1.4 Economic Environment

1.4.1 Mixed and market economies
1.4.1 There are three types of economies:

 Ø   Market economy

 Ø   Centralized/Command economy

 Ø   Mixed economy

Market economy:

 Ø   Consumers choose which goods and services they want

 Ø   Producers decide what is going to be supplied without government controls or interference

Centralized/Command economy

 Ø   Decisions are taken by the government (covers production and distribution)

 Ø   Types of goods/services produced are most likely to be different that those selected by private firms and individuals in a market economy

Mixed Economy

 Ø   Balance between market and centralized economy

 Ø   Goods and services provided are according to market economy but production and supply of other products is subject to government decision-making

1.4.2 International trade (access to markets/tariffs)
 1.4.2 International trade  (access to markets/tariffs)  

 Show an appreciation of how international trade influences an economy and its business sector by creating opportunities for growth, increased competition and consumer choice 

 Summary: 

 1. The world depends on international trade to provide the goods and services people want.

 2. International trade presents both opportunities and treats to businesses.

<p style="text-indent: -18pt;"> 3. International trade also provides benefits to consumers.

<p style="text-indent: -18pt;"> 4. Changes in exchange rates can influence demand for exports and imports.

<p style="text-indent: -18pt;"> 5. Governments may erect barriers to trade in order to protect the domestic economy.

 • Explain how international trade creates opportunities and problems [threats] for business units 

<span style="font-size: 10pt; font-family: Calibri; color: rgb(0, 0, 144);">Opportunities ' '<span style="font-size: 10pt; font-family: Calibri; color: rgb(54, 95, 145);">(Access to a larger market, increased sales, greater profits, growth) 

<p style="text-indent: -18pt;"> -   Access to a larger market; this can be especially important if the domestic (home) market for a product is small or is in decline

-  Increased sales as a result of selling in a larger market; leading to greater profits and growth as a result of increased sales and therefore production, leading to economies of sales.

<span style="font-size: 10pt; font-family: Calibri; color: rgb(0, 0, 144);">Threats ' '<span style="font-size: 10pt; font-family: Calibri; color: rgb(54, 95, 145);">(Increased competition and marketing costs, danger of over-capacity, weaker businesses may fail)  

<p style="text-indent: -18pt;"> -   Increased competition both in domestic markets and international markets

<p style="text-indent: -18pt;"> -   Increased marketing, production and distribution costs

<p style="text-indent: -18pt;"> -   Over-capacity if there are too many businesses operating in the market

<p style="text-indent: -18pt;"> -   Failure of weaker businesses that cannot compete

<span style="font-size: 10pt; font-family: Calibri; color: rgb(0, 0, 144);">Strategy development 

<p style="text-indent: -18pt;"> -   Increased marketing

<p style="text-indent: -18pt;"> -   Competitive pricing strategies

<p style="text-indent: -18pt;"> -   Developing products that more closely meet the needs of customers

<p style="text-indent: -18pt;"> -

 Expanding into international markets: 

<p style="text-indent: -18pt;"> -   Developing a niche market

<p style="text-indent: -18pt;"> -   Growing as a business, take over or merging with other businesses operating in the same market, or working in partnerships and joint ventures with businesses in other countries

<span style="font-size: 10pt; font-family: Calibri; color: rgb(0, 0, 144);">Problems of entering new markets abroad 

<p style="text-indent: -18pt;"> -   Language problems

<p style="text-indent: -18pt;"> -   Costs of selling abroad (distribution and trading costs)

<p style="text-indent: -18pt;"> -   National culture (taste differ from country to country)

<p style="text-indent: -18pt;"> -   Lack of essential knowledge (trade barriers and restrictions)

-  Absence of guidance on legal matters

<span style="font-size: 10pt; font-family: Calibri; color: rgb(0, 0, 144);">Benefit for consumers 

<p style="text-indent: -18pt;"> -   Availability of products from all over the world

<p style="text-indent: -18pt;"> -   Increased competition between suppliers

<p style="text-indent: -18pt;"> -   Greater consumer choice (wider range of products to choose from)

<p style="text-indent: -18pt;"> -   Better quality products

<p style="text-indent: -18pt;"> -   Increased consumer choice

<p style="text-indent: -18pt;"> -   Lower prices

<p style="text-indent: -18pt;"> -   Improved customer service

<span style="font-size: 10pt; font-family: Calibri; color: rgb(0, 0, 144);">Rising exchange rate (appreciation) 

<p style="text-indent: -18pt;"> -   Higher price exports

<p style="text-indent: -18pt;"> -   Fewer sales abroad

<p style="text-indent: -18pt;"> -   Cheaper imports

<span style="font-size: 10pt; font-family: Calibri; color: rgb(0, 0, 144);">Falling exchange rate (depreciation) 

