Economics and Business Studies A level quiz, 2010 Unit 3 International Business more resources on...

Economics and Business Studies A level quiz, 2010

Unit 3 International Business

more resources on this course from geraldwood.com

How to revise1. Use your own notes as your basis for revision. 2. I have used a number of examples in this quiz that you

would not be expected to know about. The specification does not require that you learn any specific examples.

3. Use this revision quiz if you want a change from your own notes. It will test your knowledge of the basic ideas. However, many of the questions contained here have more than one correct answer

4. If you don’t understand any of the questions, use your own notes, or textbooks, or teachers, or friends to improve your understanding.

5. Don’t forget – knowledge of the concepts is only part of what you are tested on. Application, Analysis and Evaluation are all equally important. The comments given provide some examples of how basic content might be extended.

3.3.1 Why does a business seek international markets?

This section of Unit 3 looks at why some companies wish to sell overseas, looking at the product or market conditions which may encourage a business to trade internationally

3.3.1(1) International trade as a means of meeting growth objectives

Q1: What is the simplest way of describing the aims of most large businesses?

A: Profit maximisation

Comment: Most large firms are public limited companies whose shares may be bought by anyone. Unless such firms pursue the path of maximising the profit made on its assets, it is vulnerable to being taken over by companies which are more profit-orientated


Q2: Why does the aim of maximising profits lead most large companies to trade internationally?

A: The UK with a population of 60 million has just 1% of the world’s population. Very few large firms can afford to ignore the other 99%

Comment: The skills which large companies acquire are in many respects transferable across the globe. It makes no sense to confine their use to just one corner of it


Q3: Why is growth essential if profits are to be maximised?

A: There is a limit to the amount of profit that can be squeezed out of static revenue – the only long-term way to grow profits is to grow revenue

Comment: And ultimately this means selling overseas


Q4: If a company manages to double its sales levels together with sales revenue what will normally happen to profits?

A: They will more than double. Any business has fixed costs, so doubling output does not normally double costs – there are ‘economies of scale’ (size)

Comment: Selling overseas is often the fastest path to doubling sales


Q5: Why might selling overseas enable a company to extend its product life cycle?

A: While there is always a market in rich countries for the latest products at relatively high prices, in ELDCs (Economically Less Developed Countries) demand for older products persists

Comment: For example, in the 1990s Trevor Bayliss reinvented the windup radio, which sold to people without access to mains power

3.3.1(1) International trade as a means of meeting growth objectivesQ6: Why might selling overseas enable a company

to launch an innovative new product?

A: Most people who buy the latest products (the ‘first adopters’) do not live in the UK. Innovative new products may have a greater chance of success if launched first in the larger markets of Japan or the USA rather than the UK

Comment: Or they may be launched close together in Japan, the USA and Europe e.g. the Xbox 360


Q7: Why might selling overseas be a sensible response to increased domestic competition?

A: Any static business model is always in danger from potential competitors, whether based in the UK or overseas. ‘The best form of defence is attack.’

Comment: However, expansion should not be seen as a solution to any company suffering from underlying problems which make it uncompetitive


Q8: Why might buying in supplies from overseas be a means of growing a business?

A: By confining itself to UK suppliers, a company rules out the vast majority of potential partners, many of whom may offer better (or cheaper) products

Comment: Nonetheless, domestic suppliers will normally be able to deliver more quickly (with a shorter ‘lead time’), and without any exchange rate risk


Q9: What is the long-term trend with respect to the transport and communication costs of doing business internationally?

A: These costs are falling, with telephone and email costs essentially the same internationally as nationally

Comment: These technological advances remove one of the traditional costs associated with international trade

3.3.1(2) The laws governing international trade

Q 10: What is meant by ‘trade liberalisation’?

A: The process by which international trade is made easier through a relaxation of the rules which govern it

Comment: To ‘liberalise’ anything is to reduce the legal constraints on the activity. While this is not always a good thing, there are powerful economic arguments in favour of liberalised international trade (also known as ‘free trade’)


Q11. What are trade barriers?

A: Any arrangements that make international trade more difficult, such as taxes on imports (known as ‘tariffs’) or restrictions on the amount of imports (known as ‘quotas’) – see 3.3.4

Comment: The process of trade liberalisation does, therefore, consist in the removal of trade barriers

3.3.1(2) The laws governing international tradeQ12: What is the work of the World Trade

Organisation (WTO)?

A: To encourage trade liberalisation by operating a system of trade rules and by providing a forum for the negotiation of trade disputes

Comment: While every country stands to benefit from free trade taken as a whole, every country also faces situations where they would like an exception to be made – normally to protect a domestic producer who is not competitive


Q13: What is a trade bloc?

A: A group of countries which have agreed to operate by the same rules with respect to international trade

Comment: Depending on how closely the members wish to integrate their economies they may form different types of trade bloc – such as free trade areas, customs unions, common markets and full economic and monetary union

3.3.1(2) The laws governing international tradeQ14: What is a free trade area?

A: A group of countries, which have agreed not to impose any trade barriers between themselves

Comment: There are many such regional blocs around the world, including the North American Free Trade Association (NAFTA), consisting of Mexico, Canada and the USA. The European Economic Area (EEA) consisting of non-EU states is another example – now small, the main members being Norway and Iceland


Q15: What is a Customs Union?

A: A free trade area where all the members impose the same import taxes on all other countries – the level of import taxes being known as the Common External Tariff (CET)

Comment: The benefit of a CET is that once goods have been imported into one of the countries in the Customs Union they may then be moved freely within it without the owners of the goods avoiding tariffs


Q16: What is a Common Market?

A: A customs union where the members also have the same rules on product regulation, and seek to implement free movement of capital and labour between member states

Comment: The Eurasian Economic Community, whose members consist of many former states within the Soviet Union such as Russia, Belarus, and Kazakhstan is one example


Q17: What is Economic and Monetary Union (EMU)?

A: A common market where the members also use the same currency

Comment: Many examples of EMU consist of one major state with satellite states e.g. EMU between South Africa and Swaziland, Lesotho & Namibia


Q18: Do trade blocs always fit neatly into one of the above categories?

A: No. Trade blocs tend to be very fluid. They form, break down, gain members and lose them – and often evolve from one type of trade bloc into another over time

Comment: Nonetheless there appears to be a global trend towards more, and more tightly knit, trade blocs – and this is in turn one of the factors driving the increase in international trade

3.3.1(2) The laws governing international tradeQ19: What type of trade bloc is the European

Union (EU)?

A: The EU is an example of Economic and Monetary Union. Although only 16 out of the current 27 member countries have adopted the Euro, all except the UK and Denmark are committed to adopting it in due course

Comment: The other 9 (mainly recent members) are expected to join when their economies become more closely integrated with the EU


Q20: Is the EU essentially a trading bloc?

A: The EU has a strong political dimension: it is not merely an economic arrangement. The original aim of the 1957 Treaty of Rome was ‘ever closer union’. This is interpreted by many to mean a single state should be the aim

Comment: Indeed for many the economic arrangements within the EU are secondary to the political project


Q21: What are the benefits of trading within the EU?

