External Business Environment Flashcards
What are the main reasons for the increasing pace of global operations?
- Removal of global trade barriers
-Advances in communications and technology
-Growth in global trade
-New opportunities in emerging markets
-Technological developments in transport
-The development of global media
Advantages of Globalisation
-Cost savings through purchasing in bulk generating economies of scale, and production as costs can be saved through producing in foreign countries
-Choice of cheaper locations means businesses no longer have to stick to operating in one country
-Access to cheaper raw materials from developing countries
-New production techniques can be used and learned
-Legislation tends to be more relaxed in foreign countries.
-Allows the organisation to control production from start to finish without giving over control of certain areas of production to other organisations
-Opportunity to take advantage of lower wage rates and less restricting working conditions which can increase profits
Disadvantages of Globalisation
-Higher consumer expectations due tot eh increase in e-commerce, customers can now browse the internet and compare products easily
-Increased competition this is because there is an increase in companies setting up and selling globally (physically and online)
-Challenge of multi-cultural societies. businesses need to keep this in mind when moving into areas of America and Asia to ensure they satisfy all cultural demands
-increased lobbying from anti globalisation groups who petition against the exploitation of foreign workers and increased pollution caused by air, sea and road pollution
- Language barriers can exist
-May increase risk for employees if they are working in politically unstable countries
-organisations may find it hard to meet local needs if they have no knowledge of the market
What is Glocalisation?
Glocalisation is when the business operates globally but act locally in a way that shows sensitivity to and awareness of local markets, local issues and cultural differences.
Reasons for the growth of Multinationals
- Increased market share and dominance this allows market dominance and you become the go to for that product
-closeness to local markets means that you can tailor your product more to suit the local customer preferences. As the business operates within that country rather than just deliver to it, allows the business to engage more with the local community
-Can avoid import tariffs or taxes which are applied to any product being imported into a country. A way around this is to manufacture the product within the country you hope to sell it.
-Often leads to lower labour costs – especially when MNCs choose to set up in developing countries as these countries are unlikely to be protected by Minimum Wage legislation. MNCs should be prepared to pay workers above the average wage in these countries to avoid negative publicity.
-Setting up in certain areas means that MNCs can benefit from government incentives e.g. grants. Usually these areas are highly deprived or have high unemployment levels.
-The cost of people and freight travel is decreasing making it cheaper for businesses to ‘move abroad’.
-Reduction in trade barriers. as you no longer have to pay tariffs to export goods from one country to another, this should encourage businesses to trade globally.
-Just as easy to communicate with someone across the globe as it is with someone in the next office due to the ICT and Communication developments.
-To gain economies of scale. large quantities will be ordered which will allow the business to qualift for bulk discounts. Manufacturing may be done in house (backward vertical integration) which can reduce costs more.
-Can avoid monopoly legislation E.g Competition Commission that exists in the UK
-Foreign direct investment is where the company has outgrown its home country and moves abroad to target new markets.
What are the methods of growth for Multinationals?
-Foreign Direct Investment
-Joint Ventures
-Mergers and acquisition
-Franchises
What are the main reasons a business would use Foreign Direct Investment?
- To access new overseas markets or better serve existing markets e.g., investing in the UK to reach customers in Europe
-To take advantage of lower manufacturing and wage costs e.g., outsourcing
-To access new technology and skills particularly in R&D
What are the two methods of FDI that a business may use?
-Creating new facilities in the host country (factories ,outlets, stores and offices). This method takes time, effort and finance e.g., building, hiring, training. An advantage is that it can effectively replicate corporate culture.
-Building over an existing company in the host country. This is a quick way to expand into new markets. The advantages are that an overseas company can gain knowledge and experience of local markets and can often buy loss making companies and ‘turn them around’
Advantages of Foreign Direct Investment
-FDI contributes to creating and underpinning British jobs, as well as boosting local and regional economies. International investors are some of our biggest and most innovative manufacturers, and service providers, bringing enormous benefits to the UK. These include not only job and wealth creation but also an injection of innovation
-International investment allows companies to achieve growth and economies of scale that domestic markets alone would not allow. This makes them more productive and profitable with greater capacity for job and wealth creation. The expansion of high productivity businesses helps strengthen competition within the economy as companies are expected to new ideas and practices
Cons of Foreign Direct Investment
-A business using this method could be disadvantaged if the firms bought were previously struggling to maintain custom and reputation. It may take a long period of time to build up confidence again, especially if the business is seen as operating the same organisations but under a different name. It is costly to rebrand and update signage and equipment
-Investing directly in a country to set up a new operation will take a lot of time. New staff need to be hired and trained and new sites need to be sourced and premises built/modified. This is also expensive and time consuming to organise.
