GCE Business

Business Structure
A2 Level

Objectives

Evaluate the arguments for and against

privatisation of state-owned industries
Analyse the reasons for recent growth in
international trade and the development
of multinational businesses
Evaluate the impact of multinational
businesses on the country in which they
become established

Business sectors

Private sector comprises businesses

owned and controlled by individuals or
groups of individuals

Public sector comprises organisations

accountable to and controlled by central or
local government

Privatisation

Privatisation means selling state-owned

and controlled business organisations to
investors in the private sector
The main aspect is the transfer of
ownership of nationalised (state-owned)
industries into the private sector by
creating public limited companies.

Examples of privatisation

Japan Post (Japan)

Nippon Telegraph and Telephone (Japan)
British Telecom (UK)
British Gas (UK)
British Airways (UK)
British Petroleum (UK)
British Rail (UK)
Deutsche Telekom (Germany)
Skoda (Czech Republic)

Privatisation
Privatisation, Consumerism and Thatcherism in the 1980s
http://www.youtube.com/watch?v=QcGV_7clARY
Privatisation in Britain
http://www.youtube.com/watch?v=40NVkfbaMo4&feature=rel
ated

Privatisation and The Crusade of Popular Capitalism

http://www.youtube.com/watch?v=vUj5DMTPf5k

The arguments for and against privatisation

Arguments for
privatisation

Arguments against
privatisation

The profit motive of privatesector businesses will lead to

much greater efficiency than when
a business is supported and
subsidised by the state
Decision making in state bodies
can be slow and bureaucratic
Market forces will be allowed to
operate: failing businesses will be
forced to change or die and
successful ones will expand,
unconstrained by government
limits on growth. Profits of most of
the privatised businesses have
increased following their sell-of
Sale of nationalised industries

The state should take decisions

about essential industries. These
decisions can be based on the
needs of society and not just the
interests of shareholders. This may
involve keeping open business
activities that private companies
would consider unprofitable.
Breaking up nationalised
industries, perhaps into several
competing units, will reduce the
opportunities for cost saving
through economies of scale

Privatization of MTR

Background of MTRCL

Mass Transit Railway (MTR) is the rapid transit railway system in Hong Kong. Originally opened in 1979. On 5 th
October, 2000, the operator of the MTR network, MTR Corporation Limited (MTRCL), became Hong Kong's first rail
company to be privatized, marking the beginning of the Hong Kong government's initiative to dissolve its
interests in public utilities. Prior to its listing on the Hong Kong Stock Exchange, the Mass Transit Railway
Corporation (MTRC) was wholly owned by the Hong Kong government. The ofering involved the sale of about one
billion shares, and the company now has the largest shareholder base of any company listed in Hong Kong.

Now, MTRCL has often developed properties next to stations to complement its already profitable railway
business. Many recently built stations were incorporated into large housing estates or shopping malls. For
example, Tsing Yi station is built next to the Maritime Square shopping centre and directly underneath the Tierra
Verde housing estate.

Why was MTR privatized?

Donald Tsang, the former financial secretary of

the Hong Kong government in 1999 described
the privatization of the MTR as a "milestone"
since it will benefit the economy of Hong Kong
and help enhance Hong Kong's status as an
international financial center. Privatization of
the MTR will reinforce the government's
commitment to a free market and bring about
further improvements in efficiency, productivity
and flexibility of the MTR.

Advantages

After MTR was privatized, it keeps making

more and more money which benefits
shareholders.

Advantages

Expanding
rapidly
which
directly
benefits the
passengers.

Advantages

Creating more jobs opportunities for

the local people. ( 10,000 in 2009 to
12,000 in 2011)

Reinvest its profit back into the

business, improving its facilities and
services.
e.g. Platform screen doors

Disadvantages

Expanding lines causing so much trouble to the local

people.
e.g. Historical villages such as Choi Yuen Village in Yuen
Long has to be moved to another place due to the
construction of Guangzhou Shenzhen Hong Kong
Express Rail Link.

Keep increasing its ticket price since 2010 in order to

generate more profit according to the Fare adjustment
Mechanism (The ticket price was readjusted $0.1 - 0.4
higher on 17/6/2012 for each ride.)

