Socio Economic and Legal Environment LO1: Critically analyze the knowledge economy and the various drivers of economic changes which impact business activities Socio Economic and Legal Framework LO1: Critically analyse the knowledge economy and the various drivers of economic changes which impact business activities LO2: Understand the legal framework and its implications in the wider context of business management LO3. Critically evaluate the political factors which influence company management and dynamics LO4. Analyse case scenarios and case studies on the various economic drivers and legal frameworks practised in business management KNOWLEDGE ECONOMY ● The knowledge economy (or the knowledge based economy) is an economic system in which the production of goods and services is bases principally on knowledgeintensive activities that contribute to a rapid pace of advancement in technical and scientific innovation as well as accelerated obsolescence. ● The key element of value is the greater dependence on human capital and intellectual property for the source of the innovative ideas, information and practices. ● Organizations are required to capitalize this “knowledge” into their production to stimulate and deepen the business development process. There is less reliance on physical input and natural resources. A knowledge-based economy relies on the crucial role of intangible assets within the organizations settings in facilitating modern economic growth. CHARACTERISTICS OF A KNOWLEDGE ECONOMY ● Knowledge and information key driver of productivity ● Growth in high technology investment and industries ● Growth in knowledge intensive service sectors such as education, communications and information ● Knowledge is a non-finite resource. Capital gets used up but knowledge is not limited and can be shared without losing it. In fact, sharing can help boost overall knowledge ● Growth in demand for higher skilled labor/university degrees CHARACTERISTICS OF A KNOWLEDGE ECONOMY ● Increased importance of tacit knowledge – the skills and ability to implement codified knowledge ● Innovation is driven by both producers and users ● Knowledge spillovers from one industry to another ● Nature of knowledge economy, related to the process of globalization and global diffusion of knowledge ● Knowledge economy and high-tech industry raise scope for increased automation of production processes leading to rapid changes in the labor market IMPORTANCE OF THE KNOWLEDGE ECONOMY ● Enables product innovation and customization ● Greater role for human capital. Firms need to attract and retain workers adapted to the new mode of economy ● To enhance knowledge distribution and benefit from new working practices collaborative networks can help ● New growth theories emphasis the potential for human capital and increasing knowledge to provide new sources of economic growth and high levels of productivity ● Potentially greater demand for skilled labor. In OECD report unemployment for lowersecondary education is 10.5% - but just 3.8% for those with university education ECONOMIC DRIVERS OF CHANGE ● There are various factors in businesses that define its growth and sustainability. These factors drives profits for businesses. These factors may be identified as business drivers. Recognizing and watching the key drivers of business is crucial. ● Price, variable costs, fixed costs, and sales are key driving factors in a business. It is highly undesirable for a business to focus on one driver and not interpret the other economic drivers in a business. CONSIDER THESE QUESTIONS ● How government (local and global) policy affects their revenue, production choices, location, etc.? ○ This comes under the remit of Fiscal policy (By which a government adjusts its spending levels and tax rates to monitor and influence a nation’s economy). ● How central bank policy affects their financials? ○ This comes under the remit of Monetary policy (The process of drafting, announcing, and implementing the plan of actions taken by the central bank, currency board, or other competent monetary authority of a country that controls the quantity of money in an economy and the channels by which new money is supplied). ● How the general state/condition of the economy (local and global) affects demand for their product or service. LET US UNDERSTAND WHAT ARE FOREIGN DIRECT INVESTMENT https://www.youtube.com/watch?v=xP3nDn_fzGQ NOW LET’S UNDERSTAND HOW AND WHY ARE FDI’S IMPORTANT https://www.youtube.com/watch?v=HSDj-apqFgQ FDI’s ● Governments want to be able to control and regulate the flow of FDI so that local political and economic concerns are addressed. ● Global businesses are most interested in using FDI to benefit their companies. As a result, these two players—governments and companies—can at times be at odds. ● It’s important to understand why companies use FDI as a business strategy and how governments regulate and manage FDI. FDI’s ● Let’s look at why and how companies choose to invest in foreign markets. ● Keep in mind that the Political and Legal frameworks equally play a role in making markets attractive DRIVERS OF FDI’S ● Cost. Is it cheaper to produce in the local market than elsewhere? ● Logistics. Is it cheaper to produce locally if the transportation costs are significant? ● Market. Has the company identified a significant local market? ● Natural resources. Is the company interested in obtaining access to local resources or commodities? ● Know-how. Does the company want access to local technology or business process knowledge? ● Customers and competitors. Does the company’s clients or competitors operate in the country? ● Policy. Are there local incentives (cash and noncash) for investing in one country versus another? DRIVERS OF FDI’S ● Ease. Is it relatively straightforward to invest and/or set up