International Business Environment - Case Study Example

International business environment Name Course Tutor Date Introduction The UK economy is under pressure from the extended impacts of economic recession. The rising level of unemployment in the UK is a major concern to policy makers. This paper presents an analysis of current policies that the English government can introduce to mitigate the economic impacts of recession. This paper presents a background of state of affairs in the Northeast of England and in Scotland. The paper develops into view into theories about optional development of economies before analyzing the recent government efforts employed in the two separate countries. Background The divide between the north and south of Britain has significantly widened since the start of the 2008 recession, and the trend is likely to worsen as the households worst hit by the increasing unemployment and falling house prices hail from Northeast of England. According to an economist report from the Price water-house Coopers on regional financial index, rising taxes, stalling wage growth, and personal insolvencies also increase the pressure on people. As the unemployment rate increases, it is once again the North East Britain is enduring the worst global economic recession, compounded with crude and austerity measures employed by the government. According to OECD report, the extended global recession in Northeast of Britain might extend until the next spring. The northern economy is experiencing weak demand for its exports. In addition, the unemployment rate in the public sector has markedly increased resulting into large amounts of delayed pensions. The unemployment rate in the North East stands at 12%, the highest in Britain and well above the national rate of 8.4% (...). Reports by accountancy firm, Begbies Traynor has revealed that the impacts of cuts in public spending is leading to a growing divide in levels of business distress in the between the north and south. Companies located in the north-west, the Midlands, Yorkshire, Wales and the east of England face increasing financial pressure, while the southeast and London are getting of relatively lightly. Northeastern region was the worst hit by the knock-on effects of heavy reliance on public sector following disproportional squeezing of many small and medium sized enterprises by the austerity programs introduced by the government. The austerity measures introduced by the government have worsened the economies of many northeastern cities. The cuts on public spending have worsened the conditions in the region already struggling with high levels of unemployment, shrinking job markets, and feeble economic growth, not forgetting poor health and poverty that is also escalating. The region is relatively dependent on the public sector, with more than 25% of jobs in the public sector. According to a report released by Fiscal Studies in 2012, the overall cut on local government spending in the region are some of the largest in the UK. With relatively low business start-ups and stocks, both at around 65% of national rates, increasing employment rates and growth in the private sector will prove difficult in many areas across the region. Notwithstanding the recession, there has been positive progress in some areas. Newcastle's economy received a strong growth prior to 2008 with employment growing rapidly than in any other major city in and outside London. In addition, there is evidence of investment and confidence despite the economic slowdown including the establishment of Virgin Money headquarters in Newcastle; private sector investment of £100million on the North Bank; completely pre-let major city center retail extension; and new office rentals across the city center. Scotland has a population of around 5 million, with approximately 2.5 million employed. The economy of Scotland is just 10% below that of UK although the country’s economy grew by 15%. The country has experienced a general shift over the past 30 years from manufacturing to services, with service sector accounting for 82% of jobs and 75% of the output. Manufacturing currently accounts for 13% of the output and 7.5% of the jobs. Towards the end of 2010, the public sector accounted for 22.4% of all jobs, and this was marginally higher than the UK at 20.5%. The Bank of Scotland’s chief economist reported that the threat of a double-dip recession hitting the country is on the decline as a survey on business suggested a slow recovery on the economy (Vina, 2012, p.1). The Scottish labor market is on the rise favorably over the past year, with rate of employment starting to rise since the mid 2010. The increase in employment in the private sector business was highest. The country experienced the steepest rise in staffing numbers in four years, attributed to increase in recruitment in the service sector. In another report, the country received the slowest rate of cost of inflation for 17 months, but this is faster than the UK average. The country’s manufacturing export value has strengthened significantly over the past year. This is an indication that the exporters have utilized the depreciating sterling to boost margins rather than volumes (Davidson, 2012, p.235). Following favorable growth in the middle of 2010, output in the Scottish economy dropped by 0.4% in the final quarter of the year (Peston, 2011). Many economists attribute this to the influence of unfavorable winter weather in December 2010. Never the less, GDP grew by 0.8% in 2010 compared to 2009. The Scottish government’s response to recession includes an approach to include recognizing the importance of capital investment as the key in kick starting the economic recovery process. This objective is evident in the recently produced Spending Review, which saw the redeployment of revenue resources to capital projects. The Scottish government is providing tax relief to small and medium business as a means of stimulating growth. The government is also playing a significant role in stimulating international investment and pulling investors into the country. The Scottish government has an enhance devolution or independent economic system enabling it to achieve an active economic competition. Adam Smith’s and Michael Porter’s theories In his famous essay, the Wealth of Nations, Adam Smith holds that nations attain wealth and function best where individuals are entirely free to use their capital and skills at their own discretion and own self interest (Smith, 1998). According to Smith, wages and prices will automatically reach optimal levels guided by invisible hands in an environment where such freedom prevails. For example, jobs that require specific training will result into fewer people making such investment, and eventually resulting into higher wages. This offers an explanation why engineers make more money than office cleaners do. In contrast to mercantilist view that believes in favorable balance of trade, Smith favored unregulated foreign trade, on principles that if Scotland produces oil at lower cost than England and if England can produce fabric at a lower cost than Scotland, then it would be beneficial for both countries to exchange these