospace These structural changes also contribute to globalization as: Most of the above Industries an export orientated & many of the firms set up operations globally, employing staff globally Internet & social media have opened the global markets for large & small firms Tertiary sector firms can locate anywhere, not confined by geographical locations. Eg: chain stores like Walmart is operating globally  Advantages of globalisation to firms Global firms benefit the most from globalsation because : Access to huge markets: firms can reach consumers worldwide, increasing sales & profits Lower costs: firms are bigger so they can exploit economies of scale & lower their costs Access to cheaper labour: globalisation has increased free movement of labour, so firms could have more choices of workers. Furthermore, the ↑ supply of labour pushes wages down Access to cheaper resources: the firm could locate at countries with cheaper resources, reducing their cost Lower tax: firms could locate their head offices in countries with lower corporation tax  Disadvantages of globalisation of firms Competition – firms now face global competition, not just local The power of MNCs – MNCs dominate global markets, have strong brand names, can exploit economies of scale. This makes it difficult for smaller firms to compete & survive. Interdependence – globalisation has increased interdependence among nations. An event in 1 country affects others, eg: China's economic slowdown in 2013 resulted in fall in oil prices globally Exploitation – some MNCs locate in countries with under- developed legal system. They exploit the workers or damage the environment. Protectionism Chapter 25 What is protectionism? government measures to protect domestic firms against imports aka TRADE BARRIERS  Reasons for protectionism Prevent dumping: dumping is where a foreign producer sells goods below cost in a domestic market, eg: in 2016 Chinese manufacturers dumped 9m truck & bus types in the USA at below market prices Protect employment: without protectionism, some domestic firms may not survive. This will ↑ unemployment. Protect infant industries: infant industries need time to grow of establish before they could compete with foreign produces Gain tariff revenue: tariff is a source of revenue for government to fund government spending  Reasons for protectionism Prevent entry of harmful products: eg in 2008, Malaysia banned the import of milk powder from China, to safeguard against poisoning by toxic industrial melamine (embargo: totally ban) Reduce current account deficit: If a country has a very large account deficit, it would try to reduce import & increase exports. In 2018, the USA wanted to impose trade barriers on India to help reduce US 24b trade deficit. Retaliation: when a country imposes trade barriers on another country, the latter may retaliate, which could cause a trade war National security – it can be a threat to a nation if it becomes over- dependent on trade with other countries for its economic sustainability. When the USA imposed tariffs on steel & aluminium in 2018, it quoted national security as its reason  Tariffs Tariffs/customs duties: tax on import They raise price of imports, making it possible for local products to compete They also raise revenue for the government However, it is ineffective if imports are price inelastic It could increase costs for domestic firms that need imported materials, which in turn result in higher price of local products Quota Is a limit on the quantity of imports, which also raises the price of imports Restricting the quantity of imports, domestic firms will have more of the market. This will also protect government Embargo – total ban of imports from a particular country. Could be due to – war with that country, or the product is known to be harmful, eg: milk powder from China Government legislation / administrative barriers A government would limit/ reduce the quantity of imports by imposing certain regulations on imports, eg: strict safety regulations especially in relation to food products This form of protectionism is more subtle & difficult to prove to warrant retaliation. Indonesia was known to restrict imports entering its country through only a few ports  Domestic subsidies A government could give financial support to local firms such as subsidies, grants, interest-free loans or tax breaks to exporters or firms that face strong competition from imports This could lower their costs of production, allowing them to lower price & be more competitive, so that they could compete with imports or to enter the global market· This form of protectionism is also more subtle & difficult to prove to warrant retaliation.  Impact of protectionism In the short term, the use of trade barriers to reduce competition from overseas will benefit domestic firms, as competition is reduced It allows domestic firms to ↑ sales volumes, revenues & profits, which enable them to expand or invest to become more innovative/ efficient & be more competitive However, in the long term, protectionism might prevent competition, protect poorly performing & inefficient industries, as domestic firms become overly dependent on trade barriers, instead of innovating/expanding In the long term, firms would benefit more from free trade as it encourages competition which motivates firms to be more innovative & efficient Free trade would also increase specialisation which enables firms & nations to exploit economies of scale & ↑ employment & economic growth Protectionism may cause retaliation & possibly lead to trade wars which will have – ve impact on all countries concerned TRADING BLOCS Chapter 26 T H E E X PA N S I O N O F T R A D I N G B LO C S A trading bloc is a group of neighbouring countries that have regional trade agreements (RTA) to enjoy free trade with one another F R E E T R A D E A R E A S ( F TA ) A FTA is a group of countries that have few or no barriers to track in the form of tariffs or quotas between each other FTAs have their own trade barriers against non-member countries Often, to protect the region, countries may use a system of allocating "rules of origin" on the products, ie, certificates to show that products that are traded made within the region This prevents MNCs that set up retail in the region to take advantage of the FTA agreement. FTAs tend to ↑ volume of trade among member coutries. This allows them to ↑ their specialisation in their respective comparative advantages, eg NAFTA CUSTOMS UNIONS a type of trade bloc which is composed of a free trade area They have common external trade barriers → main features!!! Especially tariffs COMMON SINGLE MARKETS A common market allows for the free movement of capital & products but large amount of trade barriers remain It eliminates all tariffs but non-tariff barriers remain (among the countries) They share common external trade barriers Workers can relocate from one country to another without being stopped All of this integration means that the members of a common market must work together on economic & political policies that affect the market Eg: ASEAN SINGLE MARKET A single market is a type of trade bloc in which most trade barriers have been removed for goods or services, & there is freedom of movement of capital & labour Common laws/policies work to make the movement of goods, services, labour & capital between countries as easy as the movement within each country Eg: European Union ECONOMIC UNIONS Refers to an agreement between countries that allows products, services, capital & labour to cross borders freely (no barriers) The union is aimed at eliminating internal trade barriers between the member countries, with the goal of economically benefitting all member countries When there is a common currency, it is also known as MONETARY UNION Eg: European Union THE