Principles of Business

Macro economics and regulations – Part 2

2

Overview

• Understand the seminal frameworks of Porter’s Diamond and Factor mobility theory providing the determinants of national competitive advantage

• Explain the different business cycles that exist• Detail the government’s role in a free-market system• The role of regulation and government intervention

in stimulating and stabilising the economy• Different regulatory bodies in the UK• Delve into the pros and cons of regulation including

creating efficient markets but inhibiting creativity

3

Learning Outcomes

• Be able to explain the determinants of National Competitive Advantage

• Outline the role of regulation and government intervention in a free market economy

• Explain the pros and cons of regulation

• Identify the major ways of measuring economic activity

Following on from the last session where…

Economic determinants are said to arise from:

However, it does not answer why have some countries developed and sustained different

competitive advantages?

The diamond of national competitive advantage is a

theory showing four features as important for competitive superiority:

demand conditions, factor conditions, related and

supporting industries; and firm strategy, structure and

rivalryMichael Porter

Porter’s Diamond

Porter’s Diamond

Factor endowmentsThere are two kinds of factor endowments - the basic factors of production such as land, labour, capital and materials; and advanced factors such as technological know how, managerial skills and physical infrastructure.

Demand conditionsDemand conditions are relevant, argues Porter, in creating pressure for innovation and quality. Domestic demand pressures in countries like India may have been especially relevant in forcing companies like Tata to improve their competitiveness..

Related and supporting industriesWhen suppliers are located near the producer, these firms can provide lower cost inputs that are not available to the producer’s distant competitors. It also aids the sharing of information between supplier and producer.

Firm strategy, structure and rivalryPorter argues that strong domestic rivalry in a country like the US promotes fitness to compete rather like athletes training for the Olympics. Only by competing with the best at home can one hope to compete successfully at the global level. The strategy and structure of firms is also influenced by the management style and culture of the country

Porter’s Diamond

Porters Diamond in Action

Factor Mobility Theory

Focuses on why production factors move, the effects on transforming factor endowments and the impact on world trade

and economics

Why production factors move?

Capital, especially short-term capital, is the most

internationally mobile production factor.

Companies and private individuals primarily

transfer capital because of differences in expected

return (accounting for risk).

Economic Motives: People move countries in order to earn more. For example, Indian workers moving to

the Middle EastPolitical Motives: People

more for political reasons, because of persecution or

war dangers.

Capital Labour

Effects of Factor Movements

• Factor movements alter factor endowments

• Factor movements can be substantial for some countries, and insignificant for others

• The movement of labor and capital are intertwined

• Pros and cons of outward and inward migration– Brain drain– Remittances

Business Cycles

Business cycles Fluctuations in the rate of growth that an economy

experiences over a period of several years

Recession A period during which national

income, employment, and production all fall; defined as at

least six months of decline in the GDP

What is inflation & deflation?

Source: Bovee et al, 2013

Business Cycle: 4 Stages

Source: Emeraldinsight.com

An Example: UK GDP

Can you spot the stages?

Source: BBC.com

Controlling the Business Cycle

Fiscal Policy

Involves the government changing tax rates and levels of government spending to

influence aggregate demand in the economy.

Monetary Policy

Involves changing the interest rate and influencing

the money supply

They are both used to pursue policies of higher economic growth or controlling inflation.

Consider the effects of a

rise in interest rates on the

economy

Consider the effects of increased

government spending on the economy

A Big Factor - Regulation

“By a three-to-one margin informed publics call for increased government regulation of financial services, energy and food &

beverage industries” Edelman, 2014

Source: Edelman, 2013

The Role of Governments & Regulation

• Protecting stakeholders• Fostering competition• Encouraging innovation and economic

development• Stabilizing and stimulating the economy

FCA - Treating Customers Fairly

Source:http://www.fca.org.uk/static/documents/fca-approach-advancing-objectives.pdf

Department for Business & Enterprise

Source: Departmennt for Business & Enterprise

Government Taxes

Source: Bovee et al, 2013

Regulation & Deregulation

• Regulation – Relying more on

laws and policies than on market forces to govern economic activity

• De-regulation – Removing

regulations to allow the market to prevent excesses and correct itself over time

Source: Bovee et al, 2013

In the UK, economic regulation has aimed to promote effective competition where this is possible, and to provide a proxy for competition, with protection of consumers’ interests at its heart, where it is not meaningful to introduce competition.

Pros of Regulation: A UK Govt View

High quality and efficient economic

infrastructure plays a vital role in

supporting a competitive and

growing economy

In certain sectors network effects and/or economies of scale create circumstances, such as natural monopolies, which, under current technological patterns, limit the prospects for effective competition. In these areas, independent economic regulation1 will be needed over the long term to continue to provide vital consumer protections and ensure consumers’ interests are promoted

Source: https://www.gov.uk/government/uploads/system/uploads/attachment_data/file/31623/11-795-principles-for-economic-regulation.pdf

The Government is committed to maintaining the strengths of the design of the system. Given the scale of the challenges for the UK’s infrastructure, it is important to reinforce its key foundations and ensure it provides the right degree of clarity, certainty and consistency for the future.

Pros of Regulation: A UK Govt View

The regulated sectors such as telecoms,

water, energy and rail face the challenge of

delivering the majority of the £200bn2 of

planned infrastructure investment over the

next five years. Beyond that, continued

investment is critical not only for growth but

also for the UK’s international

competitiveness

Efficient delivery of this investment is vital to the long term interests of consumers who will ultimately bear the costs. Appropriate economic regulation is a critical enabler of infrastructure investment.

Source: https://www.gov.uk/government/uploads/system/uploads/attachment_data/file/31623/11-795-principles-for-economic-regulation.pdf

Cons of Regulation

Stifle Creativity

Present unfair advantage to certain

groups

Reduce overall competitiveness

Political Agendas

Types of Competition in a Free Market

Competition Rivalry among businesses for

the same customers

Monopoly A situation in

which one company

dominates a market that it can

control prices

Oligopoly A market situation in which a very small

number of suppliers, sometimes only two, provide a particular

good or service

Pure competition A situation in which

many buyers and sellers exist that no single buyer

or seller can individually influence market

prices

Monopolistic competition A situation in which

many sellers differentiate their

products from those of competitors

Source: Bovee et al, 2013

Regulation in India: What’s changed since 1991?

View video: http://www.youtube.com/watch?v=PiHlLM8IMJ0

Google in China

View Video: http://www.dailymotion.com/video/xpmkjt_google-may-pull-out-of-china-over-censorship_fun

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Essential work for next week

• Please consult the OLE for details of:– Essential readings*– Seminar/workshop preparation work*– Recommended further readings– Any additional learning

* Essential readings and preparation work must always be completed in time for the next session

Appendix – Sources for illustrations

Slide 4:www.mrscultz.com

Slide 5:www.harvard.edu

Slide 6:www.slideshare.com

Slide 7:www.tonyuwblog.com

Slide 8:www.notebookcheck.net

Slide 9: www.slideshare.com

Slide 11: www.mpesa.com

Slide 17: www.fca.gov.uk

End of presentation

© Pearson College 2013