The Relationship Between Competition Policy Measures and Economic Growth - Essay Example

UK Businesses Going Abroad Ethical Issues Introduction Many UK businesses are going abroad owing to a variety of reasons. The first of these is the more obvious one like globalisation. This is a phenomenon that has helped construct virtual bridges that have helped in geographical diversification as far as international marketing is concerned. UK businesses are moving abroad more easily owing to better coordination due to globalisation between world economies as well as standards in customer care relations as well as socio economic implications of international marketing. Tax Implications Owing to the financial aid that is being extended to developing countries by institutions like the World Bank, UK businesses are aiming at developing countries for geographical diversification. This also has various tax implications. In UK, the double taxation hit has come about due to the fact that the foreign income dividends have been abolished. By going abroad, companies like SmithKline Beecham, BAT industries, Glaxo Wellcome, RTZ as well as Reckitt and Colman, have managed to accommodate the principles of geographical diversification as a bid towards cushioning the blow of double taxation that has been proposed by the Chancellor of Exchequers. (Ahmad, 1997) There are numerous ethical issues that come up in this regard. To begin with, there has been a sharp increase in the number of companies that have chosen to pay their dividends as "Fids". This cost the UK economy and UK businesses over 400 million due to the fact that most of these UK businesses were moving abroad. Other issues include an analysis of whether or not it is ethical to make use of the various facilities in terms of fiscal, policy and financial mechanisms that are made available to developing countries. (Ahmad, 1997) Developing countries are in need of aids that will further the cause of economic progress. Therefore, the tax implications for these countries are favourable. Yet, the economics of these countries can accommodate only a certain percentage of businesses as far as the enjoinment of these benefits is concerned. In this regard, when a UK business moves to one of these countries, it is technically eating into this share that could otherwise have been enjoyed by the national businesses. This is an ethical issue that has been explained by cynics and economic scholars as making use of the next best opportunity. (Ahmad, 1997) International Marketing The arena of international marketing has become a field on its own that has revolutionised the arena of geographic diversification. UK businesses have taken the step towards international diversification due to make better use of opportunities that lie in the avenues of international marketing on today's world. This involves reaching out to developing countries like India, the Far East countries and other developed nations like US as well. While the developing countries have increasing levels of disposable income due to a growth in economies, the UK businesses are aiming at these countries. The UK businesses take to more developed countries like USA and Australia due to consistency as far as standards in management and marketing are concerned. Also, culturally the UK businesses are closer to the culture followed in USA and Australia more than other countries. In this regard, it is imperative to loosely define international marketing before moving on. International marketing is that sphere of activities that is aimed at introducing a product in a country or group of countries with the aim of creating sales and some amount of awareness regarding the brand. Customer satisfaction in today's world has come to occupy a place of vital importance. The phrase, "customer is king", is not just a phrase anymore. It is symbolic of the changing times where consumer courts are waiting to help citizens assert their rights. In this context, a traditional industry like banking has followed the trend and pulled up its socks. The characteristic laid back attitude of the banking industry has been long replaced by almost paperless transactions and phone support systems. This poses a variety of socio economic implications as far as the issue of ethics is concerned. In terms of UK businesses going abroad, it may be seen that in recent times, the world has seen a boom in the disposable income held by people the world over. This has triggered an increase in the investment arenas that have now begun to cater to a variety of individuals and firms. Businesses in UK have been making a beeline for this phenomenon by diversifying geographically. While most individuals invest in securities for reasons like saving on tax and diverting disposable income towards better returns and growth, most UK businesses have been engaged in building portfolios in markets abroad for reasons that have to do with financing new projects or increasing productivity by putting ready cash into investments for machinery and raw material. (Armstrong, 2003) In this regard, security analysis and portfolio theory are important aspects of study as these are the summation of the assets held by an individual and his or her net worth in terms of liquidity and other such factors. This is where the study of ethics comes in. Thus, in ethical terms a portfolio should be used by UK businesses in the international market as a combination of securities with varying risk and return characteristics which in turn will contribute to the net worth of the investor. (Swisher, 2005) Before going any further, it is imperative to point out that investment brings a certain degree of speculation, especially in today's economic scenario where there has been a boom in the information transmission trends due to an increase in the number of people from various quarters flocking towards investing in portfolios. This is an ethical practice as long as the taxation benefits are distributed in the operational sphere of the UK business in the concerned country. The tools used in the course of application of these concepts include the Capital Market Line and the Security Market Line apart from alpha and beta coefficients which help measure mean, variance, risk and returns of the portfolio as a whole. Customer Relations In this regard, the UK businesses need to achieve appropriate decentralization of its goals and activities at the following levels: Communication Motivation and Incentives Manager - employee relationship Reporting Techniques (Wright et al, 2003) This will serve the purpose of rendering authenticity to the activities that take place in the operational sphere of the organization in the international market. In turn, there will be a better focus on