A: As a free trade area, there are no import duties, and as a common market what is sold in one country may be sold in another. With monetary union there are fewer costs involved in changing currencies, and it is easier to compare prices

Comment: Almost all multinational companies including those based in the UK would like Britain to adopt the Euro

3.3.1(2) The laws governing international tradeQ22: What are the constraints on trading within

the EU?

A: The UK is not part of the Euro zone, so we still face the exchange rate risk and transactions costs of dealing in another currency. Different languages and cultures also form trade barriers

Comment: Additionally, while the EU is a vast market of 500 million mainly wealthy people, rapidly growing markets in Asia and elsewhere will for many offer more opportunity

3.3.2 Key players in the world economy

This section of Unit 3 looks at how firms and businesses may be affected by the growing economic power of India and China and how a national business may seek to trade with them.

3.3.2(1) What will be the likely impact of the growing economic power of India and China?

Top ten countries by GDP

GDP in US $ trillion

Ranking by GDP /head (out of 228)

1. USA 14.4 10

2. China 8.0 133

3. Japan 4.3 37

4. India 3.3 167

5. Germany 2.9 33

6. Russia 2.3 73

7. UK 2.2 32

8. France 2.1 39

9. Brazil 2.0 102

10. Italy 1.8 41

Top ten countries by GDP/head

GDP/ head in US $

Ranking by GDP (out of 228)

1. Liechtenstein 118,000 165

2. Qatar 111,000 69

3. Luxembourg 81,200 97

4. Bermuda 69,900 162

5. Norway 59,500 41

6. Kuwait 57,500 58

7. Jersey 57,000 159

8. Singapore 51,600 47

9. Brunei 51,300 123

10. USA 44,600 1

Source: CIA Factbook 2009. Figures are for 2008, or the latest available estimates. Figures converted into US dollars using Purchasing Power Parity exchange rates

TABLE 3.1 TABLE 3.2

3.3.2(1) What will be the likely impact of the growing

economic power of India and China?

Q23: Does GDP or GDP/head give a better guide to economic power (see previous tables)?

A: GDP gives the better guide

Comment: A country is economically powerful if it produces more goods than others. This is measured by GDP. By contrast, GDP/head is a guide to the standard of living as it measures output per person. Because of wildly different population sizes there is little connection between the two measures, as the previous tables show


TABLE 3.3 Top ten countries by GDP, using market exchange rates

GDP in 2008 as % of world GDP

1. USA 25.52. Japan 10.33. China 6.44. Germany 6.35.France 4.66. UK 4.27. Italy 3.88. India 2.79. Canada 2.510. Spain 2.4

TABLE 3.4Top ten countries by GDP, using Purchasing Power Parity exchange rates

GDP in 2008 as % of world GDP

1. USA 20.6

2. China 11.4

3. Japan 6.2

4. India 4.7

5. Germany 4.2

6. Russia 3.2

7. UK 3.2

8. France 3.0

9. Brazil 2.8

10. Italy 2.6Note: World GDP in 2008 was US$70.1 trillion (PPP exchange rates) Sources: CIA Factbook 2009 and UNData websites


Q24: What is the difference between market exchange rates and Purchasing Power Parity (PPP) exchange rates?

A: Market rates are the rates at which currencies may be traded in the open market. PPP rates are the rates at which you could buy the same typical basket of goods in different countries

Comment: If all products could be freely traded the two rates would be very similar. In practice, most services cannot be traded internationally


Q25: Why does it matter which rate we use?

A: PPP exchange rates give a much better indication of purchasing power, and so of economic power

Comment: If you compare China and Japan in the previous set of tables Japan appears to produce almost double the GDP (10.3/6.4) using the market exchange rate whereas in reality it is producing roughly half the GDP (6.2/11.4)

3.3.2(1) What will be the likely impact of the growing

economic power of India and China?

Q26: Why does using PPP exchange rates show countries with low standards of living narrowing the gap with rich countries?

A: Because poor countries have low wages which are reflected in low prices for labour-intensive services. Market exchange rates do not reflect this because most services cannot be traded internationally

Comment: For example, a porter in India cannot sell his services at the going rate in a rich country


Q27: How can we summarise the relative economic strength of the major economies in 2008?

A: Using PPP exchange rates, the USA on 21% of world GDP is well ahead of China (11%), Japan (6%), India (5%) and Germany (4%)

Comment: Another way of looking at it is to say that the USA on 21% is roughly matched by all 27 EU countries (also on 21%) and by the top three Asian countries combined on 22%


Note: While PPP exchange rates give a better guide to current economic power, economic growth rates are normally expressed using GDP based on market exchange rates. For this reason, the subsequent slides are based on comparisons using market exchange rates. As China and India catch up with the developed world, so the difference between their PPP and market exchange rates will diminish


TABLE 3.5 Rank order by GDP in 2008

GDP in 2008 - mkt exchange rates: US $ bn

Annual real growth: ‘97 to 2008

GDP in 2015 at 1997-2008 growth rate



1. USA 14440 2.6% 17229 19546 25155

2. Japan 5838 1.4% 6438 6904 7939

3. China 3617 9.7% 6936 11043 27994

4. Germany 3546 1.5% 3932 4233 4906

5.France 2635 2.1% 3037 3361 4118

6. UK 2382 2.6% 2853 3246 4200

7. Italy 2170 1.2% 2361 2507 2828

8. India 1527 8.0% 2615 3841 8282

9. Canada 1428 2.9% 1750 2023 2705

10. Spain 1340 3.5% 1703 2021 2845

Source: UNData website


Q28: The ‘rule of 70’ states that a variable growing at x% pa will double in approximately 70/x years. Using this rule and the data from Table 3.5, how long will it take for a) China b) India and c) Britain/USA to double their GDP?

A: China – 70/9.7 = 7.2 years India – 70/8.0 = 8.8 years USA/Britain = 70/2.6 = 26.9 years

Comment: The ‘rule of 70’ is pretty accurate. The actual times are a)7.5 b)9.0 c)27.0 years


Q29: What does a country need to challenge for the top spots in world economic power?

A: A level of GDP that is already high, and a future long-term annual rate of growth of GDP that will be higher than the existing leaders

Comment: From Table 3.5, both India and China are likely to meet these criteria with growth rates over the past decade far in excess of anything produced by the other 8 largest economies


Q30: From Table 3.5, how does the forecast relationship between China’s and the USA’s GDP change between 2008 and 2030?

A: In 2008, the USA’s GDP is almost exactly four times that of China’s. By 2030, China will have just pulled ahead – on this forecast

Comment: We might guess that by 2030, the USA and China will have roughly the same GDP – and roughly three times more than Japan and India, who may be fighting for third place



GDP in 2008 - mkt exchange rates: US $ bn

Annual real growth of GDP: ’97-’08

Population in millions (2008/09)

GDP / head (US $ mkt exch rate)

1. USA 14440 2.6% 307 47,000

2. Japan 5838 1.4% 127 46,000

3. China 3617 9.7% 1339 2,700

4. Germany 3546 1.5% 82 43,200

5.France 2635 2.1% 64 41,200

6. UK 2382 2.6% 61 39,000

7. Italy 2170 1.2% 58 37,400

8. India 1527 8.0% 1166 1,300

9. Canada 1428 2.9% 33 43,300

10. Spain 1340 3.5% 41 32,700Source: UNData website, and CIA Factbook


Q31: Why is it possible for a country to achieve long-term rapid economic growth when its GDP per head is much lower than that of developed countries?

