external environment - business and international competition
Richard Bowett describes the key features of international competition from a business studies perspective.
Trade Barriers
The world is full of trade barriers which make exports and imports more difficult and more expensive. There are considerably fewer trade barriers than there used to be. This reduction is mainly due to the work of the WTO, and this organisation is working to further reduce trade barriers. At the same time, there has been a growth in the number of regional trading blocs. The EU is perhaps the best known of these, but there are others such as NAFTA , the Andes Pact in the east of S America, Mercosur in the west of S America and ASEAN . These blocs promote trade within the bloc, but often erect further barriers between blocs.
Costs of Production
Competing in a market depends on having as low or preferably lower costs of production than competitors. This is not as simple as having access to cheap raw material and other factor inputs (the factors of production used by businesses). It also depends how efficiently these factors are used. What counts is productivity ie the amount of output produced from a given amount of input.
Example:
Suppose two farmers use land to produce crops. In Country A a farm costs £5000 and in Country B a farm costs £10 000. We might think land is cheaper in country A so their farmers have lower costs and a competitive advantage. But it also depends on how much is produced. Suppose Country B also has superior knowledge and technology in farming, and produces 150 tons of crop instead of 50 tons of crop in Country A. The unit cost of each ton is £100 per ton in Country A and £66.67 per ton in Country B. So it is in fact Country B that has the competitive advantage. We than have to think about what gives low per unit costs, and the answer to that is efficiency and productivity, productivity of all the factors of production (land, labour, capital and enterprise) and productivity most of all of labour because the UK and most of its competitors are high-wage economies.
The Behaviour of Businesses
Low costs are a good place to start a new business from, but you still have to sell the product. To do this you must offer customers (industrial and consumers) a product which meets their needs in the fullest way possible, needs for a good price, needs for quality, needs for reliability and so on.
Some businesses still do not behave as if their customers are the most important things to business success. A change in business behaviour is often needed to ensure that the customers are the prime focus of business activity, that their needs are fully met (including adapting as these needs change – innovation) and that the low and efficient costs are used as a platform for successful fulfilment of those needs.
However, there is a possible problem in that it is more difficult to understand the needs of export customers who may have different values and priorities than domestic customers; successful export businesses make the effort to understand these differences properly.
International Organisations and Groupings of Developed Economies
The main groupings and categories of economies are as follows:
1. The European Union (see other tutor2u revision notes)
2. The World Trade organisation ("WTO"). This used to be called GATT (General Agreement on Tariffs and Trade). It has worked hard since 1945 to reduce international barriers to trade with considerable success, despite some very hard-fought battles. Almost all countries are members. The most recent new member is China, which had fought hard for many years to gain acceptance. The advantage of membership is that the same rules then apply to all members (MFN – Most Favoured Nation Status – which means your access to a country’s market is as good as the ‘most favoured nation’) and your exports can’t be kept out for any reason, economic or political. Breaches of the rules are referred to a kind of ‘court’ and the WTO can fine countries large sums of money for breaking the rules, as the US is alleged to have done with its recent import duties on steel.
Every few years the WTO arranges a new ‘round’ of talks with the aim of getting all the members to agree to some new reduction in barriers to trade. Because the interests of different members are so different (eg developed countries v. developing countries) this can be a very difficult job. Lower barriers to trade mean lower costs and more efficiency. More efficiency means more growth. The work of the WTO since 1945 has led to a dramatic increase in world trade, and has arguably contributed to the growth of all economies during that time.
3. G-7. This a ‘club’ of the 7 biggest economies in the world; the USA, Japan, Germany, the UK, France. Italy and Canada. They meet to discuss the world economy, the interests of themselves, and possible economic co-operation such as exchange rate co-ordination. Russia has observer status in order to make it feel better about itself.
4. The OECD (Organisation of Economic Co-operation and Development). This is a much bigger club of all the developed countries, and nearly-developed countries, in the world. It was originally set up in 1945 to co-ordinate the economic recovery of the war-damaged countries of Europe, but it has a much bigger and wider role of discussion and co-operation between countries now. Its HQ in Paris publishes very well-respected economic analyses and forecasts.
Eastern Europe
One of the most significant political changes of the last century was the collapse of the Soviet empire in 1989. This has allowed freedom to a number of Eastern European countries. They have gradually, and with difficulty, converted their centrally-run command economies to market economies. This has opened up new opportunities for EU businesses including UK businesses:
1. A large number of new consumers, although most of them still have fairly low incomes.
2. There are opportunities for joint ventures, where EU technology and management skills can be combined with cheaper labour and land.