Public-private partnerships
(PPP)

Public-private partnerships are

government services or business ventures
that are funded and managed through a
partnership of government and one or
more private-sector companies

Public-private partnerships
(PPP)
There are two main types of public-private
partnerships (PPP):
1. Government funded privately managed
schemes.
In these ventures, the government will provide all
or part of the funding, but the management of the
organisation will be by a private business that will
use privatesector methods and techniques to
control it as efficiently as possible.

Public-private partnerships
(PPP)
There are two main types of public-private
partnerships (PPP):
2. Private-sector funded government or state
managed.
In these ventures, which will often involve large
sums of capital investment, the government is
released of the financial burden of finding
taxpayers money to pay for the project. Once the
assets have been paid for, they are then managed
and controlled by a government department.

Nature and scope of

international trading links
All counties, to a greater or lesser degree engage
in international trade with other countries. This is
true no matter which economic system is in
place. The growth of world trade in recent years
has been very rapid. In addition, the huge
expansion in trade between certain countries, for
example China with the USA and the EU, have
had a great impact on their economic
development.

Free trade and globalisation

Free trade means no restrictions or trade

barriers exist that might prevent or limit trade
between countries
The most common forms of trade barriers are
tarifs, quotas and voluntary export restraints.
When any of these are used, this is
protectionism.

Free trade and globalisation

Tarifs are taxes imposed on imported goods to make

them more expensive than they would otherwise be

Quotas are limits on the physical quantity or value of

certain goods that may be imported

Voluntary export limits means an exporting country

agrees to limit the quantity of certain goods sold to one
country (possibly to discourage the setting to
tarifs/quotas)

Protectionism means using barriers to free trade to

protect a countrys own domestic industries

What are the benefits of free

trade between nations?

By buying products from other nations (importing), consumers (and

producers) are ofered a much 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 and this should encourage them to keep costs and prices
down and make their goods as well designed and of as high quality
as possible
Countries can begin to specialise in those products they are best at
making if they import those that they are less efficient at compared
to other countries. This is called comparative advantage.
Specialisation can lead to economies of scale and further cost and
price benefits

What are the drawbacks of free

trade between nations?

There may be loss of output and jobs from those domestic firms that
cannot compete efectively with imported goods
There may be a decline, due to imports, in domestic industries that
produce very important strategic goods, for example coal,
foodstufs; this could put the country at risk if there were a conflict
between countries or another factor leading to a loss of imports
The switch from making goods that cannot compete with imports to
those in which the country has a comparative advantage may take a
long time
Newly established businesses may find 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 firms

International trade and

globalisation
In recent years, there have been moves to
reduce international trade restrictions.
These measures have been a major factor
driving the globalisation process.

Globalisation means the increasing

freedom of movement of goods, capital
and people around the world

International trade and

globalisation
The recent moves towards free trade have been driven by:
1. The World Trade Organisation (WTO)
This is made up of countries committed to the principle of
freeing world trade from restrictions.
2. Free-trade blocs
These are groups of countries, often geographical grouped
that have arranged to trade with each other without
restrictions. The best examples are NAFTA (USA, Canada,
Mexico in the North American Free Trade Association),
ASEAN (Association of South East Asian Nations) and the
European Union (EU).

International trade and

globalisation
Globalisation and Indian Cofee Houses
http://tutor2u.net/blog/index.php/business
-studies/comments/globalisation-and-indian
-cofee-houses/

Political Decisions and Trade

Missing words
In difficult times, voters expect to be protected by their governments. In 2009,
with unemployment shooting ahead,
workers were prepared to ___________ for British jobs for British workers. This
puts pressure on governments to find ways to block imported goods. In January
2009 the government of India placed a 6 month ban on toy ___________ from
China. Britain cannot do the same due to its membership of the
________________ Union.
Within the E.U. there is free movement of goods and labour. The E.U. as a whole
can and does tax imports from
Japan or China, but no individual member has that power. The term
_______________________ is used for policies that attempt to protect people from
overseas competitors. There are three types of trade protection: quotas, tarifs
and non-tarif barriers. Restrictions on foreign workers arriving in Britain are
also a form of protectionism.
European, imports, protectionism, strike.