customer satisfaction. Industrial relations and its practices is an important area that needs to be looked into in order to achieve a standardization of activities. This includes the laying of proper communication channels - both formal as well as informal. Also, there needs to be clearer focus on incentives and motivational plans for the employees. In order to bridge the gaps between the technologies provided and the after sales services, there is a need for more training as well as research programs in countries where UK business have not had prior experience and countries where technology is still in the developing stage. The employees and technicians must be re evaluated in order to conduct the following analysis: S: Strengths; W: Weaknesses; O: Opportunities; T: Threats This SWOT analysis will help the managers place the right man at the right job with a clear agenda as per the training modules and schedules to be followed. Further, there will also be a clear cut assessment of the manpower requirement to match the expansion that the company is currently undergoing. In effect, all these practices will lead to better entrepreneurial management and customer satisfaction abroad. Cultural Implications The cultural values are demonstrated in their penchant for various features. Ethics demand that UK businesses that are going abroad must develop cultural affiliation through a focus on the various elements of the socio cultural climate in the countries where they are setting up businesses. These can be amalgamated to form a strategy that will help anyone garner competitive advantage in any corner of the globe. This strategy for entrepreneurial success is as follows: - The laying of well defined lines of communicationThe laying of informal and formal lines across the globe with multinational companies, will help workers in various corners get to know each and relate with different cultures as well. This will greatly enhance a feeling of belonging and coordination. (Graham et al, 1993) - Customs and traditions: The devising of certain customs and implementation of the same does not need to be region or culture specific. These can be customs that are unique to the organization and its people. (Graham et al, 1993) - Development of traits like loyalty: this is crucial to any organization's health because the human capital today is of vital importance. The culture based negotiations have come to signify people centric operations where there is a special place in the organization for every person. This helps build qualities like loyalty as the employee feels wanted. (Graham et al, 1993) These features in the UK based organization will help develop a fool proof entrepreneurial strategy that will integrate the personal with the organizational goals, in other countries. This will in turn, help the organization gain competitive advantage. The essence of an organization will be brought out through features to give it a unique edge over others. Economic Issues As discussed above, the socio economic issues are of great importance when studying the ethical issues that come up when UK businesses go abroad. To begin at a logical point of reasoning, it would be important to establish the fact that the theory of second best has come to occupy a place of vital importance in today's world of open economies where opportunities and conditions have become important to economic decisions on an almost daily basis. To elaborate a little more before proceeding towards an outline of its implications and impact, this theory, formalised by Richard Lipsey and Kevin Lancaster in 1956 (Suranovic, 2004), lays focus on a situation where the optimum conditions in an economic model are not satisfied, and the outcome thereof. This perception of conditions has laid the groundwork for a better understanding of the government as well as trade policies, as the implications of this theory holds good in the area of trade policy analysis and international trade policy issues, as well as their application. The conditions arising out of the maximising behaviour of producers and consumers, in economic models, have given rise to a solution called an optimum. This adheres to the equilibrium conditions, which are described by explaining the conditions or relationships that must be satisfied in order to use a set of assumptions to deduce a series of logical conclusions that include the economic models and their exercises. To explain this with the help of comparisons between standard and general conditions - a perfectly competitive model will include equilibrium conditions like, an output price that equals the marginal cost for each firm in an industry; an equal ratio of prices between any two goods and the consumer's marginal rate of substitution between the two goods; a long-run profit that equals zero, for each firm; and a perfect equilibrium between the demand and supply of goods. In view of these parameters, a general equilibrium model, with its many consumers, firms, industries and markets, will consist of numerous equilibrium conditions that will require simultaneous satisfaction. (Ahmad, 1997) The question that arises here has to do with the implications of what follows a situation where one of these conditions is not satisfied - would it be better for the consumers and firms to deviate from the situation or should they continue chasing after their 'perfect' conditions The answer lies in the fact that the non satisfaction of equilibrium conditions would pose a situation where it would no longer be optimal for firms or consumers to continue setting prices and ratios that equal the marginal cost and the marginal rate of substitution, respectively, among various other factors. (Ahmad, 1997) The dilemma that comes before the economic policy advisers in this case has its genesis in the question of whether the justifications commonly given for protection or for government intervention with some form of trade policy can be explained by the use of the second best theory. This is where the debate between the first best and the second best policy makes its rightful entry. To begin, let us consider a small yet perfectly competitive open economy where all resources are privately owned, with nil adjustment costs or wastage of scarce resources, along with maximum profits for the firms and maximum utility for the consumers. The resulting equilibrium would be referred to as first best. The conditions that are typical to this state include the complete lack of market distortions or imperfections as well as externalities in production or consumption and public goods. With the lack of scope for further improvement in economic efficiency, which has already reached its peak due to the lack of tax or subsidy on the part of the