Fast Economic Growth and Continuous Business - Essay Example

? International and Pacific Asian Business Number and Number Number of Words:3,021 Introduction Changes in domestic and international economy are significant part of our life. Back in 1950s, the ways in which businesses is being conducted has shifted from agriculture to industrialization. In 1990s, the shift from industrialization to multinationalism was dominant part of our economy. During this era, multinational companies were more focused on keeping investment on capital, expenses spent on human resources and raw materials low. Because of the presence of technological improvements in communication technology, trade liberation and economic freedom were heavily promoted (World Trade Organization 2008). These factors contributed to the shift from multinationalism to globalization. Since the millennium, academics and business people were more concern about ways in which globalization could affect domestic and international economy (Tierney 2004; Smith and Yaw 2002, p. 1). The purpose of globalization aims to promote the practice of free trading in the world market by removing barriers like import and export taxes which could prevent business people from taking advantage over the use of natural resources around the world (Nanduri 2006). By linking the trade and development in one country to other countries around the world, globalization makes it possible for businessmen to have the opportunity to maximize the use of the available natural resources and manpower (Krugman & Obstfeld 2009, p. 27, 273). As part of examining the new economy in the international and pacific Asian business, this report will analyze and discuss ways in which international trading is being conducted using the new trade theories as tackled by Paul Krugman. Eventually, trade theories which could accurately explain the competitiveness of business locations will be tackled in details. In line with this, economic theories related to economics of scale, demand led, product life cycle, the significance of monopolistic competition will be applied in different case scenarios by providing real-life examples and evidences. Prior to conclusion, the key trade patterns will be critically evaluated. The New Economy in International and Pacific Asian Business Because of globalization, fast economic growth and continuous business expansion can be observed in the modern international and pacific Asian businesses. In order to gain competitive advantage over other businesses in the world market, the new economy in International and pacific Asian businesses are heavily focused over the need to rely on the practice of trading goods and services within and outside a given country. As part of increasing the competitive advantage of each business, large-scale companies are competing with one another not only in terms of acquiring the cheapest yet high quality raw materials but also in terms of hiring competitive and highly skilled employees at a minimum wage level (Steger 2003, p. 37). As a basic rule in business, high profit can be achieved not only when a company is able to produce enough supply based on the market demand but also when a company is able to keep its business operational cost at a very low price. Specifically the low operational cost can be achieved either by maximizing the use of the available human resources through the use of high technology and machineries or through economies of scale. Economies of Scale As explained by Krugman and Obstfeld (2009, p. 114), economies of scale in microeconomics is all about the cost advantage each businesses could earn by maximizing the use of its available technology and human resources. In line with this, a company is able to keep the unit price of certain product low each time the buyer purchases specific item by bulk. In other words, reducing the unit cost of a product is possible because producing a single item by volume can be manufactured on a large scale without the need to spend more money spent human resources. For example: Employing 30 manpower, company A in pacific Asia manufactures printed papers. Regardless of whether or not company A is able to receive new orders from its customers or not, the company will still have to pay the salary of its 30 employees on a regular basis. In case the company receive a purchase order of only 10,000 pieces, the company will have to deduct employees’ salary and other variable operational cost such as electricity bill and cost of raw materials among others in order to determine whether or not the company will have positive or negative (+/-) profit. In case company A recieves purchase order of 10,000,000 pieces, there is a higher chance for the company to be able to gain positive profit at the end of the day. There are many suppliers around the world who are competing in the world market. Since qualified suppliers are more interested in serving customers who purchase a single item in large volume, buyers who are capable of ordering product by bulk increases their bargaining power over the suppliers. This is one reason why small-scale businesses are unable to compete with large-scale companies in terms of selling their end products to their target market in terms of market price. In most cases, it is the large-scale businesses that are able to receive a bigger return on production as compared to their small-scale competitors. Basically, economies of scale does not only benefit large-scale companies in terms of profit but also in terms of increasing their capabilities to enhance their production efficiency. Since large-scale companies are able to gain more profit, these companies have the financial capacity to invest in new technology which is crucial in terms of enabling the business be able to produce end-products by volume within the shortest time possible. In line with this, technology is not limited in terms of acquiring the latest machineries but also IT technology which can be use in enhancing the company’s operational flow of production. In general, economies of scale an either be classified as internal or external. The example that was metioned earlier regarding the case of company A is more on the internal economies of scale. Basically, external economies of scale is so much different from internal economies of scale in the sense that external economies of scale is referring to situations wherein a company could effectively reduce the cost of production as a result of external factors which could occur outside the control of the business organization. A good example of external economies is the advancement