EUROPEAN UNION The European Union is the most powerful trading bloc in the world It expanded from the six funding members to 28 countries in 2018 It is a single market which guarantees the free movement of people, goods, services & capital throughout the member states It also makes laws, policies & regulations work together in key areas, eg: a common foreign & security policy Thus, firms operating in most European countries are able to move and compete equally in all countries in the EU Once goods enter anywhere at an EU border, they cannot be subject to custom duties, taxes or import quotas as they are transported throughout the bloc Likewise the freedom of movement of people & purchase of shares & property However, not all European countries belong to EU, eg: Switzerland, Iceland, Norway, UK, not all use the Euro but retain with their own currency eg: Denmark, Sweden, most remain culturally distinct with their own languages, customs & religions ASEAN FREE TRADE AGREEMENT It was establish in 1967 to promote growth in the social, cultural, technical, scientific & administrative fields , regional peace & stability As part of a move to regional economic integration, to become a single market , the ASEAN Economic Community (AEC) has established in 2015 Thus , there is free flow of goods & services, investment, labour & capital The countries cooperate in areas such as macroeconomic, financial & labour policies & regional sourcing N A F TA The North American Free Trade Agreement (NAFTA) was a treaty between Canada , Mexico , and the United States that eliminated most tariffs between the countries. The agreement covers trade & investment, labour, financial dealings & intellectual property, including common environmental issues Members agree to eliminate tariffs on most manufactured goods & investors from member countries are considered domestic investors However, it is believed that Mexico did not benefit from this FTA – Mexican corn farmers faced difficulties to compete (American corn enter at much lower prices, with latest technology and EOS) FACTO R S TO CO N SIDE R IN TR A DIN G B LO CS These are the factors firms may consider in relation to trading blocs Where to produce? A firm could choose to locate in a member country with lower costs of production, then export to other members When to sell ? As a trading bloc is like one big market, there are more opportunities, but also threats How to enter a market? Many options available eg mergers / TVs Business strategy: eg locate at a country that is part of a trading bloc will give access to a much larger market. TRADING BLOCS: OPPORTUNITIES TO FIRMS Access to larger market: firms could sell to consumers of member countries Access to cheaper resources: it will be easier for firms to source for & get cheaper resources & labour Member countries that specialise in products: they have the resources & skill to produce, this benefit from EOS & ↑ employment As there is greater competition, firms become more innovative, efficient & improve Being part of a RTA may give regions the power to negotiate for better deals in the global market TRADING BLOCS: DRAWBACKS TO FIRMS Trade diversion may happen: eg, due to subsidies given within a trading bloc, the price of a crop may be “artificially” lower than a non-member country that actually has competitive advantage – inefficient use of resources Inefficient firms may be protected from competition resulting in more trade diversions Some of the benefits may he distributed unequally, creating political tensions eg: CAP in the EU Smaller firms may have difficulties to compete Members of RTAs may have different levels of economic power, which can cause long-term economic & political imbalance & potential conflict. CHAPTER 27 Conditions that prompt trade  Reasons for international trade Get goods that cannot be produced domestically Every country has its own climate & natural resources, thus, able to produce certain goods & not others Get goods that can be bought more cheaply from overseas Due to skills & resources available, some countries have comparative advantage in producing certain products , so can sell them at lower prices than other countries Sell surplus products when countries have obsolete/comparative advantages in production, they are most likely to have surplus products which could be sold to earn foreign currencies 2  Conditions that prompt trade Firms see expanding into international markets as an opportunity to find new resources & markets for their goods, as well as producing their goods & services at a lower cost They may make more money or extend the Iife of their products or services There are many conditions that encourage international trade, categorised as push & pull factors 3  Push factors “push the business out” Push factors – negative factors in the existing market that motivate a firm to seek international opportunities, such as: Saturated market Market saturation is the point when a specific market is no longer providing new demand in an individual firm There is limited opportunity for growth in sales Eg: bubble tea in Klang Valley Competition Competition forces firms to lower prices & have smaller profit margins, pose threats of losing customers to a competitor with better/newer products, forces firms to innovate If competition is too strong, a firm may consider moving elsewhere to increase profits 4  Pull factors Pull factors are opportunities that draw a firm to enter a foreign market, such as: New / bigger market Cheaper resources, eg: labour, raw materials Technological expertise / skills available Lower cost of transportation These factors allow firms to: Increase revenue & profits, eg: emerging economies have more potential of growth Exploit economies of scale Spread risks – not be over-reliant on a single market as it makes the firm vulnerable 5  Of fshoring The relocation of a business process from one country to another – typically an operational process, such as manufacturing Offshoring is moving jobs to other countries, usually from high-cost countries to lower-wage countries, then goods are exported back Reasons – reduce costs or access particular labour skills However, the downside of offshoring includes: facing challenges such as language/cultural differences, political, economical, technological risks in the host country causing ↑ unemployment in home country the firm may face higher costs, reduced efficiency, loss of IP, exposure to corruption 6  Outsourcing Where a firm hires a third-party, usually specialists, to perform tasks, handle operations or provide services for the firm Outsourcing is moving jobs to other firms, contracting out entire business function to a specialist external provider. Reasons: reduce costs, access to specialists, allows the firm to focus on its core functions, ↑ speed/quality However, outsourcing could cause: The firm to be vulnerable due to over-dependence on others Poor quality product as objectives/ interests are different from the firm Increased costs for the firm 7  𝑣𝑎𝑙𝑢𝑒𝑠 𝑜𝑓 𝑔𝑜𝑜𝑑𝑠 & 𝑠𝑒𝑟𝑣𝑖𝑐𝑒𝑠 𝑝𝑟𝑜𝑑𝑢𝑐𝑒𝑑 Labour productivity = 𝑖𝑛𝑝𝑢𝑡 𝑚𝑎𝑛 ℎ𝑜𝑢𝑟 Firms may move production operations overseas to access cheaper labour However, a more important consideration is labour productivity – how much is produced in relation to labour costs Factors that determine labour productivity include skills, qualifications, working conditions, technological support available & labour laws 8  Extending product life cycle one of the extension strategies when a product is in decline stage of Its life cycle is to sell the product in a new market Firms may do so by selling in an overseas market Some products could be in its mature stage in one market & introductory stage in a new market when extending the product life cycle into international markets, a firm has to decide whether to change the