MNI3701 EXAM MEMOS

MNI3701 EXAM MEMOS |Global Business Environment | Question One “China must privatise”: this is a statement that echoes the sentiment of many involved in the administration of China’s state assets. Given this statement you are required to respond to the following questions: 1.1 What is meant by the term “privatisation”? (4) Privatisation can be defined simply as the selling of government-owned economic resources to private operators. Transferring ownership from the public to domestic or foreign private sector by privatization holds many advantages for countries such as providing direct investments, providing foreign entrepreneurs and acquiring managerial expertise and technology from abroad. ` 1.2 Describe the economic system that would be most conducive to accommodating the process of privatisation? (9) A market economy is an economic system in which economic decisions and the pricing of good and services are guides solely by the combined interactions of the countries citizens and business, with little, if any, government intervention. Market economies work on the assumption that market forces, such as supply and demand are the best determinant of the pricing of G&S. it requires customer sovereignty, entrepreneurial spirit and competitiveness. A market economy can therefore be regarded as an economic system in which the major portion of the nations land, productive facilities and other economic resources are owned privately, rather than by the state. Here the supply and demand are dictated by the price mechanism. It is based on the belief that individual interest should supersede group interest because groups are bound to benefit when individual are rewarded for their initiative and achievements. There is a broad agreement that certain conditions are necessary for the proper and smooth functioning of a market economy. These conditions are freedom of choice, free enterprise and price flexibility. A market economy implies a large degree of economic freedom where citizens can exercise their right to own property, invest their earnings, trade internationally and participate equally in all aspects of the economy within fair legal and institutional frameworks. 1.3 Explain what is meant by the concept “index of economic freedom” in determining the scope of privatisation that can be achieved, when countries embark on the privatisation process? (6 marks) The Index of economic freedom – measures countries economic freedom based on 10 measures of economic openness, regulatory efficiency, rule of law & competitiveness. Basic principles emphasised in index are individual empowerment, equitable treatment & promotion of competition. 10 categories regarded as Economic Freedom Component Score include Business freedom, Trade freedom, Fiscal freedom, monetary freedom, Investment Downloaded by: samanthap84 | Distribution of this document is illegal S - The study-notes marketplace freedom, Financial freedom, Labour freedom, Government spending, Property rights, Freedom from corruption Determinants of economic freedom 1. Corruption of judiciary, customs service & government bureaucracy 2. Non-tariff barrier to trade (import bans, quotas, strict labelling & licensing) 3. Fiscal burden of government (income tax, corporate tax, gov spending) 4. Rule of law, efficiency in judiciary & ability to enforce contracts 5. Regulatory burdens on business (health, safety & environment) 6. Restrictions on banks & fin services (selling securities & insurance) 7. Labour market regulations (work weeks, separation pay) 8. Informal market activities (corruption, smuggling, piracy) The less economic freedom a country has the more the reason to privatise. 1.4 What are the barriers to privatisation? • Native conservatism - politicians do not want to try new things which may turn out to be public relations disaster or costly mistake, • The barriers to privatisation include the resistance to change in political ideology • Job loss. Due to the additional financial burden placed on privatized companies to succeed without any government help, unlike the public companies, jobs could be lost to keep more money in the company. • Reduced wages and benefits: outsourcing public services sets off a downward spiral in which reduced worker wages and benefits can hurt the local economy and overall stability of middle and working class communities • Inferior quality products. Private, for-profit companies might cut corners on providing quality goods and services in order to maximize profit • Improvements. the government is motivated to performance improvements as well run businesses contribute to the State's revenues. • Corruption. Government ministers and civil servants are bound to uphold the highest ethical standards, and standards of probity are guaranteed through codes of conduct and declarations of interest. However, the selling process could lack transparency, allowing the purchaser and civil servants controlling the sale to gain personally. • Accountability. The public has less control and oversight of private companies. • Civil-liberty concerns. A democratically elected government is accountable to the people through a parliament, and can intervene when civil liberties are threatened. Question two There are various strategic orientations by which multinational enterprises (MNEs) can pursue their international objectives and strategies". Given this observation you are required to: 2.1 Describe "polycentric orientation" as a strategic orientation of MNEs. (4) S - The study-notes marketplace Downloaded by: samanthap84 | Distribution of this document is illegal S - The study-notes marketplace In Polycentric orientation, the culture of the country in which a subsidiary or foreign operation is located receives priority and dominates decision making. Foreign subsidiaries accordingly enjoy relatively greater freedom, the entire MNE is highly decentralised and subsidiaries are predominantly staffed with people from the host country. 2.2 What type of international strategy should an MNE adopt if it faces relatively weak pressures for local responsiveness and cost reductions? DISCUSS this strategy (10) Think of international software giant, Microsoft. It does not really face pressures to reduce costs, nor does it face much pressure to adapt its product to local conditions. Apart from making it available in different languages, its software is expected to do much the same thing all over the world. Microsoft is very good example of an MNE that follow an international strategy because: • It has a valuable core competence or strategic resource that indigenous competitors in foreign markets lack • It faces relatively weak pressures for local responsiveness and cost reductions • The potential to obtain economies of scale and the benefits of being sensitive to the preferences in specific country markets are of little value. Should pressures for cost reductions or local responsiveness (or both) increases over time as an organisation grows internationally, it may need to consider changing to a different international strategy generally tend to: • Centralise R&D and product development functions at home • Gradually establish manufacturing and marketing functions over time in each major country in which they are involved • Limit local customisation of products in different foreign markets • Retain tight head office control over product and marketing strategy. However, due to the duplication of manufacturing facilities in various foreign markets over time, economies of scale may not be achieved and costs could become high, making his strategy inappropriate in markets with high pressure for cost reduction. 2.3 What Strategies should an MNE have to adopt if the pressures for cost reduction, as opposed to local responsiveness increase? Discuss this strategy. (10) Global strategy A global strategy makes most sense where there are strong pressures for cost reduction and where demands for local responsiveness are minimal. In a global strategy, the focus is on increasing profitability by benefiting from cost reductions that are obtained from the experience curve effects, economies of scale and location economies. The following are key characteristics of a global strategy: S - The study-notes marketplace Downloaded by: samanthap84 | Distribution of this document is illegal S - The study-notes marketplace • Mutually independent subsidiaries • Marketing of standardized products worldwide to price sensitive consumers • Global economies of scale in key activities • Leveraging of technology across many markets • Global coordination of sales and branding • Centralised decision making, control and reporting activities. • Production, marketing and R&D functions concentrated in a few favourable locations. A company, like coca cola for eg retains strong control of its production and development, intellectual property and branding functions and limited localiation of these activities are allowed.