Changes to Economic and Legislative Business Policy - Essay Example

International finance Table of Contents Introduction 3 Task 4 Changes to economic and legislative business policy 4 Current economic condition 4 Current policies 4 How to value such changes 7 A critical evaluation of the success or otherwise of the policy 8 Task 2 10 Sales and business financials 10 Marketing of products or services offered by the business 10 The businesses internal organization, both domestic and overseas 11 The businesses external environment both domestic and overseas 12 Future of the business, in the changing internal market 12 Conclusion 13 References 15 Introduction International policies are aimed at improving foreign relations. Policies are framed to stimulate trade between countries which is aimed at growth and targeting inflation. A nation’s growth is measured by change in gross domestic product. It refers to the value of total goods and services produced in a country. The role of the government is to regulate and facilitate trade aimed at increasing domestic output. Output is not only measured in terms of physical goods, but it also refers the value of services. Globalization has given access to companies to conduct business across nations. Businesses enjoy competitive advantage in importing goods or outsourcing services. Owing to high cost of labour and resources business resort to importing this gives them operating leverage. This further leads to increased exports. Imports and exports have led to exchange rate volatility that result in cost push inflation, leading to macro economical imbalances in the domestic country. The role of the government is to frame policies that will positively impact the foreign trade that will protect the domestic country from foreign competition as well as increasing its competitiveness. Foreign companies have better resources that will eliminate local competition leading to unemployment, resulting in falling per capita income. Foreign trade affects the domestic organizations internally if they are acquired or merged and externally by increasing market competition. Domestic companies face high technological challenges that are detrimental to their long term sustainability. Thus, government play an important role in framing international policies that is aimed at promoting growth and protecting the domestic industries by collaborating with different nations. Task 1 Changes to economic and legislative business policy Current economic condition The growth rate in UK has not witnessed any significant change under the coalition government. The cabinet was formed of members from either parties i.e. Conservative and liberal Democratic. The GDP growth rate stood at 2.4% compared to its projected rate of 2.5% for the current fiscal. It witnessed a quarter on quarter growth of 0.3% compared to its earlier figure of 0.6%. It witnessed the slowest growth rate since 2012. The UK economy witnessed a marginal growth in the service sector in the current financial year with 0.5%, but on the contrary the economic output fell by 1.6%. Some service sectors like finance, engineering and architecture have also shared equal fortune that witnessed insignificant growth. The production industry has been most affected owing to global oil prices. There has been no significant contribution from the oil and gas sector. The manufacturing sector also remained low and witnessed a growth of 0.1%. This could be best explained with the appreciating pound that led to fall in export value. The falling growth in the economy is much attributed to the low demand for its goods and services in the export market i.e. US and China. Hospitality sector was most favourable as it witnessed a growth of 1.2%. This is mainly attributed to the increased output of hotels and restaurants. Current policies UK government through its economic and legislative policies wants to provide opportunities for trade and foreign investment attract foreign investment in UK and build on global trading platform that is aimed at developing emerging economies. Various policies like corporate tax rate, export and import tariffs and subsidies, trade agreements, anti dumping policies, etc. The corporate tax structure has been revised to 21% in 2014 and will be cut down to 20% in the financial year 2015. UK works with European commission to implement trade agreements between EU countries and UK. There are two trade agreements multi lateral agreements and bilateral agreements. There are recent developments where UK has trade agreements with various developing nations. The trade agreement with European Union is expected to add £10 billion. The bank interest rate affects the growth rate of UK economy. The base rate of 0.5% was consistent since 2009. This affects the corporate borrowing and influences foreign investments in UK. The exchange rate is another important economic factor that influences trade and trade policies. The sterling rate measures the value of pound against other basket of currencies. SERI (Sterling exchange rate index) rose by 2.7% in February 2015. It rose by 16.9% from its 2009 level. Strong sterling impacted UK exports and the growth in manufacturing sector fell. Pound was up against the US$ by 1.3% to $1.54 in March 2015. The sterling rate showed high value against Euro and was up by 3.5%. Figure 1: The growth of SERI since 1992 Figure 2: Value of pound against US$ and Euro since 2012. Economic policies in UK influenced the public sector employment level. Trade policies affect the level of employment. UK has witnessed a fall in public sector employment level since 2010. How to value such changes The international policies that influence foreign trade in UK are explained in regard to corporate tax rate, trade agreements with European Union, Interest rate, exchange rate and employment level. These factors would outline how trade was affected owing to such policy changes. The coalition government faced many challenges that affected UK’s industrial output, public sector employment, exports, etc. All of these affected the domestic output that led to fall in the gross domestic product. The decrease in corporate tax rate adds incentive to the domestic companies. It helps them to enjoy higher profits and future growth plans. It will also attract foreign investments that will benefit from lower tax advantage. EU and US companies would benefit from such policy action, provided the tax rate is higher compared to UK. It would also be followed by mergers, strategic alliances, forming subsidiary, etc. This gives leverage to foreign companies to do business in UK in the form of low tax structure. Government policies are aimed at promoting domestic industries by either providing subsidies or reducing the tax