A: All the country has to do is ‘catch up’ by using technology and economic management techniques which already exist

Comment: From the previous table, we see that India and China both have low GDP/head, so their rapid growth may continue for many decades


Q33: For mathematicians only [not needed for exam]. Assuming China and the USA maintain their existing rate of GDP growth, in how many years from 2008 will the GDP/head in the two countries be equal? (assume zero pop’n growth)

A: 43 years i.e. 2051 (see next slide for calculation)

Comment: Both countries would have a GDP/head 3.0 times greater than the current US figure. And China’s GDP would be 4.4 times greater than that of the US


Working for optional Q33: When will China (GDP/head 2700, growth rate 9.7% pa) catch up

with the US (GDP/head 47000, growth rate 2.6 %pa)? We want to find the number of years, n, such that the following equation is

solved:

2700 x 1.097ⁿ= 47000 x 1.026ⁿ

1.097ⁿ= 470/27 x 1.026ⁿ

Convert all 3 expressions into logs as follows:

nlog1.097 = log420/27+nlog1.026

nlog1.097 - nlog1.026 = log420/27

n(log1.097 - log1.026) = log420/27

n= (log420/27)/(log1.097-log1.026)

n = 42.7 – the years from 2008 it will take China to catch up i.e. 2051


TABLE 3.7: Decade:

1970-78 1978-88 1988-98 1998-08

Av. annual growth rate:

5.9% 10.1% 9.6% 9.7%

Q34: Why should we view all such forecasts with extreme caution?A: There are too many unknowns. The further we look ahead, the more inaccurate we will beComment: However, China has already maintained astonishing growth rates for the past three decades (see Table 3.7 below). Perhaps it can repeat the trick over the next four Source: UNData website



GDP in 2008 - mkt exchange rates: US $

bn

Exports as a % of GDP

Imports as a % of

GDP

1. USA 14440 16 21

2. Japan 5838 20 14

3. China 3617 46 36

4. Germany 3546 57 50

5.France 2635 36 39

6. UK 2382 35 42

7. Italy 2170 29 27

8. India 1527 22 36

9. Canada 1428 36 40

10. Spain 1340 33 44

Source: UNData website


Q35: Which two countries in Table 3.8 rely least on Exports?

A: The USA and Japan

Comment: It is normally the case that very large economies export a smaller percentage of their output, as they are big enough to achieve many of the gains from specialisation within their own borders. By contrast, the smallest economies often export up to 80 or 90% of their GDP


Q36: To what extent does China rely on Exports?

A: Both China and Germany are unusual in being very large economies with around 50% of their GDP being exported (46% in the case of China)

Comment: You can also see from Table 3.8 that they run large current account surpluses (i.e. the excess of Exports over Imports)


TABLE 3.9


Q37: Using Tables 3.9 and 3.10, how did the relative size of India’s and China’s economy change between 1969 and 2009?

A: India’s economy went from being one-and-a-half times the size of China’s to under half the size

Comment: India is on any count a rapidly growing economy, whose GDP may well overtake the UK in 20 years or so – but it has not been able to equal the extraordinary growth rates of China


Q38: How do political arrangements differ between India and China?

A: India is the world’s largest democracy; China is a one-party state run by the Communist party

Comment: China has largely embraced a capitalist, free-market economic model. However, many large companies are still state-owned and there is less freedom of expression than in India or in a Western democracy

3.3.2(1) What will be the likely impact of the growing economic power of India and China?TABLE 3.11 UK Exports as % of total(China includes Hong-Kong)

TABLE 3.12UK Imports as % of total(China includes Hong-Kong)

Source: ONS website


Q39: How have UK import patterns changed over the last decade (see Table 3.12)?

A: Germany and Benelux (Belgium, the Netherlands and Luxembourg) continue to be major sources of supply. The USA has fallen from first to fourth place, having been overtaken by China (including Hong-Kong)

Comment: In 2008, only 1.3% of UK imports came from India compared to 9% from China


Q40: What opportunities exist within China for UK firms to outsource manufacturing?

A: Most low-technology manufacturing that used to be done in Britain has shifted to South-East Asia (and China in particular) where wages are much lower and quality is of a similar standard

Comment: This is reflected in the growth of Chinese imports to the UK from 5% to 9% of all imports over the last decade (see Table 3.12). We might expect this trend to continue


Q41: What opportunities exist in China for UK firms to market their products (see Table3.11)?

A: Table 3.11 shows that Chinese success in penetrating the British market has not been matched by anything like an equivalent penetration of the Chinese market by Britain

Comment: Nonetheless, UK exports to China are up from 2.2% to 3.5% of all UK exports over the decade. This 50%-plus increase is roughly the same as India’s (1.1% to 1.6%)


Q42: Apart from the legal barriers [discussed later in 3.3.4], what barriers to market entry exist for UK firms attempting to sell into China?

A: For example, China restricts the import of creative content (books, CDs and videos). In the case of film to just 20 a year. Yet it makes little attempt to enforce copyright, so effectively China pirates creative content and gets it for free

Comment: The WTO has ruled against these practices but its sanctions are slow to take effect

3.3.3 How does a company decide which countries to target?

This section of Unit 3 looks at how companies seeking to expand overseas go about choosing which of the 200-plus countries they should consider investing in.

It also introduces the theory of comparative advantage, the traditional explanation of why countries as a whole gain from specialisation followed by international trade.

3.3.3(1) Assessment of country markets

Q43: What is any commercial company looking for when it invests in a foreign country?

A: A profit, normally measured in terms of the annual ‘percentage return on capital employed’ (ROC)

Comment: This is measured by the annual operating profit expressed as a percentage of the original investment (i.e. ‘capital employed’) made


Q44: How, therefore, might a company rank a number of different investment projects across a range of countries?

A: In the order of the likely ROC on each project

Comment: Other broad considerations will be the size of potential projects (large firms are likely to favour large investments); the degree of risk entailed and the firm’s attitude to risk; and wider strategic objectives – e.g. gaining knowledge of how to do business in a country


Q45: Why do companies that go overseas to buy raw materials (or manufacture goods), and those that go to market their products both need to invest?

A: Companies looking for raw materials or manufacturing facilities may wish to buy up local assets e.g. the right to prospect for oil (or build an oil refinery). Those intent on marketing their products will invest in office and retail space, advertising campaigns, and management time


Q46: For which type of company will the availability of natural resources be a key factor?

A: Primary (extractive) industries such as agriculture, mining and oil companies

Comment: One notable feature of China’s expansion over the past decade has been its rush to invest in Africa to secure the raw materials it needs for its growing manufacturing sector


Q47: What will be the impact of commodity prices within the primary sector on a firm’s decision to invest?