in transportation technology. Another way of gaining benefit from economies of scale is through business expansion in another country. Specifically this type of business strategy is often used to avoid saturating the market in the origin country. Because of the economic benefits associated with economies of scale, majority of the large-scale companies such as Nestle and Johnson & Johnson’s are continuously expanding their the scope and location of their business not only in their country of origin but also in other countries around the world. Business expansion in another country is possible by entering into merger and acquisition or a joint business partnership with an existing foreign businesses. Specifically acquisitions is referring to the process of acquiring or gaining control over a company by purchasing stocks to enable a business entity have the right to takeover their target company (Investor Words 2011a) whereas merger is the process of combining two or more companies either by pooling of interests or puchasing acquisitions (investor words 2011b). Considered as one of the most reliable business strategy for business expansion, merger and acquisitions can be use in solving financial problems or increase the business’ efficiency in terms of grabbing a bigger market shares in the world market. As a result of acquiring new assets and improvements in technology, companies that enters into merger and acquisition could gain more competitive advantage in terms of becoming more competitive in the world market (Gugler and Mueller 2003). Demand Led Growth Based on Keynesian principle of effective demand, demand led growth can occur when the output of supply increases in response to a significant increase in demand. It means that as long as there is demand for a product and services, supply will continue to increase by encouraging more people to invest on businesses that is currently in demand. Specifically in the case of international and pacific Asian businesses, majority of the large-scale businesses in developed countries has shifted their companies to developing countries in pacific Asia in order to take advantage of being able to hire competitive human resources at a lower cost. Aside from increasing the foreign direct investment (FDI)1 in international and pacific Asia region, expanding or shifting their businesses in developing countries could make the large-scale businesses from developed countries able to keep their annual operational cost very low since the cost of electricity, transportation, and other related operational expenses is relatively cheaper in developing countries. As a result, the economic GDP in developing countries significantly increases. Despite the significant increase in GDP of developing countries in pacific Asia, demand led economy could result to a more serious long-term economic problems. Even though unemployment rate decreases as a result of the significant increase in demand for products and services in manufacturing sector (Gwartney et al. 2009, p. 320), the quality of life of most people who are employed is not necessarily improving because a continuous growth in developing countries’ GDP could result to inflation. Aside from increasing the interest rate, the uncontrollable growth in the economy could make the real prices of goods and services increase in the long-run (Gwartney et al. 2009, p. 577). Specifically China and India are among the fastest growing economy today. Since most of the employed individuals in developing countries are earning either a minimum wage or close to minimum wage, we can say that the quality of life of employed individuals did not improve one way or the other. Product Life Cycle Specifically the right time wherein a business enterprise should expand its business domestically and internationally can be explained through the use of product life cycle theory. According to Dent (2004), the product life cycle is composed of four major stages which include: (1) innovation; (2) growth; (3) stakeout; and (4) maturity. In some books, the product life cycle in economics is classified as: (1) market introduction; (2) rapid market growth; (3) demand maturity; and (4) market decline (Zopounidis and Pardalos 1998, p. 327). During the innovation stage, the company has a lot of business growth opportunity within domestic market where the company was established. As a result of continuous business expansion and growth, the company could soon saturate the market before it reaches the decline stage. Maturity is the stage wherein the business has no longer any opportunity to grow. To avoid reaching the maturity stage, most the fast growing companies are expanding its business in other countries worldwide (Dent 2004). A good example wherein the company follows the economic theory of product life cycle is the case of Starbucks. Starbucks dominated the entire U.S. coffee retailing market because of its massive business expansion. Even before Starbucks saturated the U.S. local market, the company expanded its business in different countries worldwide. As part of Starbucks’ global expansion, the company was able to establish its retail store outlets in Australia, China, Hawaii, Hong Kong, Indonesia, Japan, Malaysia, Philippines, Singapore, South Korea, Taiwan and Thailand (Hwang 2005). Eventually, Starbucks has successfully opened 190 store outlets throughout 19 cities in China (Delaney and Chan 2006). Market Competition Monopolistic competition is often considered as imperfect market competition because of the absence of free market competition. As mentioned earlier, the main purpose of globalization is to promote free trading in the world market. As a result of continuous promotion of free trading, the cases of monopolistic competition is limited in terms of the number of businesses that are able to take advantage of monopolistic power through the strong support of the local government. Although the use of IP laws such as trademarks, patent, and copyright laws could still enable the business owners to protect their product and company name from being copied by its potential competitors, most of the businesses that are selling homogenous products are unable to enjoy monopolistic competition regardless of the size of the business. Market competition within a free market is more beneficial on the part of the consumers basically because the market prices of goods and services are dictated by the equilibrium point wherein the supply and demand curve meets. Taking this concept into consideration, the market prices of goods and services is more likely to increase whenever