Political Decisions and Trade

True or false?
Tarifs are taxes placed solely on imported goods
Quotas are no longer used by developed countries such as America and
Switzerland.
Companies can overcome trade barriers by opening a factory behind the
protectionist walls
Non-tarif barriers include regulations that make it hard (and more expensive) to
take goods into a country
Find The Word formed by the first letter of the terms defined below
A government policy that disrupts imports.
What Russia might do if America decided to block imports from Russia.
A product made overseas, but bought in this country
The person who loses out if a government places tarifs or quotas on imports
The trading bloc that provides Britain with a huge free trade area for British
exports

Multinational businesses

A multinational business is a business

organisation that has its headquarters in one
country, but with operating branches, factories
and assembly plants in other countries
Multinational businesses are more than just
importers and exporters; they actually produce
goods and services in more than one country.

Why become a
multinational?
There are several reasons why businesses start op
operate in countries other than their main base,
1.Closer to main markets this will have a
number of advantages:
- Lower transport costs for their finished goods
- Better market information regarding consumer
tastes as a result of closeness to them

Why become a
multinational?
2. Lower costs of production apart from
lower transport costs of the completed items,
there are likely to be other cost savings:
- Lower labour rates due to the much lower
demand for local labour compared to
developed economies
- Cheaper rent and site costs, again resulting
from lower demand for commercial
property

Why become a
multinational?
3. Avoid import restrictions by
producing in the local country there will be
no import duties to pay and no other
import restrictions
4. Access to local natural resources
these might not be available in the
companys main operating country

Potential problems for

multinationals
Setting up operating plants in foreign countries is not
without risks. Communication links with headquarters
may be poor. Language, legal and culture diferences
with local workers and government officials could lead to
misunderstandings. Coordination with other plants in the
multinational group will need to carefully monitored to
ensure that products that might compete with each other
on world markets are not produced or that conflicted
policies are not adopted. Finally, it is likely that the skill
levels of the local employees will be low and this could
require substantial investment in training programmes.

Evaluation of the impact on

host countries of
multinational
operations
The potential benefits are
clear,

The investment will bring in foreign currency and, if

output from the plant is exported, further foreign
exchange can be earned
Employment opportunities will be created and training
programmes will improve the quality and efficiency of
local people
Local firms are likely to benefit from supplying services
and components to the new factory and this will
generate additional jobs and incomes

Evaluation of the impact on

host countries of
multinational
The potential benefitsoperations
are clear,

Local firms will be forced to bring their quality and

productivity up to international standards either to
compete with the multinational or to supply to it
Tax revenues to the government will be boosted
from any profits made by the multinational
The total output of the economy will be increased
and this will raise gross domestic product

Evaluation of the impact on

host countries of
multinational
However, the expansionoperations
of multinational corporations
into a country could lead to these drawbacks,

Exploitation of the local workforce might take place. Due

to the absence of strict labour and health and safety
rules in some countries, multinationals can employ
cheap labour for long hours with few of the benefits that
the staf in their home country would demand
Pollution from plants might be at higher levels than
allowed in other countries

Evaluation of the impact on

host countries of
multinational
operations
However, the expansion
of multinational corporations
into a country could lead to these drawbacks,

Local competing forms may be squeezed out of

business due to inferior equipment and much smaller
resources than the large multinational
Some large Western-based businesses, such as
McDonalds and Coca-Cola, have been accused of
imposing Western culture on other societies by the
power of advertising and promotion

Evaluation of the impact on

host countries of
multinational
operations
However, the expansion
of multinational
corporations into a country could lead to these
drawbacks,

Profits may be sent back to the country where the

head office of the company is based, rather than
kept for investment in the host nation
Extensive depletion of the limited natural
resources of some countries has been blamed on
some large multinational corporations

A2 Business Structure: Multiple

Choice
Which of the following is not generally considered to be
a likely benefit of privatisation?
a raises revenue for the state to fund other
activities
b subjects the business to market forces and, therefore,
improves efficiency
c enables the business to secure funds from stock
markets
d increases the opportunities for cost savings through
economies of scale

A2 Business Structure: Multiple

Choice
Which of the following is not considered to be a
likely benefit of free trade?
a Specialisation can lead to economies of scale.
b Increased competition encourages domestic
industry to reduce costs.
c There is increased consumer choice.
d It reduces the exposure of an economy to adverse
changes in the world economy.

A2 Business Structure: Multiple

Choice
A multinational corporation, such as Coca-Cola, is best
defined as a business that:
a sells its goods or services in more than one country
b is very large
c has its headquarters in one country, but with
operating branches, manufacturing
or assembly plants in other countries
d employs people from a variety of ethnic backgrounds.