A: New investments in mining and agriculture are far more likely to come when prices look set to remain high – the returns on the investment will be that much greater

Comment: Recent Chinese economic expansion has fuelled an upward trend in commodity prices


Q48: For which type of company will the size and wage level of the potential labour force be of particular interest?

A: Labour-intensive industries such as low-technology manufacturing and low-technology services such as call centres

Comment: The availability of large numbers of well-disciplined and cheap workers is a necessary condition behind China’s and India’s rapid economic growth


Q49: For which type of company will the level of technology be of particular interest?

A: For high-technology companies involved in design and research & development and advanced manufacturing

Comment: These activities are typically located in developed countries where there are lots of workers with the required skill base and practical experience – not only in the Western world but increasingly in Asia as well


Q50: What does the HDI (Human Development Index) measure?

A: A combination of three things: life expectancy, education & literacy and GDP per head (using PPP exchange rates) – on a scale of 0 to 1

Comment: The practical effect of using HDI rather than GDP per head to compare countries is that HDI favours countries where income is redistributed extensively (such as Scandinavia) over more capitalist models (such as the USA)


Country (top 10 by HDI & selected others)

HDI score (range of 0 to 1)

HDI rank order

GDP/head (PPP) rank order

GDP (PPP) rank order

Norway 0.97 1 5 41Australia 0.97 2 24 19Iceland 0.97 3 17 139Canada 0.97 4 22 15Ireland 0.97 5 11 56Netherlands 0.96 6 20 21Sweden 0.96 7 25 33France 0.96 8 39 8Switzerland 0.96 9 18 39Japan 0.96 10 37 3USA 0.96 13 10 1UK 0.95 21 32 7Germany 0.95 22 33 5China 0.77 92 133 2India 0.61 134 167 4

TABLE 3.13 Sources: Wikipedia for HDI, CIA Factbook for GDP


Q51: What is the fundamental difference between GDP and HDI as a measure of a country’s development?

A: HDI is a ‘per capita’ measure whereas simple GDP is not

Comment: From Table 3.13 you will see that there is a rough correspondence between HDI and GDP per head, but hardly any correspondence between HDI and simple GDP


The map below shows countries shaded by their HDI scores, with dark green the highest down to dark-red/black the lowest (grey = data not available)

TABLE 3.14 Source: Wikipedia, List of countries by HDI


Q52: What does Table 3.14 show about the geographical distribution of Economically Less Developed Countries (ELDCs)?

A: Sub-Saharan Africa contains most of the world’s very poor nations

Comment: Asia and South America contain mostly ‘middle-income’ countries and show every sign of following Japan, South Korea and Singapore into the ranks of the developed world


Q53: For which type of company will economic development (as measured by GDP per head or HDI) be of particular interest?

A: Companies seeking to sell their products overseas will seek markets able to afford them

Comment: Simple GDP will also be of interest. For example, China scores low on GDP/head (and HDI) but nonetheless is so large that it has a substantial middle class in absolute numbers interested in buying luxury brands


Q54: Why is growth in GDP (and GDP per head) of particular interest to companies looking to enter an overseas market?

A: It is always easier for a company to enter a market if it doesn’t have to take market share away from others to do so. An expanding market offers this type of opportunity

Comment: As with any investment, the ideal is to ‘get in at the bottom’ i.e. to invest in shares (or in a country) just before rapid growth occurs


Q55: Why is geographical proximity a much less important factor than it once was?

A: The container revolution of the past 30 years has dramatically reduced both transport costs, and door-to-door transport times (and so both lead times and inventory costs)

Comment: The whole globalisation phenomenon (including cheaper air travel and communications) is another way of saying that geographical proximity matters much less than it did


Q56: For which companies will geographical proximity nonetheless remain an important consideration?

A: For perishable goods (such as newspapers and flowers) and for low-value high-bulk goods (such as coal) – though all these goods are in fact commonly traded between continents

Comment: Membership of a trade bloc is normally connected to geographical proximity and this may often prove the more important factor


Q57: What impact do exchange rate movements have on a firm’s willingness to invest in a country?

A: It is easy to hedge (i.e. insure) against unfavourable exchange rate movements – though this adds to the cost of doing business

Comment: The more volatile a currency, the more it will cost to insure against unfavourable movements. Volatile currencies are associated with small and weak economies


Q58: What bearing does the legal system of a country have on multinationals’ willingness to invest?

A: Businesses want to know that their assets (including intellectual property) are effectively protected by the police and legal system and that contracts are enforceable quickly and cheaply

Comment: A country where large amounts have to be spent on private security raises the cost of doing business


Q59: How does the political system affect a company’s willingness to invest?

A: Firms want political stability. This is best provided by mature democracies, though enlightened dictatorships as in Singapore may also provide stability and rapid economic growth

Comment: Political transitions are dangerous for business. Political instability e.g. in much of the Middle East and much of Africa is a key reason why investment (and so growth) are hindered


Q60: How may government policies affect the willingness of a company to invest?

A: This part of the specification covers a wide range of policies. It includes a favourable tax regime, an ability to get money out of the country easily, the minimum of onerous regulation in the areas of Health & Safety, employment and the environment

Comment: There may be a direct conflict between ethical standards and profitability


Country Number of procedures needed by an investor seeking a business license from the government

Average number of days taken to complete these procedures

South Korea

10 17

USA 19 40

Angola 12 119

China 37 336

Cameroon 15 426

Source: World Bank’s annual Doing Business survey, quoted in ‘Dead Aid’ by Dambisa Moyo (p. 100)

TABLE 3.15


Q61: How may gov’t administrative efficiency affect the willingness of a firm to invest?

A: Basic levels of efficiency are as important as the overall regulatory burden

Comment: Looking at Table 3.15, the attractions of doing business in South Korea or the USA are obvious. Medium-to-large companies may be prepared for a 10-month wait to get into China – but is Cameroon really worth a 15-month wait? For most companies, probably not


s

The map below shows Transparency International’s ‘Corruption Perception Index’, with the darker the shade indicating the greater perception of corruption in that country

Source: Transparency International

TABLE 3.16


Q62: What connection do you see in Table 3.16 between the perceived level of corruption in a country and its GDP per head?

A: There is a clear inverse relationship with developed countries having low levels of perceived corruption and the poorest nations in Africa and the Middle East having the highest

Comment: High standards of living, low corruption and open democratic societies appear to go hand-in-hand


Q63: Why should a high level of corruption make a business less willing to invest in a country?

A: First, it increases the cost of doing business through the need to offer bribes. Second, it increases uncertainty – how do you know who to bribe, and how much?

Comment: We might guess that India and China will have to clean up their act if they wish to catch up with Japan, Germany and the US – all of whom demonstrate low levels of corruption

3.3.3(2) Comparative advantage and the role of specialisation by countries

Q64: What is the definition of Comparative Advantage?