rate. Trade agreements with EU are aimed at granting access to sell or manufacture goods and services to EU member countries. Earlier there were no trade agreements, which led to high import duties resulting in increased price of commodities. Trade agreements facilitate duty free goods or goods with lower import duties between countries i.e. UK and EU countries. It also ensures anti dumping policies where countries export goods to another country below the international market price to boost its exports. Trade agreements can be multi lateral and bilateral. The former includes many nations whereas the latter includes two nations. The market interest rate also influences international trade. Though this is a monetary policy, it still has strong bearing on framing international policies. High interest rate implies high cost of borrowing for domestic and prospective foreign producers. This drives away growth leading to fall in goods and services output. Foreign companies expect the interest rate to be low so that it will help them borrow low cost funds that will help them to grow their business in the domestic market i.e. UK. Exchange rate plays a key role in framing foreign trade policies. There are two implications to exchange rate. Strong domestic currency i.e. sterling will incentivise imports but will not stimulate exports. The value of exports fall with appreciating currency, as the domestic country would receive less foreign exchange in exchange of goods and services. On the contrary a depreciating currency would incentivise exporters as they would receive more value for their goods and services. This would increase foreign exchange earnings. Low currency value also impacts imports. Countries which are import dependent would be affected as its imports would become expensive, leading to inflation. But strong exports would reduce the effect of high import bill, owing to creation of foreign exchange reserves. Greater foreign capital in domestic business would lead in loss of control of domestic businesses. Foreign companies from EU, Asia and US have greater intellectual and technological resource that gives them higher competitive advantage. This affects the domestic producers from low cost products, which results in greater macro economic imbalances i.e. unemployment rate surges. A critical evaluation of the success or otherwise of the policy UK ranks 7th in the list of leading importers compared to its rank in the list of leading exporters, where it stands at 12th position. Despite Bank of England’s low base rate investments in UK have not picked up. This can be contributed to the appreciating and strong currency i.e. sterling. Though the lower rates influenced domestic producers to borrow money for growth and expansion, the strong value of pound coupled its problem. This was mainly because of the fact that the industrial output was relatively low which along with strong currency further witnessed a fall. Exporters witnessed reduced value of its exports. The manufacturing sector grew marginally owing to strong currency and low demand for its products in emerging countries and US. Service sector especially the hospitality sector witnessed significant growth. The domestic service growth rate contributed more towards its output than its exports. Though these changes are based on quarter basis, yet it shows the growth trajectory of the value of goods and services. Year on year growth in value of goods and services were significant, compared to its current quarter results. 2012 exports and imports stood at $481 billion and $646 billion. Its export basket comprises tobacco, beverages, food, fuel, chemicals, etc. Its imports include inputs for food processing, crude oil, machinery, etc. UK Export partners (2012) Countries Value Germany 10.9 US 9.9 Netherlands 7.9 France 7.4 Switzerland 7.1 Ireland 6 Belgium 5.3 UK Import partners (2012) Countries Value Germany 12.5 China 8.2 Netherlands 7.1 US 7 France 5.7 Belgium 4.8 Norway 4.7 Task 2 Sales and business financials The change in government policies has a severe effect on the business sales and the financial effect of the business and the sales. For instance the economic policy between the years 1945 and 1979 was an era in which the government issued increasing rules and regulation and built state run enterprises. It was in this time that the government felt that it needed to control the macroeconomic environment in order ensure that the companies did not exploit the conditions and that the competition was fair. Another factor to be taken into consideration is the taxation policy. When the government increases the taxation it has the same effect as increase in cost for the company and is reflected adversely on the financial health of the company. Another economic policy that has the effect on the business is the interest rate that is prevalent in the market. The interest rate that is prevalent in the market is actually controlled by the fiscal policy of the government and has an effect on the borrowing cost of the company. The foreign policy of the government of UK will also be affected on the sales and business financials of the company. If the government signs any agreement with a different country or the policy on the part of government regarding repatriation of income is likely to have an impact on the financial position and international business position of the company. The foreign trade policy of the country and the amount of foreign currency can keep or the enforcement of international tax proposition has an effect on the financial and business position of the company. Marketing of products or services offered by the business BT has to face challenges in marketing of its products and services that are offered by the company in lieu of changes in the policy and economic environment of the country. For instance the company had to recently face the burden of a law by the UK government which made it illegal to view the communications of the individual internet users. BT has also asked the government to change this law in a private talk with the government. This is because the company plans to install filters in order to view pornographic content. However that means that the company has to view confidential information of the users. However that can cause a conflict with the regulation on the matter. Hence the company has to lobby with the UK government so that introduction of the prosecution law can be stopped or delayed (Mance and Thomas, 2013). This is just an example of how the policies of the government can interfere with the business decisions that are taken up by the government. The BT has to also introduce goods and services that can be based on the introduction of new policies by the government of the