product in order to improve it for the new markets, or standardise the product for global use some firms 'defeat’ the curve by repositioning products by adding new features a sell in multiple markets 9 Assessment of a country as a market Chapter 28 Factors to consider: When assessing a country as a market, a firm needs to understand its competitive advantages, & whether the new market, if successful, will improve these Factors to consider: levels of growth of disposable income Ease of doing business Infrastructure Political stability Exchange rate Levels of disposable income Disposable income: the amount of income left after paying taxes & other deductions Firms need to consider: the average level of household disposable income of a target country compared to other countries can the consumers afford its products? The proportion of high & low-income earners of the country as this determines their spending patterns The % of young professionals as this age group is the one that usually spends more Is the country's level of income steady & growing over time Ease of doing business How easy to run the business, seeing the country as a market Ease of doing business is how easily can a firm do business in a target country Considerations such as setting up premises, goods, entering the country, distribution chain, permits – all of which could pose problems that could cause delays in sales or increase costs Infrastructure The quality of a country's infrastructure is an important factor in deciding its sustainability as a new market Transportation: entry points for goods, eg: ports, airports, railway system, shipping lanes, roads – these would determine speed of sales & contribution Communication: internet coverage & consistency of electricity Political stability A country with a calm situation can reduce uncertainty isan attractive potential market for firms. Issues to check: The government’s relationship with firms & with major international organisations, eg: UN, WTO Possible political risks, eg: instability during an election, coups, terrorism, human rights issue Level of corruption Transparency International CPI - Malaysia 57th. Exchange rate All firms that are involved in international trade are exposed to exchange rate risks Fluctuating exchange rates make it difficult for firms to forecast revenue, costs & profit, especially as currency movements are unpredictable & can be quite sharp The impact of fluctuating exchange rates depends on the price elasticity of demand of the firm's products  A firm could protect itself against adverse fluctuations of exchange rates by: lowering the price of its products to overseas customers to compensate for currency appreciation but this is not possible if the firm has very low profit margins Take out foreign exchange insurance to protect the firm from losses resulting from SHARP currency fluctuations Buy & sell currencies when prices are favourable, however this is risky Hedge against financial risks by buying financial instruments whose prices move in completely the opposite direction to unfavourable currency movements. However, this is also risky Application of Porter’s Five Forces Model to assess markets Porter's Five Forces Model is a tool that can be used to analyse the opportunities & overall competitive advantage of a firm It can assist in determining the competitive intensity & potential attractiveness of an overseas market, & decide whether it Is worth entering the target country. However, sometimes not all the info is available, & films may need to make assumptions which could be inaccurate. Assessment of a country as a production location CHAPTER 29 Locating production There are several factors that firms consider when deciding on locating production overseas: Cost of production Ease of doing business Skills & availability of labour force Political stability Infrastructure Natural resources Locating in a trading bloc Likely return on investment Government incentives Costs of production Most firms would want to keep production costs low as it allows them to have a competitive edge in the market. Main production costs: labour, energy, raw materials & land Labour costs is one of the highest production costs for most firms, especially labour-intensive firms, though more & more are moving towards automation So, many firms are attracted to countries with low wage costs However, countries that used to have lower wage costs, eg: China, have starred to rise due to production of MWR & their people not wanting to work in factories as they begin to have better living standards Rising cost of energy & land is having an increasing impact on the location plans of some firms. Skills & availability of labour force Though law wages is important, firms must consider the quality of human capital in a target country This is because the firms need to consider: whether the workers has the skills to maintain the quality of products costs of training is there enough workers for now & for future if the firm expands Firms are finding it difficult to recruit in China because: China's 30-year one-child policy has caused shortage in workers workers prefer not to work for exporters due to more stringent quality standards.  Reshoring there is a trend of reshoring: moving production back from east Asia due to poor quality control in the factories there Infrastructure Before locating a factory overseas, a firm will need to identify its infrastructure needs & determine whether a particular country is able to meet them: is the quality of infrastructure able to support what the firm wishes to do Roads: this affects the speed of transportation of materials, workers & distribution of finished goods Good broadband network: vital for effective communication & facilitate e-commerce Airports & ports: ease of business travel & transportation of materials & goods Railway networks: especially important when there is a need to transport large/heavy goods Education: this determines the quality of human capital available, but also an important consideration for senior employees when locating in those countries as expatriates Hospitals: health of the labour force & a consideration for expatriates Commercial services & suppliers: access to banks, insurance, advertising , manufacturing process Government incentives Many governments, especially developing nations, are keen to attract FDI due to the benefits it brings, eg: ↑ employment Incentives provided include: Tax breaks / exemptions: Corporation & income taxes Low/ free rent for a period of time Remittances & easy exit: capital, profits & dividends can be returned to the investor's own country without penalty Multiple entry visas for investors Reduce red tape, invest in better infrastructure & education Ease of doing business The commercial environment of a country is an important consideration: how easy it is for a firm to carry out its business activities some factors include: The ease to start business: permits required , conditions to be met, registration Bureaucracy, eg: construction permits How easy to get credit: the ease of resolving insolvency These factors are important as it determines time & costs involved. Political stability A country's political situation is a very important consideration for production location of firms Factors include : Risk of financial loss die to an unstable government Risk of kidnap Corruption & bribery Human rights record It is not only financial loss that would be at stake, also the reputation of the firm especially in relation to consumers & shareholders Natural resources for some firms, the availability of natural resources is an important consideration when locating their factories Transportation of large quantities of coal, timber can be very expensive due to their size & weight Location in trading blocs Some firms may