The Global Business Enviroment

Question 1

Explain the reasons why a host country may encourage Foreign Direct Investment (FDI).

Answer 1

Foreign direct investment (FDI) is a direct investment into another country normally by a multinational enterprise (MNE). The benefits of FDI for the host country include those factors listed below:
• FDI is likely to create jobs for the local population and boost the economy generally. Although the profits made by the MNE are still exported, the domestic economy should benefit from the wages earned by the workforce and the income earned by any local firms that supply the MNEs.
• An influx of capital and increased local tax revenues will result in improved economic growth in the host country.
• FDI will lead to a transfer of new and advanced skills through the skills training invested by MNEs in the local workers and the availability in the workplace of more advanced technology and management approaches.
• Host countries often try to channel FDI investment in ‘greenfield’ developments into new infrastructure and similar projects to take advantage of local conditions in that country.
• Greater competition from companies controlled by MNEs can provide a stimulus to productivity gains and greater efficiency by the country’s local companies.
(Other valid responses are possible and these will also receive credit).

Question 2

Describe FIVE main benefits of free trade.

Answer 2

• Free trade leads to overall production efficiencies consistent with the concept of the division of labour. An individual nation no longer has to produce everything its population requires and can concentrate instead on producing a more limited range of goods and services to a better standard.
• Free trado promote countries to specialise with differing competencies and resources in the production of goods and services in which they have a natural advantage.
• Free trade allows companies to develop a larger market for their products beyond home sales. This has the potential of both allowing them to achieve a greater volume of production (and hence economies of scale in production) and possibly extending the product life cycle of certain products.
• Free trade encourages greater competition which should lead to incentives for improvement and greater efficiencies. This, in turn, should result in lower prices and greater choice for customers.
• Free trade can encourage a better understanding of other nations and cultures so leading to greater political harmony and collaboration. This may also lead to initiatives such as more prosperous countries supporting free trade in certain commodities where other nations have switched production from demerit goods (e.g. opium production).
(Other valid responses are possible and these will also receive credit.)

Question 3

Describe types of taxes

Answer 3

• Direct taxes on earned income, Straightforwardly revenue can come through taxation (normally a percentage) raised on earnings of both: i) Individuals (normally referred to as income tax and deducted by employers on behalf of the government at source), and
ii) Businesses (corporation tax) through tax being applied. to profits. In addition, an individual may be self-employed and again tax might be applied to earnings (possibly net of costs of self-employment).
• Direct taxes on unearned income Individuals, may also accrue income through so-called ‘unearned income’ such as dividends from shareholdings (possibly unrelated to their work) and interest on investments, etc.
• Indirect taxes on general expenditure, Indirect tax is unlike direct taxation in that the incidence falls on expenditure rather than on income and is sometimes referred to as consumption tax.
• Indirect taxes on expenditure on demerit goods
Particular purchases may be the target of additional tax beyond the normal general level of indirect taxation. This means that a number of governments levy a hydrocarbon tax or a tobacco tax. The motivation for government over and above the mere raising of revenue is that it wishes to discourage demerit goods.
• Protectionism: the imposition of taxation on imported goods, Where a government is pursuing a policy of protectionism it may impose a tax on imported goods. The impact would be that those goods would be made more expensive and may cost more than locally produced goods as a result, so their purchase would be discouraged. Where imported goods continue to be purchased the tax would be a source of revenue for the government.
• Other forms of tax, There are many other examples of tax that have been applied by various governments in the past including a wealth tax on property, an inheritance tax, a premium tax. Sometimes a special tax on individuals will be designated for a particular purpose, (for example to help finance healthcare or road improvements, etc.).
(Other valid responses are possible and these will also receive credit.)

Question 4

Explain FIVE reasons for the growth in geographically dispersed (virtual) teams.