countries. For example if the government introduces policies to introduce mass communication policies for the general public then the company can step in and take up this opportunity. The businesses internal organization, both domestic and overseas BT is in the telecommunication industry which is characterised by high value services. It uses high value of inputs in producing its services i.e. telephony, television subscriptions and broadband. Government foreign policies affect the telecom sector both internally and externally in the domestic and overseas market. International policies affect organizations internally. It leads to mergers, strategic acquisitions and joint ventures. Trade tariffs and subsidies provided to domestic producers will help them with increased profitability (Sawyer, 2005.). Trade policies will affect the earnings level of the telecom sector. It influences employment which affects the organizational structure. Legislative policies will bring about changes in the organization with high legal requirements, more disclosures, etc. This might result in operational hindrances. The fixation of minimum wage can affect the company with increased wage payments that will reduce its earning level. Domestically it will affect the parent company’s earning owing to the fall in earnings of its foreign subsidiary. BT depends on its foreign subsidiaries for its value added items and any economic or legislative policies in the foreign country will increase the value of intermediary products that will lead to an overall increase in the final price of the product. This will lead to an increase in the price of services in the domestic market and other markets where it operates. The businesses external environment both domestic and overseas External environment of an organization refers to the factors that are beyond the control of the organization. The external environment of the organization is dependent on the policies of the government that are beyond the control of the organization. The policies that the UK government takes on its domestic and international factors and issues are going to have a major impact on the company. Economic and legislative policies will affect the external environment of British Telecom both in the domestic and the foreign market. International policies affect the trade relation of BT’s partner countries (Bamford and Grant, 2000). The policies include trade agreements, tax policies, exchange rate policies etc. Low tax policies will attract fresh investments that might add to the market competition from global telecom giants which want to venture the UK market. This will result in better service at low cost and might drive away BT’s customers. High exchange rate will affect BT’s service exports. Strong currency discourages exports and weak currency promotes exports, as it will increase the value of exports. Future of the business, in the changing internal market BT had once upon a time been a state monopoly in UK and was the company which controlled the telecom market in UK (Williams, 2015a). The BT has been provider of the national telecom network in the UK. However the physical infrastructure that is provided by the company is not up to the mark. This has resulted in severe criticisms of the company. A recent review of the telecoms and communication market that was released by Ofcom focussed on the fact and question of whether BT was being able to deliver the infrastructure and service that was needed by the economy. It was found that the BT was not being able to deliver the infrastructure needs of the people and it was suggested that the Open reach which provides the physical infrastructure should be spun off to form a separate company. This has resulted in rival companies which included the likes of Sky and TalkTalk to push on the matter. However this decision if it takes place would strip BT of its control of the national telecom network. This would mean that the effect of the regulators on the company’s power would be fairly strong and deal a major blow to the company and its position. There has been lot of changes that are sweeping across the telecom industry and market in the UK. The moves such as BT’s acquisition of EE at around £12.5 billion launch of broadband services by Vodafone and the push into the Pay-TV services by TalkTalk (Williams, 2015b). This has brought the fixed line, mobile and television networks much closer to each other and thus the regulatory body to think over whether to look at these services separately or unified. These changes are going to have a serious impact on the business of BT and its domination of the market. Conclusion The UK economy is seen to experience a modest rate of growth. In order to increase the investment into the UK market the banks have kept the interest rate at low rates. However it is found that the despite the facts that interest rate are low there have been no major investments in the UK market. This is due to the fact that the currency of the country that is pound sterling has remained relatively strong. However the domestic companies have benefitted from the prevailing of the low interest rates and this has helped them to increase their production and output. However the strong sterling has adversely affected the growth of exports by the exporters of the country. The country ranks 7th in the list of le3ading exporters and 12th in the list of leading importers. In the year 2012 the total exports were $481 billion and imports were $646 billion. The policy changes of the UK government are also reflected in the business position and sales of the company. Currently there are lot of changes that are taking place in the telecom market. Some of the decisions and new rules implemented by the government are also having an impact on the BT like the RIPA act implemented in 2000. References Bamford, C. G. and Grant, S., 2000. The UK Economy in a Global Context. Oxford: Heinemann. Mance, H. and Thomas, D., 2013. BT lobbies for legal changes over online pornography filters. [Online]. Available at < http://www.ft.com/cms/s/0/24118652-0c10-11e3-8840-00144feabdc0.html#axzz3YtL5H4vU > [Accessed 1May 2015] Sawyer, M. C., 2005. The UK economy. London: OUP. Williams, C., 2015a. BT lashes out in battle over future of broadband network. [Online]. Available at < http://www.telegraph.co.uk/finance/newsbysector/mediatechnologyandtelecoms/telecoms/11478655/BT-lashes-out-in-battle-over-future-of-broadband-network.html > [Accessed 2May 2015]. Williams, C., 2015b. BT faces battle for control of broadband network. [Online]. Available at < http://www.telegraph.co.uk/finance/newsbysector/mediatechnologyandtelecoms/telecoms/11467326/BT-faces-battle-for-control-of-broadband-network.html > [Accessed 2May 2015]. Read More