government - calling this kind of a market condition 'economic nirvana' would not be far off the mark. In contrast, a real world market would be scarred with imperfections and distortions - rare availability of information, profit margins soaring high even in the numerous small firms floating about in the market, government taxes on profit, production, consumption, are a few to name. In this context, if we were to go back to the perfect market and introduce one distortion, the resulting equilibrium would be less efficient and it would demand that one or more of its conditions should be satisfied in order to reach that state of economic nirvana. In this regard, the economic policy advisers have to consider how that one distortion reduces the optimal level of national welfare while framing policies, as this issue is one that gives rise to conditions that define a less efficient, or in other words, the second best equilibrium. This does not serve the purpose of policy effectiveness or economic efficiency. Moving further towards the use of trade policies for national welfare, we must come to a point where government intervention in a private market characterised by the second best equilibrium, must have an economic rationale. The policy makers need to keep in mind the fact that the distortions would be completely corrected leading to the state of economic nirvana, in case of implementation of a foolproof government policy. The next best option would be the birth of new equilibrium conditions, in case the distortions are not completely done away with. To counter the effects of these market imperfections on national welfare, the economic advisers call on machinery like trade policies chosen to match the market conditions. In any case, the issue facing the policy makers is whether the policy will act or correct, or merely reduce the detrimental effect of market distortions that will finally lead to economic nirvana and/or national welfare. This is the reason behind the adoption of a variety of trade policies ranging from the domestic (production subsidies and consumption taxes), to trade (taxes, subsidies and quantitative restrictions), where the prominent area of trade policy research focuses on identifying the optimal policy to be used in a particular second-best equilibrium situation. While the ideal or first best policy will raise national welfare, or enhance aggregate economic efficiency, to the greatest extent possible in a particular situation, the second best policy would raise the welfare standards to a lesser degree. The main criticism suggested by the theory is that rarely is a trade policy the first best policy choice to correct a market imperfection or distortion. Instead the trade policy is second best. (Wright, 2003) The framework within which one can proceed to understand the welfare implications of a trade policy in the presence of market distortions, would lead one to realise that the policy makers have applied the framework for this to much of the welfare analysis that had been done in international trade theory up until that point; in context of the second best theory (Wright, 2003). The policy makers facing the dilemma of economic nirvana or national welfare can achieve both by acting to correct the market distortions using the appropriate policies and not just resisting the detrimental effects that arise thereof. They should operate according to the fact that while a first best policy will merely have the traits of a domestic policy, all the circumstances in the real world will make a trade policy second best. Further, international trade policies must include concepts like monopolies, oligopolies and duopolies in order to reduce the negative aggregate effects caused by the imperfection and thus raise national welfare, with the help of a properly targeted policy. In conclusion, the dilemma faced by the economic policy advisers for UK businesses diversifying internationally, mainly has to do with the conception as well as proper implementation of a policy that will sufficiently outweigh the detrimental effects of market distortions, under the second best conditions we operate in so as to avoid ethical complications. For this it is imperative on the part of the policy makers to carry out evaluation and correct any deviations in the path of policy implementations, thereon and make sure that whenever there are market imperfections or distortions present it is always theoretically or conceptually possible to design a trade policy that would improve national welfare in the face of rankings of equilibriums using first best or second best labels. In short, the policy advisers need to take a proactive stand against the distortions and detrimental effects of the second best equilibrium, and not a reactive one so as to conduct business abroad in an ethical manner. Empirical Evidence for Ethical Issues in Competitive Strategies The commonly perceived fact in economic theory is that monopoly is basically bad and market competition between firms is diametrically opposite as it contributes to the cause of consumer welfare. This is in context of UK businesses that diversify abroad in terms of ethical issues as far as monopolistic activities are concerned. If we were to view the competition policy measures in emerging markets from a developmental and international perspective, we would come to the conclusion that contrary to conventional wisdom, while the evidence seems to be conflicting in terms of static measures of concentration, many different studies and indicators of the dynamics of the competition process as well as economic theories and various kinds of evidence suggest that the intensity of competition in leading emerging markets is certainly no less, if not greater, than that seen in the advanced countries. (Vagalisindi, 2003) Among the indicators cited in the evidence surrounding this theory, are the market shares of three or four leading firms in leading emerging markets, Japan, the EU and the US, and the persistence of profitability over a period of years - in emerging markets as well as the industrialized world. But the point is that such indicators do not provide any evidence about emerging markets not having competition as far as UK businesses are concerned. While they might not have felt the requirement in the past, developing countries are waking up to the avenues that are presented by the adoption of national competition policies and the measures suggested by the same. However, the current competition policies in the US and the EU have been rendered inappropriate for developing countries. An important school of thought points to the fact that developing countries need to formulate national competition policies to foster competition along with