choose to locate their production in trading blocs to avoid trade barriers & access to a much larger market Manufacturers, such as Nissan, Honda & Toyota, have located car factories in the UK to avoid EU trade banners. Cars made in the UK, can be sold in France , Germany, Italy and all other EU member countries without attracting tariffs Return on investments when deciding production location, besides considering the factors alone, firms could do SWOT & PESTLE analysis & use some quantitative techniques to assess the suitability of locations Payback method: calculate how long it will take to recoup the initial investment 𝑛𝑒𝑡 𝑟𝑒𝑡𝑢𝑟𝑛 𝑝𝑒𝑟 𝑎𝑛𝑛𝑢𝑚 Average Rate of Return (ARR): × 100 𝑖𝑛𝑖𝑡𝑖𝑎𝑙 𝑖𝑛𝑣𝑒𝑠𝑡𝑚𝑒𝑛𝑡 Discounted cash flow: value of future cash flows reduced to show their present value R E A S O N S F O R G LO B A L M E R G E R S , TA K E O V E R S O R J O I N T V E N T U R E S CHAPTER 30 LICENSING & FRANCHISING Licensing: a business contract in which one firm allows another firm to manufacture its product or use its brand/ intellectual property, for a specified fee. The latter firm is free to run its business however it likes Franchising: similar to licensing, except, the franchisor retains control over the intellectual property /the brand, & retains control over how the franchisee business is operated  GLOBAL JOINT VENTURES, CROSS- BORDER M&A Licensing/ franchising may not work for some firms Firms may choose joint ventures or cross border mergers / acquisitions for various reasons, such as: Maintaining/increasing global Spreading risks & EOS competitiveness Entering new markets & trading blocs Reducing competition Acquiring national & international brand name /patent Making use of local knowledge Accessing supply chains Government / legal requirement Accessing distribution networks/supply chains Sharing costs & risks SPREADING RISKS & EOS A firm may protect against & economic downturn by locating in markets where these risks are less likely to occur, or less likely to occur at the same time Eg: During the 2008 global financial crisis countries like Ukraine, Argentina, Greece were badly hit, but countries like China, India & Australia were unscathed When firms become larger, especially through cross-border joint ventures or M&As, they are able to exploit economies of scale significantly due to their large size ENTERING NEW MARKETS/TRADING BLOCS Firms choose cross-border because: A joint venture enables firms to enter a new market very quickly, as all relevant regulations and logistics are taken care of by the local firm, eg American firm, Uber joint venture with Volvo, Swedish firm, to produce driverless cars The only way for established firms to grow is through M&A of firms in other markets, eg UK-based Vodafone acquired German company Mannesmann, & became the largest mobile operator in the world To gain easy assess into a growing market, eg Air Asia joint venture with Everbright, a Chinese state-owned firm, to enter the Chinese budget airline market ACQ U I R I N G N AT I O N A L & I N T E R N AT IO NA L B R A N D N A M E S / PAT E N T S Developing intellectual property internally is a long & expensive process So, some firms gain access through joint venture, mergers or acquisitions It can benefit from: – Strong brand recognition & loyalty – Limited competition – Not having to risk high costs & uncertainty of creating its own brand However, the brand can be easily destroyed/damaged if care is not taken post merger to ensure employee confidence & customer satisfaction are looked after A C C E S S I N G S U P P LY C H A I N S An important reason firms go for cross-border partnerships is to access resources This involves backward vertical integration Reasons of doing so: To guarantee supply of resources especially if the resource is critical/rare/hard to get To maintain quality of resources, & thus the product To remove the profit margin taken by supplies, thus lower cost To maintain higher ethical standards → better company image E.g., Starbucks bought its own coffee farm in Costa Rica to ensure a reliable supply of the best coffee beans ACCESSING DISTRIBUTION N E T W O R K S / S U P P LY C H A I N S Another important reason firms go for cross-border partnerships is to access distribution networks This involves forward vertical integration Reasons of doing so: There are guarantee outlets to sell its products Able to sell output immediately Removes the profit margin of the retailer Eg: Amazon's purchase of whole foods, to have outlets to sell its products or have customers pick them up M A I N TA I N I N G / I N C R E A S I N G G LO B A L COMPETITIVENESS When firms have cross-border partnerships, it would increase their global competitiveness in terms of: Pricing power over customers & supplies as their size is bigger, allowing them stronger negotiation power Ability to cross-sell products which would increase sales & lower costs Improving their tax position as they could relocate their HQ to a lower tax location. Costs saved allows them to ↑ investment & ↑ competitiveness Eg: FB purchase of Whatsapp in 2014 – for user growth as Whatsapp had very high % of users which allowed FB to gain access to mobile user bases & pared the way for future growth, making FB very competitive. REDUCING COMPETITION Global mergers/takeover, especially when it is horizontal integration, would reduce competition This would allow greater market domination However, it usually attracts the attention of industry regulators who may block the integration if it is against the public's interest Sometimes, the firms may need to sell off part of their assets before the merger/takeover can continue MAKING USE OF LOCAL KNOWLEDGE Knowledge of consumer tastes/trends/spending patterns, cultures, government regulations, language are among crucial information a firm needs to have to successfully thrive in a foreign market To reduce the risks, cross-border partnerships are chosen This is especially so for firms from the western world when entering the Asian market Eg: Ripple, a vs firm, acquired 40% stake in Asia's leading cross-border payments specialist Tranglo, a Malaysian firm GOVERNMENT / LEGAL REQUIREMENT To protect local firms against strong competition from foreign firms, & to ensure their survival, some governments require foreign firms to joint venture/merge with local firms, In order to enter their markets This ensures transfer of new work practices, skills, knowledge & technology to the local firm. SHARING COSTS & RISKS When a firm can share costs & risks, it is more likely to venture into new markets Eg Malaysian airline, Air Asia joint venture with Hong Kong based China Everbright Group, to set up a new low-cost carrier in China. Global expansion & uncertainty Chapter 31 Global expansion MNCs benefit most from global expansions because they can: Do global sourcing – access to cheaper & best quality resources Be located closer to their international customers Have a bigger range of knowledge & scope for innovation Diversify & spread risks with a wider range of products 2 Global uncertainty With the increase of globalisation, there is an increase in interdependence among nations. This increases uncertainty around the globe The 2008 financial crisis started in the USA due to irresponsible lending led to a world recession In 2016, when UK announced its intention to exit EU, it had global impacts 3 Effect of exchange rate movements Firms involved in international trade are affected by the fluctuations of the currencies Some governments try to protect against these fluctuations by fixing the exchange rate, but generally, there is still a need to adjust the currency to market rate Revaluation of currency – the government raises the exchange rate, making it a stronger currency Devaluation of currency – the government reduces the exchange rate, making