managerial eco by srirammadhav



            List of figures                                                           ix

            List of tables                                                           xi

            Preface                                                                 xiii

Part I      The Macroeconomic Environment                                               1
            Further reading for Part I                                                  2

Chapter 1   Globalisation                                                               3
            1.1 Introduction                                                         3
            1.2 A Brief History                                                      4
            1.3 What Is Globalisation?                                               7
            1.4 Measuring Globalisation                                             15
            1.5 National and Business Implications of Globalisation                 19
            End of Chapter Summary                                                  21
            References                                                              21
            Answers to Self-Assessment Questions                                    21

Chapter 2   The economic environment                                                23
            2.1 Introduction                                                        23
            2.2 The Economic Framework                                              24
            2.3 A Simple Model of the Economy                                       26
            2.4 Using the Model                                                     34
            2.5 The Economic Environment and Business                               41
            End of Chapter Summary                                                  46
            Answers to Self-Assessment Questions                                    46

Chapter 3   Measuring economic performance                                          49
            3.1 Introduction                                                        49
            3.2 Measurement of Economic Variables                                   50
            3.3 Macroeconomic Performance Indicators                                56
            3.4 Business and Macroeconomic Performance                              63
            End of Chapter Summary                                                  65
            Appendix 1 Analysis of the UK’s Economic Performance in the Short Run   66


            Appendix 2 Analysis of the UK’s Economic Performance in the Long Run   67
            References                                                             67
            Answers to Self-Assessment Questions                                   68

Part II     The Theory of the Firm and Competitive Strategy                         69

Chapter 4   Business objectives                                                     71
            4.1  Introduction                                                       71
                 Case Study ConsFirm                                                72
            4.2 Profit Maximisation                                                  73
                 Case Study ConsFirm                                                77
            4.3 Sales Revenue Maximisation                                          78
                 Case Study ConsFirm                                                81
            4.4 Sales Volume or Output Maximisation                                 82
            4.5 Managerial Utility Maximisation                                     84
                 Case Study ConsFirm                                                88
            4.6 Wealth or Value Maximisation                                        89
            4.7 Growth Maximisation Models                                          90
                 Case Study ConsFirm                                                98
            4.8 Behavioural Models of Business Objectives                           99
            End of Chapter Summary                                                 102
            References                                                             102
            Answers to Self-Assessment Questions                                   103

Chapter 5   Demand estimation and forecasting                                      106
            5.1   Introduction                                                     106
            5.2  Demand Theory                                                     108
                 Case Study Marks & Spencer                                        116
            5.3 Demand Estimation and Forecasting                                  117
            5.4 The Marketing Approach to Demand Measurement                       118
            5.5 Regression Analysis                                                126
                 Case Study Motorola in Scotland                                   132
            5.6 Demand Forecasting Techniques                                      133
            End of Chapter Summary                                                 137
            Answers to Self-Assessment Questions                                   138

Chapter 6   Production and cost estimation                                         140
            6.1   Introduction                                                     140
            6.2   Supply Theory                                                    141
                  Case Study easyJet                                               146
            6.3   Introduction to Production Theory                                146


                 Case Study easyJet                                                          157
                 Case Study A Sample Regression Equation                                     159
            6.4 Cost Estimation                                                              160
                 Case Study easyJet                                                          168
            End of Chapter Summary                                                           168
            Answers to Self-Assessment Questions                                             169

Chapter 7   Pricing in theory and practice                                                   171
            7.1  Introduction                                                                171
            7.2  Pricing and Market Structures                                               172
                 Case Study The Price of Rail Travel                                         178
            7.3 New Product Pricing                                                          179
                 Case Study Penetration Pricing versus Price Skimming                        182
            7.4 Pricing in Established Markets                                               182
                 Case Study ASDA                                                             188
            7.5 Specialist Forms of Pricing                                                  189
            7.6 Changing Prices over Time                                                    191
            End of Chapter Summary                                                           193
            Answers to Self-Assessment Questions                                             193

Chapter 8   Non-price competition                                                            195
            8.1   Introduction                                                               195
            8.2   Promotion and Advertising                                                  196
                  Case Study Advertising by Universities                                     203
            8.3   Product Policy                                                             208
                 Case Study University Product Policy                                        214
            8.4 Product Distribution and Production Site Location                            215
                 Case Study ‘Place’ Decisions for Universities                               221
            End of Chapter Summary                                                           221
            Answers to Self-Assessment Questions                                             221

Chapter 9   Managerial decisions and the firm’s competitive strategy                          224
            9.1  Introduction                                                                224
                 Case Study Strategic Choices in the Pharmaceutical Industry                 225
            9.2 The Firm’s Competitive Strategy                                              226
            9.3 Implementation of the Firm’s Competitive Strategy                            231
            9.4 The Applicability of Competitive Strategies and Managerial Decision-making
                   Tools to Different Industries                                             235
            End of Chapter Summary                                                           236
            Reference                                                                        236
            Answers to Self-Assessment Questions                                             237


Part III   Investment Decisions                                             239
           Further reading for Part III                                     240

Chapter 10 Investment appraisal                                             241
           10.1 Introduction                                                241
           10.2 The Economic Nature of Investment                           242
           10.3 Traditional Techniques                                      246
           10.4 Discounted Cash Flow Techniques                             253
           10.5 Capital Constraint Problems                                 269
           End of Chapter Summary                                           274
           Answers to Self-Assessment Questions                             274

