Internationalisation, Globalisation and the interconnection of the people of the world has brought much trade and along with it prosperity and despair. This booklet gives a brief introduction into the maze of international businesses, trying to answer the key questions that our world is faced with: Is Globalisation a dream come true, or is a nightmare in the making?
Edexcel International Business Edexcel A2 – Unit 3
Quazi Nafiul Islam
THIS IS A FREE BOOK AND IS NOT FOR SALE
WHY I WROTE THIS BOOK I wish you all peace! To everyone reading this, I want to simply tell you how thrilled I am to publish my first book. It’s a simply package of notes that I have made trying to address the key concern of many students out there is places such as South Asia, panicking because they have no resource for studying this topic. I was far worse off than most of the students out there: I study by myself, meaning that I have no teachers and no tuition, I had to make the entire course plan, time management system and had to train myself to contain my frustration in mental solitude. Throughout my time in these past two years, which I have studied for the A Level course, the most help that I have ever received was from the internet. Without the internet, perhaps this fascinating journey that I embarked upon would not have ended up in being a success. People on the internet produced free notes, exchanged past-paper questions and also exchanged useful books and resources – without these selfless individuals, I would not have been able to write this this book and you would not be reading it. That’s when the idea hit me; I wanted to give back to the internet, because I kept taking from it, resources, movies, exam-papers, you name it! But, in all that time of getting exactly what I wanted from trying a few words into Google, a profound feeling of ungratefulness began to build up. For every resource I had used, I simply typed in two words “Thank You”. That was all I did, and I felt so guilty because I had not given back, I was not able to follow the people who have spared time out of their busy lives to care about people they don’t even know, and might never. And that’s when I realised what great people were: they were the kind ones. They were the ones that showed kindness in the hardest conditions, the ones that forgot of being better than everyone else and focused on destroying the inequality that makes our world rife with strife. They could have kept everything to themselves; but they did not. I realised at that point, how great they were, and how selfish I was. Although this alone was not what changed me to adopt a new philosophy towards life, but none the less, a very significant one. A distant relative lived in England when I was half way through my A2 course, and I had nothing to study from for the International Business section. So, I asked my cousin (who is far closely related to that relative) to request if she could send me the book. By Allah’s grace it was made possible. I realised at that point that not everyone had access to the proper resource that I had, so that is when I decided to make notes for everyone, so at least everyone would have a chance to gain an understanding of what was required for the examination. So, I hope these notes help you. I spent a lot of time writing them, and I would be glad to hear feed-back from all the people reading this. If you have any suggestions, please do not hesitate as it will make this book more comprehensive for future readers. My e-mail:
[email protected] Thank you for taking the time to read this.
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Why Businesses seek International markets Overview
1. Extend the Product Life Cycle 2. Domestic Limitations a. Government watchdogs b. Market saturation c. Foreign competition d. Small market 3. Global sourcing 4. Business Objectives 5. Trade Liberalisation 6. Ability to trade within a trade block using the EU as an example 7. Technology
Extending the product life cycle • • •
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Businesses can often sell old products or services to new markets. This can be mainly because the product has become mature in the domestic market, and demand is declining. One great example would be mobile phones, which have reached market saturation in western economies, but are still new to places such as Africa or South Asia This way, the business can sell an old idea in a new place, and there is not additional R&D cost.
Domestic Limitations •
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Government Watchdogs o Most governments want to keep their markets competitive and make sure that there is constant innovation. It also means that prices will be kept competitive, which in turns leads to consumers having more purchasing power. o Government watchdogs, do this by making sure successful businesses do not gain too much influence in the market. Market Saturation o When a product reaches market saturation, it means that the growth of sales of products will be low, on the PLC curve, this is the point of maturation. o What do you do? Reach out to new markets, and often they are international markets. Foreign Competetion o Often foreign competetion may provide better quality goods at lower prices, such as T-Shirts or other clothes made in poorer nations, where labor is cheap. o This will force businesses to search of new markets or make their products more competetive: making better products, lowering prices etc. Often, when foreign competitiors have acquired significant or a majority of the market share, the business has to export in order to expand it’s business
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Small Market o If the business is in a country with a little demand for its product, then exporting may be the only way to expand the business. BitDefender, the antivirus maker originated in Romania, where the market is small. So, it started exporting to more lucrative places such as the USA and Germany.
Global Sourcing •
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Global sourcing is the procurement (Obtaining something/people) from a different country than the country the business is from. Essentially, this is to exploit global efficiencies such as cheap labour (in places such as India or South-Asia). Exploiting the local efficiencies such as cheap labour, or cheap land or skilled market pool (India for its English-speaking population). Due to the differences in the cost of living in poorer nations, skilled labour as well as unskilled labour can be significantly cheaper. Skilled engineers from Malaysia or Computer Technicians from India will work at lower wages than those in more developed nations because the cost of living is cheaper. The Business has to spend less on production, and there will be more profit as a result. Key Terminology o Outsourcing: buying necessary inputs from independent suppliers. o Offshore Outsourcing: buying necessary inputs from overseas suppliers.
Business Objectives • It may the desire of the entrepreneur to expand the business across the borders of the domestic nation. The reason being that there will be more profit and the bigger the business the more the risks are spread. • Bigger businesses can take some risks without threatening its futures, and it may be a dream the entrepreneur wants to make a reality.
Trade Liberalisation •
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International trade barriers such as quotas and tariffs have decreased massively over the past few decades. As a result, it gives businesses more incentive to export as well as import goods. The World Trade Organisation (WTO) has helped nations to achieve greater co-operation in making markets more accessible to each other. This has resulted in greater FDI (Foreign Direct Investment) flowing into and out of countries. Recently the BRIC nations are being increasingly sought after as the destination for FDI. In simple terms, costs for trading internationally have gone down meaning that makes international trade far more lucrative.
