The External Business Environment Flashcards
1
Q
What are the benefits of globalisation to businesses?
A
- chance to gain economies of scale which saves costs
- increased market share and dominance
- working practices will increasingly demand co-operation with people in other countries
- companies likely to specialise in particular parts of their organisation to cut costs
- instant worldwide communication
- business sourcing materials worldwide
- container shipping makes transport much cheaper
- choice of cheaper locations
- access to cheaper raw materials
- transfer pricing
- new management techniques can be discovered
- new production techniques can be discovered
- allows organisation to control production from start to finish
- large organisations may be able to influence government policy in their favour
- legislation may have limited growth in the home country
2
Q
Costs of globalisation to businesses
A
- language barriers
- competitive advantage will be harder to sustain as information spreads quickly around the world
- higher consumer expectations
- challenge of multi-cultural societies
- increased lobbying from anti-globalisation groups
- organisations may find it difficult to react to changes in the local market if they have no local knowledge
- different parts of the world have different tastes and preferences
- increased travel for senior managers can be expensive
- may have employees working in politically unstable countries
- customers are more aware of the tax avoidance schemes and can build pressure
3
Q
Reasons for growth of MNCs
A
- increased market share and dominance
- closeness to local markets - tailor products to customer preferences
- can avoid important tariffs or taxes
- lower labour costs
- government incentives e.g. grants
- falling cost of transportation of people and goods
- reduction in barriers to trade
- low cost communications enabled by ICT
- to gain economies of scale
- to avoid monopoly legislation in its home country
- markets are saturated in home country and new markets need to be found elsewhere
- being close to raw materials
4
Q
What is foreign direct investment?
A
Occurs when overseas companies set-up or purchase operations in another country. Includes new projects, expansions of existing projects, or mergers and acquisitions.
5
Q
What are the benefits of creating new purpose-built production facilities abroad?
A
- can gain competitive advantage in emerging markets
- custom built to suit the organisations requirements
- enables the company to establish its own business philosophy and corporate culture
- ensures uniform global facilities
- only option as no suitable facilities are available
- problems of integration into the existing business structure are minimised
6
Q
What are the benefits of buying over an existing business abroad?
A
- able to reduce competition
- allows a large market presence to be built up quickly
- enables moves into markets where you can attract a different segment
- gain access to management and their experience of local conditions reducing risk of failure
- may be able to acquire a loss making business cheaply
- start earning revenue and profits straight away
7
Q
What are the disadvantages to foreign direct investment?
A
- business may be disadvantaged if the firms bought were previously struggling to maintain custom and reputation
- 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, new sites need to be sourced, and premises built/modified
- less tough safety laws mean the business could be damaged by negative press
8
Q
What is a joint venture?
A
A joint venture is formed when two or more businesses undertake a project together. They each contribute capital for the project and then share in revenues, expenses, and control of the enterprise. Can be either for a specific project or a continuing business relationship.
9
Q
What are advantages of joint ventures?
A
- businesses able to learn from each other
- the cost of the joint venture can be shared = a greater return on the investment for the businesses
- once venture is completed the businesses can take what they have learned and continue to apply this knowledge to their existing business
- economies of scale
- stronger, more competitive operations
- access to more customers and increased profits
- risks are shared
10
Q
What are disadvantages of joint ventures?
A
- specialist knowledge is lost to future competition
- compromise is needed
- profits are shared so each business won’t receive the maximum return
11
Q
What is transfer pricing?
A
Transfer pricing refers to the price charged between one international subsidiary of a multinational company and another for the goods supplied between them.
A multinational company transfers goods from the low tax country in Asia where its subsidiary company is based to the high tax country where the company has its head office.
12
Q
What are the reasons that multinational corporations use transfer pricing?
A
- minimise the companies overall tax liability which increases overall profits
13
Q
What are the effects of transfer pricing on the host country?
A
- increases profit margins in the host country because more tax is being paid there. This improves the host country’s economy because its government is getting more money.
14
Q
What are the effects of transfer pricing on the home country?
A
- lowers profit margins in the home country because less tax is being paid there.
15
Q
What are the advantages of multinational corporations to the host country?
A
- gross national product (GNP) will increase. Measure of countries economic performance - the amount of goods that were produced and sold within a country. A higher GNP shows strong economic activity which results in further investment in the country.
- more direct employment opportunities are created by the multinational and many indirect jobs are created as a consequence. Often employees learn new skills which can be transferred to other employment opportunities.
- standard of living improves due to wealth creation from better employment as in general foreign owned firms pay higher wages than domestically owned firms.