it a weaker currency 4 The significance of changes in exchange rate on firms Elasticity of demands – the impact of the fluctuations of the currencies depends on the PED of the firm’s imports/exports Cause of the exchange rate fluctuation – if the appreciation in a currency is due to increase in efficiency & productivity, the firms can adapt to the stronger currency more easily However, if a currency rises due to speculation, or weaknesses in other countries, then firms could become uncompetitive Fixed contracts – many firms use fixed contracts that set prices for 12-18 months to overcome currency fluctuations Some may use other financial products to reduce the uncertainty due to exchange rate fluctuations Economic risk – the risk of the firm’s present value of future operating cash flows due to exchange rate movements It is caused by the effect of unexpected currency fluctuations on a company’s future cash flows and market value and is long term in nature The impact can be substantial, as unanticipated exchange rate changes can greatly affect a company’s competitive position 5 Skills shortages A skill shortage exists when firms can't fill vacancies in an occupation or in a specialisation of that occupation A strong hiring demand & changing skills requirements are making it harder for firms to find the right workers Firms that are able to access skilled & cheap labour have competitive advantages over their competitors Many countries face "brain drain" – skilled workers leaving the country Thus , the governments offer different incentives to encourage skilled workers to return, eg: tax breaks 6 Impact of skills shortages Higher wages – as supply of labour is low, wages will increase. This is more so when a particular skills is in high demand, further pushing up the wages as firms compete to attract the skilled& qualified workers needed Lower quality – the quality of products may be affected if firms are unable to employ the skilled labour needed Lower productivity – lack of skilled labour may cause production delays resulting in lower productivity. Or firms may use less skilled workers when would also cause lower productivity Loss of business – lower productivity may result in the firm not able to meet customers' orders. This is very likely to result in losing them, threatening the survival of the firm in the long term 7 MARKETING Chapter 32 Global marketing strategy Global marketing involves the planning, producing, placing and promoting of a firm's products in a worldwide market It involves: having offices in different countries the use of internet Global localisation (Glocalisation) a good or service that is developed and distributed globally but is also adjusted to accomodate the consumer in a local market the adaptation of global and international products, into the local contexts they're used and sold in Eg: a global fast-food chain offering geographically-specific menu items that cater to local tasks Marketing approaches: Ethnocentric / domestic approach products are marketed in foreign countries based on the perceived superiority of the home nation's values this approach ignores local customs, culture and religion – no adaption of product to meet local needs In order for this to be a successful approach, the markets need to be similar Eg: Nissan – all cars overseas war exactly the same as those in the local Japanese domestic market Advantage: standardisation provides significant economies of scale & much lower marketing costs as there is little or no research required for new markets A drawback is the risk of losing sales as the biz is not market orientated Marketing approaches: Polycentric / international approach The business adapts their marketing strategy to the local market, providing products tailored for that market The values of that country or the most important in order to successfully market the product there. This approach is the direct opposite of ethnocentric The business believes the overseas market is distinct from the domestic market Eg: Pizza Hut in Japan has pizza toppings of squid & seaweed & in South Korea it offers crust stuffed with sweet potato to satisfy local customers tastes A benefit of this approach includes a likely increase in sales & local brand loyalty due to the market orientation of the market A drawback is that average product costs will increase due to new product development, market research & a reduction in economics of scale. And, its difficult to compete with established local brands Marketing approaches: Geocentric / mixed approach This is a fusion of both ethnocentric and polycentric approaches The promotion of the product is undertaken on a global point of view, ie: maintain the global brand name, whilst customising the product to local markets This approach takes the benefits of polycentric & ethnocentric to gain the best of both & hence is the best approach for business to take Eg: Coca-Cola can operate an ethnocentric approach in markets such as the UK and the US and benefit from economies of scale, but a polycentric approach in places like India, where customers have less money to spend; hence similar cans are sold at cheaper prices The benefits are the same as the polycentric and ethnocentric approaches The biggest drawback is that it will not always be clear which is the correct strategy to choose for different markets, which could lead to the wrong approach. AND higher cost at product development. Adapting this 4Ps to global markets: Price Pricing is a crucial part of the marketing mix for international firms The most important factors that decide the prices are : costs: production costs, tax, rent etc customers: price sensitivity , consumer preferences , income competition: intensity of competition , competitors' prices Adapting this 4Ps to global markets: Product A global firm must be flexible enough to modify the attributes of its products in order to adapt to the legal, economic, political, technological or climatic needs of a local market Overall, global marketing requires the firms to have available & specific processes for product adaptation for success in new markets The firm has to decide which approach to use – ethnocentric, polycentric or geocentric Adapting this 4Ps to global markets: Promotion How a firm chooses to promote its products can have a direct & substantial impact on its sales, especially globally It needs to decide the most effective promotion methods in different countries Also need to consider language differences, the values, beliefs, perceptions, legal & sociocultural aspects of the different countries Some firms change the name of their product in overseas market Adapting this 4Ps to global markets: Place In order to be successful in global market, a firm must make its products accessible to customers at all costs How do customers buy their products in local markets? Application of Ansoff’s Matrix to global marketing Market penetration – the firm adopts products for markets with it already operates, ie: in the country it already has a presence Market development – the firm markets its existing products in new markets / countries, but the firm needs to consider the different consumer tasks & preferences of different countries Product development – the firm promotes new or modified products in existing markets. This is especially suitable for products with short product life cycle such as clothes Diversification – the firm develops new products for entirely new markets. This is the riskiest strategy as the firm enters markets that it lacks knowledge & experience in Application of Porter’s Strategic Matrix to global marketing Cost leadership – the firm tries to be the lowest-cost supplier in the market Differentiation - the firm makes its product different from those of competitors in a mass market Focus – the firm targets a