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Ability to trade within a Trading Bloc (Using the EU as an example)
Figure 1 - Trading Blocs around the world
What are Trading Blocs? A trading bloc is a group of countries that have no trading restrictions between them such as tariffs or quotas. Types of Trade Blocs • Free Trade Areas o Countries have no restriction within themselves but each country determines their own trade policies with the rest of the world. NAFTA (Canada, USA and Mexico) • Common Markets o Countries that have no trade restrictions within themselves and also have a common trade policy with the rest of the world. In addition to the free movement of goods and services, there is also free movement of people and capital i.e. a citizen of one country can work in another; businesses can freely invest in any other country within the trading bloc. Figure 2 - EU nations • Single Market o A common market is a first stage towards a single market, and may be limited initially to a free trade area with relatively free movement of capital and of services, but not so advanced in reduction of the rest of the trade barriers; a single market is where there are no barriers to trade, just like in a country where there are no barriers and there is a single policy throughout the country, a single market is a place where with regard to trade they are one country. Figure 3 - The EU Flag, the EU aims to be a single market
4 |Quazi Nafiul Islam - w w w . s t u d e n t t e c h . c o . c c Benefits • The EU is highly competitive and there is a competition commissioner that makes sure that all businesses trading in the EU had equal opportunities. o There is not price fixing and no barriers to trade. • Businesses do not have to spend extra on specialising a product for each region, they can sell a standard product; businesses benefit from economies of scale • No border controls mean that goods arrive faster to the consumer, benefitting the both the business and the consumer. • Businesses now have access to a larger market and can chose where to buy their inputs and where to sell their products, they can exploit economics efficiencies better; lower prices and a larger market result from this – Trade Creation. • Buyers are driven towards EU products as they will become cheaper than non-EU member goods; at the same time EU businesses are protected – Trade Diversion. • All prices are quoted in euros, it will be hard for businesses to raise prices above the competition; price transparency • A common currency results in there being no uncertainty of damage to trade due to appreciation or depreciation. In addition transaction costs are reduced as there is no for foreign exchange deals.
Technology • • • •
Shipping containers (containerisation)have made over-seas sale of products much cheaper o This used to be a labour intensive job, now cranes handle everything. Plane fares have dropped due to rising fuel efficiency o Air transport is much cheaper. Computerised data handling has led to a drop in administration costs E-commerce has made shopping accessible to people anywhere in the world. o Websites such as eBay and Amazon make products accessible to almost any place in the world
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Key Players in the World Economy
What will be the likely impact of the growing economic power of China and India on individuals, national and multinational firms in the 21st century?
Overview 1. China and the implications of its: a. Population b. Economic growth c. The influence of: i. Increased purchasing Power ii. Increased FDI (Foreign Direct Investment) d. Predicted economic power in comparison to the USA and EU e. Barriers to entering Chinese markets f. Trade opportunities 2. India and the implications of its: a. Population b. Economic growth c. The Influence of: i. Growing purchasing power ii. Foreign investment d. Predicted economic power in comparison to the USA and EU e. Barriers to entering the markets of these economies f. Trade opportunities
Figure 1 - Deng Xioaping was the Chinese leader that introduced capitalistic reforms in China
China Background Information • China is the fourth largest country by landmass and has a population of 1.3 Billion people. • China was originally a state-run economy, but after the death of Mao Zedong, his successor, Deng Xioaping introduced major economic reforms that changed it from a state-run economy to a more capitalist economy. • This saw the making of megacities like Shanghai, which were close to the sea. • However, the interior provinces of China still remain very Figure 2 - Click Image to know more about China poor, with little education.
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Economic Growth
Figure 3 - China's GDP growth in comparison to the rest of the world. China became the world's second largest economy shortly after 2009.
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China has been booming for the three decades. Economic growth has been constant around 10 for a very long time. These double digit growth rates make China a very lucrative business to settle in. However, high growth rates are normal for a developing economy, but to have double digit growth rates for such a prolonged period of time is truly remarkable. From this economic growth, the population of China has benefitted greatly, their incomes have risen and the past famines that had plagued china are now a thing of the past.
The Influence of Purchasing Power • Purchasing power is measured by the purchasing power parity: an exchange rate that allows the accurate comparisons of purchasing power. It is used because prices for specific products such as food vary considerably between countries and consequently the purchasing power of a sum of given money. • Much of rural China still remains poor, even though there has been dramatic change over the past few decades when China first adopted Capitalism. • Overall, the massive increase in total GDP has helped China. • Cities such as Shanghai and Guangzhou have very wealthy citizens, facilitating the growth in demand for luxury goods.
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The Influence in Increased Foreign Direct Investment
Figure 4 - As can clearly be seen in the Graph, FDI in China has sky-rocketed after 2004. Foreign Direct Investment has helped China reach those double digit figures as well as make its labour market more skilled due to technology transfer. More Information of Chinese FDI→
Foreign Direct Investment (FDI) is the inflow of foreign wealth into a nation. This can be in the form of capital such as manufacturing plants or other production facilities. It may be associated with outsourcing of production in countries with lower input costs or it may be directed towards production of foreign markets. •
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FDI has poured into China as soon as it had adopted Capitalistic reforms; business became more lucrative in China and the cheap unskilled labour that China provided was ideal for manufacturing plants. FDI led to Technology Transfer, when countries with limited access to technology acquire expertise when Multi-National Companies locate there. Gaining access to new technology was one of the key aims of the Chinese government when economic reforms were introduced; the reason why MNCs had to set up a joint venture with a Chinese company. This resulted in the availability of more skilled labour in the Chinese market due to Technology Transfer. The increase in skilled labour lead to great production efficiency in China. As a result of more technology and information coming into China, China began to develop more sophisticated products like electronics and photovoltaic cells (solar cells). Companies such as HUAWEI (Networking Electronics producer) and Suntech (Solar Cell producer) not have become MNCs as they operate in different countries.
4|Quazi Nafiul Islam – www.studenttech.co.cc Predicted Economic Power in comparison to the USA and EU
Figure 6 - The ten largest economies in the world in 2050, measured in GDP nominal (millions of USD), according to Goldman Sachs. Bigger Picture →
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The USA has a far higher GDP than China for the time being but China has a far higher growth rate. Predictions state that China will overturn the USA by 2040, and is currently the second largest economy. However right now as China becomes more developed, will growth rates reduce? Read more → China right now has the largest car market in the world. Read more → o Such fast-rising car sales will put a great pressure on its roads and other infrastructure in the future. China is already ‘economically colonising’ Africa to make sure it has the resources to sustain strong economic growth in the future. But opinions differ on this matter. None the less, China is making strong advances in order to secure African natural resources. This is a developing topic, but facts are that America has the largest economy by far, but China is still growing at a rapid pace. The shift in power due to the growing influence of China has made China a key market for most Multinational businesses. China is also investing heavily into education and research facilities due to the massive inflow of foreign currency. China is trying to make something similar to the Ivy league in America; C9 League→ Due to these high growth rates, Chinese are becoming richer and are demanding better foods such as meat and fish. China is making its business more competitive and transparent through the introduction of regulatory commissions as well as privatisation of SEOs (State Owned Enterprises); reducing corruption at the same time.