-Many multinationals choose to set up in countries with less stringent safety laws. whilst this cuts the costs of production the business could be damaged by negative publicity
What is Joint Ventures?
Joint Ventures is formed when two or more businesses undertake a project together. They each agree to contribute capital for the project then share in revenues, expenses and control of the enterprise.
Advantages of Joint Ventures
-Economies of scale
-Stronger, more competitive operations
-Access to more customers and increased profits
Disadvantages of Joint Ventures
-Specialist knowledge is lost due to future competitor as when the arrangement dissolves, businesses will return to be competitors
-The venture may not succeed as both parties need to be willing to compromise. This may not be possible if the separate businesses want to push the venture in different directions
-Risks are shared, but so are profits meaning each business will not receive the maximum return on their investment
What is a takeover?
A takeover is when one company literally ‘takes over’ another company. This usually results in the company being taken over being rebranded. A takeover can be voluntary or hostile.
What is a Merger?
A merger is where two companies integrate on equal terms - a ‘friendly’ combining of companies, where elements of both brand/names will be retained.
What is a Franchise?
A franchise is a contractual agreement under which the owner of a business idea or name (franchisor) gives another person or company (franchisee) the right to sell a good or service or use a company name under the specifications of the franchisor. The franchisor may provide marketing and other support such as training and advice.
What is transfer pricing?
transfer pricing refers to the price charged between one subsidiary of an MNC and another for the goods supplied between them. This is an internal transfer of goods and therefore the price charged between them is set by the company. Transfer pricing is mainly used to minimise the company’s overall tax liability
Advantages of Transfer Pricing
-May lead to a reduction in the tax paid on profits
-These savings can be used on research, growth etc
-Creates employment and wealth in countries with low tax rates
Disadvantages of Transfer Pricing
-Negative reputation if home/host consumers protest against it
-Multinationals can be taken to court/fined if they are found to use transfer pricing
-Host country will not be raising much tax revenue
Advantages of Multinationals Home Countries
-Creation of additional high quality technical and managerial jobs at the MNCs headquarters. This enhances spending power in the UK as the nationals employed to these new positions are financially rewarded according to the amount of responsibility they are given
-People seeking further and higher education due to less demand for unskilled labour. As unskilled work moves abroad UK citizens will retain, benefiting themselves as well as the taxation received by government
-Company profits are returned to home country which boosts balance of payments . A UK business may own a business overseas and send back some of the operating profits to the UK
-Demand for home country exports can increase if foreign subsidiary creates a demand for them
Disadvantages of Multinationals on Home countries
-Employment opportunities may be reduced as MNC’s wind down operations leading to less tax revenue for government and increased spending on unemployment benefits
-Increased burden on government to provide training and skills development to help workers find suitable jobs
-competition from foreign based subsidiaries may lead to greater need for home based companies to become more efficient or result in losing customers and profit
Foreign influence on the economy
-Business is happy because they are paying reduced amounts for land and labour
-These developing countries live with these conditions as they are provided with a job, even though these conditions are poor
-MNC’s take advantage of the less stringent employee legislation and health and safety legislation in these developing countries
-As the MNC’s provide jobs and income into these countries, they can also hold influence over them in areas such as new legislation being introduced. Can cause the country to favour the MNC so their people don’t lose their jobs.
What is a host country?
A host country is a foreign country where the business chooses to set up.
