Business Structure

Key De nitions

Globalisation : the increasing freedom of movement of goods, capital

and people around the world.

Free Trade : No restrictions or trade barriers exist that might prevent or

limit trade between countries.

Tari s : 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.

Multinational Business : Business organisation that has its

headquarters in one country, but with operating branches, factories and
assembly plants in other countries.

Privatisation : Selling state-owned and controlled business

organisations to investors in the private sector.

Local, National and International businesses

Local businesses operate in a small part of a country.

National businesses have branches or are operating across most of the

country.

International businesses operate in more than one country. These are

also called Multinational businesses.
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 Nature of international trading links

All countries, to a greater or lesser degree, engage in international trade

with other countries. By trading together, countries can build up
improved political and social links and this can help resolve di erences
between them.

Potential risks from international trade :

• There may be loss of output and jobs from those domestic rms that
cannot compete e ectively with imported goods.

• There may be a decline, due to imports, in domestic industries that

produce very important strategic goods.

• Newly established businesses may nd it impossible to survive

against competition from existing importers.

• Some importers may ‘dump’ goods at below cost price in order to

eliminate competition from domestic rms.

Free trade and globalisation

The most common forms of trade barriers are tari s, quotas and
voluntary export restraints. When any of these are used, this is called
protectionism.

Bene ts of free trade between nations :

• By buying products from other nations, consumers are o ered a wider
choice of goods and services.

• Imports of raw materials can allow a developing economy to increase

its rate of industrialisation.

• Importing products creates additional competition for domestic

industries which would encourage them to keep cost and prices low
and make their goods well designed and of high quality.

• Specialisation can lead to economies of scale.

The recent moves towards Free Trade have been driven by :

• The World Trade Organisation : 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.

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 Multinational businesses

These rms have bene ted greatly from the freedoms o ered by
globalisation.

Why become multinational?

1. Closer to main markets
• Lower transport costs for nished goods.

• Better information about consumer tastes and therefore operating

closer to them.

• May be viewed as a local company and therefore gain customer

loyalty.

2. Lower costs of production

• Lower labour rates.

• Cheaper rent and site costs resulting from lower demand for
commercial property.

• Government grants and tax incentives designed to encourage the

industrialisation of such countries.

3. Avoid import restrictions.

4. Access to local natural resources.

Potential problems for multinationals

• Communications links with headquarters may be poor.

• Language and culture di erences could lead to misunderstandings

• The skill levels of the local employees are likely to be low.

Evaluation of the impact on ‘host’ countries of multinational

operations.
Advantages :
• The investment will bring in foreign currency.

• Employment opportunities will be created and training programmes

will improve the skills of local people.

• Tax revenues to the government will be boosted from any pro ts

made by the multinational.

• Management expertise in the community will slowly improve.

• The total output of the economy will be increased and this will raise
gross domestic product (GDP).

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 Drawbacks :
• Exploitation of the local workforce might take place.

• Pollution from plants might be at higher levels than allowed in other

countries.

• Local competing rms may be squeezed out of business due to

inferior equipment and smaller resources.

• Pro ts may be sent back to the country where the head o ce of the
company is based, rather than kept for reinvestment in the host
nation.

• Extensive depletion of the limited natural resources of some countries

has been blamed on some large multinational corporations.

Privatisation

The policy of privatisation includes other features apart from the

outright sale of state assets, for example making state-owned schools,
hospitals and local authorities ‘contract out’ many services to private
business. The main aspect of privatisation is the transfer of state-
owned industries into the private sector by creating public limited
companies.

Arguments for privatisation :

• The pro t motive of private-sector businesses will lead to much
greater e ciency than when a business is supported and subsidised
by the state.

• Decision-making in state bodies can be slow.

• Privatisation puts responsibility for success rmly in the hands of the

managers and sta who work in the organisation.

• Sale of nationalised industries can raise nance for government,

which can be spent on other state projects.

• Private businesses will have access to private capital markets leading

to increased investment in these industries.

Arguments against privatisation :

• Through state ownership, an industry can be made accountable to
the country.

• Many strategic industries could be operated as ‘private monopolies’ if

privatised and they could exploit consumers with high prices.

• Breaking up nationalised industries will reduce the opportunities for

cost saving through economies of scale.
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