Figure 5 - China vs. USA. Bigger Picture→
5|Quazi Nafiul Islam – www.studenttech.co.cc Barriers to trading in China • China unlike India was not a colony of the British; it lacks able English speakers, making language a barrier to trade in China. China is ripe for investment so these English speaking Chinese managers are in short supply and are likely to be expensive. • Intellectual copyright laws are not properly enforced in China, so software makers and music companies will have a very difficult market to sell to. • Markets can suddenly fluctuate due to changes in government’s economic policies; the government of China has a massive influence on the market because a large portion of the businesses in China are SEOs. Investors have to understand a whole new set of the monetary, regulatory, and legal issues that are involved as the Chinese government has a lot of say in the economy. • China has no nationwide credit database, so it is difficult to assess consumers’ creditworthiness. • China is undergoing rapid social and economic change; a widening disparity between haves and have-nots could cause significant upheaval. • Multinationals often must compete against local players with lower cost operations and lower prices. • The diversity of the Chinese market is significant, requiring a variety of products to meet segmented needs. • Infrastructure is less developed than in US, making transportation a challenge: especially legal and banking infrastructure. • Conducting market research and identifying market sectors is extremely difficult due a language and cultural barriers; an advert may be culturally offensive to the Chinese. More→
Trading Opportunities • • • • • •
China is a fast growing market with both enormous landmass and population; there are plenty of customers in China. Growing car market means that it gives a larger market for car manufacturers to sell to. There is a lot of interest in foreign education, as many Chinese students are now opting for foreign degrees from countries such as Australia and the UK. As China is becoming richer there is growing demand for processed foods such as meat and fish. Wine is also becoming something that rich Chinese are wanting. Large increase in income has led to the demand of luxury goods.
Please note, that more comparisons will be made in the India section of these notes, to give you guys a comparative understanding of these two competing nations.
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India Background Information • India is also a very large nation; 7th largest by landmass and with a population of 1.2 Billion. • The Indian subcontinent was colonised by the British and India remained a colony for 200 years. As a result the economy was crippled although the British did establish an administration system and rail transport lines (which was to transport Indian natural resources). o However, this is now giving India an edge over China because it has more English speakers; its markets are more accessible. • India was later broken up into the Muslim half (Pakistan) and then the Hindu half (Present India). Pakistan then broke Figure 7 - Click to get more details in India up into Bangladesh and Pakistan. • Right now India has a much lower HDI than that of China. The higher the HDI the better. HDI is a composite index of life expectancy, education and standard of living.
Figure 8 - Human Development Index: Trends 1980 - present
Figure 10- Human Development Index: Trends 1980 - present
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Economic Growth • After India received independence it adopted socialist principles aiming to reduce the rift between rich and poor. It also believed greatly in the idea of self-sufficiency. o This caused few private industries to grow as there were many restrictions and formalities. • Domestic markets in the 1980s were guarded by trade barriers; the government hoped that this would give domestic businesses protection: markets were not open. This in turn attracted little FDI and thus no technology transfer. Growth was slow in the 1980s and the majority of Indians were very poor. • In the 1990s government control over businesses were removed. As a result export as a percentage of GDP increased, making India an open economy: an economy in which exports and imports form a significant part of the GDP. • India now has about 50% of the global market for outsourced IT and business services, made possible by its English speaking population and good education system. • India also has great human capital as there are many unemployed graduates in India with growing industries in pharmaceuticals, electronics, cars, aerospace and biotechnology. The Influence of increasing purchasing power Per Capita GDP,PPP,2007
Average annual growth of real per capita income, 1990-2007
China
US$2,753
4.5%
India
US$5,383
8.9%
Source: UN Human Development report,2009 •
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India has a strong and growing middle class meaning that the overall purchasing power of India is increasing. This means that it will be more lucrative for car manufacturers, luxury goods producers as well as electronics manufacturers to start selling here. Increased purchasing power has also resulted in more FDI into India. However most 40% of the Indian population live in the poorest states and 25% of the Indian population live under the US$1.25 poverty line.
8|Quazi Nafiul Islam – www.studenttech.co.cc The Influence of Foreign Direct Investment $160,000,000,000 $140,000,000,000 $120,000,000,000
US$
$100,000,000,000 $80,000,000,000 China
$60,000,000,000
India
$40,000,000,000 $20,000,000,000 $0
Year Figure 9 - Foreign Direct Investment into India and China over the past few decades. Source: World Bank
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Flow of FDI is still slow due to the government still partially believing in self-sufficiency; efforts are being made to increase this. FDI has increased purchasing power of Indians overall allowing them to purchase more sophisticated goods and services. Also, technology transfer has helped India’s IT sector grow making it a powerhouse for IT. Bangalore, the IT capital is making able IT engineers. As you can see, India and China took a big hit when it came to FDI (China’s hit was far more significant).
9|Quazi Nafiul Islam – www.studenttech.co.cc Predicted economic power in comparison to the US and EU Figure 6 on page 4 gives you a prediction on how the economies of India and China might become if they continue to grow at staggering rates.
10 | Q u a z i N a f i u l I s l a m – w w w . s t u d e n t t e c h . c o . c c Barriers to Trade • India still holding onto the ideals of selfsufficiency does have many trade barriers installed that make imported goods more expensive. o Foreign companies have to pay higher corporate tax. For normal companies, it is 35% while for foreign companies, it is 40%. • Culture and Language is a big problem in India: India has 23 languages with a myriad of different cultures. • There is still a lot of corruption that persists in India, and this means that setting up businesses and legal formalities take a long time. • Inconsistent Industrial Policy and Rules; Laws, regulations and rules are often and suddenly changed. • Labour Regulations and Protections: Under the Industrial Labour Law, in the case that any company employing more than 100 employees lays off staff, it must first acquire permission from the state government. As it is extremely difficult to obtain such permission from the state government, not only does this regulation directly affect flexible business plan changes, but it also makes business closure difficult. • Foreign companies are limited to the amount of loans they take. • China does not respect international intellectual property laws. • Goods in India are often smuggled from other countries making them cheaper. For a legal business to import and sell foreign goods there are a lot of fees to be paid, which makes them very expensive and does not give them a fair chance at competition. • Foreign investors are barred from investing into key sectors such as agriculture and infrastructure such as transport. • Lack of Infrastructure o Infrastructure in such areas as electric power, roads and telecommunications networks has not been developed and this is the principal barrier to the enlargement of overseas investment in India.
11 | Q u a z i N a f i u l I s l a m – w w w . s t u d e n t t e c h . c o . c c Trade Opportunities Trade still as of now is difficult to carry out in India, mainly because of the protectionist policies that India persists in maintaining, although new opportunities have been created with the incoming of economic reforms in the 1990s. •
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There is considerable human capital in India and with an English speaking population, it means that skilled labour can be recruited at very cheap wages are the cost of living in India is much lower than that of western nations. India is a very education-promoting nation, meaning that there are many opportunities for western Universities especially in UK, USA and Australia to make money from Indian students. International businesses are allowed to own pharmaceutical companies in India meaning that they can take advantage of the location to export to other nations as well as taking advantage of the human capital present in the country.