<p style="text-indent: -18pt;"> -   Lower price exports

<p style="text-indent: -18pt;"> -   Increased sales abroad

<p style="text-indent: -18pt;"> -   More expensive imports

<span style="font-size: 10pt; font-family: Calibri; color: rgb(0, 0, 144);">Barriers to international trade 

<p style="text-indent: -18pt;"> -   <span style="font-size: 10pt; font-family: Calibri; color: rgb(227, 108, 10);">Tariffs  – import duties of good entering a country. The effect is to incease the price of goods, helping home producers to compete with foreign producers, increasing the demand for home-produced goods

<p style="text-indent: -18pt;"> -   <span style="font-size: 10pt; font-family: Calibri; color: rgb(227, 108, 10);">Subsidies  – the government gives money to home products, making domestically produced goods more attractive to buy

<p style="text-indent: -18pt;"> -   <span style="font-size: 10pt; font-family: Calibri; color: rgb(227, 108, 10);">Quotas (quantitative restrictions)  – limits on the volume of imports allowed into the country

<p style="text-indent: -18pt;"> -   <span style="font-size: 10pt; font-family: Calibri; color: rgb(227, 108, 10);">Non-tariff barriers  – hidden barriers to trade such as imposing technical regulations which importers will find difficult to meet

1.4.3 Problems of entering new markets abroad
<p style="line-height: normal;"> The different ways to enter overseas markets 

<p style="line-height: normal;"> When you decide to enter an overseas market, it's important that you identify the best approach for your business. There are four main ways to sell to customers in overseas markets. You may find you need to use more than one entry strategy, depending on the markets you target and the products you offer.

Opening an overseas operation
This involves opening your own branch or subsidiary in the new market, or entering into a joint venture with a local business. Having a presence on the ground can be valuable, but setting it up and maintaining it may involve major resource commitments.

Using an overseas sales agent
A sales agent acts on your behalf in the overseas market, either by introducing you to a customer or by receiving commission on any sales to that customer. Agents are used extensively in the European Union and are protected from abusive business tactics by law. Ensure that you understand what you have agreed and seek legal advice on your agreement, as it's not advisable to operate without an agency agreement in place. The key benefit of using an overseas sales agent is that you get the advantage of their extensive knowledge of your target market.

Using an overseas distributor
A distributor buys from you and then sells on at a higher price to their market and customers. They take full responsibility for the import of your goods. A distributor takes ownership of the goods and therefore can do with them as they wish, which means you must trust them with your brand. It is always worth spending time ensuring that the relationship is documented and well thought through.

Important considerations

There is much more to exporting than simply generating overseas sales. An intermediary can help you with issues including customs and other paperwork, shipping, warehousing and after-sales service. Selling direct means you will have to handle these issues yourself.

When selling overseas, you can sell your product or service directly to customers or use an intermediary. You may decide a mix of these approaches is best for your business. There is no 'one size fits all' solution.

You should consider the implications of each method in terms of: An intermediary may be able to handle issues such as paperwork, shipping and warehousing. However, you will have less direct control. Selling directly may give you more control, but you will have to bear higher costs. See our guide on outsourcing
 * the direct and indirect costs, such as investment in an overseas operation, or the heavy discounts often demanded by distributors
 * how much control you'll retain over how your product is sold, and how much you'll need to delegate to partners or intermediaries
 * which export-related risks you'll have to bear, such as exchange-rate movements, non-payment risks, longer trading cycles and delays due to documentation problems

Opening operations in overseas markets
Opening an operation in your overseas market is generally the most costly and time-consuming way to enter it, but the rewards can be great.

Local rules may restrict your options, but the three main ways to open an overseas operation are to set up:
 * a local office - staffed by one or more of your employees
 * a locally registered subsidiary company - a new business in the target market, subject to local company, employment and tax rules, and generally hiring some local staff
 * a joint venture - partnering with a local business to set up a new business with ownership shared between you

Advantages
A local office in this way gives you the chance to identify and exploit opportunities in your target market. It also gives you the flexibility to control your operation, and expand if necessary. There are other benefits:
 * While intermediaries may opt for short-term sales, this way you can plan for the long term.
 * Your customers will take you more seriously if you have a local base. This is particularly true if your products require specialist after-sales service.
 * If you use a joint venture, you will be able to share the risk. You will also benefit from your partner's local knowledge and reputation.
 * If you operate alone, all profits from the enterprise remain yours alone.
 * A local subsidiary company offers limited liability if things go wrong. It is also easier to expand than a local office.
 * It provides an opportunity to extend your intellectual property rights and registrations into other markets.