Chapter 11 Investment appraisal under risk and uncertainty                  277
           11.1   Introduction                                              277
           11.2   Risk versus Uncertainty                                   278
           11.3   Risk Assessment Methods                                   279
           11.4   Probability Analysis in Investment Appraisal              284
           11.5 A Case Study in Risk and Sensitivity Analysis               287
                Case Study Alarms R Us                                      287
           11.6 Investment Decisions under Uncertainty                      299
           11.7 Investment Analysis: Implications for Economic Efficiency   301
           End of Chapter Summary                                           302
           Answers to Self-Assessment Questions                             303

Chapter 12 Public sector decisions                                          306
           12.1 Introduction                                                306
           12.2 Market Failure                                              307
           12.3 Making a Difference?                                        309
           12.4 Objectives in Public Sector Decision Making                 312
           12.5 The Meaning of Value for Money in the Public Sector         314
           12.6 Public Sector Investment                                    325
                Case Study The ‘NEWSITE’ Project                            325
           End of Chapter Summary                                           330
           Reference                                                        331
           Answers to Self-Assessment Questions                             331

Appendix   Discount tables and the normal distribution table                333
           How to Use the Tables                                            333

Index                                                                       340

Part I
           The Macroeconomic

         In Part I we begin with a discussion of the process and concept of
         globalisation. In other words, the text starts at the macro level and
         gradually moves down to key microeconomic decisions which
         business managers in the private and public sectors need to
         consider. The first chapter introduces you to a brief history of
         globalisation, what it means and how it can be measured. The
         second chapter in Part I moves down in scale from the global
         economy to a national economy and develops a simple model of
         how an individual economy can be analysed in terms of its impli-
         cations for managerial decision making. The level of mathematics
         required is basic and students who prefer to avoid this can easily
         do so and still fully grasp the main implications of the model. In
         Chapter 3 we move on to the measurement of economic perfor-
         mance at the macroeconomic level and this is directly linked to
         consideration of performance at the level of business. Part I of the
         text is thus designed to give you a clear overview of the links
         between global economic processes, national economy perfor-
         mance and the fortunes of the private and public sector.

Further Reading for Part I
          Chapters 1, 2 and 3

          Baldwin, R. (1994) ‘Towards an Integrated Europe’, Centre for Economic
              Policy Research Paper, London.
          Crafts, N. and Toniolo, G. (eds) (1996) Economic Growth in Europe since
              1945, Cambridge University Press.
          European Commission (1996) First Report on Economic and Social
              Cohesion, ECU 14, Luxembourg.
          Ferguson, P., Ferguson, G. and Rothschild, R. (1993) Business Economics,
              Macmillan – now Palgrave Macmillan, Basingstoke.
          Henley, A. and Tsakalotos, E. (1993) Corporatism and Economic
             Performance, Edward Elgar, Aldershot.
          HM Treasury Economic Trends (monthly).
          Mankiw, G. (1990) ‘A Quick Refresher Course in Macroeconomics’, Journal
             of Economic Literature 28(4): 1645–60.
          Porter, M.E. (1990) The Competitive Advantage of Nations, Macmillan –
              now Palgrave Macmillan, Basingstoke.
          Temple, P. (1997) ‘The Performance of UK Manufacturing’, London Business
             School Discussion Paper No. DP 14–97.

  1        Globalisation

■ 1.1   Introduction
        If asked the question ‘what does globalisation mean to you?’, most people would be able to
        give some kind of answer, even if based only on what they have read in newspapers or seen on
        television news items. However, there would be a very wide array of answers – the term itself
        has yet to be consistently defined and there will continue to be strong disagreement over what
        it actually means. This chapter will introduce you to the ‘globalisation debate’ by focusing on
        what the term is most likely to mean in practice and how the process itself might be identified
        and measured. The discussion then moves on to an assessment of what globalisation may imply
        for policy-makers, business and management decisions.

            Objectives                By the end of the chapter you will:

                                      ■ Understand and be able to explain the concept of global-
                                         isation as an economic, political, social and psycho-
                                         logical phenomenon.

                                      ■ Be able to argue convincingly that globalisation, as a
                                         process, has many historical antecedents and is not
                                         entirely unique to the past few decades.

                                      ■ Understand and be able to explain that globalisation is
                                         amenable to measurement but that ‘indicators’ of glob-
                                         alisation are necessarily only partial.

                                      ■ Be able to connect the process of globalisation to the
                                         constraints faced by policy-makers and managers in
                                         producing decisions that are nationally and locally
                                         consistent with the interests of individual economies
                                         and individual organisations.

managerial economics for decision making

■ 1.2       A Brief History
            The EU economies have become increasingly open ones since the end of the
            Second World War. The EU has always contained many trading economies, but
            prior to the 1960s the trade was dominated by export activity while imports
            represented a much smaller fraction of total GDP. In the late 1990s, although
            export levels were lower relative to that ‘golden age’ they still represented
            nearly a quarter of EU GDP and imports represented nearly 30 per cent of GDP.
            Taken together, over half of the EU’s economic activity was based on trade as
            the economy began the twenty-first century. This development was, however,
            not confined to EU economies.
                All industrialised economies in the world and many of the newly
            industrialising ones share in a very large trade volume compared with 40 years
            ago. The development of containerisation, ‘super’ ships, faster communi-
            cations and easier currency transfers has enabled trade volumes globally to
            increase by over 900 per cent in four decades. Alongside this massive growth
            in global trade volumes has been an ‘explosion’ in foreign direct investment
            (FDI), mainly between the industrialised countries, although in the last
            decade this has increasingly involved developing and newly industrialising
            countries. Taken together, the growth in trade volumes and in FDI has
            produced not only a global economy, in a very real sense, but also the ‘global’
            firm. In fact the growth in trade volumes and the emergence of the global
            firm are closely related: many economies in the world still operate restrictions
            on imports of one type or another, the EU included, and this has made it
            necessary for large firms to locate production in foreign markets. In addition
            the implementation of the General Agreement on Tariffs and Trade (GATT) in
            1947 which sought to ease trade restrictions also enables trade volumes
            between countries to be ‘negotiated’ so that if firms wish to sell more output
            than ‘negotiated’ they must locate production facilities closer to or actually in
            the receiving economy. So, why has globalisation happened, why has the
            global firm emerged and what are the implications for EU business? There are
            many reasons:

            ■ GATT/WTO
            ■ Aggregate demand
            ■ Market access
            ■ Currency convertibility
            ■ Strategic ‘thinking’
            ■ Vertical integration
            ■ Geopolitical interests


    The GATT simply made it much easier for trading economies to develop
closer ties without the restrictions which dogged trade prior to 1945. In other
words, a great deal of potential trading had simply been ‘smothered’ for a whole
variety of political, social and economic reasons specific to different economies.
The advent of the GATT enabled the potential to be released and further devel-
oped. However, this could only take place in the context of growing aggregate
global demand for industrial and especially consumer products. Much of the
increase in aggregate demand experienced by the developed economies after
1945 was inspired by reconstruction, a need to satisfy ‘pent-up’ demand after
years of rationing, and a realisation that higher trade volumes would more
closely integrate these economies politically as well as economically.
    However, the rapid development in FDI was mainly market driven, and not
cost driven, although in recent years cost has assumed a greater importance than
before. Under GATT it was simply not possible to export all of a firm’s non-
domestic consumption output; in many cases therefore it became necessary to
locate production facilities abroad. This improved market access, in terms of both
production and exports, lies at the root of the philosophy of the WTO – increased
market access is the very bedrock of the multilateral trading system today.
    It could be argued that this has become even more essential for trade
growth in the future given the advent of economic blocs such as the EU and
NAFTA (North American Free Trade Area) which strictly controlled the level of
imports negotiated in each round of the GATT agreement. Thus, the sale of
computers produced in the EU by a US firm to Germany now represents output
for domestic consumption, whereas prior to GATT they were more than likely
to have to be imported from the US. However, it could be argued that the devel-
opment of these economic blocs runs counter to the philosophy of the WTO
since they tend to offer protection to their own firms, often negating WTO
rules. For many developing countries this is particularly the case in agricultural
products. This process of ‘regionalisation’ is continuing with the expansion of
the EU to possibly 25 countries by 2005, further development of the ASEAN
bloc (South-East Asian economies), SADCC in Africa and regional groupings in
South America. Indeed, the process of ‘globalisation’ is developing in parallel
with increasing regionalisation across the world.
    The introduction of the Treaty of Rome in 1957 went a very long way to
achieving full convertibility of EU currencies and the US dollar, principally at
the insistence of US investors. Hence US FDI anywhere in the EU area would
not be exposed to currency risks. This in tandem with growing consumer
demand led to the development of a more strategic approach to business plan-
ning in which the restrictions implied by the ‘need’ for local sourcing,
controlled use of technology and other aspects of operating outwith the home
economy came to be viewed as much less of a problem than in the past.
    Management methods were developed to cope with greater diversification of
products and greater vertical integration of business so that the ‘strategic’ firm
could guarantee not only sources of input supply but also markets to sell its

managerial economics for decision making




                  Per cent
                  Per cent



                              1970   1975
                                     1975        1980
                                                 1980         1985
                                                              1985             1990
                                                                               1990          1995
                                                                                             1995   2000
                                                   Series 1                Avg. (Series
                                                              55 per. Mov. Avg. (Series 1)

Figure 1.1   Global trade as percentage of global GDP
             Source: Constructed from World Bank Tables

             output to. The development of production, logistics and financial planning
             techniques accelerated more in the past three decades than at any other time in
             business history. All of the above developments enabled the emergence of the
             global firm; however, the environment in which these developments took place
             was also amenable, that is, the emergence of new and stronger geopolitical inter-
             ests on the part of the Western economies ensured that the political environ-
             ment for such developments was welcoming. However, although GATT has
             enabled long-term growth in global trade volumes these have fluctuated consid-
             erably over the decades. Growth was well above its 5-year moving average
             throughout the 1970s and early 1980s but fell below its trend for much of the
             1980s. It accelerated again in the 1990s, especially from 1994/95, coinciding
             with the advent of the World Trade Organization (WTO) in 1995. Whether this
             was merely coincidental or simply a reflection of other global trends is a difficult
             question to answer. Figure 1.1 traces this growth since the 1970s.
                 This continues to be the case at the beginning of the twenty-first century.
             Indeed it is difficult to imagine the major economies of the world and the
             newly industrialising economies once again retreating into fortress Germany,
             America, France, UK or Japan.

■ ■ ■ Self-Assessment Question ■ ■ ■ ■ ■ ■ ■ ■ ■ ■ ■

      Q1     What might ‘globalisation’ mean for the competitive stance taken by a small
             EU firm?



        Before we consider what all this might mean for business, business decisions,
        EU governments and EU citizens we need to take a step back and consider
        exactly what we mean by globalisation because it is not at all clear and it does
        not necessarily apply across all sectors of an economy. We need a definition, we
        also need to ‘measure’ it and we need to be able to assess what this definition
        of globalisation and its component indicators can tell us about the probable
        economic environment EU firms and citizens will face in the future.