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HOW DOES A COMPANY DECIDE WHICH COUNTRIES TO TARGET? OVERVIEW •
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Assessment of country markets o Geographic proximity Elementary my o Government policies & dear businessman exchange rates o Level of economic development (Ranking by GDP or HDI) o Political and legal system o Natural resources o Commodity prices o Potential labour force o Level of Technology o Return on investment Comparative advantage and the role of specialised economies o Advantages for a company of trading with a country which can produce a good or service more cheaply through specialisation.
ASSESSMENT OF COUNTRY MARKETS G EOGRAPHIC PROXIMITY •
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Common logic would dictate that the further the nation, the higher the transport costs. However sometimes, it takes less to transport thousands of miles through cargo ships than hundreds of miles through trucking. But for normal manufacturing businesses, such as car manufacturers, it would be best to locate near their manufacturing plants, which would make transportation easier and faster. Service oriented businesses will not find this a great problem, as there is little to transport.
G OVERNMENT POLICIES AND EXCHANGE RATES •
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Taxes, Businesses will try to avoid paying high taxes, often maximising profits in low tax countries and minimising profits in high tax countries: They use tactics such as transfer pricing and asset movements to reduce the profits declared in countries with a higher rate of corporation tax and boost those in lower rate countries. HMRC are currently claiming that HSBC bank 'avoided' paying £2bn in tax by such methods last year. They may well maximise profits in low tax economies to offset business in high-tax economies as well. Low taxes attract FDI. Barriers to trade such as tariffs and quotas. Ease of setting up a business; often with developing nations there is excessive red tape.
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Exchange rates; rates unstable exchange would cause uncertainty. Undervalued exchange rates would make foreign goods more expensive; some business chose to locate the business in the target market will have to offset added production cost with sales. Grants and subsidies, this makes doing business cheaper for businesses. Often governments try to lure in businesses in poverty stricken areas in order to increase employment there.
160 140 120 100 80 60 40 20 0
2003 2004 2005 2006 2007 2008 2009
L EVEL OF ECONOMIC DEVELOPMENT (R ANKING BY GDP OR HDI) The HDI (Human Development Index) is a composite index made up of the per capita income, education and life expectancy of a country. The GDP (Gross Domestic Product) 𝐺𝐷𝑃 = 𝑝𝑟𝑖𝑣𝑎𝑡𝑒 𝑐𝑜𝑛𝑠𝑢𝑚𝑝𝑡𝑖𝑜𝑛 + 𝑔𝑟𝑜𝑠𝑠 𝑖𝑛𝑣𝑒𝑠𝑡𝑚𝑒𝑛𝑡 + 𝑔𝑜𝑣𝑒𝑟𝑛𝑚𝑒𝑛𝑡 𝑠𝑝𝑒𝑛𝑑𝑖𝑛𝑔 + (𝑒𝑥𝑝𝑜𝑟𝑡𝑠 − 𝑖𝑚𝑝𝑜𝑟𝑡𝑠)
Consumption is expenditure on goods and services by the consumer.
High
Medium
Low
Figure 1 - A map of HDI across the world. 0.9 – 1.0 : Very High Development 0.8 – 0.9 : High Development 0.5 – 0.8 : Medium Development 0.3 – 0.5 : Low Development
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Targeting areas of high HDI and GDP per capita will be good for most businesses as people there are healthy, educated and rich. This means the market should be able to cater for most businesses, but labour costs should be very expensive. Strong Infrastructure should allow for businesses better communication as well as transportation of goods and services, allowing them to reach a larger number of consumers. Businesses will need to seek out economies that meet their needs and at the same time provide the best competitive advantage due to its economic efficiencies.
P OLITICAL AND LEGAL SYSTEM •
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Businesses will want stability in the economy, so that business can go on as usual and long term predictions on growth can be made. However often businesses have to take risks in order to make profits in volatile nations where there is much political instability and rampant corruption. o Often businesses will ingratiate themselves with corrupt political leaders in order to gain greater safety. The legal systems in foreign nations are not always dependable. o Counterfeit software is a major concern in China. o If the legal system does not protect the business’ assets, then there will be a lot of risk involved in doing business in the country.
N ATURAL RESOURCES AND COMMODITY PRICES •
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Natural resources are a big factor for location for mining and oil/gas companies. Chinese mining companies have invested heavily into Zimbabwe as it has many metal resources that China can avail of such as coal, chromium ore, asbestos, gold, nickel, copper, iron ore, vanadium, lithium, tin, platinum group metals. High commodity prices for natural resources such as coal, oil and metals may give companies enough incentive to start doing business in volatile regions. Chinese companies have a lot of mining operations in Zimbabwe (which has a lot of political instability) because of the abundant mineral reserves and very cheap labour available there. Click here to view commodity prices→ Commodity prices will affect a decision in a similar way to the level of other factor costs. Lower commodity prices make location there more attractive. However, by the widely traded nature of commodities, it is unlikely to be a major factor in location as they can simply be imported. Much depends on the importance of commodities as a raw material for the business in question.
P OTENTIAL LABOUR FORCE AND LEVEL OF TECHNOLOGY • •
Different businesses will need different levels of skill. Businesses may often have to trade off additional training costs with low wages in certain countries, and low wages should provide a greater return on investment. If a business wants to locate its R&D sector in a country, then it will have to have met its technology and human capital requirements. Infrastructure and good telecommunication should also be a key factor when deciding where to locate the R&D sector.
R ETURN ON INVESTMENT •
Businesses will make forecasts based on transportation, set-up and wage costs how much profit they are going to make. The profitability, which depends on all the aforementioned factors it also depends on what the business expects in the long term. o Many foreign businesses in China made a lot of losses to being with, but stayed for the long run as they believed that having a foot-hold in china would be a great advantage to them. o Low wages should lead to high return on investment in the long run, even if at the beginning investment needs to be made on training and other equipment, low wages can be a trade-off in the long run.
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COMPARATIVE ADVANTAGE AND THE ROLE OF SPECIALISATION IN ECONOMIES When businesses are tasked with producing something, they divide the workload into different parts, handled by different workgroups: the division of labour. As these groups work on their specific tasks more and more, they become better at what they do and thus increasing efficiency. This is called specialisation.