- balance of payments shows how much is being spent by consumers and businesses in the UK on imported goods and services against how successful UK businesses have been in exporting to other countries. The UK’s balance of payments benefits from: initial injection of capital to the country, increase in exports if goods/services are sold to other countries, reduction of imports if the investment eliminates the need to buy from abroad
- tax raised from multinationals profits is a source of revenue for the government.
- local companies can benefit from technology transfer improving their skills and making them more efficient as MNCs will bring the technology knowledge from the home country to the host country.
- competition within the host country can be stimulated leading to improved efficiency and increased productivity - both directly improving GNP further.
- greater choice of goods and services are now available within the host country, leading to higher sales and increased taxation collected by the government.
16
Q
What are the disadvantages of multinational corporations to host countries?
A
- profits can be returned to the home country and not reinvested in the host country.
- multinationals usually employee 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.
- 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 tax liability.
- local companies may be forced to close because they can’t compete with larger companies.
17
Q
What are the advantages of multinational corporations to the home country?
A
- creation of additional high quality technical and managerial jobs at the MNCs HQ - enhance spending p;owner 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 - more tax’s 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. This would count as a credit item for the UK current account as it is a stream of profits flowing back to the UK.
- demand for home country exports can increase is foreign country subsidiary creates a demand for them.
- other firms in the home country may gain opportunities from any experience gained which will in turn create wealth for the country in the form of increased taxation collected.
18
Q
What are the advantages of multinational corporations to the home country?
A
- employment opportunities may be reduced as MNCs wind down operations leading to less tax revenue for government and increased spending on unemployment benefits
- increased burden on government to provide college and university places.
- balance of payments suffer in the short run from the outflow of money to the foreign country as profits are reinvested in the host country to provide additional capital investment on building, machinery, etc.
- 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.
19
Q
What are positive effects of ASEAN on UK businesses? (1)
A
- inward investment - the investment China provides to UK businesses is expected to pass £105 billion in the emerging energy , property, and sectors sectors 2025. In 2012, China Investment Corp, the country’s sovereign wealth fund, bought an 8.68% stake in Thames Water Utilities Ltd and a 10% stake in Heathrow Airport. Another example is Chung Kong Infrastructure Holdings purchasing UK utility company Northumbrian Water for £2.4 billion in 2011.
20
Q
What are the positive of ASEAN on UK businesses? (2)
A
- cheaper materials - raw materials from ASEAN/China may be cheaper due to lower wage rates/lower production costs in these countries. China doesn’t have a national minimum wage, but sets a minimum per region. The average minimum wage across China is £0.79, compared to £6.50.
21
Q
What are the positive effects of ASEAN on UK businesses? (3)
A
- newer technologies - because of its vast size, population and GDP over capita ASEAN/China have access to newer technologies, allowing for better quality products to be manufactured and used in UK production processes. This allows them to be at the cutting edge of product innovation.
22
Q
What are the positive effects of ASEAN on UK businesses? (4)
A
- production processes - UK businesses can learn from the production processes of ASEAN/China businesses. China manufactures 90% of the world’s computers, 80% of all air conditioners, and 70% of all mobile phones. This means they also have the largest knowledge of how best to manufacture these products. Chinese companies investing in the UK will bring the lessons they have learned with them, resulting in a technology transfer to UK businesses.
23
Q
What are the positive effects of ASEAN on UK businesses? (5)
A
- large market - China has a population of 1.4 billion people, with ASEAN adding another 380 million, meaning UK businesses have a larger market in which to export their luxury goods.
24
Q
What are the negative effects of ASEAN on UK businesses?
A
- price wars - wage and manufacturing costs of products coming out of Asia are much lower than than UK meaning that UK businesses may have to lower their prices to compete with Chinese/ASEAN businesses.
- buying power - the buying power of Chinese businesses may leave UK businesses vulnerable to takeover. A Chinese firm bought out Pizza Express in July 2014.
- corporate culture - cultural differences could make trading with China/ASEAN nations problematic as UK businesses may be unfamiliar with local customers and cultures. Language and currency are different.
- transport costs - with a distance of almost 5000 miles between China and the UK, transportation costs will be high. Importers must also take account of the time taken to transport. As environmental awareness increases, less consumers want UK businesses to trade with Asia, given the increased carbon footprint of doing so.
25
What is the European Single Market?
- in terms of trade all the countries that are members of the European Union operate co-operatively as if they were one country.
- removal of barriers to competition in banking and insurance, recognition of product standards.