■ 1.3   What Is Globalisation?
        At its simplest level, globalisation could be defined as a process which increases
        the share of trade in global GDP, as per Figure 1.1. Or we could define it as a
        process which leads to an increasing share of FDI as a proportion of global
        investment. There are many other economic and financial ratios we could use
        to define the term or the process of globalisation. However, none of these
        would be sufficient on their own as they are very uni-dimensional. This is
        because globalisation, whatever it really is, is most certainly multi-dimensional.
        It is not simply about trade or investment – it involves an acceleration in the
        process of change which has been ongoing for hundreds, perhaps even thous-
        ands, of years. These changes involve all facets of social, political and economic
        relations which appear to have culminated in connecting billions of people
        (whether they know it or not) around the world. If you drink tea you are
        connected with the farmer in China or Sri Lanka; if you drink coffee you are
        connected with the farmer in Colombia or Kenya; if you wear a designer T-shirt
        you have a connection with a factory worker in Singapore, Mauritius or the UK.
        The list of products and an associated list of country connections goes on and
        on. So, globalisation also involves people: their place of work, their work condi-
        tions, their wages, who they work for and how they live their lives are all
        affected by globalisation.
             It could be argued that, in the above sense, these connections are not really
        that different from the ones created by earlier societies. We know for example
        that the Romans were trading goods and labour 2000 years ago across Europe,
        Africa, the Middle East and Asia Minor. The Minoan civilisation based on Crete
        traded across three continents over 3500 years ago. The Vikings are thought to
        have been involved in trade across the Atlantic and as far east as the Ural moun-
        tains. There is also evidence of trade across the vast expanse of the Indian Ocean
        between East Africa, Indonesia, Polynesia and even Western Australia occurring
        thousands of years ago. These were all developed societies (in their terms) and
        they all engaged in trade over large distances in the context of what was effec-
        tively the known world to them. So, if globalisation is to be defined in terms of
        trade alone then there really is nothing new about it – it has just become larger
        in scale in terms of the known world today. Of course it is not just about
        trade – it is more about the nature of trade today, how it is conducted and the

managerial economics for decision making

            speed with which it is conducted. This is the essential difference today – speed
            of movement and the speed of the flow of information.
                Another key difference is in the content of trade – much of it today does not
            involve physical goods at all. It involves the trading of information, finance,
            legal and many other services which, even in the nineteenth century, were
            rarely the subject of international trade. Indeed trade in services has grown so
            large in recent decades that the GATT now has a parallel in GATS (General
            Agreement on Trade in Services) which covers almost all types of service,
            including education itself. The EU has already signed up to GATS inclusive of
            trade in knowledge and knowledge acquisition – in just a few years it will be
            possible for universities in over 100 countries to offer their courses in any other
            country by attendance at class. Thus the very nature of what is traded today,
            how it is traded and the speed of trade essentially define globalisation as some-
            thing different from what has gone before. And, in addition to this, we now
            have a trading ‘architecture’ – a system of rules most countries are expected to
            follow under the multilateral trading agreements monitored by the WTO.
                In some ways it could be argued that globalisation has also become an attitude
            of mind as well as a system of economic relations – these days people are not
            surprised by where a product or service comes from – indeed they are more likely
            to be surprised if it is made in their own country. But there is another aspect of
            today’s globalisation process which is distinct from similar processes in history –
            that is the progressive reduction in the ability of the nation state to command its
            own economic affairs. It is now more difficult than ever for a single country to
            determine its own economic policy since multinational companies and internat-
            ional financial service companies can move production facilities and money very
            rapidly across borders to take advantage of differences in tax regimes, labour costs
            and exchange and interest rates. Hence the trend discussed above towards regional
            blocs designed to act as larger and therefore stronger economic bargaining units.
            The world of finance is possibly the most glaring example of globalisation today
            in terms of scale, speed of movement and cross-border versatility. But even this
            ‘financial globalisation’ still has many aspects which do not fit well with the purist
            view of a wholly globalised world economy. For many, financial globalisation is
            the forerunner of a wholly integrated world economy. But there are many ques-
            tion marks as to just how globalised even finance has become (Lewis, 1995).
                The clearest way to illustrate this is to describe what financial globalisation
            is not. It is not simply the expansion of net or gross international capital
            flows; it is not the expansion of individual economies’ external financial
            transactions per se and nor is it the increasing entry of large financial insti-
            tutions into non-home-based markets. These are all aspects of the internation-
            alisation of capital and, as we already know, are subject to significant cyclical
            fluctuations. Were these the key elements of financial globalisation it would
            be irrefutably logical to talk of periods of ‘deglobalisation’ such as in the
            1930s and 1950s. In addition there remains a strong tendency for investors
            and their portfolios to retain a very strong ‘home bias’ and for wealth in all


its forms to be predominantly held within investors’ home countries. This
home or domestic bias is likely to decline with time, but it is an indication
that the completely ‘globalised’ financial world is still some way off. It seems
clear therefore that cyclical fluctuations in cross-border capital transactions
can neither conceptually nor empirically form the basis of what is effectively
a relatively new and even ‘populist’ concept. Instead we need a clear and
unambiguous theoretical rationale which is capable of providing deeper
insights into a process which we believe is under way but as yet do not fully
understand. As Shirakawa et al. argue:

   globalisation refers to [a situation] where each country’s economy, including its
   financial markets, becomes increasingly integrated resulting in development towards
   a single world market.