Advantage
Absolute
Comparative
Competitive
A BSOLUTE ADVANTAGE Absolute advantage is the ability of a country, individual, company or region to produce a good or service at a lower cost per unit than the cost at which any other entity produces that good or service. INVESTOPEDIA
C OMPARATIVE ADVANTAGE Comparative advantage is a situation in which a country, individual, company or region can produce a good at a lower opportunity cost than a competitor. INVESTOPEDIA Comparative advantage is an economic law that demonstrates the ways in which protectionism (mercantilism, at the time it was written) is unnecessary in free trade. Popularized by David Ricardo, comparative advantage argues that free trade works even if one partner in a deal holds absolute advantage in all areas of production - that is, one partner makes products cheaper, better and faster than its trading partner. The primary fear for nations entering free trade is that they will be out-produced by a country with an absolute advantage in several areas, which would lead to imports, but no exports. Comparative advantage stipulates that countries should specialize in a certain class of products for export, but import the rest - even if the country holds an absolute advantage in all products. (To learn more, read What Is International Trade?)
5|Q u az i N a f i u l I sl a m – w w w . s t u d e n t t e c h .c o . c c The essence of this law can be illustrated with a simple example. Imagine that you are a skilled cabinetmaker as well as a gifted painter. It takes you a day to build a cabinet or a day to paint a picture. In the local economy, paintings sell for $400 and cabinets go for $350. Your neighbour also shares the same skill sets, but it takes him a day and a half to build a cabinet and three days to complete a painting. You have an absolute advantage over your neighbour in both areas, so you should try to out-produce him across the board, right? Wrong. Here's why: If you flip between painting and cabinetmaking over a six-day work week, you would produce three paintings and three cabinets worth $2,250. If your neighbour embarked upon the same work schedule, he would produce one painting and two cabinets worth $1,100. There would be a total of four paintings and five cabinets produced: a total of nine production units. If, however, you were to choose to focus on painting, the area where you have the greatest comparative advantage and the most profit, and leave cabinetmaking to your neighbour, something magical would happen. You would produce six paintings worth $2,400 per week, while your neighbour would produce four cabinets worth $1,400, bringing the total to 10 production units. In real terms, both you and your neighbour would be richer for specializing - and the local economy is one production unit the better for it. This example rings true on the level of international trade as well. Britain provided support for comparative advantage by essentially outsourcing its food growth (importing grains, meat, cheese, wine, etc.) and focusing on manufacturing goods for export, thus, becoming the workshop of the world during the industrial revolution. This passage has been copied from Investopedia
C OMPETITIVE ADVANTAGE A competitive advantage is a particular advantage that a business has that enables it to perform better than its rivals. Competitive Advantage is to do with sales and specifically how a product or service sells in relation to the competition. So, it might be because it is cheaper, have a more popular brand name, be advertised heavily, be of better quality etc. Absolute advantage is more to do with production; it involves using fewer resources to make the product than a competing business or nation. This does not necessarily mean that a competitive advantage will follow as a result of having absolute advantage. It might do, if the business with an absolute advantage can charge a lower price, but a lower price is only one sort of competitive advantage and can be outweighed by other considerations such as brand name, customer service etc.
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OTHER CONSIDERATIONS BEFORE TRADING INTERNATIONALLY OVERVIEW 1. RESPONSIBILITY TO STAKEHOLDERS a. b. c. d. e. f.
Ethical decisions as to what and where to manufacture Balance between capital and labour Where to sell Pay and work conditions Environmental factors such as waste and disposal Potential conflicts of socially responsible and ethical behaviour with profit-based and other objectives.
2. SOCIAL AND CULTURAL DIFFERENCES IN DOING BUSINESS a. b. c. d.
Different promotional message for different countries International branding Distribution channels and Joint Ventures Pricing strategy for different countries
3. THE PURPOSE OF TARIFFS, LAWS AND IMPORT QUOTAS a.
b. c.
Why tariffs, laws or import quotas are used i. Protect domestic industries ii. Balance of trade Other Trade barriers Constraints on that these barriers provide
RESPONSIBILITY TO STAKEHOLDERS Corporate Social Responsibility (CSR) is continuing commitment by businesses to behave ethically and contribute to economic development while improving the quality of life for the work force and their families as well as of the local community and society at large. THE WORLD BUSINESS COUNCIL FOR SUSTAINABLE DEVELOPMENT
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W HAT AND WHERE TO MANUFACTURE •
Businesses (especially mining) may have to take up large areas of land in order to operate which may often be farm-land. Establishing business operations here will damage the livelihoods of the local inhabitants as well as have negative environmental effects. Often businesses will compensate by spending money on local environmental projects; jobs to local community are also offered. o Places that are very environmentally sensitive are best left untempered as small change could have a large impact on the ecosystem.
Figure 1 - Locating in this sensitive ecosystem could have disastrous implications for the environment.
B ALANCE BETWEEN CAPITAL AND LABOUR •
Businesses might seek to reduce production cost by making their production capital intensive. However, this will mean that fewer jobs will be available. In poorer countries, cheap labour is heavily exploited.
W HERE TO SELL •
•
Figure 2 - Coca-Cola production is highly capital intensive.
Often businesses will take advantage of the lack of education that people have in certain regions. For example, the sale of cigarettes has declined heavily in western markets, so now they are exploring markets in Asia (Philippines) where the literacy rate is low. Businesses that deal in arms, will exploit civil unrest to sell their weapons. This may in turn cause much bloodshed.
P AY AND WORKING CONDITIONS •
Giving workers better working conditions will definitely increase business costs. Businesses often outsource production in order to from lower wage costs. Figure 3 - Smoking KILLS!
Figure 4 - Brick makers in India are offered the worst working conditions. Children also are forced to work when they are able so that the family can at least earn something to feed itself. The dust that these children inhale could cause asthma in many and other go on to have worse diseases.
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25 1991 1992 20
1993 1994 1995 1996
15
1997 1998 1999
10
2000 2001 2002
5
2003 2004 2005
0 United Kingdom
United States
China
India
Bangladesh
Russian Federation
Germany
European Union
2006 2007
E NVIRONMENTAL FACTORS SUCH AS WASTE AND DISPOSAL • •
• •
Often there are laws in countries (such as Germany and other developed countries) that limit the amount of pollution that a business can emit. Fines have to be paid for crossing the limit. Often businesses relocate to a developing country where their laws on pollution are not as stringent, all in an effort to reduce cost, but the total damage to the environment remains constant. Developed countries emit the highest pollution per capita. Often businesses are adopting more responsibility for their actions, many chocolate producers are now opting for fair-trade. This means that the cocoa farmers will get a fair price for their produce.
C ORPORATE S OCIAL RESPONSIBILITY AND ETHICAL BEHAVIOUR Ethical Decision making means making decisions based on moral principles. The objective is to do the right thing, which means taking into consideration of everyone affected by the decision. The difference between CSR and Ethical decisions is that ethical decisions are morally intended to benefit the stakeholders. CSR although pays some attention to taking responsibility for its actions, ethical decision making goes further, often setting their own standards for environmental friendly-ness etc. Ethical decisions are done to with intentions to genuinely benefit the community, however CSR is often done because of laws and regulations and also because it is really good for Public Relations.
