1. Principles of Business
Seminar: Applying economic concepts
to your business
Topic Number:5
2. Overview
The economic environment is an important determinant of
business success. This seminar looks to determine the
implications and impacts of the global economy on your
business.
You are tasked with initially explaining the concept of supply &
demand and the factors that influence it in relation to your
business activity.
As part of this analysis you will determine a number of the key
economic indicators in relation to your business. As you have
recently learnt about the various strategies you can adopt when
‘going global’, determine how the theory of comparative
advantage can help your business.
Finally, if you were going to make an investment abroad explain
if you would opt for direct or indirect FDI.
3. Learning outcomes of this seminar
• Be able to explain the concept of supply & demand
and the factors that influence it in relation to your
business activity
• Identify and describe the key economic indicators
that could impact your business?
• Illustrate and apply the comparative advantage
theory in your business
• Critically evaluate and describe the various global
investment options
4. Agenda for this seminar
Explaining the concept of supply & demand and the impact of a slowing Asian economy
on the UK’s economy? How could this impact your business?
What is the impact on key economic indicators such as GDP, inflation and employment?
Explain how you would use the concepts of comparative advantage to your businesses
benefit.
If you were going to make an investment abroad explain if you would opt for direct or
indirect FDI. Explain your rationale.
5. Structure for the session
You will have
15 minutes to
discuss each
question
We will have a
de-brief at the
end of each 15
minutes to hear
your thoughts
on each area
Feel free to ask
questions but
please do not
have separate
conversations
‘we are all in
this together’!
6. Explaining the concept
of supply & demand and
the impact of a slowing
Asian economy on the
UK’s economy? How
could this impact your
business?
7. Lets look at the UK & Developing Asia
According to the IMF (2012:60), developing Asia (DA) is moderating primarily
due to the slowing of exports to the EU region, reliance on Euro banks, crisis
and deteriorating business sentiment. However, domestic demand still fuels
growth in key economies across the region (e.g. China) (IMF, 2012:60).
Source: IMF, 2012
8. Implications for supply and demand
The UK has a growing reliance on imports and exports and hence increasing
‘trade-openess’ (ONS, 2011). The UK’s propensity to import goods outweighs its
exports however this is partially offset by its service exports (ONS, 2012a & Begg
and Ward, 2009:365). Developing Asia (DA) is an important supplier of UK imports
and recipient of goods and services from the UK (e.g. call centres in India) and
therefore does have impact on the macro-economic environment in the UK (DBIS,
2010).
Source:
IMF, 2012:127
9. Implications for supply and demand
In accordance with the theory of comparative advantage (Ricardo, 1817) the UK is
exposed to fluctuations in other national economies/regions such as DA. The largest
direct impact on the UK would occur due to imports (leakages) and exports
(injections), however one must also account for foreign direct investment flows.
The UK will benefit from exporting goods/services it can produce at a lower marginal
cost while importing goods/services that it cannot produce as efficiently.
Consider
each of the
curves
10. What is the impact on
key economic indicators
such as GDP, inflation
and employment?
11. Impact on GDP
In line with the circular flow of income (Begg and Ward, 2009:208) we can see
that reduced growth in DA will negatively impact the net value of goods and
services produced by UK firms as the demand reduces. This will in turn reduce
aggregate income. The effect is a decline in the UK’s GDP in the short-term
however in the long-term a number of scenarios are possible which is likely to
increase AD2 to AD*.
This assumes, in line with the theory of comparative advantage, the UK in the
short-term would not be in a position to produce the goods themselves and
therefore needs to buy the goods or services more expensively from DA or
elsewhere. Also consider the impact of monetary and fiscal policy intervention.
Source: Begg and Ward, 2009
12. Impact on inflation & unemployment
As the UK imports more/cheaper goods from DA it will make the cost of goods
and services cheaper in the UK. This will in turn reduce inflation.
The net effect will be an increase in unemployment in the UK as the value of labour
will fall and firms seek to pay lower wages. Considering the IMF (2012) have only
predicted a short-term slowdown in DA the type of unemployment is likely to be
cyclical in nature (Begg and Ward, 2009:242). Government intervention could be
used to reduce unemployment in the short-term.Reflects workers who have lost jobs
due to the adversities of the business cycle also referred to as demand-deficient
unemployment.
Source: Begg and Ward, 2009
13. Explain how you would
use the concepts of
comparative advantage
to your businesses
benefit
15. Consider your core production lines:
Where should you produce them?
Cars Rice
100
(1C=1R)
100
(1R=1C)
50
(1C=4R)
200
(1R=1/4C)
A
B
Consider the per unit opportunity cost and go for the lowest
option
16. Consider why one location has lower opportunity
cost
Source: Wikipedia.org
17. How will this benefit your business?
Higher Margins
Lower Costs
More Profit
Are there any other implications?
18. An example from Starbucks
View video: https://www.youtube.com/watch?v=ElYNhGbOTOQ
19. If you were going to
make an investment
abroad explain if you
would opt for direct or
indirect FDI. Explain
your rationale.
20. Firstly consider the options
View video: https://www.youtube.com/watch?v=I8w7Kv2aZPg
21. Firstly consider the options
Direct Indirect
• Invests directly in
business operations in
another country
• M&A or establish a new
business
• More control
• Greater stake
• Form global synergies
• More sticky
• Investing in a company
operating in another
country through a
financial instrument
• Invest in shares or
bonds
• Less control
• Less stake
• No global synergies
• Less sticky
22. Secondly, consider what your business needs
and what its current resource position is
Do you currently
have the
ability/capability or
do you need to
acquire it?
Does it make
strategic sense for
your business?
Do you have the
required
resources?
Consider how you
would structure a
deal
23. Thirdly, identify good opportunities to invest in
considering fit with your organisation
Determine if you will
be able to realise the
anticipated
synergies
Scan the market for
a strategic fit
