Business Environment in United Kingdom - Essay Example

? Business Environment in UK Introduction Businesses are affected by the economic situations in their respective location. Every country faces economic problems of inflation, allocation of the scarce resources, unemployment and how to make the economy blossom. Howe this economic problems are solved depends on the kind of economic system that is practiced in that particular economy. An economic system are the consists of the people, institutions, processes, procedures that must be followed when making economic decisions to help solve the economic problems that face different economies. The different types of economic systems will determine the decisions on what to produce, how to produce, and who to consume the output. Economic Concepts and Problems The major economic problems that face economies include: the scarcity problem, competition, choice, resources, opportunity costs, needs, efficiency and wants. These are the key concepts that are fundamental in the understanding of the economic problems and that influence the kind of economic decisions that must be made for economic stability purposes and for the attainment of the solutions to the economic problems. The first concept is scarcity. This is a major economic problem that states that human needs are unlimited and resources are insufficient to satisfy all the diverse needs. The society is therefore faced with the challenges of the allocation of the scarce resources to attain maximum satisfaction of the unlimited needs. The economic system will therefore determine what to be produced and who to consume. It therefore also mean that a trade off must be made while making the economic decisions. Due to scarcity problem, the individuals in an economy will compete for the limited resources in order to survive. Competition is the scramble for the limited resources in order to acquire a fair share. Businesses and individuals both have to compete for the limited and scarce resources in order not to get eliminated in the system. When competition arises, the government agencies may formulate policies that are aimed at ensuring that the allocation of resources and that the competition is fair for all the participants. Competition has always been desired in order to increase efficiency and improve on the quality. The third important concept is opportunity cost. In economics the pursuance of one decision will mean a sacrifice to another possible action. Opportunity cost is the cost forgone for selecting the best alternative. Because the resources that are available in each economy is not enough to produce enough goods and services for everybody, some decisions must be made while others will be sacrificed. Economic systems will assist in the determination on what to produce and what to sacrifice. Needs are the requirements for existence or survival. Individuals in an economy will need food, shelter and good infrastructure for them to have a good life. Businesses as well will need resources e.g. raw materials in production or economic conditions that are favourable for operation. In addition, resources are the commodities or assets that are needed for production of goods and services that are demanded by individuals. Resources have the characteristics that they are limited, get depleted and have utility. The allocation of resources in production determines the manner in which the economy performs and the output that will be attained. Economic systems are instrumental in the allocation of these scarce resources to maximize the satisfaction that will be achieved in the economy. Moreover, the scarcity of resources in production and in the satisfaction of human needs will mean that a choice must be made in relation to what to produce, quantity to produce, when to produce and who to consume. Choice can be defined as the choosing from among alternatives. In economic problems, a choice must be made on what to pursue among the various alternatives that are existing. The economic system influences the choices that are adopted in the economy. Finally, efficiency is the utilization of economic resources to maximize the output that is attained. An economy is said to be efficient when it can produce more goods and services without using much resources or it uses little resources to produce more output. Efficiency helps in reducing wastages, breakages and losses that are faced in economic production. Economic systems that aim at maximising output through eradication of wastages would be desirable for economic growth. Economic Systems Every business operation is affected by the environment with which it operates and the kind of economic system that exists. In their bid to earn revenue and realize going concern, businesses always scan their environment to ensure that their operations are not adversely affected by the economic shocks. An understanding of the different economic system will therefore be necessary for the business success. There are four major types of economic systems. They include planned, free enterprise, mixed and transitional economic system. Each of these systems has their advantages and drawbacks. The economic systems determine the economic directions and allocation of the scarce resources. Planned economic system is the system in which the governments and its agencies play significant roles in the allocation of resources. The governments in these economies determine the major needs and prioritises on what should be produced. The government determines what to be produced; how the distribution should take place and the prices to be charged on the produce. In the planned economies, all the major decisions are made by the government and the government therefore greatly determines the performance of the economy. The problem with this kind of economies is that it is rigid and the consumer’s needs are slowly reacted to. The consumers’ sovereignty