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SOCIAL AND CULTURAL DIFFERENCES IN DOING BUSINESS Culture refers to the attitudes, values, customs and expectations that define groups of people. INTERNATIONAL BUSINESS FOR A2 Culture is the customary beliefs, social forms, and material traits of a racial, religious, or social group MERRIAM-WEBSTER’S DICTIONARY
D IFFERENT PROMOTIONAL MESSAGES IN DIFFERENT COUNTRIES •
• •
Due to the differences in culture, there may be many manners as well as customs that businesses have to understand and appreciate in order to do business in a particular country. Often, businesses have had to resort to changing brand names or even slightly altering the machine itself in order to appease customer tastes. Adverts often have to carefully worded in order to make sure that people are not offended by it. Advertising may be handled by local firms so that all potentially disastrous.
Figure 5 - Promotional poster for the ICC 2011 Cricket world cup from PEPSI
I NTERNATIONAL BRANDING •
•
Brands with international appeal can be marketed in a range of different countries. For example, Pepsi or Coca-Cola can market their products with few changes to their product’s composition. So production (which is a big part) is made a lot easier. Making this product marketable to a wide range of countries with limited modifications. Brand loyalty felt by many could be exploited and would become a trusted product to the business traveller. For example, to a travelling businessman who has no time to find local cuisine can simply go to the nearest McDonald’s and get a meal.
D ISTRIBUTION CHANNELS AND JOINT - VENTURES •
Often businesses have to work in co-operation with partners in foreign countries, forming a joint-venture. This means, that profits will be shared as well as the tasks of operating the business. The exact deal will differ from company to company.
P RICING STRATEGIES •
Often products with a brand image have to reduce the quality of their products in order to sell them. People in developing countries often have to sacrifice something else for branded product. In these cases, marketing using high prices to prove the product’s superiority is not a good idea as the average Asian consumer is not as rich as the average European or American consumer.
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THE PURPOSE OF TARRIFS, LAWS AND IMPORT QUOTAS A Tariff is a taxation imposed on goods and services imported into a country; also known as a duty tax. INVESTOPEDIA A Quota is a limit put on the amount of a specific good that can be imported. INVESTOPEDIA
Trade Barriers
Tariffs
Quotas
Subsidies
Exchange Rates
Safety standards
W HY T ARIFFS AND QUOTAS ARE USED •
•
•
•
PROTECT DOMESTIC INDUSTRIES: As foreign goods are more expensive, it will give the domestic products cheaper and thus more people will opt to buy domestic products. RAISE TAX REVENUE: Some goods such as food are price inelastic, increasing duties will give the government significant rise in revenues. PREVENT DUMPING: When a country sells a product at a much cheaper price that in domestic markets, in an effort to kill domestic competition. So, that when only the foreign company remains, it can charge whatever it wishes to charge. PROTECT INFANT INDUSTRIES: This is a temporary measure where the government allows fledgling industries in their countries to strengthen their bases, so that when they are strong, the tariff will be lifted.
However, tariffs have negative consequences as the countries that these tariffs are implemented on may retaliate which means the country’s exporters will suffer. However in financial crises, it may be the only way to protect a failing industry. Either way, these protectionist policies have a very high price: relations with other countries can be seriously jeopardised. Quotas can also help the exporter when the demand for the good is inelastic, as there is lower supply but still the same demand, this the price of the good will increase. Thus, the exporting business could make more profits from fewer units sold.
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O THER BARRIERS • • •
The government could provide businesses subsidies, so that they are able to sell their goods at cheaper prices, to cut costs or to simply ensure their survival through a recession. Undervalued exchange rates provide exporting businesses a competitive advantage when they are exporting their goods as it makes their goods cheaper. China has been accused of this many times by the United States. Safety standards can often be used to prevent certain goods from competing. Nowadays, this is mostly imposed on the food industry.
C ONSEQUENCES • • • •
Implementing tariffs and quotas make goods more expensive and thus reduce consumer purchasing power. Often price hikes can cause civil unrest and demonstration leading to a lot of negative coverage from the media. Retaliation by foreign nations could damage the country’s exporting industry and hence reduce GDP. However, is a company is dependent on a particular nation; it might force the company to set up operations in the country.
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GLOBALISATION OVERVIEW 1. GLOBAL INDUSTRIES a. b. c.
Global strategy versus global localisation The impact of takeovers and mergers on a company i. Ability to balance resource investments in countries Sourcing
2. GLOBAL MARKETING a. b. c. d.
Ethnocentric Model – The domestic approach Polycentric Model – The international approach Geocentric Model – The mixed approach Sales Incentives
3. GLOBAL MARKET NICHES Globalisation is the process through which an increasingly free flow of ideas, people, goods, services and capital leads to the integration of economies and societies INTERNATIONAL MONETARY FUND
GLOBAL STRATEGY VS GLOBAL LOCALISATION • •
Global strategy is having a common strategy for all countries; for this to succeed, the countries have to have similar expectations. Global localisation is adapting to the local expectations in order to succeed in doing business there.
THE IMPACT OF TAKEOVERS AND MERGERS ON A COMPANY Takeovers and mergers are both examples of inorganic growth. Inorganic growth happens when a business expands by combining with or taking over another business. Organic growth is when a business expands by increasing its own outlets or increasing production; essentially increasing output. Merger means combining with another company on a collaborative basis INTERNATIONAL BUSINESS FOR A2 Takeover or acquisition means to essentially ‘buy’ another company. It can be a friendly takeover where the business (the managers of the business) that is being taken over agrees to the bid and this transition is smooth. A hostile takeover is one where the business that is being taken over does not agree to the bid. THE PERSON WHO WROTE THE NOTES
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ADVANTAGES OF TAKEOVERS AND MERGERS • •
• •
•
•
•
•
•
•
• •
For the sake of growth, which means there will be greater prospects for profit. Often for fame, as taking over another business might mean that the business becomes the largest for that particular type of goods. For example when Procter and Gamble took over Gillette in 2005, it became the largest household goods maker Access to brand portfolio that the business has; buying a brand means that you are gaining customers that are loyal to it. Taking over a business means that you are gaining access to market segments that you did not have before. Gaining more market segments mean that you essentially have access to a larger part of the market, making the business more influential. Access to greater markets as well as access to the research and technology the business has; the business can now hope to make better products with the information that it has now. Cost savings can be very high, as when two businesses combine they can reduce administration costs significantly; they do not need two head-quarters, and the entire re-structuring process can increase efficiency as well as save costs Greater efficiency is reached as one business can adopt the good policies of another and combine to become a greater and stronger force because it has now combined its talent pool as well as its structure. Combining gives businesses a big performance boost. Access to new markets is also important as a foot-hold in emerging markets can be a good investment for the business in the future. Growing markets will mean that the business can exploit growing demand and make greater profits due to increasing sales. Often when market saturation is reached in a particular industry, the only way to expand is to take over a competing business or merge. T-Mobile and orange merged to form a bigger company as well as to grow – the UK phone market has reached maturity. Businesses can chose to take over businesses in the same market or different markets; taking over businesses in different markets makes it a conglomerate, meaning that it Figure 1 - Unlike businesses, humans has increased stability if one industry falls, it can rely on the other to full a fall in sales or cannot grow inorganically. a fall in demand for services. Taking over businesses internationally can also mean that if one country faces a recession, it can rely on the other to buffer the losses. In simple terms, the business becomes more stable. To gain access to new technology, that might be a potentially allow the business to offer more innovative products. Especially with mergers, businesses often combine simply to stay in the game. When British Airways combined with Iberia of Spain, it was simply to compete effectively with Air France KLM and Lufthansa.