Advantages of Multinationals on host country
-Multinationals directly employ people to work in their factories
-Jobs are created in firms that supply their raw materials and components as well as within the local area
-Competition from multinationals may act as a stimulus to domestic firms to find ways to cut costs and increase efficiency
-Multinationals often train their workers in new skills, which can be used later in indigenous firms
-Multinationals may bring knowledge of new production techniques, which will gradually spread through local businesses in the host country
-The GNP of the host country will increase as will the standard of living where there has been investment in new manufacturing capability
-Multinationals may improve roads, rail networks and communication facilities if they are not adequate for their needs. this can benefit whole communities
-Governments may invest in improving infrastructure to attract inward investments
Disadvantages of Multinationals on host country
-Multinational profits are returned to the home country. this means some of the profits can be returned to the home country and not reinvested into the host country
-Multinationals usually employ staff from the home country in managerial positions and use the local labour for the lower skilled jobs
-Multinationals may be socially irresponsible by exploiting local resources for a number of years and then relocating back to the home country e.g. depleting their water supplies
-Multinationals have no loyalty to the host country and can easily switch production to another location to suit their needs resulting in job losses and lowering economic growth.
-Multinationals can manipulate transfer pricing between subsidiaries to reduce their tax liability. MNCs can move stock from one country to another at an inflated or deflated price to impact the amount of profit made - they may wish to record a stronger profit in a country with lower tax rates and a lower profit in a country with a higher tax rate.
-Local companies may be forced to close because they cannot compete with larger companies.
-Local governments can feel pressure from large MNCs to offer incentives to keep them operating within the country.
-Local governments can also feel under pressure from MNCs when introducing new legislation or policies that the MNC does not agree with. The MNC can threaten to leave the country and take their production elsewhere.
Why was the EU created?
The EU creation established a free trade area where tariffs and quotas were removed between member states thereby allowing the free movement of goods, services, capital and people. This means that any business within an EU country can import and export between EU counties without the need for additional payments, levies or taxes.
The same applies to employees and capital purchases. The benefits to businesses are that they can move goods, workers and equipment within the EU countries freely. For consumers this means more choice and reduced selling prices (as the business has reduced shipping costs).
What are the 4 EU Constitutions?
The European Commission
The council of the European Union
The European Parliament
The European court of Justice
The European Commission
-Represents and upholds the interests of the EU as a whole
-Proposes EU policy and legislation
-Carries out decision taken by Council of Ministers
-Manages day to day business of the European Union
The Council of the European Union
-Agrees or adopts legislation based on Commissions proposals
-Each member state acts as president for six months
-Meetings attended by one minister from each national government
-Decides which minister attends what topic on the agenda
The European Parliament
-Elections held every five years
-751 MEPs from 28 countries
-Provides opinion on proposals before Commissions can implement them
-MEPs sit in seven Europe wide political groups
The European Court of Justice
-Staffed by one judge from each member state
-Deals with disputes between member states
-Ensures established laws are observed the same way in all member states
-Rules on interpretation and application of EU laws and hears appeals
What is the Single Market?
The single market is one of the EU’s greatest achievements. It extends the EU’s basic principle of free trade to cover free movement of factors of production within the EU. Its success comes from the fact that all the member countries operate co-operatively as if they were one large country. Restrictions between member countries on trade and competition have gradually been eliminated ultimately resulting in increased standards of living for member countries.
Features of the single market
-Simplifying tax regimes across member states
-Harmonised product standards
-Free movement of goods, services, peoples and capital, removing trade barriers
-Fair competition between organisations in member states
-Driving forward economic integration
-Tariff-free trading between member states
-Common external tariffs imposed on all goods entering member states and common negotiation on international trade deals
Benefits of the single market
-Reduced production costs because of free movement of goods and common standards
-Opens up new markets to businesses leading to new opportunities
-Efficient companies producing for a larger market can benefit from economies of scale
-Consumers can benefit from increased choice and cheaper products
-Innovation in the creation of new products improves as businesses compete for customers
-EU regulations ensure quality
Costs of the single market
-Can have a short term negative impact on some sectors of the economy due to increased international competition.
-Business that previously had market protection and national subsidies may find it difficult to compete in such an open market leading to failure and unemployment in the country.
-Differences in cultures and tastes may prove to be a barrier in entering some markets.
What is the Social Chapter?
The social chapter aims to create a “level playing field” for all EU members regarding conditions at work
The social chapter guarantees workers the right to:
-Join a trade union
-Take industrial action
-Have a minimum wage
-Take parental leave (either gender)
-Have at least four weeks paid annual leave
-Be treated equally whether they are part time or full time