is therefore limited in that what consumers consume and the prices to be paid are set by the government. Planned economies are also faced with the problem of lack of incentives to employees and managers as their remunerations and decisions are vulnerable to those of the government (Conklin 1991). Planned economies also do not favour entrepreneurship as the government decisions affect business operations and their returns. On the other hand, planned economies are advantageous in that they are not affected by the economic cycles that are responsible to the depressions in the economy (Halm 1968). This is because in planned economies, there is no overproduction or underproduction that occurs. All that is produced is determined from the economic needs. Again, planned economies are advantageous in that it promotes the welfare of the people as this is the main motive. The quantity of life is therefore achieved in planned economies rather than free enterprise. The lack of profit maximization also ensures that there is no exploitation of natural resources hence reducing the level of pollution and no discrimination on the side of consumers (Halm 1968). The second type of economic system is the free enterprise. In this economic system the government does not determine the economic decisions of allocation of the scarce resources or the determination of prices of goods and services (Conklin 1991). The resource allocation, determination of what to produce, quantity to produce and the distribution of the output are all dependent on the market forces of demand and supply. This kind of economic system is also referred to as market economy as the market determines the production. In the free enterprise economies, the government plays a limited role of ensuring that there are all the enabling environment for trade, they provide the conditions that are demanded top lure private investors to participate in the production process. The government may also intervene in few instances when the profit motive has resulted to the exploitation of the public or the exploitation of natural resources that lead to environment pollution and degradation. It is therefore true to state that no market is perfectly free since there must be some extent of government intervention however small it may be. The advantage of a free enterprise economy is the level of liberalization that makes the consumers sovereignty be high. This is because the businesses have to operate in flexible ways for them to have demand for their products. Consumers will therefore have a wide range of products to choose from and their tastes and preferences will be highly looked into (Hand & Hand 1974). The unique price determination in free markets has been responsible for the discrimination by monopolists and oligopolies and promoted fair competition and improvement in the quality of products. The level of competition in this system has also promoted innovation and introduction of new product that are in demand by the consumers. Another advantage of free enterprise economic system is that it ensures efficiency in the allocation of resources. In free markets the forces of demand and supply will ensure that the production level is pegged on the quantity demanded and therefore no surplus will be produced. This will therefore eliminate wastage and ensure that the firms aim at maximizing the level of satisfaction and output level. In cases where there is surpluses, the prices will reduce hence reducing the level of supply thereby correcting the surplus not required (General Books LLC 2010). Moreover, free enterprise systems have promoted globalization by attracting foreign investors in the domestic economies. Businesses have been able to expand their operations in the global economies and an attained economy of production. This has therefore stimulated economic developments in various parts of the world. On the other hand, free enterprise system is also faced with various disadvantages. To begin with, there might be distortion of production because the entrepreneurs may be interested in maximizing profits at the expense of the welfare of the people. There is likely to be limited provision of social services like education and health that might be very important for the people (Hand & Hand 1974). Moreover, free enterprises are responsible for the exploitation of the natural resources and even labourers efforts. Private businesses are little concerned about the impacts of their activities on the environment or depletion of natural resources. This might be harmful for the economy since the impacts may have huge environmental impacts. The second disadvantage of free enterprise economy is that it might lead to increase in the economic disparities between the rich and the poor. In free enterprises, individuals work towards maximizing their own wealth and this may make those with resources to amass more wealth by exploiting the vulnerable poor population (Douglas 2003). This has been the cause of the exploitation of the labour of the poor and led to ling working hours with low wages. Unemployment has also been a reason why free enterprises may not be desired. This has been responsible for the increase in unemployment in India and China because there has been preference to use of machinery to increase the level of production at the expense of human labour (Buxton & Chapman 1998). This has also increased social crimes since individuals are fighting for their own benefits. As a result, corruption and other social crimes have increased sporadically. The individuals who are not able to find for themselves have sometimes engaged in criminal activities with an aim of surviving in the highly competitive environment. The third economic system is the mixed economic system where there are both the elements of planned and free enterprise economic system. The government will always want to influence investment decisions on the sectors