DISADVANTAGES OF TAKEOVERS AND MERGERS • • •
Statistics tell a different story, less than 50% of the companies get what they expect from the merger or takeover. The two businesses might not be able to function properly due to a clash of corporate culture and management styles. Businesses that become conglomerate through expansions tend to move away from their core business and become weaker there.
SOURCING • •
Figure 2 - BA and Iberia are merging to stay competitive in business.
Takeovers and mergers facilitate sourcing in the sense that it means that the business can gain access to more countries and thus can exploit the economic efficiencies of that region. Outsourcing and the pouring in of FDI into developing nations such as China and India has improved the standard of living in these countries significantly.
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PRODUCT MARKETS ETHNOCENTRIC MODEL – THE DOMESTIC APPROACH •
•
•
In this model, foreign markets are seen to be almost identical or similar to that of domestic markets, and hence the marketing and promotion of the product is done in the same way as done in domestic markets. There is no adaptation of the product. o However, in order for this to succeed the two markets have to have similar The benefit lies in the economies of scale that it provides. No extra research of investment has to be made when marketing the product in a new market. This standardisation reduces average costs significantly. o However, the businesses risks losing sales because the marketing mix is not oriented to the individual market. Often businesses have to adopt an ethnocentric model especially when they are in a business with rapidly changing technology; these products entail high development costs, so specialising these products would make it very expensive.
Figure 3 - Companies like Sony and Nintendo have high development costs when making products, so they have to make a product that can roughly fit most countries that they are concerned of selling to.
POLYCENTRIC MODEL – THE INTERNATIONAL APPROACH •
•
Essentially, firms focus on adapting to the local market, providing tailored products to the market: believing that the market is distinct from that of domestic markets and thus requires tailored products. o As a result, there is likely to be an increase in sales. However, the average costs of the product should increase as there is more expenditure on market research and new product development.
GEOCENTRIC MODEL – THE MIXED APPROACH •
•
The fusion of poly and ethnocentric models, essentially managing what needs to be managed globally in one way and managing what needs to be managed locally in another way. In this way, the domestic approach of the business is retained to the extent possible and sales orientation to products that are different. o This essentially, takes advantage of all the possible economies of scale. o At the same time, this is something that will be difficult to actually achieve and requires market research. This is associated with the Glocalisation and “Think global, act global” – the combination of the two extremes of approaches.
Figure 4 - Cows are sacred in India, so McDonalds came up with the Maharaja Mac, which has chicken instead of beef. However, McDonalds manages is brand name globally, taking the best of both poly and ethnocentric policy.
SALES INCENTIVES • Orientation of products is done simply for one purpose, to increase the prospect of sales and to become more recognised in the country that the business has newly set up in. • Price strategies that have worked in western economies are likely to be unsuccessful in eastern economies as the level of economic development is low. o Often special pricing strategies and deals have to be tailored in order to provide customers with enough incentive to buy the product.
←Figure 5 - The Nokia 1100 has a torchlight so that when there is loadshedding in places such as India, it will come in handy.
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•
Adaptation to culture is also very important, as consumers in countries such as India may want a different environment from which they buy their products to that of the west. o Adapting to culture reduces the barrier that the person is actually buying something foreign, and allows greater integration into the country. Specialising products, such as adding torchlight to a telephone (because of power-outages in certain countries) can increase sales.
GLOBAL MARKET NICHES Global niche markets are similar to domestic niche markets in the sense that they target a very specific range of people, often called subcultures. Subcultures are groups of people that share a common interest such as hobbies of values. Global niche markets include things such as luxury products, high performance vehicles, and luxury cars with elegant design (Rolce Royce, BMW, and Mercedes Benz) as well as environmentally friendly products such as electric cars etc… With the advent of technologies such as the internet and smart-phones these subcultures are able to communicate internationally and this increase enthusiasm for these global market niches. Figure 6 - Mercedes Benz exploits a niche market of luxury cars world-wide. Global niches are born because these subcultures have special needs and have a sense of brand loyalty to the company producing the product. This adds stability to sales as brand loyalty to these products will mean that they will be more tolerant of faults as they have few alternatives.
These businesses have to work hard in order to distinguish themselves from mainstream products and this involves: • • • • • • •
Clear understanding of the needs and wants of their chosen market segment Excellent customer service Expertise in their field Prioritising profit rather than market share, as niche markets are a small part of the entire market Innovation to satisfy changes in markets Cost efficiency that is not at the expense of quality Appropriate and effective use of marketing mix
International businesses may often start to target a market niche to begin with as they cannot hope to compete with the mainstream competitors with are mainly concerned with quantity and cheap price. Often these businesses distinguish themselves as sellers of an exotic good, which distinguishes its customers from the average person.
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MULTINATIONAL CORPORATIONS OVERVIEW 1. BENEFITS THAT MNCS BRING TO HOST NATIONS a. b.
Improvement in the standard of living Employment and economic growth in overseas countries
2. POTENTIAL NEGATIVE IMPACT a. b.
c. d. e.
Influence on foreign governments to gain concession Exploitation of labour in developing countries i. Implementation of working practices which would be unacceptable in their home country ii. Sale of unsafe products to consumers Use of unsustainable resources and the degradation of the local environment Cultural Imperialism Footloose Capitalism
3. CONTROLLING MNCS a. b. c. d. e. f.
Pressure groups and public opinion Internet Self-Regulation Political Constraints Legal or constraints Competition policy
WHAT IS A MULTINATIONAL CORPORATION (MNC)? A Multinational Corporation (MNC) is a company that operates or has assets in more than one country.