operations in the country, or is there another country in which setup might be easier? ● Culture. Is the workforce or labor pool already skilled for the company’s needs or will extensive training be required? ● Impact. How will this investment impact the company’s revenue and profitability? ● Expatriation of funds. Can the company easily take profits out of the country, or are there local restrictions? ● Exit. Can the company easily and orderly exit from a local investment, or are local laws and regulations cumbersome and expensive? WHY & HOW GOVERNMENTS ENCOURAGE FDI Many governments encourage FDI in their countries as a way to create jobs, expand local technical knowledge, and increase their overall economic standards. Ian Bremmer, The End of the Free Market: Who Wins the War Between States and Corporations (New York: Portfolio, 2010). Countries like Hong Kong and Singapore long ago realized that both global trade and FDI would help them grow exponentially and improve the standard of living for their citizens. As a result, Hong Kong (before its return to China) was one of the easiest places to set up a new company. Guidelines were clearly available, and businesses could set up a new office within days. Similarly, Singapore, while a bit more discriminatory on the size and type of business, offered foreign companies a clear, streamlined process for setting up a new company. WHY & HOW GOVERNMENTS ENCOURAGE FDI Governments seek to promote FDI when they are eager to expand their domestic economy and attract new technologies, business know-how, and capital to their country. In these instances, many governments still try to manage and control the type, quantity, and even the nationality of the FDI to achieve their domestic, economic, political, and social goals. ● Financial incentives. Host countries offer businesses a combination of tax incentives and loans to invest. Home-country governments may also offer a combination of insurance, loans, and tax breaks in an effort to promote their companies’ overseas investments. The opening case on China in Africa illustrated these types of incentives. ● Infrastructure. Host governments improve or enhance local infrastructure—in energy, transportation, and communications—to encourage specific industries to invest. This also serves to improve the local conditions for domestic firms. WHY & HOW GOVERNMENTS ENCOURAGE FDI ● Administrative processes and regulatory environment. Host-country governments streamline the process of establishing offices or production in their countries. By reducing bureaucracy and regulatory environments, these countries appear more attractive to foreign firms. ● Invest in education. Countries seek to improve their workforce through education and job training. An educated and skilled workforce is an important investment criterion for many global businesses. ● Political, economic, and legal stability. Host-country governments seek to reassure businesses that the local operating conditions are stable, transparent (i.e., policies are clearly stated and in the public domain), and unlikely to change. DIFFERENT MARKET STRUCTURES CIRCULAR FLOW OF ECONOMIC ACTIVITY CIRCULAR FLOW OF ECONOMIC ACTIVITY The circular flow is a conceptual model that depicts economic activity focusing on the following key components: ● Personal consumption expenditures (C) ● Gross private domestic investment spending (I) ● Government consumption expenditures and gross investment (G) ● Net export spending (X-M) PERSONAL CONSUMPTION EXPENDITURES ● Spending by households on durable goods, nondurable goods, and services (C). ● Typically the largest component of expenditure in modern economies (over 60% of total expenditure GDP) ● Largely determined by consumer income but also influenced by such factors as consumer wealth and confidence. GROSS PRIVATE DOMESTIC INVESTMENT SPENDING ● Spending by firms (and some households) households on nonresidential structures, equipment, software, residential structures and inventories (I). ● Largely determined by market interest rates but also influenced by business confidence. ● Investment expenditure is key to future production, i.e. the capacity to produce. GOVERNMENT SPENDING & GROSS INVESTMENT ● Federal, state and local government consumption spending and gross investment (G). ● Most modern economies are what we call ‘mixed-economies’ – this means there is central role for government. ● Largely determined within the political process but may be used to try to manage macroeconomic activity. NET EXPORT SPENDING ● Net exports are the difference between the value of exports and imports (X-M). ● Net exports are primarily determined by currency exchange rates, relative prosperity and relative interest rates. ● Most modern economies rely on trade to maintain their relative prosperity MICROECONOMICS & MACROECONOMICS ● Microeconomics is the branch of economics that analyzes the decisions that individual consumers, firms and industries make as they produce, buy and sell goods and services. ● Macroeconomics is the branch of economics that focuses on the overall level of economic activity, changes in the price level, and the amount of unemployment by analyzing group or aggregate behavior in different sectors of the economy. MICROECONOMIC INFLUENCES ON MANAGERS ● How consumer behavior affects their revenue. ● How production technology and input prices affect their costs. ● How the market and regulatory environment in which managers operate influences their ability to set prices and to respond to the strategies of their competitors. PESTLE MODEL PESTLE MODEL HOW TO CONDUCT A PESTLE HOW TO CONDUCT A PESTLE • Download the TEMPLATE: https://www.cipd.ae/Images/pestle-analysis-template_tcm2227107.pdf • See a SAMPLE: https://www.cipd.ae/Images/7583-PESTLE-example-retailindustry-2020_tcm22-27108.pdf
