Sample Notes: External Influences On Business Activity

A2 Level Business – Detailed Notes

Chapter 6.1: External Influences on Business Activity

6.1.1 Political and Legal

Privatisation

• Definition: Transfer of ownership from the public (government) sector to private individuals/companies.
• Advantages:
  • Increased efficiency due to profit motive.
  • Access to private investment and innovation.
  • Reduces government spending and debt.
  • Promotes competition, improving services/prices.
• Disadvantages:
  • Risk of job losses due to cost-cutting.
  • Loss of public control over essential services.
  • Profit motive may lead to reduced quality or neglect of social goals.
  • Can create private monopolies if poorly regulated.

Nationalisation

• Definition: Transfer of ownership from private sector to government control.
• Advantages:
  • Ensures essential services are run in the public interest.
  • Job security and long-term planning.
  • Redistributes wealth through state ownership.
  • Prevents monopolistic exploitation.
• Disadvantages:
  • Risk of inefficiency due to lack of competition.
  • Can be politically influenced and poorly managed.
  • Costly for the government.
  • Reduced innovation due to lack of profit incentives.

Government Use of Law to Control Business

• Employment Practices: Minimum wage, equal opportunities, protection against unfair dismissal.
• Work Conditions: Health and safety regulations, working hour limits, rest breaks.
• Wage Levels: Statutory minimum wages, collective bargaining rules.
• Marketing Behaviour: Truth in advertising, bans on harmful products, consumer protection.
• Competition: Anti-monopoly laws, fair trading laws, merger restrictions.
• Location Decisions: Zoning laws, regional development grants, environmental restrictions.
• Specific Goods/Services: Bans or taxes on tobacco, alcohol, firearms, polluting products.

Impact of Political and Legal Changes on Business

• Creates uncertainty; policy changes may affect strategic plans.
• Could increase costs (e.g. higher wage laws).
• Could open new opportunities (e.g. deregulation of industries).
• Requires compliance, affecting HR, marketing, production, and finance decisions.

6.1.2 Economic

Government Intervention to Help Businesses

• Subsidies and grants.
• Tax incentives for start-ups or green energy firms.
• Infrastructure development (roads, internet).
• Training programmes to improve labour quality.

Government Constraints on Business

• Regulations on pollution, labour laws, trade limits.
• Taxation (corporation tax, import duties).
• Interest rates that affect cost of borrowing.
• Exchange rate controls that affect trade competitiveness.

Market Failure and Government Intervention

• Market failure: when markets fail to allocate resources efficiently.
• Examples:
  • Pollution → Regulation or taxes.
  • Under-consumption of merit goods → Subsidies.
  • Public goods → Government provision.
  • Monopolies → Competition regulation.

Key Macroeconomic Objectives

1. Low unemployment – Aims to achieve full employment.
2. Low inflation – Target typically around 2%.
3. Economic growth – Increase in GDP.
4. Favourable balance of payments – Exports ≥ imports.

Government Policies to Achieve Macroeconomic Goals

1. Fiscal Policy

• Definition: Use of government spending and taxation.
• Expansionary: Lower taxes, higher spending → growth.
• Contractionary: Raise taxes, reduce spending → control inflation.

2. Monetary Policy

• Definition: Control of interest rates and money supply.
• Lower interest rates → more borrowing → higher demand.
• Higher interest rates → reduced inflationary pressure.

3. Supply-Side Policy

• Goal: Increase productivity and efficiency.
• Examples: deregulation, education, tax incentives.

4. Exchange Rate Policy

• Manipulating exchange rates through central bank intervention or currency management.
• Depreciation → exports cheaper, imports costlier → growth.
• Appreciation → imports cheaper, exports less competitive.

Impact on Business

• Interest rate rises → higher borrowing costs.
• Fiscal stimulus → higher demand for goods/services.
• Exchange rate changes → affects import/export profitability.
• Business must adjust strategies, pricing, production.

6.1.3 Social and Demographic

Corporate Social Responsibility (CSR)

• Definition: Business accountability to society beyond profit.
• Issues:
  • Accounting practices: Transparency, avoiding tax evasion.
  • Bribes/Incentives: Ethical concerns in contract awards.
  • Social auditing: Independent reviews of social/environmental impact.

Need to Consider Community and Pressure Groups

• Pressure groups can influence policy, protest unethical behavior.
• Community needs affect brand reputation, sales, and recruitment.
• Good CSR improves brand image, builds trust, and ensures license to operate.

Demographic Changes

• Local: Migration, age structure, education levels.
• National: Ageing population, urbanisation, gender distribution.
• Global: Population growth, rising middle class in emerging economies.

Impact on Business

• Labour supply: Size, cost, and skill levels change.
• Consumer demand: Changes in preferences and needs.
• Product adaptation: For aging populations, youth markets, urban lifestyles.

6.1.4 Technological

Impact of Technological Change

• Automation reduces costs, increases productivity.
• E-commerce expands market access and reduces distribution costs.
• Big data and AI improve decision-making and targeting.
• Disruptive tech (e.g. blockchain, robotics) reshapes industries.

Impact on Business Decisions

• Investment in R&D and innovation.
• Changes in production methods.
• Need for employee retraining.
• Security risks and need for IT infrastructure.

6.1.5 Competitors and Suppliers

Impact of Competitors

• Drives innovation, efficiency, and cost control.
• Forces pricing strategies and product differentiation.
• Can limit market share and profit margins.

Impact of Suppliers

• Cost of inputs affects pricing and profitability.
• Supply chain reliability critical for operations.
• Power of suppliers (monopoly vs. competitive) influences business negotiation strength.
• Supplier ethics and sustainability can affect brand.

6.1.6 International

Importance of International Trade

• Access to larger markets.
• Diversification of customer base.
• Economies of scale.
• Exposure to currency risk, tariffs, trade restrictions.

Trade Agreements

• Reduce barriers to trade (e.g. EU, ASEAN, USMCA).
• Allow free flow of goods, labour, and capital.
• May introduce standards and regulations businesses must meet.

Technology in International Trade

• E-commerce and digital payments.
• Global supply chain management software.
• Digital platforms for B2B and B2C commerce.

Multinationals (MNCs)

Advantages to Host Country

• Job creation
• Technology and skills transfer
• Infrastructure improvement
• Tax revenue

Disadvantages

• Profit repatriation
• Environmental damage
• Domination over local businesses
• Influence on national policy

Relationships Between MNCs and Governments

• Governments may offer tax breaks or subsidies to attract MNCs.
• MNCs may be expected to follow CSR, pay taxes, and comply with local laws.
• Conflicts can arise if national interests are undermined.

6.1.7 Environmental

Physical Environmental Issues

• Climate change, natural disasters, pollution.
• Can disrupt supply chains, affect production and increase costs.

Environmental Audits

• Independent assessment of environmental impact.
• Helps identify improvement areas in:
  • Energy use
  • Waste disposal
  • Carbon emissions

Growing Importance of Sustainability

• More consumers value eco-friendly products.
• Regulatory pressure to reduce emissions and waste.
• Drives innovation in green technologies, packaging, transport.
• Long-term brand reputation and ethical investor appeal.