state-directed cooperation for promoting development as well as fuel a higher level of economic outcome. Besides the level of development, the governance capacities and the supporting institutional framework tend to influence the choice of a competition policy for developing countries. Apart from this, maximum competition does not necessarily maximize economic efficiency. Analysis and evidence are an illustration of the fact that maximum competition is not necessarily the best bet in terms of dynamic efficiency, i.e., maximization of an economy's long-term productivity growth. (Vagalisindi, 2003) The issue of economic growth in terms of productivity and dynamic efficiency brings us to the question of whether or not competition policy measures contribute to the same in context of UK businesses diversifying abroad. In the context of ethics for the issue of economic theory and supporting empirical evidence, it has been established that the relationship between competition and economic development has been a controversial one. In view of the new developments in the theory of industrial organization indicating that the proposition regarding the excess of competition is valid and that maximum competition is not necessarily the optimal degree of competition, either for promoting economic welfare in the static sense as well as dynamic terms for maximizing long-term productivity growth in the economy; hypothesis by economic orthodoxy stating a monotonic positive relationship between competition and economic development, has been qualified by modern economic analyses. (Vagalisindi, 2003) As a rational conclusion to the perception that the case for competition spurring economic efficiency is very weak in real market conditions, it can be assumed that a suitable combination of cooperation and competition is more likely to enhance societal as well as economic welfare rather than competition alone - a conclusion supported by the examples set by East Asia, China as well as industrial countries. In relation to innovation, inter-firm coordination among horizontal competitors can bring substantial benefits. To look at the bigger picture, it is imperative for us to now go into an example. To take the case of vertical restraints which more often than not, arise in a retail setting where the typical situation is that of an upstream firm or manufacturer from UK restricting the downstream local retailer's choices; a critical review of the empirical evidence involved becomes important from the point of view of the downstream party, who is more often than not a retailer going by the prices set by the upstream manufacturer, whether or not those prices suit the level of welfare that is to be attributed to him. (Vagalisindi, 2003) According to the empirical evidence as well as conventional theories, there is an emphasis on the economic rationale behind vertical restraints that are voluntarily taken as it includes the issue of efficiency as well as anticompetitive motives. In this regard, it is to be noted that a competition policy for UK businesses diversifying globally can be called suitable for developing countries when it has the capacity to restrain anti-competitive behaviour by domestic privatised large firms, limit abuse of monopoly power by mega-corporations created by the international merger movements and promote development. It is only under such conditions that the cause of economic efficiency and growth will be furthered. If competition is to be explored as the relationship between competition policy measures and economic growth, it can be carried out from a number of perspectives. To take into consideration empirical analysis, we can summarise that the evidence does not suggest trade liberalisation and competition law as effective substitutions for economic and societal welfare. On the basis of very thin empirical evidence, it can be deduced that competition laws and policies will merely assist competitiveness. Even though the short term social costs of the transition to a more competitive economy can be highly significant, they will be insignificant when compared to the long term costs of the economy not being competitive - a trait that no economy can afford to have in today's day and age. Therefore, the empirical evidence needs to be stronger and the economic theory pointing to such assumptions need to be adapted to suit the state of the current world economy besides being more elaborate. (Vagalisindi, 2003) The effectiveness of competition policy measures has been assessed in various transitional economies in the areas of enforcement, competition advocacy and institutional effectiveness. Such studies show that the competition policy is strong enough to complement the dynamics of a growing economy as well the positive relationship between effective competition policy implementation and expansion of more efficient private firms. (Vagliasindi et al, 2000). On the basis of the above information, if we were to talk strictly in terms of developing countries and how competition can help their economies evolve and emerge as competent compared to the developed countries, we will find many who are of the view that competition policy and law are tools for the rich and urban society. They are highly mistaken. Going strictly by economic theories, the design and implementation of a competition policy at the macro level will enable the enhancement of the welfare of poor consumers; while an effective competition regime or consumer law (covering competition distortions) at the micro level can prevent consumer abuses both at the industry level as well as in a more rural setting. It is beyond a doubt that an appropriately designed competition law should be an integral part of every governments' central framework policies. For that, the basic requirement is to design a model that gives evidence of the detrimental effects of barriers to import (in case of larger countries), and the domestic entry on the basis of a certain mark up price (in case of smaller countries). These factors show that a proper competition policy, with appropriate advocacy, complements other government policies aimed at competition by inhibiting existing as well as growing barriers. The empirical models pointing to evidence regarding the advantages of the use of competition policy measures need to concentrate more on those economic theories that support the need for different policies for different nations, in a more global context. The fact is that the world has shrunk and economies are becoming more open by the day. Apart from this, we need to break out of conventional views by taking stock of our current situation and basing research, studies and facts on the same. 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