Business structure

Local, national and international businesses

• Local businesses operate in a small and well-defined
part of the country. They do not have expansion as an
objective and make no attempt to expand to obtain
customers across the whole country.
• National businesses have branches or operations across
most of the country. They make no attempt to establish
operations in other countries. Good examples include
large car-retailing firms, retail shops with many branches
selling goods in just one country, and national banking
firms.
• International businesses operate in more than one
country. These are often called multinational businesses.
 Nature and scope of international
trading links
• By trading together, countries can build up
improved political and social links and this can
help to resolve differences between them.
• All countries, to a greater or lesser degree,
engage in international trade with other
countries. This is true no matter which
economic system is in place.
 The potential risks from international trade
• There may be loss of output and jobs from those domestic firms that
cannot compete effectively with imported goods.
• There may be a decline, due to imports, in domestic industries that
produce very important strategic goods, for example coal or foodstuff
• The switch from making goods that cannot compete with imports to
those in which the country has a comparative advantage - job losses
and factory closures.
• Newly established businesses may find it impossible to survive against
competition from existing importers. This will prevent ‘infant
industries’ from growing domestically.
• Some importers may ‘dump’ goods at below cost price in order to
eliminate competition from domestic firms.
• If the value of imports exceeds the value of exports (products sold
abroad) for several years, then this could lead to a loss of foreign
exchange.
 Benefits of free trade between nations?
• By buying products from other nations (importing), consumers are
offered a much wider choice of goods and services
• The same principle applies to raw materials
• Imports of raw materials can allow a developing economy to
increase its rate of industrialisation.
• Importing products creates additional competition for domestic
industries - keep costs and prices down, well designed, high quality
• Countries can begin to specialise in those products they are best at
making if they import those that they are less efficient at as
compared to other countries. This is called comparative advantage.
• Specialisation can lead to economies of scale and further cost and
price benefits.
• By trading in this way, the living standards of all consumers of all
countries increases.
• Free trade: no restrictions or trade barriers exist that
might prevent or limit trade between countries.
• Tariffs: taxes imposed on imported goods to make
them more expensive than they would otherwise
be.
• Quotas: limits on the physical quantity or value of
certain goods that may be imported.
• Voluntary export limits: an exporting country agrees
to limit the quantity of certain goods sold to one
country
• Protectionism: using barriers to free trade to protect
a country’s own domestic industries.
• The World Trade Organization (WTO): This is
made up of countries committed to the
principle of freeing world trade from
restrictions.
• Free-trade blocs: These are groups of
countries, often geographically grouped, that
have arranged to trade with each other
without restrictions
 Multinational business
Multinational business: business organisation
that has its headquarters in one country, but
with operating branches, factories and
assembly plants in other countries.
 Why become a multinational?
1 Closer to main markets – this will have a number of
advantages, such as: Lower transport costs for the finished
goods, Better market information about consumer tastes, It
may be viewed as a local company and gain customer loyalty as
a consequence.
2 Lower costs of production – apart from lower transport costs
of the completed items, there are likely to be other cost
savings, such as: Lower labour rates, Cheaper rent and site
costs, Government grants and tax incentives designed
3 Avoid import restrictions – by producing in the local country
there will be no import duties to pay and no other import
restrictions.
4 Access to local natural resources – these might not be
available in the company’s main operating country; see
 Potential problems for multinationals
• Setting up operating plants in foreign countries is not
without risks.
• Communication links with headquarters may be poor.
• Language, legal and culture differences with local workers
and government officials could lead to
misunderstandings.
• Coordination with other plants in the multinational group
will need to be carefully monitored to ensure that
products that might compete.
• Finally, it is likely that the skill levels of the local
employees will be low and this could require substantial
investment in training programmes.
 Potential benefits to host countries
• The investment will bring in foreign currency and, if output
from the plant is exported, further foreign exchange earned.