that it feel are most important in as much as the private sector will take part in the actual investment (Conklin 1991). In this economy, the prices of goods and services are mostly determined by the forces of demand and supply. The economy of the United States is an example of a mixed economy where both the government and individuals are instrumental in the performances of the industry (Halm 1968). Mixed economies are advantageous in that there is no over exploitation of the individuals. The government role will always ensure that consumers are protected and that the economic shocks are absorbed to prevent massive unemployment and exploitation of the labour force. Mixed economies can also be preferred because of the limited role of the government which implies that there is freedom in making economic choices by the private individuals. They will rarely get affected by the government hence there will be that motivation on profit making. In addition, mixed economies ensure that there is efficiency in resource utilization. This is because the government will always influence the production when there is need to ensure that the welfare of its citizens is satisfied. The role of the government has also ensured that there is fair competition and trade practices hence the economy becomes better. In addition, the fact that the government isd a partisan will make the businesses operations be in line with the countries development agenda. On the contrary, this economic system may suffer from the problem of government control. In instances that the government continuously controls the businesses, private investors will be discouraged from investments. Their main objective of maximizing profits at the expense of the welfare of the individuals will be prevented through policies of price control. This will therefore make the businesses cut their production level hence create unemployment. Mixed economies has also been a cause of bureaucracy and caused corruption in most economies. There has been greed whereby every individual works towards enriching himself. In addition, this kind of economies is responsible for the closed economic system whereby the domestic economy is restricted from access by foreigners (Heritage Foundation 2011). This has therefore limited competition to the domestic market and made firms less competitive. It has also resulted in the consumers lacking a wide range of products from the external markets. Transitional economic system is one that changes from planned to market system. There is need for the economy to attain liberalization and to increase the size of the private sectors (Chin 1996). The shift from planned to market economy is promoted by the need to attain macroeconomic stability and gain liberalization. This kind of economy is characterized by legislation changes and reforms that are aimed at reducing the rigidities in the system (Douglas 2003). Notwithstanding, there will be restructuring of the institutions in order to survive the new economic conditions. China and Vietnam are examples of economies that have shifted planned to market economies (Lin, Cai, & Li 1996). The coutries are faced by challenges in the process as the transformation of the institutions may resisted and reuires large amount of resources. UK Econony and Economic System The United Kingdom has adopted a free enterprise form of economic system where most economic decision is dependent on the private investors. In ranking, UK is the sixth largest economy based on the GDP and the third largest economy in Europe (Economy Watch 2011). The economy of UK has a wide number of sectors each having a contribution on the performance of the economy. The service sector contributes about 77% of the GDP, industries 22% and agriculture around 1% making services sector the largest sector in the UK economy (Economy Watch 2011). Other sectors include agriculture, tourism, education, real estate, transport, and communication among many more. In 2010, for instance the GDP was US$2.172 trillion (Simpson 1996). The UK economy has experienced a high balance of trade deficit following the US. The level of imports is high and this has been responsible for the rising balance of trade deficit. In 2010, the UK had the sixth largest current account deficit making the government come up with austerity measures which were aimed at reducing significantly the level of current account deficit (Economy Watch, 2011). The high average inflation of 4.2% has also been cited as a reason for the poor balance of account deficit and the need unfavourable interest rates (Economy Watch 2011). In the UK, the total population in 2010 was 62.22 million and 18% of this population was constituted by those below the age of 15years. 66% of the population are aged between 15 and 64 while the remaining proportion is aged 65 and above (Economy Watch 2011). It must also be noted that the age structure is not evenly distributed across the country. With about 29 million workers, the UK economy has the fourth highest labour force with unemployment rate of 7.8%. This high rate of unemployment may be worsened by the cut in government expenditure (Smith & Grant 2003). With the free enterprisse tranking of about 75% trade in the UK has been liberalised with the government intervening in situations where thereb are heavy economic turbulence (Heritage Foundation 2011). In the recent period, the government has increasedb its level of intervention in business matters as a way of keeping in waatch the rising level of inflation and the fluctuations in the interest rates. The economic recession of 2008 also saw the UK government formulate policies that would regulate the manner in whioch businesses were to be operated. The policies that are formulated are aimed at ensuring that there is sound economic perfomance and development in the level of economic growth. Government Policies The government of UK has come up with