goods. According to Smith, trade between countries is beneficial. This argument is not only limited to international trade it also applies to trade within a country. Smith argued that the key determinant of wealth of nations was the productivity of its labor and that labor productivity depended on division of labor. He pointed out that as labor becomes more divided and specialized; its productivity also increases dramatically. As labor becomes more specialized, nations produce goods more cheaply and efficiently thereby increasing returns. He realized that if two individuals become more proficient through labor specialization, the cost of producing both their products decreases resulting into mutual benefit by trading and specializing. This is a state where any nation can achieve cost advantage in production of certain goods through specialization and division of labor. Economists are increasingly viewing corporate strategies in a global context. Organizations have to look at the international business environment even if they do not plan import or export. International business environment factors such as buyers, competitors, new entrants providing substitutes, and sellers may have significant influence in the domestic market. In his book, The Competitive Advantage of Nations, Michael Porter introduces a model that allows analysis on why some nations are more competitive than others are, and some sectors or industries within a nation are more competitive than others are (Porter, ME 1994). The Porters Diamond model suggests national home economic outlook of a company plays a significant role in shaping the level to which, it can achieve a competitive edge on a global market. Porter identifies four determinants: Factors of production including infrastructure, skilled labor, and material resource among others play a pivotal role in competition of a given industry. Each nation has its own unique set of factor conditions that provide initial national advantages. Production factors extend to include deregulation of markets, quality research in universities, or liquidity of national stock markets. According to Porter, when the demand for a given product is larger in the domestic market than in the foreign market, the domestic companies dedicate more attention to that product than foreign companies do, resulting into a competitive edge. High demand in the domestic market leads to national advantage. In the presence of competitive supporting industries, firms enjoy more innovative and cost effective inputs. This effect is stronger when the suppliers have strong global presence. Relative proximity to downstream or upstream industries facilitates the exchange of information and ensures a continuous exchange of innovations and ideas. Porter believes that the global market depend on dynamic conditions. Increased direct competition force firms to increase innovation and productivity. The government plays a crucial role in the Porters Diamond model. It acts as a challenger and catalyst for companies to increase their performance, for example, by introducing austerity measures. According to Porter, government can encourage such advantages by ensuring high expectation of performance, environmental standards, or encouraging buyers and suppliers to co-operate on a domestic level. The government can also stimulate local rivalry by limiting co-operation and enforcing antitrust regulations. Analysis The government program in Northeast England to reduce the deficit facing the region has done worse to increase the unemployment rate. The UK government introduced austerity measures to keep interest rates under check. According to (Folbre, 2011, p.11), more than 0.5 million people have their jobs terminated in the public sector alone if the government continue to cut on public spending. Currently, 1.4% of the employees have the agricultural sector as their employer, 18.2% in industries, and 80.4% in services. However, the agricultural sector may face labor crisis due to an aging workforce and diminishing interest in farming. Smith would argue against UK’s austerity since it goes against free trade. Austerity causes a short-term decline in economic development as resources shift from one use to another on a large scale thereby making the private sector spend more time to put back the resources to efficient use. Increased lending by the government makes the banks less competitive resulting to high credit prices offered by banks. This trend is likely to increase the dependency of economic activity on government policy. Smith would definitely reject UK’s government intervention since he believes that wages and economic development will automatically reach optimal levels in economic environments where freedom prevails. Transferring resources within different sectors of the economy would slow down economic development. The ever-increasing unemployment rates in the UK reduce the consumer-spending result into low demand in the home market, which according to Porter low demand in the national market discourages innovation and global competition. The Scottish government efforts to mitigate the impacts of recession include intensive mobilization of the public sector to protect the economy and jobs. Smith would not support such strategy due to government involvement in the economic development. On the other hand, Smith would support the Scottish government more liberal or independent economic system as it enables the country to achieve active economic competition. The Scottish government efforts to enhance economic confidence would auger well with Porter’s ideas that strong domestic or local demand enhances the global competitiveness of local firms. Michael Porter would advise the Scottish government to scan the international environmental factors before implementing economic strategies. Porter would accuse the Scottish government of leaving the people without independence. The Scottish government needs to spend the money at its disposal by focusing on achievable goals rather than abstract ideas. Government control would be beneficial in avoiding uncertainties for firms at this time of economic difficulty. According to Porter, the government move toward low-carbon economy would result into globally competitive products. References Davidson, N 2012, ‘The politics of the Scottish independence referendum’, International Socialism Journal, vol. 60, no. 137, pp. 231-239,viewed 11 April 2012, Academic Search Complete database. EconomyWatch 2010, ‘UK’s economic in brief,’ EconomyWatch, 30 June, p. 3, viewed 11 April 2012, http://www.economywatch.com/world_economy/united-kingdom/?page=3 Folbre, N 2011, ‘The Weak Heart of Economics’, The New York Times, 31 January, p.11, viewed 11 April 2012, The New York Times Archives database. Peston, P 2011, ‘UK total unemployment on the rise,’ BBC News Business, 17 August, viewed 11 April 2012, http://www.bbc.co.uk/news/business-14555264 Porter, ME 1994, The competitive advantage of nations, London, Macmillan. Smith, A 1998, On competition, Harvard, Harvard Business Press. Vina, G 2012, ‘U.K. economy will escape recession in 2012, Osborne to say’, Bloomberg News, p. 1, viewed 11 April 2012, BloombergBusinessweek. Read More