In other words, financial market globalisation will not and cannot proceed in
the absence of the globalisation of all production relations, including labour
itself. Using the definition given above it is possible to delineate stages of the
globalisation ‘process’ and to categorise what these stages mean in terms of
both the ‘real’ economy and the financial markets. Consider Figure 1.2. This is
a ‘model’ which posits a world of only two economies, A and B, in which there
are two broadly defined sectors – the goods and services market (GSM) and the
financial services market (FSM). In Stage 1 there is no trade between A and B
but there is synergy between the GSM and FSM within each economy. In Stage
2 GSM trade between A and B is completely dominant but supported by the
FSM within each economy only. The degree of integration between the GSM
and the FSM domestically is expanding over time during this stage but does not
yet involve cross-border integration in any significant sense.
     As GSM trade increases it becomes increasingly necessary for the FSMs in
each economy to support it bilaterally since the GSM demand for capital is
outstripping the supply of loanable funds domestically (Stage 3). Credit
creation and financial economies of scale and scope enable this. With
increasing integration there is a greater (parallel) need for coordinated policy
action between the authorities in A and B to ‘manage’ their respective domestic
economies. This point (Stage 3) is effectively where the ‘global’ economy is at
the present time – although a high degree of integration has already taken place
it is still characterised by a strong ‘home’ bias in the financial markets.
     The shift to the next level (Stage 4), an integrated global economic system in
which all sectors are reciprocally and fully integrated within and between each
economy, represents a fundamental structural change in the nature of internat-
ional production relations. So much so as to effectively produce the globalised
economy in the Shirakawa et al. sense. In terms of Figure 1.2 the completely
globalised economy develops on the path between Stages 3 and 4. The key
policy issues along this path are those which relate to increased liberalisation of
trade and of financial markets, both of which represent a continued threat to a

managerial economics for decision making

                    Integration                                            Globalisation

                                                           STAGE 4     GSM           GSM
                                                                        A             B
                          STAGE 3
                          International GSM and                FSM
                          FSM trade increasing fast    GSM           GSM
                                                        A             B

                                              FSM            STAGE 2
                                               A             GSM trade dominates
                                        GSM         GSM
                                         A            B

                                                STAGE 1
                                   A            No trade
                        GSM             GSM
                         A                B


Figure 1.2   The globalisation process

             nation’s or a group of nations’ control over economic policy. For many firms it
             potentially represents a threat to their own domestic markets – they increasingly
             face competition from similar firms often located in different continents. For the
             public provision of services there is also increased competition from private
             sector service providers since they are, and increasingly in the future will be able
             to compete to deliver public services. This is especially true of services which are
             expensive to provide such as health, education and transport. If increased glob-
             alisation of trade and of firms is the likely future for many economies, what are
             the implications for firms in the EU? We can analyse these in terms of possible
             advantages and disadvantages.



A main advantage claimed for EU firms of the emergence of the global firm is
the demonstration effect. The importation to the EU by foreign firms of new
technologies, new management methods, new products and a more dynamic
approach to business has enabled EU firms to become more competitive, more
attuned to consumers, more cost conscious, more quality conscious and gener-
ally more effective in the domestic and global economies.
    Many of these advantages have been the result of FDI using local sourcing of
inputs supplied by domestic EU firms. In addition, the employment of EU
managers by many of these global firms has been an ‘education’ for EU manage-
ment in general and this has had spillover effects into EU-managed firms.


A main disadvantage of the growth in global trade and in FDI to many EU firms
has simply been that it came in a period when many EU businesses were not
capable of competing effectively, the result being that many EU sectors are now
dominated by foreign firms. The claim that local sourcing has enabled many EU
firms to develop further is not as strong as first appears since many FDI firms
source globally – thus driving down the price a local firm can expect to get for
its sales to a global firm. In addition, the introduction of management methods
such as just in time, ‘outsourcing’ and ‘strategic’ (local) suppliers has meant EU
firms need to make investments which ‘tie’ them into a single customer, thus
raising their risk exposure.
     Whether the advantages or disadvantages discussed above are perceived or
real probably depends on the experience of individual EU firms in competing
with or working with the FDI firm. Nevertheless it is quite clear that there are
serious threats to domestic EU firms from further globalisation and further
development of the global firm. The point is that these need to be recognised
and countered using the most modern management methods available and
continuing to meet the requirements of customers which are becoming more
demanding every year. Although the EU has a significant number of global
firms of its own, most employment in the EU is still in the context of small and
medium-sized enterprises. These are particularly at risk in the globally compet-
itive market place. The quality of the workforce, the product and above all the
management in such enterprises will be the key to long-term survival and
development – and not necessarily the minimisation of costs, a strategy which
has not been particularly successful for EU firms in the past. However, as a
regional economic bloc the EU has already taken a major step towards posi-
tioning itself so that its firms and its workers can compete in a globalising
economy. This step was the introduction of monetary union. Although only a
few countries within the EU have yet to join, there is clearly an advantage to

managerial economics for decision making

            EU firms in terms of internal reductions in costs in trading within the EU and
            in the development of a currency to compete with the dollar and the yen. Why
            should European monetary union (EMU) be a likely benefit to EU firms in terms
            of globalisation?

1.3.1       EMU and Globalisation
            Given that over half of the EU’s economic activity involves trade whether as
            final goods and services or as intermediate inputs, it is quite clear that 15
            exchange rates within the EU are a crucial factor in determining not only the
            volume of intra-European trade but also its value to businesses and to the
            economy. We already know that globalisation of trade and the emergence of
            very large multinational corporations have significant implications for EU
            business but these take on even more significance in the context of EMU. The
            very first point to make even though it seems obvious is that non-exporting
            and non-importing firms in the EU will be as much affected by EMU as those
            involved in intra-EU trade and extra-EU trade. If a family never takes an over-
            seas holiday they will still be as much affected as those who do! In other words,
            if EMU is eventually implemented as planned in all EU member states its effects
            on all EU economies will be ubiquitous.