A: Country A is said to have the comparative advantage over country B in the production of Good X if country B is relatively more efficient in the production of Good X compared with other products

Comment: It is not necessary for country A to have the ‘absolute advantage’ in the production of X i.e. to use fewer resources in its production


Q65: If person A can deliver newspapers twice as fast as person B, and person A can flip hamburgers four times as fast as B then who has the comparative advantage in i) delivering newspapers and ii) flipping hamburgers?

A: Person A – flipping hamburgers. Person B – newspaper delivery

Comment: Although B is slower than A at delivering newspapers, yet B is relatively more efficient at newspaper delivery i.e. relative to flipping burgers


Q66: What conclusion does the theory of comparative advantage lead to?

A: That all countries will stand to gain if they specialise (in part or in full) in those products in which they have a comparative advantage, and then trade with each other

Comment: This explains why teenagers dominate newspaper delivery. They may be slower at the job than adults– but not nearly as much slower than they would be at the jobs that adults do


Q67: Why is the theory of comparative advantage good news for poor countries (& poor people)?

A: You can still make a living even if there are other countries (people) that could do what you do more quickly. You simply need to find the products (or job) at which you are least bad – or most good

Comment: Because of the way comparative advantage is defined, every country (& person) must have some comparative advantages – in the worst case, you have to be least bad at something!


Q68: The ‘gains from trade’ generated from specialisation followed by international trade will not be realised unless they are great enough to overcome what additional costs?

A: The management and transport costs associated with international trade, and the risks associated with relying on overseas markets and supplies

Comment: As previously discussed these costs have fallen very fast over the last 30 years – a key reason why int’l trade has grown so rapidly


Q69: What determines which countries have the comparatives advantage in which goods and services?

A: The key phrase is ‘relative factor endowment’ e.g. countries with a relatively large amount of the factor of production land will have the comparative advantage in ‘land-intensive industries’ – primarily farming

Comment: This works with (for example) Sudan, Australia, New Zealand, Brazil and Argentina


Q70: Use the theory of comparative advantage to explain why at present the USA dominates industries reliant on science research, and China dominates low-technology manufacturing

A: The USA is relatively well-endowed with the factors of production needed in this area – capital and skilled labour. China is relatively well-endowed with the unskilled yet disciplined labour needed for low-tech manufacturing


Q71: Is a country’s relative factor endowment (and so comparative advantage) fixed over time?

A: Not at all. Those countries whose GDP per head is growing faster than average will have the opportunity to invest the extra resources into capital equipment and also into labour skills (sometimes known as ‘human capital’)

Comment: There is a well-trodden development path whereby countries move from low-tech to high-tech manufacturing and service industries


Q72: Which economic agents receive the gains from international trade?

A: Initially the business sector, which is driven by the profit motive to seek these gains. However, competitive pressures will force prices down and spread these gains among consumers – and also the state sector through additional tax revenue

Comment: Within each country there will be industries which lose out, but every country will in total gain from free international trade


Q73: What other gains from international trade exist apart from those generated by comparative advantage?

A: International trade leads to more competitive market structures in every industry it touches. This is particularly beneficial in industries where cost structures lead to monopoly-like markets within individual countries, such as steel or vehicle manufacturing

Comment: These gains accrue mainly to consumers

3.3.3(2) Comparative advantage – cont’d

UK Exports 2008, Top 12 physical goods, by value

£ bn

1. Oil 31.9

2. Road vehicles 22.5

3. Pharmaceuticals 17.2

4. Power generating equip.

15.1

5. Misc. manufactures 14.2

6. Gen. industrial machinery

10.4

7. Electrical machinery 9.9

8. Other transport equip. 9.2

9. Organic chemicals 8.4

10. Specialised machinery 7.7

11. Office machines 7.1

12. Non-ferrous metals 6.9

Total, all physical exports

251

UK Imports 2008, Top 12 physical goods, by value

£ bn

1. Oil 37.8

2. Road vehicles 33.9

3. Misc. manufactures 18.1

4. Telecoms equip. 16.3

5. Office machines 15.3

6. Electrical machinery 14.6

7. Clothing 13.2

8. Gen. industrial machinery

12.1

9. Power generating equip.

11.8

10. Meat, fruit & veg 11.7

11. Pharmaceuticals 11.0

12. Other transport equip.

10.6

Total, all physical imports

344

TABLE 3.17 UK physical goods (‘visible trade’), X and M, 2008 Source: ONS


Q74: In table 3.17, the UK’s top 8 ‘visible’ export categories also feature in the list of our top imports. Why is this?

A: The costs of doing business internationally are now such a small proportion of total costs that it makes commercial sense to export and import many items which are very similar

Comment: For example, the UK exports ‘light crude’ oil from the North Sea while importing the more viscous ‘heavy crude’

3.3.4 Other considerations before trading internationally

This section looks at three particular areas:

1. A firm’s responsibilities to its stakeholders, and potential conflicts between ethics and profit.

2. The social and cultural differences in doing business in other countries

3. The constraints on international business imposed by tariffs, import quotas and legal restrictions

3.3.4(1) Responsibility to stakeholders

Q75: Who are a firm’s stakeholders?

A: All those who have an interest in the company: its owners/shareholders, management, suppliers, employees, customers – and wider society

Comment: The proposition that a firm has responsibilities to all its stakeholders contrasts with the narrower view that the firm only has responsibilities to its owners; and that caring for other stakeholders matters only to the extent that this will also benefit the owners


Q76: What is the danger for a company operating in a competitive environment in pursuing any objective other than profit?

A: It risks being undercut and/or taken over by its single-minded profit-seeking competitors

Comment: An example in 2010 is the hostile bid for Cadbury plc by Kraft. Cadbury has a proud history of looking after its employees whereas Kraft is a food sector conglomerate with numerous brands managed essentially for profit

,


Q77: How might ‘caring for employees’ in terms of pay, working conditions and job security be compatible with the aim of profit maximisation?

A: There is likely to be some sort of financial payback generated from increased employee loyalty. Additionally, bad publicity about ‘sweatshop labour’ is likely to be avoided

Comment: Campaigning groups like peopleandplanet.org do a valuable job in raising the costs to business of breaking labour laws


Q78: What ethical argument can be made for shifting manufacturing production to the country with the lowest-paid labour force?

A: If enough multinationals move to the poorest countries, the price of labour (i.e. wages) will increase – thereby reducing global inequality

Comment: China and other Asian countries have used their comparative advantage in labour-intensive industries to set themselves on the road to economic development and prosperity


Q79: Is there any limit to the view that by going where labour is cheapest a firm is acting ethically?

A: Yes: if the labour in question is not a free agent. This covers some child labour, indentured labour trapped by moneylenders, prisoners in so-called ‘labour camps’, and illegal migrant labour unable to access legal protection

Comment: Multinationals may seek to evade responsibility by subcontracting to local firms who are less likely to be subject to scrutiny


Q80: Is it more ethical for UK consumers to ‘buy British’ and for UK firms to manufacture here?