there is a shortage in the supply of goods and services. On the contrary, the market prices of goods and services will decrease in case the demand for goods and services is lower than the available supply (Ezeala-Harrison 1999, p. 180). Most of the businesses in international and pacific Asia businesses are triggered by demand led growth. Aside from the impact of demand led growth, the continuous importation of tangible products from countries like China increases the supply of common goods in the local and international markets. A tight market competition increases the market efficiency and economic growth. Since there are so many retailers that sell homogenous products coming from China, the market prices of imported Chinese products significantly decrease. Competitiveness of Business Locations In relation to globalization, business expansion in another country should consider the importance of business location. In line with this, a company that wishes to expand its business in another location should consider the country’s distance to its target market. By doing so, the company will have competitive advantage as compared to its competitors in terms of saving a large sum of money over transportation and freight cost. Since most of the large-scale companies are aiming at targeting different countries around the world, being able to establish a strong geographical diversification in international and pacific Asia market is one of the key factors that could significantly contribute to business success. In line with this, carefully studying the geographical diversification plan could open new business opportunities for most companies because geographical location is a significant factor which enables a company to easily penetrate the market of another country. Discussion on Key Trade Patterns Based on external factors, the patterns of trading is always subject to change. Since the era of globalization, most of large-scale companies in developed countries has shifted or moved their manufacturing plant in pacific Asia in order to save a large sum of money from its operational costs. As a way of penetrating the global markets, large-scale companies that managed to invest in developing countries are able to increase their market advantages of being able to sell their finish products at a more competitive price. Specifically in the case of manufacturing companies, selling the finish products at a lower price is possible by taking into consideration the business benefits associated with economies of scale. For example: Given that a large-scale company in UK would decide on entering the market in China, the company which is based in UK could choose a potential business partner to make it easier for them to open a new business opportunity. Aside from easily entering the Chinese market, entering into a joint venture with a Chinese businessman could make the UK business owner learn more about the business culture in China. Once the company has penetrated the Chinese market, it would be easier for the business owner to ship the finish goods back to UK and its target market in Asian countries. Because of China’s close proximity to other Asian countries, the company in UK could decide to ship a portion of its manufactured product to a list of potential buyers. Although the process of merger and acquisition can be considered for the purpose of gaining economies of scale, the use of this strategy does not always promise good profitability because of the cultural differences of the stakeholders in two or more different companies. As a result of the development of potential internal conflicts, companies that enter into merger and acquisition could encounter management-related problems (Kelly, Cook and Spitzer 1999). A good real-case scenario wherein the process of entering into merger and acquisition failed to create the benefits of economies of scale can be noted in the case of Mercedes and Chrysler. Although Mercedes was expecting that the process of entering into merger and acquisition with Chrysler could make the company reduce its operational cost by $1.3 billion a year after the merger, the company was not able to make its projection turn into a reality (Cooke 1986, p. 27). Instead, the annual profit of Mercedes was badly affected. Conclusion Economies of scale could benefit large-scale companies in terms of being able to sell the end products at a competitive market price. Large-scale companies can gain more bargaining power over its suppliers. By ordering their raw materials by bulk, large-scale companies are able to purchase raw materials at a very low price. Because of the significant increase in the competition of businesses in the global markets, large-scale companies are continuously searching for new ways on how they can take advantage of cheaper human resources and available natural resources which could significantly increase the company’s ability to increase their annual profitability. To avoid reaching the maturity stage in product life cycle, most of the large-scale companies are penetrating the foreign markets. Large-scale companies that are planning to penetrate the pacific Asia market should be careful when deciding to enter into merger and acquisition or joint partnership with a foreign business owner. Even though these strategies could make it easier on the part of the large-scale companies to penetrate the pacific Asian market within the shortest period of time, the cultural differences between two different countries could cause serious managerial problem to companies from developed counties. As a result of globalization, economy in pacific Asia is driven by demand led growth. Although the significant increase in demand for production could solve the unemployment problems, excessive increase in the production demand could result to long-term economic problems because of the high inflation and interest rate associated with the significant increase in GDP. To effectively control the adverse effects of high inflation rate, the government in pacific Asia should make use of its fiscal policy to control the existing number of foreign domestic investment. *** End *** References Cooke, T., 1986. Mergers and Acquisitions. UK: Basil Blackwell, Ltd. Delaney, R. and Chan, C., 2006, October 25. Starbucks Buys Outlest in China. [online] Available at: [Accessed 9th of January 2011]. Dent, H., 2004. The Next Great Bubble Boom: How to Profit from the Greatest Boom in History, 2005-2009. Free Press. Ezeala-Harrison, F., 1999. Theory and policy of international competitiveness. 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