3. On the other hand, any Eastern European business that manages to update itself can use its lower cost base to become a competitive threat to EU & UK businesses.
4. Eastern Europe is nearer Germany, and has historical and linguistic ties with Germany. Many Eastern Europeans speak German as a second language as opposed to English. This puts UK businesses at a disadvantage, and German businesses have already been very active in forming trading links.
The Eastern European economies have many problems for business associated with their Communist past, and the fact that the changeover to a market economy is far from complete. The main problems are as follows:
1. Bureaucracy. Many things eg permissions are still controlled by the government and the process of gaining these permissions can be very complex and time-consuming. In Russia this is dealt with by bribery. Protection money is also demanded by organised crime (the ‘Russian Mafia’).
2. Low incomes. Many E European consumers simply have very little spare money to spend.
3. Political instability. The democratic political systems are still new and haven’t in all cases reliably settled down. Bulgaria and Rumania are problem cases.
4. Infrastructure is still very poor. This is not merely a matter of roads, railways and electricity supplies, but also the financial infrastructure to borrow money or raise finance by selling shares. The legal infrastructure to enforce contracts is also poor.
5. Economic conditions are still fragile because they are so new after so many years of the command economy system. Inflation has been a problem in some countries, especially Russia where it reached 1000% at one stage. There is a possibility of sudden economic collapse.
6. Some countries, such as the Ukraine, Byelorussia, and Russia itself, have made limited progress towards a market economy, and are very risky places to do business.
Developing Economies
This is a very broad area, and it is easy to over-generalise. Mostly, these countries are in ‘the South’ and have low to very low incomes. They are also in earlier stages of economic development; many are still primarily based around raw materials and industrialisation is very limited. A smaller group has broken away and has developed more quickly. Because they are now well into the industrial stage of development they are often called NICs (newly industrialised countries).
Poor infrastructure is a common and major problem. Health and education are both limited, with high mortality rates. Financial infrastructure is also very limited. Political instability can be a major problem, and coups and even revolutions may occur. The political system is usually non-democratic and corruption and bribery may be rife. These are basic preconditions for doing business which we take for granted in the UK; indeed, very few people stop to think about them. But the absence of trust and the legal enforcement of contracts can make business impossible, especially for outsiders. So business opportunities can be very limited.
There are a few Western businesses that operate in these markets, but they have years of experience of the local scene and know how it works. The risk, however, is that they get sucked into the corruption and lower their ethical standards. Most developed countries have had to pass laws against bribery by western businesses operating in developing countries. Some western businesses, such as Nike, have has problems with pressure groups due to their behaviour in developing countries.
The Newly Industrialised NICs
The exact definition of a NIC is not always easy to give. Some ‘NICs’ eg South Korea and Singapore are now effectively developed economies, just as Japan became several decades ago. China is a NIC, but only parts of it; it is a huge country and much of it is still very backward. Thailand, Malaysia and Indonesia are all examples of NICs although they are all at different stages of development with different levels of growth, employment and income. Some of these NICs operate as cheap bases for foreign investment. Japanese businesses, for example, are very active in Thailand. Some of these NICs have their own very effective businesses eg Taiwan (arguably no longer a NIC).
Either way, these countries can offer very effective competition to business in developed economies. Local businesses have low costs, and where this is combined with educated management (often holding MBAs from the best US universities) they have become MNC s able to compete with the best MNCs from developed countries. Their low costs attract investment, especially manufacturing investment from western businesses who ‘export’ jobs.
This means previous production plants in developed countries close down, and jobs are lost. This is a very contentious area. Some people argue these jobs are lost due to ‘unfair’ competition from countries where not only wages are lower, but also the other employment costs of health and safety, paid holidays, sickness benefit and all the protection provided to workers in developed economies. The MNCs are accused of ‘exploiting’ the workers of these countries (no-one actually bothers to ask these workers what they want, to which the answer is probably a reasonably reliable job). There is pressure to ban imports from these countries unless the producers have met the same standards usual in developed economies. This, of course, is absurd because these countries are much poorer and can’t afford all these ‘perks’ just as the UK couldn’t 100 years ago.
Another way of looking at the same issue is that a developed economy develops by replacing lower-wage jobs with higher-wage jobs. This is associated with rising productivity. So, it is actually a benefit if a developed economy loses relatively simple and unproductive manufacturing jobs provided it replaces these with other and better jobs. That way UK workers get better off, and so do the workers in the developing country who previously had either an agricultural job or no job at all.
Development is a huge and complex topic which is widely misunderstood. It is best to leave it at this point, but to leave you with the thought that businesses need to be very careful what they do or don’t do in the developing world; it can be very risky.
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