• Employment opportunities and training programmes will
improve the quality and efficiency of local people.
• Local firms are likely to benefit from supplying services and
components will generate additional jobs and incomes.
• Local firms forced to bring their quality and productivity up
to international standards to compete with or to supply.
• Tax revenues to the government will be boosted from profits
• Management expertise in the community will slowly
improve.
• The total output of the economy will be increased and this
will raise gross domestic product.
 Drawbacks to host countries
• Exploitation of the local workforce might take place. Due to
the absence of strict labour and health and safety rules
• Pollution from plants might be at higher levels than allowed
• Local competing firms may be squeezed out of business.
• Some large Western-based businesses, such as McDonald’s
and Coca-Cola, imposing Western culture on other societies
by the power of advertising and promotion.
• Profits may be sent back to the country
• Extensive depletion of the limited natural resources
• Little incentive to conserve these resources, relocate quickly
to other countries once resources have run out.
 Multinational to produce in Malaysia
The European Tyre Group (ETG) has announced its plan to open a
huge new factory on the outskirts of Kuala Lumpur. The government
is delighted that this new investment will bring hundreds of jobs to
the area. Other responses to the news were less encouraging. One
trade union leader said: ‘If the workers are paid the same low wages
as those paid to foreign workers in other ETG factories, then our
members will be in poverty.’ A local resident said: ‘In other countries,
their factories have got a bad record for pollution – I am worried
about the health of my children.’ A spokesman for the Malaysian Tyre
Group said: ‘This multinational could lead to the closure of our own
factory – we just do not have the same cost advantages.’ ETG, a
British-based company, today announced record profits from its
operations in 12 countries and the dividends paid to shareholders will
increase by 50% this year. Despite this, the company announced it
would go ahead with the closure of its loss-making Mexican factory.
• Explain why ETG could be described as a
multinational business. [3]
• Outline three possible disadvantages to Malaysia
that might result from the operation of the new ETG
factory. [9]
• Analyse possible reasons why ETG is expanding its
production facilities outside Europe. [8]
• Discuss the extent to which a government should
control the operations of multinational companies
within its own country. [10]
• To what extent should the government of your
country positively encourage multinational businesses
to establish themselves in your country? [20]
1. Market size – potential for sales. Economies of
scale – lower unit cost, global brand recognition.
2. Different cultures – need to tailor product
offering, packaging etc. accordingly.
Diseconomies of sale – difficult to coordinate all
resources.
3. Take advantage of local expertise and
knowledge, which could be lower risk, achieve
global sales with lower capital investment,
good business and CSR as leaving some wealth
within the country of sales.
 Privatization
Privatization: selling state-owned and
controlled business organizations to investors
in the private sector.
 Arguments for privatisation
• The profit motive of private-sector businesses - greater efficiency
than when a business is supported and subsidised by the state.
• Decision-making in state bodies can be slow and bureaucratic.
• Privatisation puts responsibility for success firmly in the hands of
the managers and staff who work in the organisation - strong
motivation = direct involvement - greater sense of empowerment.
• Market forces will be allowed to operate: failing businesses will be
forced to change or die and successful ones will expand.
• There is always a temptation for governments to run state industry
for political reasons.
• Sale of nationalised industries can raise finance for government,
which can be spent on other state projects.
• Private businesses will have access to the private capital markets
 Arguments against privatisation
• The state should take decisions about essential industries. This
may involve keeping open business activities that private
companies would consider unprofitable.
• With competing privately run businesses it will be much more
difficult to achieve a coherent and coordinated policy for the
benefit of the whole country, for example railway system,
electricity grid and bus services.
• Through state ownership, an industry can be made accountable
to the country. This is by means of a responsible minister and
direct accountability to parliament.
• Industries could be operated as ‘private monopolies’ if privatized
- consumers with high prices.
• Breaking up nationalized industries,will reduce the opportunities
for cost saving through economies of scale.