            What is EMU?

            It is simply the distillation of 15 currencies into one, the euro. This process has
            already taken place in the USA (after the Civil War), Germany (after reunifica-
            tion) and in the former Soviet Union, although in the latter the process has
            since been reversed. Thus, integrating several different currencies into one is
            not a new idea nor will it be a ‘first’ event. Some would argue that the circum-
            stances are not that different either: in the cases of the three examples above
            the overriding motivation for a single currency was political integration and
            the creation of ‘nationhood’ – and hence in the global economy of today this
            is exactly what Europeans are striving for although few politicians would
            openly say so. Whether the motivation for EMU is mainly political or not we
            are concerned here with its economic implications for EU business in a global-
            ising economy.
                 The criteria for entry to EMU are, on the surface, fairly reasonable, pract-
            icable and straightforward. They are as follows:

            1. Low inflation
            2. Low nominal interest rate
            3. Stable nominal exchange rate


4. Fiscal deficit ≤ 3 per cent of GDP
5. Debt/GDP ratio ≤ 60 per cent

The first three criteria are monetary while the last two are fiscal. That is, a
country is required to balance as closely as possible its government ‘books’
between taxation and expenditure, and the restriction on the debt to GDP ratio
is a key instrument in enabling that. The first three criteria are very much
monetary in that they are linked to money supply control by the government
which in turn is linked to interest rate levels. The requirement for a stable
exchange rate (in the 2 years up to membership) is in turn a function of money
supply management and interest rates. Thus, all five criteria are interdependent
and all five must therefore be achieved if an EU economy is to enter the single
currency. Although there have been accusations that the criteria have been
relaxed to enable some countries to enter, the point is nevertheless that these
five criteria do make sense in terms of seeking a stable, strong and sustainable
single currency in the face of increasingly fiercer global competition.
    We used the phrase earlier that ‘on the surface’ these are reasonable criteria
for the development of a single currency. This is because they are actually crit-
ical to the economic fortunes of all EU economies. In fact it is the criteria for
entry which themselves provide the debate over whether an economy should
or should not enter EMU.

What are the Implications for EU Business?

Firms which require imported inputs and/or are involved in exporting inter-
mediate or final goods and services currently incur transactions costs associated
with currency conversion. In addition, they also face a currency risk in that
contracts are often agreed on the basis of either the current rate of exchange or
a future rate of exchange, say 3 months ahead. Both of these carry the risk that
adverse exchange rate movements will result in a lower than expected price
receivable or a higher than expected price payable. Avoidance of these risks can
be accommodated using various insurance schemes (which are a cost) and in
some cases by using the export credit guarantee schemes operated by many EU
governments – in which case the taxpayer carries the risk. The point is clear:
trading arrangements on the basis of bilateral exchange rates (between two
economies) can be costly and risky. In theory therefore it ought to be in the
interests of EU firms to be dealing in a single European currency.
    The transactions costs of trade can be significant. An extreme example of
this is the movement of people within the EU as tourists! Suppose someone
from the UK wished to visit all of the other 14 member states before the intro-
duction of the euro and let us suppose he/she took two wallets – one with
£1000 for converting and to live on and one with £1000 simply to convert into

managerial economics for decision making

            the currency of each member state when they arrived there. Using the nominal
            exchange rates which applied in 1999 within the EU, the second £1000 would
            be reduced to £723 on return to the UK. That is, having bought absolutely
            nothing but merely changing from one currency to the next and back to ster-
            ling (15 changes) the transaction cost is £277! Although imported and exported
            goods will never go through 15 currency conversions, nevertheless many EU
            firms trade with several EU economies and therefore used to incur significant
            transactions costs. These would still apply to firms and people based in the euro
            area had the euro not been implemented.
                Membership of the single currency reduces these types of cost to zero, a
            very significant advantage to firms based in the euro area.

■ ■ ■ Self-Assessment Question ■ ■ ■ ■ ■ ■ ■ ■ ■ ■ ■

      Q2    Is there a potential conflict of interest between the needs of business in EMU
            and the needs of the individual national economies?


                It could also be argued that past interest and exchange rate management by
            many EU governments merely protected inefficient firms rather than enabled
            them to become more competitive. Hence, the creation of EMU helps to enable
            EU firms to compete more effectively not only with their continental counter-
            parts but also with the rest of the world.
                Of course the development of the single currency carries transitory risks but
            in the long term, as a result of full economic convergence, such risks will be
            reduced to zero or close to it. However, the benefits of a stronger single
            currency (relative to the rest of the world) and a stronger pan-European
            economy in the long term far outweigh transitory risks and changeover costs.
            Indeed with the advent of the Asian ‘tiger’ economies, the continued economic
            power of Japan and the USA and the rapid development of China, Brazil and
            India, the potential costs of not developing a single currency and hence a single
            economic bloc could be enormous. How many of the EU’s smaller and medium-
            sized firms would be able to compete with the latter countries in the future if
            they continue to operate in a ‘domestic’ system of 15 currencies? EMU is just
            one lever to help them do so. This is a complex issue and only some of the
            (main) arguments are represented here. The political, social and cultural advan-
            tages/disadvantages of EMU have not been touched upon. However, it is likely
            to be the case that these will eventually have more sway in which member
            states join the euro in the future than the more technical economic arguments.
                If we consider the five criteria for membership of EMU it is quite clear that
            these are also highly relevant to becoming and remaining more competitive as
            the world moves towards Stage 4 as described in Figure 1.2. Firms in the EU will