A: It depends on the extent to which you consider yourself a global citizen or a national one

Comment: Of course if all countries pursed a ‘buy domestic’ policy, then every country would forfeit the gains from trade. Furthermore, a common slogan of those seeking to help poor countries is ‘trade, not aid’ – a policy incompatible with a ‘buy domestic’ agenda


Q81: Is it unethical to replace labour with capital in pursuit of minimum costs & maximum profit?

A: Not if it works. As any economy grows there will be a shift to more capital-intensive methods. The alternative may well be the failure of the firm

Comment: The process of managing the switch needs both business acumen and compassion. For both ethical and business reasons, natural wastage and voluntary redundancies are to be preferred to compulsory redundancies


Q82: Why is environmental damage such as that caused by CO2 emissions or dumping waste an example of a failure of the free market to generate the best outcome for society?

A: The costs caused by this approach (known as ‘external costs’) do not fall primarily on the firms doing the damage

Comment: From a purely profit-seeking perspective, fly-tipping and unregulated atmospheric emissions make perfect sense


Q83: What mechanisms exist for incentivising firms to limit the environmental damage they cause?

A: Limits imposed by legislation (e.g. abolition of 100W domestic light bulbs); taxation (e.g. lower taxes for lower-emitting cars) and public opinion

Comment: Pressure groups, along with government campaigning, have been crucial in putting companies in the UK in a position where they feel compelled to appear ‘green’


Q84: Why is a private limited company (Ltd), sole trader or partnership more at liberty to pursue aims other than maximising profit – in contrast to a conventional public limited company (plc)?

A: They cannot be taken over against the wishes of their existing owners

Comment: John Lewis, a famous employee partnership, has as its stated aim “the happiness of all our members through their worthwhile, satisfying employment in a successful business”

3.3.4(2) Social/cultural differences in doing business

Q85: Why might a multinational be well advised to employ a local advertising agency a country where it hoped to market its products?

A: Otherwise, there would be a significant risk of cross-cultural misunderstanding

Comment: It is difficult enough for companies to run successful advertising campaigns in their own country: trying to communicate effectively across cultures adds a whole new level of difficulty


Q86: What marketing benefit do large companies in developed economies have in selling on a global scale?

A: Their brands are likely to have had some exposure – and to be well-known and trusted – across much of the globe already

Comment: Creating an international brand from a strong domestic brand is a good example of an economy of scale: the value of the brand can be multiplied up at proportionately less expense


Channel to market

Explanation Degree of direct involvement by MNC

Direct sales MNC buys offices in target country and markets product itself, probably employing local staff

Greatest

Franchise MNC sets up franchise operation with local business people acting as franchisees

Agents MNC employs local business to sell on their behalf

Joint ventures

MNC sets up a new company with a local company: both parties have an equity stake

Distributor / wholesaler

MNC sells product to local distributor/wholesaler, who then sells on

Licence MNC sells right to local business to manufacture and sell its product

Least

TABLE 3.18 MARKETING OVERSEAS


Q87: What factors would an MNC bear in mind when deciding which of these channels of distribution to use in an overseas market?

A: They might consider what level of involvement was possible, given their existing management capacity and other calls on their managers’ time

Comment: Some countries will insist that MNCs set up joint ventures as a condition of doing business


Q88: In India Tesco plans (in 2010) to set up a wholesale business after the Indian government objected to its plans for retail expansion. What might this objection be based on?

A: Food retailing in India is highly fragmented with millions relying on ‘mom-and-pop’ convenience stores for their livelihood. The impact on unemployment was considered to be too serious

Comment: In time, this situation is likely to change and Tesco will be well-positioned to enter retail


Q89: What are the particular benefits of a joint venture for a MNC with an established local company?

A: In return for sharing the profits, the MNC has a credible partner who has a direct financial stake in making the project work. The MNC should be able to become embedded in local culture and in the business community

Comment: The local company gains the prestige, products and finance of working with an MNC


Q90: What is price discrimination?

A: The practice of charging different prices to different groups of customers where the differences in price to not reflect differences in cost

Comment: For example, charging double for a first class seat in a railway is price discrimination. The service may cost more, but nowhere near twice as much.


Q91: Why is an MNC very likely to practise price discrimination between national markets?

A: The price which is considered reasonable is likely to be wildly different in different countries, and there is little danger of people who are charged more shopping internationally to access the lower price

Comment: However, the growth of internet sales is pushing companies in the direction of limiting price differentials between national markets


Q92: Are poor countries normally charged less?

A: Not necessarily. Incomes are lower suggesting a lower price is needed. But competition may also be lower enabling a higher price to be charged. The MNC may adopt a policy of ‘skimming’ – charging a high price to the few rich people able to afford a luxury import.

Comment: The product may also occupy a very different market position e.g. Cadbury’s chocolate & McVitie’s biscuits are luxuries in many LDCs

3.3.4(3) The purpose of tariffs, import quotas and other legal restrictions on trade

Q93: What is an import tariff?

A: A tax on imported goods. It may be expressed as a percentage of the goods’ value, or as so much per unit measured by weight or volume

Comment: Every Customs Union (the EU included) has what is known as a Common External Tariff, which all the member countries of the union charge non-members on their imports. Tariff details are enormously complex: the EU guide to its tariffs has 16,000 pages!


Q94: What is the purpose of an import tariff?

A: It is a convenient way of raising tax revenue. It also affords some measure of protection to domestic industry from outside competition – though at the cost of raising prices for consumers and reducing the gains from trade

Comment: Import tariffs increase the cost of doing business overseas. For UK firms, an incentive is thereby given to exporting within the EU as EU-to-EU trade does not attract tariffs


Q95: What is an import quota?

A: A set limit on the amount of a product which may be imported into a country

Comment: In the case of the EU, there are many ‘reduced tariff’ quotas i.e. specific amounts of a product are allowed in at a reduced rate of tax but after the quota is exhausted the full import tariff is imposed on subsequent amounts


Q96: What is the purpose of an import quota?

A: Import quotas, like import tariffs, are normally imposed to protect domestic industry from foreign competition

Comment: They are an even more damaging form of protection than import tariffs, because they set an arbitrary limit on imports of the good in question regardless of market demand. In practice, they are used much less than tariffs


Q97: Why might a nation impose legal restrictions on imports other than tariffs and quotas?

A: If they thought the good in question would do some harm, perhaps through not meeting health and safety concerns

Comment: e.g. China will only allow foreign media (music, films and books) to be imported through state-owned companies in order to give it a measure of control over the views its citizens hear. Internet use is restricted for the same reason


Q98: Are tariffs, quotas and other legal restrictions a significant barrier to firms doing business internationally?

A: Yes, particularly in high-tax areas such as food

Comment: At the start of Unit 3 we saw that the WTO is dedicated to reducing all these barriers to trade but that its powers are weak. Although free trade benefits every country, those domestic firms who stand to lose out are effective in lobbying government to keep out competitors

3.3.5 Globalisation

This section continues from 3.3.1 in looking at reasons why companies trade globally

3.3.5(1) Global industries

Q99: “The leader in global localisation translated [the Xbox 360 game] Brutal Legend into English, French, German, Spanish & Japanese.” What does ‘global localisation’ mean?