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BENEFITS THAT MULTINATIONAL CORPORATIONS BRING TO THE HOST NATON EMPLOYMENT • • •
MNCs bring in FDI and invest into the country; it will need to employ people which will create employment. Some jobs may require additional training which will aid in transferring technology and methods to the host country. MNCs will have a demand for many services such as meals, transport, raw materials, maintenance services that will be provided by domestic businesses, indirectly increasing employment.
WAGES • • •
Wages should increase as MNCs will want the best people that the country has to offer. Wages may be lower on international standards but should be higher than the local standard, as logically the business will pay its workers more in order to motivate them. Often MNCs are criticised for their wage policies but recent research and statistics prove this wrong.
SKILL AND TECHNOLOGY TRANSFER • • •
Transfer of technology through training and skill will make domestic businesses more competitive. Efficiency will rise as new technologies can be availed of. Production of more sophisticated goods and services will make the economy stronger due to transfer of technology.
EXPORTS AND TAXES •
• •
Exports will rise as businesses are producing goods and selling them for foreign currency. o This will raise GDP The government will get tax revenue from both exports as well as production. More employment means that the government will get more income tax as well as having to spend less of unemployment benefits.
CORPORATE SOCIAL RESPONSIBILITY AND THE STANDANRD OF LIVING • •
MNCs that offer higher wages will force domestic businesses to increase wages, raising the standard of living. MNCs often help local communities greatly by providing them compensation for things such as taking up farming land.
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POTENTIAL NEGATIVE IMPACTS INFLUENCE ON GOVERNMENT TO GAIN CONCESSIONS – CORRUPTION • • •
Multinational companies are often accused of giving bribes to government officials to gain advantage of tax breaks and other forms of financial assistance; they are essentially being subsidised. Governments can often turn a blind eye to these MNCs’ actions that may exploit the environment of use child labour. Either way, these advantages mean that the MNCs will grow in prominence and make more profits as they are getting very cheap production costs. This in turn will diminish competition as they cannot hope to compete. o Increasing unemployment and making the MNC too influential.
EXPLOITATION OF LABOUR IN DEVELOPING COUNTRIES AND UNACCEPTABLE WORKING CONDITIONS •
• •
BAT (British American Tobacco) are accused of using child labour in production; these children are exposed to large quantities of nicotine and can be subject to nicotine poisoning. o This means that the child is also working in harmful working conditions. MNCs such as Nike are accused of paying Chinese workers very little wages in order to make large profits – often referred to as ‘sweatshops’. The Bhopal explosion in India proved how unsafe MNCs can be, and how little respect they have for human life.
SALE OF UNSAFE PRODUCTS •
Toyota in the year 2010 had to do a massive re-call of the Prius Model hybrid cars sold in America because the brakes did not work properly, although this was an unintentional mistake by the company, it had caused injuries and caused massive outcry over the scrutiny of safety tests.
USE OF UNSUSTAINABLE RESOURCES – DAMAGE TO THE ENVIRONMENT •
•
• •
Oil companies deforested large areas in order to meet the growing demand of bio-fuels. In doing so large areas of forests were destroyed. The Orang-Utan was pushed to the brink of extinction in Indonesia as large areas were deforested. o Multinational Corporations have a huge appetite for natural resources and high levels of competition push these companies to make money through unsustainable means. MNCs produce and pollute on a very large scale. Often mining companies end up setting up in very delicate ecosystems, which lead to the destruction of natural environments. Capital intensive production methods have led to an influx of CO2 in the atmosphere, which has devastated the world with radical changes in climate. BP caused substantial damage to American coast due to its oil spill.
Figure 1 - This is what happened to wildlife after the BP oil spill.
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CULTURAL IMPERIALISM •
•
When MNCs come into a host nation, they bring their domestic culture with them. Often this culture is promoted to a great extent and is artificially injected into society. This results in the degradation of the host nation’s culture. Often the younger generation opt for the seemingly more “modern culture” that is often seen to be western. The adoption of a new culture and forgetting the true heritage of a nation often leads to the loss of identity for the nation.
FOOTLOOSE CAPITALISM • MNCs have the power to jump from producing in one country to another, creating and destroying jobs and prosperity in their wake. MNCs can shift production from more developed nations where it is more expensive to produce to nations with cheaper labour. This will leave a large number of jobless people and therefore the govt. has to spend more on unemployment benefits. o Their first priority is profits. o This can put a road block to government plans they rely on the MNC to provide a large part of its GDP. Exports from Dell made up 5% of Ireland’s GDP, and when they left Ireland for Poland, it had a big negative influence.
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CONTROLLING MULTINATIONAL CORPORATIONS PRESSURE GROUPS AND PUBLIC OPPINION
The combination of pressure groups and media coverage influence public opinion. This has often led to dramatic change in consumer purchases. Bad media coverage has led Nike and GAP to change its suppliers which were convicted of running ‘sweat-shops’. Greenpeace fought hard for the sinking of the Brent Spar oil storage platform owned by Shell; with favourable media coverage, they were able to get what they wanted. Public opinion also aided them as people stopped getting their cars repaired from Shell garages.
INTERNET The internet has now become one of the main places for all sorts of advocacy. Sites such as Chevwrong (Chevron + Wrong) and Tescopoly (Tesco + Monopoly) highlight what these companies. Nestle bowed down to pressure from these groups and stopped using palm oil in making Kit-Kats. This was in response to this YouTube Video. Nestle stopped buying palm oil from Indonesian producers that deforested to make new palm-oil farms.
SELF REGULATION Businesses have now become far more conscious of how PR (Public Relations) especially with respect to the environment affects their image. Businesses are now strengthening their CSR policies and some joining umbrella groups such as ETI (Ethical Trading Initiative) and EITI (Extractive Industries Transparency Initiative) – both of these organisations aims to work towards giving workers better living conditions, making the business more transparent and increasing the priority of protecting the environment. More and more companies are using the FAIR TRADE logo on their products to prove that they actually care about farmers.
LEGAL CONSTRAINTS The legal way of taking a business to court for their alleged wrongdoings can be lengthy and very costly. But there are instances where businesses have been taken to court and made to pay for their wrongdoings. Daimler (the owner of Mercedes Benz) was fined for paying bribes to over 22 countries. The consequences of being proven guilty in court can be very deadly; the Competition Commission in the UK and EU has the power to fine 10% of the company’s turnover. However Multinational Corporations, as they fall under no direct legal system are often very hard to control through law.
GOVERNMENT CONTROL Stronger governments will be able to enforce their restrictions on businesses more effectively. China and India can insist on joint venture and strict labour laws as well as tight expansion on foreign businesses since they’re both such large markets.