        simply not be able to compete, especially with ‘low cost’ suppliers in other parts
        of the world, in the absence of low inflation, low nominal interest rates and a
        stable nominal exchange rate for the single currency. In addition the ‘rules’ on
        the fiscal deficit and the debt/GDP ratio for each member state will help to
        reduce the burden of taxation on business and workers below what it might
        otherwise have been. This leaves more money in business and in people’s
        pockets so that they can make their own decisions on investment and
        consumption. It has often been argued by economists that the most vibrant
        and fast growing economies in the world are characterised by generally lower
        business and personal taxes than traditionally applies in EU economies. This
        has certainly been true of the USA, the ‘tiger’ economies of South-East Asia,
        India and Brazil. It is also true of China which entered the WTO in 2001 and
        seems poised to expand at growth rates larger than those achieved by Japan in
        the 1960s and 70s.
            The process of globalisation thus has major implications for business,
        government and citizens in the EU. Decisions on product pricing, investment,
        personal consumption, public service provision and many other ‘micro-
        economic’ aspects of the day-to-day management of firms, households and
        government services are themselves influenced by globalisation, even in the
        smallest way, and in addition, influence how the EU economy itself will
        progress as globalisation itself progresses.
            Now that we have a much clearer idea of what globalisation is (and what it
        is not), how it relates to business and people and government and what it may
        mean for all types of economic and managerial decisions, we are in a better
        position to attempt to measure it. If we can identify a set of ‘indicators’ of glob-
        alisation then business and government will be in a better position to judge
        which investment options, pricing and marketing options and economic policy
        options are more likely to succeed than others.

■ 1.4   Measuring Globalisation
        As discussed above, the concept of globalisation is multi-dimensional and this
        makes its measurement difficult – no one ‘indicator’ could possibly be sufficient
        to describe it, explain it or predict its future path. What we can do, however, is
        conceptualise what it might mean in terms of Figure 1.2. Whether some coun-
        tries or no countries are already at Stage 4 cannot be determined precisely
        because we do not, at present, have a good enough set of indicators of where
        we are in the globalisation process. This is partly because, as discussed above,
        there is widespread disagreement on what globalisation actually is. As already
        mentioned, it could be thought of as a ‘state of mind’ in which people around
        the world are either well aware or just notionally aware of the connections
        between them and the rest of the world. Goods and services are items which
        can be ‘globalised’ in the sense of production, sales, sourcing, supply chains,

managerial economics for decision making

             information and strategy. However, it is not so straightforward to measure the
             globalisation of social ‘norms’, ideas, consumer behaviour and other non-
             tangible aspects of a process which some argue is leading to ‘sameness’ across
             the world. At the moment, however, we can measure some of the tangible
             aspects of the globalisation ‘process’.
                 We do know, from our previous discussion, that financial globalisation is
             certainly not complete and that this is likely to be the key element in the
             continued globalisation of goods and services towards Stage 4 in Figure 1.2 and
             also in the Shirikawa et al. sense. It thus follows that despite claims to the
             contrary, the globalisation of goods and services themselves cannot be
             complete. However, we can identify a few ‘obvious’ measurements of global-
             isation and test these against what has gone before. Three of these are:

             ■ Global exports and imports (volume)
             ■ FDI as a proportion of global GDP
             ■ FDI as a proportion of global direct investment

             These three ‘indicators’ are useful because they give us a picture of the trends
             involved and also show us whether these trends really are new, are significant
             and are qualitatively different from trends in the past. Let us consider the
             growth in global trade in terms of exports and imports as described in Figure 1.3.
                 The graph spans a period of 20 years at the end of the last century. It shows
             that the expansion of exports and imports was very rapid in the second half of
             the 1980s and even faster in the 1990s. A world recession in the early 1990s
             significantly arrested both trends. We can find the same trends for these indic-
             ators from the 1950s right through the 1960s and 70s – however they were not
             as pronounced. The speed of expansion in the latter part of the twentieth






                              1980    1985
                                      1985            1990
                                                      1990             1995
                                                                       1995        2000

                                                 Exports     IMPORTS

Figure 1.3   Global exports and global imports


             century coupled with the scale of trade in terms of volume was quite different
             from previous periods. Indeed it was this scale and speed of expansion which
             led to the current notion of globalisation in the populist sense. We can reason-
             ably conclude from this that if the very rapid growth of this period was to
             continue for the foreseeable future then the world (or large parts of it) will
             rapidly enter Stage 4 in Figure 1.2. What about our other ‘indicators’ of global-
             isation? It has been argued that the real basis of globalisation is not trade per
             se but the development of ‘stateless’ corporations which can invest or disinvest
             ‘at will’ across the globe in order to maximise the benefits to them of differen-
             tials in tax regimes, exchange and interest rates and in regulatory frameworks
             between different countries.
                 Again we can clearly detect a sea change in the rate of growth of FDI rela-
             tive to global GDP first in the mid-1980s and again, but even faster, in the
             1990s (Figure 1.4). The troughs in the cyclical pattern of this correspond almost
             exactly with major economic recessions in the 1970s, 80s and early 1990s when
             FDI went below its 5-year moving average. This may be another indication of
             the ‘home bias’ which we discussed in relation to financial globalisation – when
             recession occurs there is a strong tendency for investors (corporations and
             individuals) to reduce planned investments abroad first. This also suggests that
             the perceived risk of such investment is higher than with domestic investment.
             Economic uncertainty therefore plays a significant role in arresting, at least
             temporarily, the process of globalisation in goods, services and finance. It
             would appear that even large corporations prefer to continue to compete more
             strongly in their domestic markets than elsewhere when such uncertainty
             arises. In addition it should be noted that, despite the clear trend of greater