niche market either in terms of cost or through differentiation. A firm could transfer its competitive advantage in its own local market to a global market Niche market Chapter 33  2 Global niche markets  Where a business targets a smaller segment of a larger market (subcultures) where customers have specific needs and wants across several countries  Global niche markets are smaller, more specialised parts where customers in more than one country have particular needs that are not fully met by the global mass market  On a country by country basis they do not offer enough market value to be successful. However, the combination of all the niche markets in each country allow for the sale ability to present profits  3 Cultural diversity  Every country consists of various cultural, racial, and ethnic groups, with its own way of evaluating everything, including spending patterns  Sources of cultural diversity includes:  Language: ensure that promotion & packaging is done in the language that can he understood by the target market  Hobbies & interest: research on hobbies & interests of the people of target country, do not assume it is the same everywhere  Economic development: know the economic development of target country to assess the people's purchasing power & spending patterns  Religious norms: know the major religions of target country to understand the people's needs, eg: Muslim's need for halal food  4 Cultural diversity  Social norms: unwritten rules of behaviour that are considered acceptable in a group/society, eg: never leave chopsticks vertically stuck in a bowl of rice  Legal systems: firms need to be aware of the legal system of target country, eg: some government officials need bribes to release business permits  Weather & climate: this influences what the people buy, eg: little demand for winter clothes in Malaysia  History & traditions: firms need to research on target country's history & traditions to understand its people's consumption patterns, eg colours have different meanings  5 Features of global niche market  Global niches exists where the local market for a product is too small to be profitable, but at a global level the market is very viable. This is due to international perceptions about certain goods  Some common features include:  Clear focus: target particular customer  Brand name: strong brand names which customers are loyal to  Quality: products are of high quality  Personal service: excellent personal service is given  6 Features of global niche market  High prices & profits: as target customers are usually very rich, & are prepared to pay high prices for quality products & services, premium pricing is used, thus profits are high  Limited competition: not many other firms targeting the same market  Economies of scale: usually niche markets cannot exploit economies of scale, but when it is global niche, with customers in many countries, , there is enough output to scale up production, though then are times product needs to be adapted to meet cultural differences , then may not be able to exploit economies of scale  7 Marketing mix & global niches  Product: emphasis on quality, uniqueness (quality customer service)  Price: prices are high & demand is price inelastic  Promotion: focus on brand name which emphasises exclusivity, heavily targeted promotion  Place: sold through specialist / exclusive dealers to emphasise high-end, rare, special 8  9 Notes:  A niche product that is successful in one country does not guarantee success globally  This is because the firm identified a particular need of domestic customers, which may not exist in other countries  Careful marketing, operations & leadership are needed to translate a total niche market into a global niche market CULTURAL/SOCIAL FACTORS CHAPTER 34 CULTURAL & SOCIAL FACTORS AFFECTING GLOBAL MARKET Culture refers to the influence of religious, family, educational & social systems on people, how they live their lives, and the choices they make Marketing always exists in an environment shaped by culture. Firms that intend to market products in different countries must be sensitive to the cultural factors at work in their target markets Firms need to overcome ethnocentrism if they wish to market effectively in other countries CULTURAL DIFFERENCES Various features of a culture can create an illusion of similarity, but firms need to dig deeper to make sure they truly understand the people and environments in which they work Language: correct grammatical use of language in marketing communication is essential for a product, brand or firm to be viewed as creditable, trustworthy and of high-quality Customs & taboos: important for firms to learn about these customs & taboos so that they will know what is acceptable & unacceptable for their marketing programmes. Eg: in Japan, the number 4 is considered unlucky, & product packages containing 4 items are avoided by many consumers. This also applies when knowing how to handle introductions, negotiations & other communication, to prevent causing offense  Values: values can influence consumer perceptions and purchasing behaviour. Ads featuring individuals tend to do better in countries where individualism is an important value, and ads featuring groups do better in countries where the group’s well being is a higher value. Time & punctuality: different cultures have different sensitivities around time and punctuality. In some countries, being slightly late to a meeting is acceptable, whereas in other countries it is very insulting Business norms: business norms vary from one country to the next, eg: norms around greetings and physical contact, eg: American-style handshakes while in Asian cultures, a respectful bow & in Islamic cultures, contact between men and women is a sensitive issue, even in business setting Religious beliefs & celebrations: religious beliefs & practice can strongly influence what consumers buy (or don't buy), when they shop, and how they conduct business DIFFERENT TASTES & PREFERENCES Consumer tastes & preferences affect the demand of a product or service. Eg consumers have very diff taste & preference in clothing & food It could be due to religious beliefs, eg: halal meat in Middle Eastern countries Firms need to adapt their products accordingly to ensure they could reach their target market, & gain market share over the local firms who could better understand the regional preferences Eg: some of Samsung refrigerators in the USA have specialist water dispensers due to the high demand for sparkling water there When adapting products, firms need to also consider legal requirements set by the government of target country LANGUAGE & UNINTENDED MEANINGS Communication is not just about using the correct language, there are other nuances that need to be considered Low-context cultures: “what you see is what you get” – the speaker is expected to make his or her points clear and limit ambiguity, eg: USA & UK High-context cultures: facial expressions & what is not said may be an important clue to understanding a speaker’s meaning, eg: Asian cultures Gestures & body language have different meanings in different countries, eg: pointing with the index finger is considered offensive in Malaysia Firms should also endeavor to overcome communication barriers such as avoid jargon, train staff to communicate effectively, ensure internet connectivity is good when communicating through videoconferencing INAPPROPRIATE BRANDING & PROMOTION when creating promotional material, whether its a billboard /commercial, its crucial to keep the language & cultural environment in mind to prevent the risk of releasing offensive/ inappropriate ads /packaging A successful marketing campaign in the UK does not mean it would be in China Failing to do the sufficient market research of target market can be costly