Answer 4

• Technological advances in systems and telecommunications. Organisations can manage and link individuals who work across different time zones and locations through improved, reliable communications and information technologies.
Potential for cost savings for the organisation. Virtual team working can offer the organisation a number of potentially significant financial benefits. These include reduced office accommodation and other overhead costs, greater employee productivity (through fewer workplace interruptions) and reduced travel costs (through e-mail, videoconferencing, Voip (voice over internet protocol) and webcam equipment, etc.).
Advantages to individual employees. Virtual team working offers employees greater flexibility of working hours and patterns and allows an improved work/life balance to be achieved. The time and cost saved by removing a need to commute to the office on a daily basis could also be significant (and better environmentally).
Availability of faster cheap travel. Despite the available technology face-to-face meetings may occasionally be necessary. The growth in cheaper, efficient transport including economy flights means that such arrangements are viable.
The opportunities offered by globalisation. Business opportunities and expanded trade with other nations can be better supported by a network of workers who are not based in a fixed location. Indeed, there are advantages to employees working in different countries and time zones. This could potentially lead to an organisation operating 24 hours a day.
Note: The Examiner’s answer and subsequent marking scheme have been prepared on the basis that the teams are geographically dispersed but from within the same organisation. Cross-organisational teams do exist and this might legitimately be reflected in alternative answers which may also be given credit.

Question 5

Explain the relationship between stakeholders and corporate governance.

Answer 5

Stakeholders are individuals or groups with a legitimate interest (stake) in an organisation. Examples include shareholders, employees, company pensioners and directors,
According to the Cadbury report, corporate governance is the system by which companies are directed and controlled. In some countries corporate governance is a legal requirement (e.g. USA), in others it is formalised by a code or a set of best practice guidance (e.g. UK). The practice of corporate governance is aimed at protecting and taking account of the rights and claims of stakeholder groups.
The primary reason for corporate governance is to protect stakeholders such as shareholders, employees and pensioners against directors abusing their positions of power. Corporate governance reminds directors of the limitations of their power, and enforces the principle that directors work on behalf of shareholders.

Question 6

Define an organization

Answer 6

“A social arrangement which pursues collective goals, which controls its own performance,
and has a boundary separating it from its environment.”

Question 7

Describe organizations categories

Answer 7

Organisations can be categorised by:
๏ Ownership;
๏ Motive;
๏ Legal structure.

Ownership
Broadly, organisations can be termed private sector or public sector.
- Public sector organisations are owned by central or local government.
- Private sector organisations are all the rest and will include both businesses and charities.

Motive
Organisations can be:
- Profit-seeking, search for economic benefits for their shareholders.
- Non-profit (or not-for profit), search for social achievements more than profits. But need to be efficient also.

Legal structure
The common legal structures are:
- Sole traders, only one owner, unlimited responsibility for liabilities.
- Partnerships, more than sole, but unlimited responsibility for liabilities for all the partners.
- Limited companies (incorporated entities), limited responsibility for shareholder respect the company’s liabilities, but unlimited responsibility for company liabilities. The difference between Public Limited and Private Limites is the first sells shares in the stock market and the second privately.
- Co-operatives & Mutuals, normally non-profit organizations owned by their participants, their objective are to improve the lives of their owners. The difference is Co-operative normally operative organizations, Mutuals, normally financial organizations.

Question 8

Describe the Mendelows Matrix

Answer 8

To manage stakeholder conflict management must assess two factors for each stakeholder:
- Stakeholder power
- Stakeholder interest (ie is the stakeholder interested enough to take action or will the stakeholder be passive?)
low interest high
low Minimal Effort Keep Informed
Power
high Keep Satisfied Key Players

• Key players: powerful, motivated active stakeholders. These stakeholders tend to get everything they want.
• Keep satisfied: potentially powerful but for some reason they choose not to use that power. They will get some of what they want. If not kept satisfied they might become key players if they are provoked into taking action.
• Keep informed: these stakeholders make plenty of ‘noise’ but are relatively powerless. They should be kept informed as a matter of politeness and also to be provided with explanations as to what’s going on.
• Minimal effort: not powerful, passive. These stakeholders can almost be ignored by management.

Classes of stakeholder
Stakeholders can be classified as:
- Internal stakeholders include: employees, managers and directors
- Connected stakeholders include: shareholders, lenders (such as banks), suppliers and
customers
- External stakeholders include: government, the local population and competitors.
These three classifications are no generally as important in stakeholder management as their
power/interest. A key player could come from any group such as a powerful militant group of
employees, a monopoly supplier or a government passing laws that have to be complied with.