26
What are the costs of a single market? (3)
- 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
27
What are the benefits of a single market? (5)
- 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 options
Innovation in the creation of new products improves as businesses compete for customers
- innovation in processes and procedures improves as businesses strive to cut costs while simultaneously maintaining quality
28
What is the EU Social Chapter? (2)
- aims to create a level playing field for all EU members in terms of work conditions
- guaranteed workers the right to join a trade union, take industrial action, have a minimum wage, take parental leave, have a maximum 48 hour working week, have at least 4 weeks annual paid leave, be treated equally whether they are part time or full time, improve health and safety protection, have access to vocational training
29
Effects of the EU Social Chapter on businesses
- workers become more motivated as working conditions are improved
- productivity increases
- better industrial relations and worker participation due to improved consultation
- raises labour costs for businesses (e.g. minimum wage)
- more difficult to compete on price bases with non EU firms
- increased regulations make labour market less flexible
30
What are business ethics?
- the moral principles underpinning decisions
- ethical issues include child labour, wages paid to third world countries, environment, manufacturing weapons, cigarettes, alcohol, animal research
- ethics code: define what is acceptable behaviour, promote the highest standard of behaviour, have a benchmark against which employees/owners can compare themselves, provide a means of establishing an individual identity
31
What is corporate social responsibility? (1)
- organisation seeks to exceed both internal and external stakeholders’ expectations beyond making profit and meeting legal obligations
32
CSR examples
- community involvement: giving cash donations, offering your staffs’ time and skills in developing and maintaining local projects, loaning equipment for a project
- employee relations: respecting human rights of all individuals, being fair in recruitment and selection processes, supporting a good work/life balance, acting ethical and with integrity at all times
- environmental practices: reducing energy consumption and minimising waste, preventing or minimising pollution, recycling and using recycled materials
- stakeholder responsibilities: meeting conflicting stakeholder demands, building sustainable relationships with your stakeholders to earn long-term profitability and respect
33
What are the benefits of pursing a policy of CSR to a business?
- it will improve the business’s public image and strengthen the brand
- it can attract good quality staff and improve employee retention and productivity
- due to the increase of ethical investors there is the ability to access new sources of capital for expansion
- you many be less likely to face litigation and fines
34
What are the costs to a business of pursuing a policy of CSR?
- increased costs lead to reduction in dividends for shareholders
- turning down a lucrative contract because you disagree with the prospective clients philosophy
- raw ingredients in food production can be more expensive
35
What are the benefits to businesses of technological change? (4)
- new products can be developed relatively cheaply
- average cost per unit can be reduced
- faster communications between suppliers and customers
- employees can access data readily to enable them to work from home
36
What are the costs to businesses of technological change? (4)
- staff training and investment in, and renewal of, ICT equipment
- e-security breaches from fraud, hackers, viruses
- load of face to face customer contact minimising the personal touch
- complying with the Data Protection Act (1998) and Computer Misuse Act (1990)
37
What is fiscal policy?
- involves changes in taxation and spending within the economy. If business taxation increases it means less profit for the business and may hinder its growth plans. Main taxes affecting businesses are income tax, corporation tax, VAT, and capital gains tax
38
What is monetary policy?
- designed to control the amount of spending in an economy by altering their interest rates, the money supply, and exchange rates.
- controlled by the Bank of England and their Monetary Policy Committee. When interest rates go up the cost of borrowing increases for both businesses and consumers. Can have an adverse affect on cash flows, increases business costs as the cost of borrowing increases and will reduce turnover because consumers have less disposable income
39
What is regional policy?
- aims to address the balance in terms of employment, income, and wealth between areas of the UK.
- grants, rent-free and rate-free premises, providing training programmes for employees, providing cheaper loans
40
Exchange rates
- fluctuations in the exchange rate alter the value of UK sterling against other currencies
- government can influence the exchange rate by using its foreign currency reserves held by its central bank to buy and sell its currency or it can use interest rates through its monetary policy
41
What are the advantages of E-commerce?
- can find out if products are in or out of stock
- can increase global market share
- customer data can be used for marketing
- improved relationship with suppliers
- often reduces lead time
- saves costs and improves efficiency
42
What are the disadvantages of E-commerce?
- concerns about security when purchasing/banking online
- delivery problems
- fear that retail shops will be replaced by storage warehouses
- shopping is more impersonal and less of a social affair
43
External influences on businesses
- social - relates to changes in society and social structures, changes in demographics, patterns of demand
-political - how the changes in government and government policies affect businesses e.g. competition policy
- technological - businesses can adopt new innovations and inventions to cut costs and develop new products/services
- legal - changes in laws and regulations and they impact the ways in which businesses operate
- ethics
- economic - internet rates, exchange rates, inflation, unemployment, trade cycles
- environmental
- stakeholder - particularly external