A: The adaptation of a product so that it can be marketed across a range of global markets

Comment: Definition from Sony’s CEO, “a new way of life for Sony, whereby we meet local needs with local operations while developing common global concepts and technologies.


Q100: What is the fundamental business idea behind global localisation?

A: Economies of scale can only be maximised from a truly global operation, and that it is possible to achieve these while still adapting products to the separate requirements of different markets

Comment: Furthermore, it is often politically advisable for an MNC to have production facilities in each of the regions where it sells – e.g. the Americas, Europe and South-East Asia


Q101: Why might it be politically advisable for an MNC wish to balance its investments across the regions in which it sells?

A: In hard times (such as the recent 2008-09 recession), countries will often defend their own industry by adopting protectionist measures. It is much easier for an MNC to persuade local politicians not to act against it if the goods it sells are manufactured at least in part in the country in question


Q102: Why are takeovers and mergers a common method of achieving a global presence?

A: Inorganic growth of this sort is so much quicker in building up a presence in a new country than organic growth. Often, competing MNCs are engaged in a race to build up market share in their sector of an emerging economy

Comment: Setting up a joint venture is another method an MNC may use to speed up its entry into a market


Q103: Why is the takeover of one large firm by another often easier to achieve if the two firms are in different countries?

A: It is much less likely that competition issues will be raised, as market shares in both countries will not be affected

Comment: This is one of the key reasons behind the drive of many large companies to seek overseas markets. It may be the only legal way to achieve the rapid growth their shareholders desire


Q104: What benefit does any company gain by being able to source its inputs from any country?

A: The benefit of minimising costs. If a company is able and willing to search on a global level for its inputs it will be charged an internationally competitive price – which will probably be less than a purely national price

Comment: The issues of the quality of the inputs and the lead times required from sourcing overseas also need to be addressed


Q105: What has led to the global boom in commodity prices over 2001-2008 shown by Table 3.19?

A: Rapid growth in the global economy and particularly from China

Comment: The impact of the sharp global recession in 2008-09 is evident in the halving of commodity prices over 6 months, followed by their rapid recovery as China used the opportunity to stock up on cheap raw materials


Q106: Which continent has benefited particularly from China’s increased demand for raw materials over the past decade?

A: Africa. The boom in commodity prices has increased GDP in the world’s poorest continent

Comment: It has also given Africa a new superpower prepared to invest in the continent’s infrastructure, and represents Africa’s best chance of being pulled into the global economic mainstream

3.3.5(2) Global marketing

Q107: Why is advertising in major-city airports very similar around the world?

A: They are aimed at the single global elite of international business people and other frequent flyers

Comment: An emerging world culture is also exemplified by shipping entrepôts, i.e. trading hubs such as Rotterdam, Shanghai, Singapore, Los Angles, Hong-Kong and Dubai


Q108: What benefit does an emerging world culture bring to the marketing plans of MNCs?

A: A reduction in the average (unit) costs of marketing, as the same marketing messages can be replicated across global regions

Comment: As globalisation gathers pace, we may expect to see yet more convergence in customers’ aspirations and tastes reflected in convergent advertising messages around the world for similar products


Q109: Why is it still the case that MNCs are likely to use local advertising agencies?

A: The process of globalisation still has a long way to go. Different languages, religions and cultures still mean that national populations will respond best to different marketing approaches

Comment: History is full of movements that appeared to have been inevitable at the time but which subsequently went into reverse. We cannot rule this out in the case of globalisation


Q110: What features of many ELDCs lead to the need for different marketing and distribution methods on the part of MNCs?

A: a) reduced creditworthiness of many consumers, hence scarcity of credit cards for Internet sales b) limited (though growing) middle class able to buy big-ticket items such as cars c) a different attitude to intellectual property with more companies prepared to copy illegally (books, software, films)


Q111: Why might pre-paid mobile phone cards have been essential to the growth of mobile phones in ELDCs?

A: In ELDCs consumer credit is often not widely understood, and repayment difficult to enforce. A mechanism for securing payment upfront is essential if new technologies are to take off

Comment: Mobile phones also have an advantage over land lines in ELDCs in that an expensive investment in a land line network is not required

3.3.5(3) Global market niches

Q112: Why are luxury brands among the biggest winners of globalisation?

A: Luxury brands face the problem of not being able to widen their market without damaging their exclusivity. A global market provides many times the opportunity of any one national market to sell more while still being available to only a tiny proportion of the most wealthy people

Comment: Hotel chains, jewellery, perfume, clothing and automobiles all provide examples


Q113: Why do non-luxury products appealing to a relatively small proportion of the population also stand to gain from globalisation?

A: Again, provided the interest is widespread across the world, a global market provides an enormous increase in size over a national one

Comment: Many sports businesses benefit from their global reach - for example, Wimbledon and Manchester United both gain most of their income from international exposure


Q114: Some enterprises exist solely on account of their international flavour. Give some examples.

A: The Olympics, London Fashion Week, Frankfurt International Book Fair, Cannes Film Festival, Esperanto, international arms fairs, the Nobel peace prize, Formula 1, the Red Cross

Comment: Many industries have room for one or more global showcases – whether run on a profit or not-for-profit basis. Because reputation is everything, entry barriers are very high


Q115: What characteristics would you associate with the international subculture based around the motorbike?

A: Youth, economy, masculinity, adventure, mobility, speed, excitement

Comment: Any motorbike manufacturer will be able to tap into a global understanding of what riding a motorbike is all about


Q116: Why do satellite launches form a global niche market?

A: The fixed costs are very large, and the demand for the service relatively small, so there is only room for a handful of companies worldwide

Comment: As technology advances and the fixed and variable costs come down so the industry is becoming more conventional in its market structure

3.3.6 Are multinationals a force for good or should they be controlled?

The short answer is – yes, they are a force for good; and yes, they should be controlled

This topic looks at the benefits and disbenefits associated with multinational operations and how they can be controlled

3.3.6(1) Benefits that multinationals bring to overseas countries

Q117: What is a multinational [transnational] corporation [MNC/TNC]?

A: A large corporation or company with offices and/or factories in several countries.

Comment: The common features of a range of definitions is that the company is large and that it has significant investments in at least two countries. Whether a given company is an MNC must be subjective as there is no agreement as to how large the firm (or its investments) have to be


Q118: Why does international trade benefit every country that takes part in it?

A: The theory of comparative advantage (see 3.3.3) shows that every country stands to gain from free trade in total

Comment: The phrase ‘diffuse benefits, concentrated costs’ explains why free trade is often opposed by politicians. The gains are spread over the whole population while the costs are focussed on individual industries


Q119: What benefits to market structure does international trade bring?

A: Markets which are opened to free trade tend to become more competitive to the benefit of consumers, who may now access the cheapest global price

Comment: There is, on the other hand, the possibility that an MNC will wipe out local producers and establish a monopoly


Q120: What is the connection between international trade and MNCs?