for firms CHAP TER 35 The impact of MNCs Impact of MNCs on the local labour force Job creation: provision of significant employment & training to the labour force. There is creation of wealth & raise expectations of what is possible for the people in terms of career path, financial security, living standards. There is also transfer of skills & expertise, helping to develop the quality of the local labour force Wages & working conditions: MNCs tend to pay higher wages to workers. As they add to the demand for workers in the locality, this would further cause an ↑ in wage rates. Furthermore, MNCs have better technology, work practices, health & safety measures & employee welfare. This provides better working conditions for the people However, 'sweat shop labour’: MNCs have been criticised for using 'slave labour' workers who are paid very low, given bad working conditions there is hardly any transfer of skills as local workers are given low-skilled jobs to handle Impacts of MNCs on the local firms Local firms have increased business from: construction of new plant of MNCs sale of materials, components & services outsourcing of production of MNCs increased trade when the local people have increased income (from jobs created by MNCs) & spending competition from MNCs acts as an incentive to local firms to improve their competitiveness, perhaps by raising quality and/or efficiency However: some local firms can't survive due to the competition labour costs increased due to what is offered by MNCs & competing demand for workers Impact of MNCs on the local community MNCs extend consumer and business choice with new products brought in at lower prices as MNCs benefit from economies of scale. As MNCs have international standards, the quality of products are better, too There is better infrastructure as MNCs invest in building roads, schools, public amenities To build trust with the community, MNCs participate in local events, give money to local charities , play a part in improving the community MNCs pay local taxes to local authorities which can be used to further improve the community However, MNCs may be accused of imposing their culture on the community, at the expense of the richness of local culture MNCs often contribute to pollution and use of non-renewable resources which is putting the environment under threat & is putting the environment under threat & negatively impact the health & activities of the local people, especially farming & fishing Impact of MNCs on economic growth & FDI flows MNCs engage in FDI which helps create capital flows to the country MNCs add to the host country GDP through their spending, for example with local suppliers and through capital investment, increasing economic growth Jobs are created, raising the levels of GDP through higher income & spending, ↑ the standards of living of the people The government has increased tax revenue from the MNCs, local firms & individuals. At the same time , there is ↓ in welfare payments. The government can use the revenue to improve government services & reduce national debt, improving its financial status, making it easier for the country to borrow in the future Impact of MNCs on balance of payment (BOP) MNCs have a double impact on the host country's BOP Inward investment will help a country's BOP. The investment itself will be a direct flow of capital into the country The investment is also likely to result in import substitution and export promotion. Export promotion comes due to the MNC using their production facility as a basis for exporting, while import substitution means that products previously imported may now be bought domestically For some less developed countries, the presence of MNCs & their exports boost the county's products in the global market, increasing exports of products of these local firms However, MNCs may import resources such as machinery & equipment which will reduce the country's BOP. Also, if the MNCs repatriate their profits, this would also reduce the BOP Impact of MNCs on technology & skills transfer the transfer of technology by MNCs help developing countries to have sustainable development as well as both preserve the environment & improve the quality of life present & future generations MNCs often bring into the host country new technology & work practices , through both horizontal & vertical transfers Large profits can be used for R&D. Eg, oil exploration is costly & risky ; this could only be undertaken by MNCs with significant profit & resources. The transfer of technology improves productivity & efficiency of host countries & help firms to develop. Some local firms copy MNCs' products through reverse engineering Impact of MNCs on consumers More choices of products , especially of international brands. However, not all MNCs produce consumer goods Lower prices: MNCs can exploit economies of scale & have efficient production techniques, thus prices will be lower. Furthermore, MNCs increase competition , pressuring local firms to reduce prices Better living standards: consumers have higher incomes due to increased jobs & can afford more & better products. However, intense competition could reduce choice for consumers if local firms can't survive & consumers may get exploited if MNCs dominate the market Impact of MNCs on business culture MNCs impact the business culture in the countries they are located. Some of their workers leave to set up their own firms as they developed skills & business practices from working in the MNCs which they take into their own firms. Some MNCs encourage these start-ups as they become suppliers to the MNCs Thus, the corporate culture of local firms began to change to that of the MNCs Eg many firms worldwide adopted Japanese production techniques & work practices, eg: Kaizen Impact of MNCs on tax revenue MNCs ↑ tax revenue for the government through their own payment of taxes, as well as ↑ tax revenue from local firms & individuals. However, some MNCs manipulate transfer prices in order to shift profits to low tax regions, ie record certain businesses transactions in other countries with lower tax rates So government need to monitor the activities of MNCs to ensure they pay their fair share of tax. At the same time, government should consider offering lower tax rates to attract MNCs due to the many benefits they bring the nation. Transfer pricing Companies charge a high price to divisions in high tax countries (reducing profit) while charging a lower price (increasing profits) for divisions in low tax countries This lowers the overall tax that the MNC pays. INTERNATIONAL BUSINESS ETHICS Chapter 36 ETHICS Ethics: moral principles that govern a person's behaviour or the conducting of an activity. When entering a foreign market, establishing a code of ethics can build a positive international image that results in better business practices and profits· International business ethics constitute a global code of conduct: a set of principles that establishes ethical standards for firms Examples include not acting fraudulently, not stealing other firms' property or ideas, and not embarking on marketing campaigns that would involve lying to customers. The firm will have to work within the institutional & legal framework of both its home & the host country STAKEHOLDER CONFLICTS Consumers: prices, product safety, misleading advertisement Employees: wages, working conditions, employee welfare, redundancies Shareholders: short-term vs long-term profits Countries/communities: well-being of the people, environmental concerns, depletion of resources ENVIRONMENTAL CONSIDERATIONS Any business activity will have an impact upon the environment, either through the natural resources that it uses or the waste products that it produces A firm can carry out a green audit in order to measure the environment impact