policies that are aimed at stabalizing the inflation rates and controling the level of unemployment in the economy. Policies that deal with labour issues have also been made flexible to ensure that there is absoprbtion and increase in employment level in these economies (Buxton & Chapman 1998). The non tarriff barriers have been imposed by the government in arease like agriculture to ensure that there is protection ofg the domestuc industries (Smith & Grant 2003). The UK government policies have been formulated in a manner that is consistent to those of the EU requirement. The financial sector in the UK has also been characterised by a high level of indipendence and competetive. The government owership in banks and ither financial institutions has been reduced to ensure that both foreign and domestic institutions face stiff competituon to achieve efficiency. The government in some instaances acquired contreol of some banks to help correct the financial crisis problems in the economy during the 2008 financial crisis. The result of trade liberalization in the UK has made production and efficiency in the allocation of resources be attained with production firms concentrating on areas with demand. The free enterprise has also promoted private investment growth and increased the foreign direct investment in the local economy (Douglas 2003). Consumers of the UK have therefore benefited from the wide range of quality products that are made available. Their sovereignity has been maximised and their choices has influenced the allocation of business resouirces. Taxation policies in the UK plays a significant role in the business perfomances. Tax laws and regulations should promote business perrfomance and increase business formation. In UK, the income tax level has been high with those in high income taxed upto 50% of their income. Corporate taxes has remained at about 28% for both domestic and foreign firms (Smith & Grant 2003). High taxation will discourage private investment and force many businesses out of operation whereas low taxes will encourage business venture (Delmas & Toffel 2008). The low tax levels as well rediuce the government level and the government should consider the trade- off of taxation and business perfomance to attain economic stabilization. Business Perfomance in UK Business perfomance in the UK have become vulnerable to the adverse business cycles becuase of the free enterprise economy. During periods of deprecession businesses in the UK are faced with declining profit margins and poor share prices in the london stock exchange (Black 2009). The businesses have also been impacted on negatively by the rising interest rates which has made the cost of borrowing high and reduced the profits. Moreover, the government policies and regulations on trade in the United Kingdom is also important in influencing perfomance in market (Simpson 1996). With a cut in the government expenditures the turnover of businesses were bound to reduce since the government is a core purchaser and their cut ill reduce the level of demand. Businesses perfomance depends on the environment. The government being part of the business environment must be monitored closely by private sector to ensure sustained profits and good results. The need for the government interventioon is called for and must be moderate i.e. in the creation of an enabling environment for trade purposes. Failure by the state to have limited control on the businesses can cause malpractices and exploitaation to the population. The level of economic disparity and the government influence on the economic perfomance will be robed. Government need to ensure smooth perfomance of the business and businesses in turn must lobby to ensure that the government regulations promote good perfomance and increased results. The government of UK should formulate good economic policies that would result in better business operations and perfomance. The policies shouls pjrovide soolution to the economic problems of unemployment, inflation, interest rates and problems with balance of payment. Failure to consider all the economic factors would result in economic turbulance and instability that is dangerous for the country’s economic good. Reference List Black, F 2009, Business cycles and equilibriu, John Wiley and Sons, New Jersey. Buxton, T & Chapman, PG 1998, Britain's economic performance, Routledge, London. Chin, AT 1996, Economic management and transition towards a market economy: An Asian Perspectiv, World Scientific, London. Conklin, DW 1991, Comparative economic systems: objectives, decision modes, and the process of choice,Cambridge University Press, New york. Delmas, MA & Toffel, MW 2008, Organizational responses to environmental demands: opening the black box. Journal of strategic management , 1027-1055. Retrieved from http://www.heritage.org/index/country/unitedkingdom Douglas, DW 2003, Transitional economic systems: the Polish-Czech example, Routledge London. Economy Watch 2011, The economy of the UK, GB, British Isles. Economy Watch . Retrieved from http://www.economywatch.com/world_economy/united-kingdom/?page=full General Books LLC 2010, Economic Problems: Inflation, Monopoly, Oligopoly, Hyperinflation, Deflation, Unemployment, Plutocracy, Recession, Stagflation. General Books LLC. Halm, GN 1968, Economic systems: a comparative analysis. Holt, Rinehart and Winston. Hand, GH & Hand, JH 1974, Economic problems; analysis and solution. Canfield Press. Heritage Foundation 2011, 2011 Index of Economic Freedom, Wall Street Journal . Lin, J. Y., Cai, F., & Li, Z 1996. The lessons of china's transition to a market economy, The Carto Journal , 2 (16). Retrieved from http://www.cato.org/pubs/journal/cj16n2-3.html Simpson, L 1996, An introduction to the UK economy: performance and policy. Prentice Hall/Harvester Wheatsheaf. Smith, D & Grant, S 2003, UK current economic policy Heinemann, London. Read More