A: The vast majority of int’l trade is carried out by MNCs – so the ‘gains from trade’ as explained by comparative advantage and the gains from having more competitive market structures are gains brought about in the main by MNCs

Comment: MNCs get a separate section in the specification – but they cannot easily be separated from the globalisation phenomenon


Q121: What has been the main source of demand that has fuelled China’s extraordinary growth rates?

A: Exports. We saw in Table 3.8 that these consist of 46% of its GDP.

Comment: With this growth has come a rapid increase in employment and in China’s GDP per head. MNCs have been crucial to this process.


Q122: Does the involvement of MNCs in the Fair Trade movement benefit overseas countries?

A: Yes: Fair Trade guarantees a minimum price for commodities such as coffee, giving its few selected growers security of income

Comment: While Fair Trade is a growing movement, it will always be a very small proportion of ELDC exports. By far the greater part of MNC’s benefits comes from their general involvement in the economies of ELDCs


Q123: Early in 2010, Google threatened to withdraw from China unless its search engines were allowed to operate without filtering sensitive subjects such as human rights in China. Is this pressure from Google a benefit to China?

A: Yes, if you believe that human rights are a universal value

Comment: The argument is often put that MNCs exert undue influence over host governments – but this influence may be a force for good

3.3.6(2) Potential negative impact of multinationals on overseas countries

Q124: Under what circumstances might an MNC be able to bully an ELDC in trade disputes?

A: If an ELDC is effectively a client state of a superpower. One way the superpower may take advantage of this is by the trade negotiations of its MNCs

Comment: Bullying by MNCs is normally only possible if it reflects an underlying geopolitical situation, where two countries have an unequal relationship


Q125: Why is the MNC Gazprom, provider of 83% of Russia’s energy, able to bully Ukraine?

A: Ukraine relies on its Gazprom for all its gas i.e. Gazprom is a monopsonist (sole supplier)

Comment: In both January 2006 and January 2009, Russia cut off Ukraine’s gas supply. Ukraine also has some leverage: gas for EU customers from Russia goes through Ukraine’s pipeline. Ultimately Russia’s greater military and economic power puts Ukraine at a negotiating disadvantage


Q126: In the nineteenth century, Britain went to war with China in 1839-42 and 1856-60 to force China to allow British traders to sell opium in its territory. Opium is a highly addictive drug with a current Class A rating. Does this illustrate the potential negative impact of MNCs?

A: Up to a point, yes – the unrestricted sale of opium was an economic and social disaster for China. But the real problem was the underlying inequality in political, military and economic terms


Q127: MNCs typically pay much less to staff in ELDCs than they would in their home country – indeed that is the main reason why so much manufacturing has been relocated to SE Asia. Does this amount to exploitation of local labour?

A: It is difficult to argue that this is immoral when local labour is far better off than it would have been without the MNCs.

Comment: Indeed, this process is the fastest known way of increasing those low wages


Q128: Working conditions may also be very much worse in ELDCs than in MNC’s home countries with longer hours of work, limited rights to organise and primitive health & safety measures. Is this a ‘negative impact’ from the MNC?

A: Again, the real issue is what the impact on local working conditions really is. In all probability, the working conditions provided by MNCs will be superior to those provided by local companies, so that local workers will experience an improvement


Q129: Since 1977(!) Nestlé has been subject to a boycott from many on the basis that its promotion of milk formula in ELDCs discourages breast feeding, thereby harming the health of the baby. Is this a ‘negative impact’ of an MNC?

A: Potentially, yes. The same point could be made of the tobacco, gambling and alcohol industries in both an international and a domestic context

Comment: Companies selling products which may be harmful need to be regulated by law


Q130: MNCs are at the forefront of using up non-renewables such as oil & coal, and the exploitation of renewables such as timber at unsustainable rates. Does this create a negative impact?

A: It may well do so, though this has to be balanced against the benefits that such activity brings

Comment: MNCs may well behave more responsibly in terms of environmental impact than local companies, if only because they will be under more scrutiny


Q131: In 1984 in Bhopal, India a leak of a deadly chemical from a plant that was 51% owned by the American company, Union Carbide, lead to an immediate death toll in the region of 4,000 to 15,000. Can we blame MNC ownership for this?

A: Probably not. Industrial disasters like the explosion of the Chernobyl nuclear reactor in 1986 in the former Soviet Union occur without MNCs.

Comment: Avoidable disasters are less common in mature democracies where culprits are made to pay

3.3.6(3) Can multinational firms be controlled?

Q132: Do MNCs or their host countries generally have the negotiating advantage?

A: Unless the host state is in a position of substantial dependence relative to the MNC’s home country, then the host country should have the upper hand

Comment: We have already looked at some of the exceptions: Ukraine versus Russia at present, and China versus Britain in the nineteenth century


Q133: “The assumption has always been that the China market is too big to walk away from. Foreign firms accept the difficult commercial conditions, the tough competition, government interference or censorship because the prize is worth it.” [BBC news, 13/1/2010] Does this suggest that China cannot control MNCs?

A: No: MNCs go into China very much on China’s terms. The WTO is not powerful enough (yet) to enforce common rights of access to global markets


Q134: In 2004, the EU Competition Commission fined Microsoft €497m for uncompetitive practices followed by a further fine of €899m in 2008 for being slow in implementing the remedies imposed at the earlier hearing – total EU fines on Microsoft are now $2.5 billion. Does this suggest Microsoft can be controlled?

A: In the case of the EU, yes.

Comment: The EU market is far too large for Microsoft simply to walk away


Q135: What pressure can be brought to bear on MNCs with regard to working conditions in ELDCs if the host government does not see it as an issue?

A: Pressure groups have had some success through adverse publicity and boycotts in shaming MNCs into improving working conditions

Comment: The problem is most acute with low-end MNCs like Primark whose business model relies on ‘cost leadership’ i.e. cost minimisation


Q136: How might an MNC seek to evade responsibility for the working conditions of those who make its products?

A: Subcontract the manufacturing process to local firms, which will not attract the attention of Western pressure groups like MNCs do

Comment: It is now common practice for MNCs to accept some responsibility for the working conditions of their subcontractors – in response to criticism of this loophole


Q137: How do the boycotts and street protests organised by student-centred groups such as People & Planet exercise influence on MNCs?

A: By raising the subject of working conditions in ELDCs in the public perception, they help to create a climate in which MNCs feel compelled to address the issue

Comment: While it is difficult to point to concrete results from such activities, their role in changing public attitudes should not be underestimated


Q138: Many High Street retailers have joined the ETI (Ethical Trading Initiative), “a ground-breaking alliance of companies, trade unions and voluntary organisations. We work in partnership to improve the lives of workers across the globe”. Why might they have joined?

A: Either out of conviction, or a feeling that it pays to be seen to be addressing public concerns

Comment: While ETI codes of conduct are often broken, it does at least represent a start


Q139: Can multinational firms be controlled?

A: In large measure, yes. MNCs are in a more competitive situation than ever before, with American, Japanese and European MNCs joined by ones from China and India – among others. The days when a small country could be dictated to by a US multinational are fast disappearing

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Economics and Business Studies A level quiz, 2010 Unit 3 International Business more resources on...

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