of its activities. Eg: measuring its carbon footprint A carbon footprint is the total amount of greenhouse gas emissions. This has increased by 2% in December 2020. In many countries, legislation, eg: climate change legislation, manages firms emissions. However, MNCs in developing countries may not be subject to such control as economic growth is a higher priority in these countries. Waste disposal: traditionally, waste has either been incinerated or sent to landfill sites. However, these are not environmentally friendly ways of dealing with waste. ENVIRONMENTAL CONSIDERATIONS Furthermore, there is a lack of effective waste disposal infrastructure in less economically developed countries (LEDCs), eg poor roads There is an increasing concern over ‘e-waste’ that contains toxic elements that deteriorate over time, being dumped illegally in LEDCs Business sustainability is the practice of operating a firm without impacting the environment negatively both in the short term & of future generations, in the long term Working in a sustainable way means that business activity does not use up or destroy natural resources To achieve this, a firm may use renewable energy, recycle materials such as paper & ink cartridges, or use devices that save energy & water SUPPLY CHAIN CONSIDERATIONS As sourcing has become more global, instances of exploitation and malpractice have come to light, raising questions about how ethical corners may he cut to produce goods cheaply Pay & working conditions: MNCs in developing countries were known as “sweatshops“ that exploited local workers with low pay & poor working conditions But with pressure from consumers, this has been introduced & improvements introduced in wages & welfare for workers Exploitation of labour : according to the International Labour Organisation, 40.3m people are victims of modern slavery globally, while 24.9m people are affected by forced labour. Child labour : Globally, an estimated 152m children between the ages of 5 and 17 are victims of child labour, and almost half work in hazardous conditions MNCs do not have to accept child labour in local area firms, but copy the Swedish furniture manufacturer IKEA, that helps to support families by offering worker a good wage & providing their children with an education while they work MARKETING CONSIDERATIONS There are a number of issues that companies must consider when they are looking to market their products, such as: Misleading product labelling: firms must ensure that their labels do not mislead & provide sufficient information to allow consumers to make informed choices Inappropriate marketing activities: firms must ensure they do not engage in illegal marketing activities to promote their products, eg: generous entertainment & gift giving Controlling MNCs Chapter 37  The power of MNCs Multinational corporations (MNC) have an immense influence in the international system, participating in the majority of economic activity & growth, especially in developing countries MNCs gain much of their power from their ability to efficiently operate, coordinate and manage transactions However, MNCs have been accused of exploiting consumers, suppliers, small firms & the environment Thus, there is a need to control MNC activity to prevent them from exploring stakeholders.  Political influence MNCs that are state-owned (SOEs) are a common form of hybrid organisation in emerging markets, especially in China Political power can be exonerated to create, manage and end a business. This can lead to lots of commercial and ethical issues, such as: Corruption: there is greater room for corruption, eg: illicit payments to powerful politicians for favourable outcome for the firm Allocation of resources may be inefficient as it is decided by politicians instead of market forces Shareholders' & other investors' rights reduced / ignored as they are not the true beneficiaries of the firms but the politicians Lack of competition & incentive to invest & innovate to create new/better products  Ensure MNCs are sourcing locally Privately owned MNCs can be controlled using a number of political initiatives such as: Tariffs, quotas, regulations and local content requirements can be used to protect domestic firms Place director / indirect ownership restrictions on businesses that are considered to be critical Support domestic industries through subsidies or tax breaks Lobbying by politicians to influence decisions of the firms Politicians taking seats on the board of directors of PLCs Legal control The activities of MNCs could be regulated or controlled. Regulation could be used to try & raise the costs of firms. Firms which fail to follow regulations could face heavy fines, which act as a disincentive to break the rule Some developing nations may not want to attempt to control MNCs, since they could be a useful source of FDI. They might fear that if they control them, they will lose this source of FDI. This could mean they lose out on an opportunity to develop economically Competition policy ensures that markets are competitive by monitoring activities of firms to prevent them from abusing their power to exploit consumers with high prices / limited choices Taxation policy is used to raise revenue for government. Also to control firms' activities, eg: green tax to protect the environment Legislation includes a system of incentives & penalties to ensure that at risk groups are protected Consumer pressure Consumers have become more informed & voice their protests more freely against firms that are unethical, applying pressure on firms to cause change Campaigns/protests Boycotts of products Writing reviews  Eg: trade unions, fight for pay & Pressure groups working conditions Pressure groups are organisations that share & champion a common interest through: Boycotts, eg: boycott against Amazon for its dodgy & unfair tax policy. Eg: price transferring Media criticisms, eg: Nike was plagued by reports that it used sweatshops & child labour Direct action is the use of demonstrations, protests, strikes or even sabotage to achieve a political or social goal, eg: Greenpeace protested against Burger King who buys huge quantities of meat & soya from Brazil, where farmers are deliberately burning the Amazon Rainforest to make way for more ranches & plantations Lobbying is the taking of issues directly to government in an effort to influence change, eg: in the UK , to influence government decisions on corona virus schools policy last year social media (refer to next page)  Social media social media includes online magazines, weblogs, social blogs (eg: Twitter), podcasts & wikis (eg: Youtube , Wikipedia) & social networking (eg: Facebook, Instagram) These platforms can be effectively used to promote products & can be used to control the behaviour of firms by: Collection of information Increasing social awareness Gathering people together to create social authority to challenge large firms Eg: information could go viral very quickly, causing huge impacts on the behaviour of consumers & firms Self-regulation / self-policing Self-regulation is when a firm monitors its own behaviour, especially in relation to ethical or legal standards, eg: CSR It could be in the interest of the firm to act ethically in order to preserve a good public reputation Many industries use "code of practise" to guide & regulate themselves Advantages & disadvantages of self regulation avoid government regulation which would be stringent & costly Better meet the needs of stakeholders (financial/non-financial) Good company image Easier to encourage & motivate staff, because it shows the business is ethical, thus they are not harming or polluting, business is likely to treat them better Benefit the taxpayers as it reduces the need for government to monitor & regulate However, firms incur higher costs