Disadvantages
This option may require significant resources, and involves greater administrative and managerial burdens than other approaches to entering overseas markets: There are important legal and financial implications involved in setting up an overseas business. You should take advice from your solicitor, accountant or business adviser, as well as from similar professionals in the target market.
 * You will need to understand corporate, employment and tax law in the new territory, and use local specialists to help you.
 * You may need to rebrand the business to attract local attention or if your existing business or product name has a different meaning in the new territory.
 * Costs will be high if things go wrong.
 * You have to take all the risks yourself (if you don't work with a local partner). These could include non-payment or regulatory compliance problems.

Using an overseas agent
A sales agent acts on your behalf in the overseas market by introducing you to customers who you supply and invoice direct. They are paid a commission for any sales they make ranging between 2.5 per cent and 15 per cent. The key benefit of using an overseas sales agent is that you get the advantage of their extensive knowledge of the target market.

While there are clear benefits, agency relationships can also have downsides.

Advantages

 * You avoid the recruitment, training and payroll costs of using your own employees to enter an overseas market.
 * An agent should be well placed to identify and exploit opportunities.
 * Your agent should already have solid relationships with potential buyers - it might take you some time to build up your own contacts.
 * Using an agent allows you to maintain more control over matters such as final price and brand image - compared with the other intermediary option of using a distributor.

Disadvantages

 * You remain responsible for shipping and other trade-related logistics - although your agent should be able to help.
 * You need to specify in an agent's contract if you need them to credit check your customers for you.
 * Arrangements must be made to allow access to your sales ledger as part of the commission payments process.
 * After-sales service can be difficult when selling through an intermediary.
 * You may lose some control over marketing and brand image, compared with entering the market yourself.

Using an overseas distributor
A distributor buys your goods from you and then takes full responsibility for selling them on in the overseas market. While the role of a sales agent is to find you customers, a distributor is your customer.

Advantages

 * The main advantage of using a distributor is simplicity. Distributors enable you to access international markets while avoiding logistics issues and many trade-related risks.
 * The distributor is usually responsible for the shipment of goods, and the accompanying customs formalities and paperwork.
 * If you sell to a UK-based distributor, you avoid currency-related risks.
 * It would be easier for a distributor with an established reputation and contacts list to introduce a new brand to the market than it would be for you.
 * Distributors generally spend on marketing to support their sales effort, although they will sometimes expect you to make a financial contribution.
 * A distributor will often offer credit facilities to potential customers.
 * Many distributors carry a stock of the products they sell - so they buy in bulk, and take care of warehousing and inventory control in the overseas market.

Disadvantages
It's important to seek advice from your legal adviser before concluding a distributorship agreement.
 * In return for taking on your trade-related risks and burdens, distributors will expect heavy discounts and generous credit terms from you.
 * You may lose control of the way your products are marketed and priced.
 * If you use a sales agent, you can use the commission structure to motivate them - there's no similar mechanism with a distributor.
 * Distributors often demand a long period of exclusivity, so you need to be sure that you choose one that has experience selling your type of products and has customers for the kind of goods you sell. See the page in this guide on finding and contracting with overseas agents and distributors.

1.4.4 Competition and business
• Identify the impact of competition on business in terms of consumer choice and sales

• Show awareness of the potential for consumer exploitation in uncompetitive markets

1.4.5 Concept of exchange rates and how changes in them affect business
<p style="margin-bottom: 0.0001pt; line-height: normal;"> Appreciate the implications of tariff barriers, quotas and exchange rate changes for businesses that trade internationally 

<p style="margin-bottom: 0.0001pt; line-height: normal;"> • Awareness of how restrictions on trade impact on businesses that export and import 

<p style="margin-bottom: 0.0001pt; line-height: normal;"> • Understand the impact of exchange rate movements on competitiveness and profitability 

<p style="margin-bottom: 0.0001pt; line-height: normal;"> Answer: 

<p style="margin-bottom: 0.0001pt; line-height: normal;"> An exchange rate is the price of one country’s currency in relation to that of another. So, for example, an exchange rate of 1HK$=10pKr means that 1HK$ is worth 10R. Alternatively, 1pKr is worth 0.1HK$. Exchange rates are determined on foreign exchange markets throughout the world. R=the main reason why exchange rates are so important to business is because of their influence on the price of imports and exports. All but a very few small firms use at least some goods and services imported from abroad. There are large numbers of businesses are finding that they have to export their products in order to grow or survive. Thus the majority of firms are affected in some way by exchange rates. A fall in the exchange rate will affect the price of a business’s exports and the price it pays for imports. The effect of rising exchange rates has the opposite effect to falling exchange rates. A rise in the exchange rate can cause the price of exports to rise and the price of imports to fall. Overall the effect is likely to be negative. Unstable exchange rates can also make it very difficult for firms to plan for the future. A rise in the exchange rate, could turn a previously profitable export order into a loss maker.