                Per cent





                             1970   1975        1980            1985     1990          1995           2000


                                      Series1          Power (Series1)   5 per. Mov. Avg. (Series1)

Figure 1.4   FDI as a proportion of global GDP

managerial economics for decision making



               Per cent




                           1970   1975    1980        1985            1990         1995   2000


                                          Series1     5 per. Mov. Avg. (Series1)

Figure 1.5   FDI as a proportion of global direct investment

             investment abroad in the 1990s, the global proportion relative to GDP was still
             very low by the end of the century at less than 3 per cent. It could be argued
             that such a low proportion is hardly indicative of a rapidly globalising world
             economy and in fact is just another, albeit more rapid, phase of foreign invest-
             ment growth. In other words, some of the ‘wilder’ claims of a globalising world
             economy simply do not match the evidence of a very obvious indicator of the
             process. Another way to look at the foreign investment issue is to consider how
             it has developed relative to global investment itself rather than global GDP.
             This is depicted in Figure 1.5.
                 The same pattern we described in Figure 1.4 is also evident here. As a
             proportion of global direct investment, foreign investment was significantly
             above its 5-year moving average only in the latter half of the 1980s and for
             most of the 1990s. Prior to this period it hardly deviated from its trend. In
             addition, even by the end of the century only about 10 cents in every invested
             dollar were actually invested outside domestic economies and the 5-year
             average was less than 8 cents in every dollar. What can we conclude from this?
             We know that the most ‘movable’ commodity, finance and financial services,
             tends to be seen as the most globalised yet it is still dominated by a very strong
             ‘home bias’; we also know that global trade in terms of exports and imports
             has certainly accelerated in the past 20 years and would suggest rapid global-
             isation; but we also know that a fundamental aspect of globalisation as a
             concept, FDI, has increased rapidly but is still a very small proportion of both
             global GDP and global investment. In addition to this, such investment


        expansion is quite easily arrested and sometimes actually reduced by recession
        and economic uncertainty (Obstfeld and Taylor, 1997).
            The evidence is therefore very mixed using these indicators. Indeed it can
        quite easily be argued that very few economies, if any, are anywhere near Stage
        4 as described in Figure 1.2 earlier. This leaves us with an alternative explan-
        ation – that ‘globalisation’, as discussed above, is more to do with faster
        communications, easier access to information on a global scale and a ‘state of
        mind’ than with actual recent history of economic development per se. This
        does not mean that it is not happening – it does mean that we are still a very
        long way from Stage 4 in the conceptual model of globalisation. The evidence
        does suggest that the world has become more of an economic ‘unit’ than it
        used to be but still much less of an economic unit than the nation state
        continues to be! If globalisation is happening then it is developing much more
        slowly than many commentators and pressure groups suggest. But even at a
        slower pace of development it still contains many significant implications for
        national governments and for businesses, wherever they are located. We will
        consider this in the next section.

■ 1.5   National and Business Implications of Globalisation
        Even if developing more slowly than currently assumed, the process of global-
        isation will have major and profound effects on how individual economies are
        managed and how individual businesses, large and small, manage their
        resources and plan their future. At the national level (including regional blocs
        such as the EU) a number of key macroeconomic management tools are likely
        to become less effective in addressing the needs of individual economies. These

        ■ Regulation of business
        ■ Environmental policy
        ■ Taxation policy
        ■ Trade policy
        ■ Exchange rate management
        ■ Financial regulation
        ■ Central bank functions

             Business regulation is commonly associated with competition policy and
        the achievement of a set of standards in relation to the quality, safety and
        selling of goods and services. These regulations tend to be domestically defined
        but can be in contravention (or appear to be) of international or regional bloc

managerial economics for decision making

            rules and agreements such as in the case of the WTO and the EU. There is thus
            a trend towards the standardisation of such regulation across borders which
            reduces the ability of domestic governments to determine their own standards
            and rules. It may be the case that domestic firms’ costs will need to rise to meet
            ‘standardised’ regulations thus making them less competitive. In other words,
            changes or enhancements to existing business regulation will inevitably give a
            competitive edge to firms able to absorb these extra costs. This will have impli-
            cations for those firms which are slow to react or fail to anticipate future regu-
            latory change. Increasingly the domestic government cannot be relied upon to
            produce predictable and locally relevant regulation since it is likely to be super-
            seded by an international agreement.
                The same analysis can be forwarded in terms of environmental policy
            where regional or even global agreements will increasingly impose additional
            costs on business at the local level – even where this may not be locally
            appropriate in many cases. On taxation the difficulties for domestic govern-
            ment could be even greater. Differentials in corporation tax between coun-
            tries, even within regional blocs, will increasingly influence the direction of
            FDI or the decision by a domestic based firm to move its facilities across
            borders. This has many implications for employment, tax revenue and
            domestic GDP growth. Although most economies are members of the WTO
            and regional blocs they still have some room for determining domestic trade
            policy and the level of protection they give to domestic industry, for example
            through subsidies. But domestically produced trade ‘rules’, including protec-
            tion, increasingly come into conflict with agreements already in existence or
            are often seen to be by other countries. Increased globalisation is likely to
            make it even more difficult for domestic trade policy to be ‘out of line’ with
            international or regional agreements. The increasing globalisation of financial
            services makes the management and targeting of an appropriate exchange
            rate increasingly more difficult. This affects the ability of a domestic govern-
            ment to achieve a ‘competitive’ exchange rate for its currency and to achieve
            an interest rate which is consistent with the competitive stance of the
            businesses operating within its borders. In addition, the possibility of a finan-
            cial crisis in one country being transmitted to another (financial contagion)
            has increased significantly, making financial management tools of economic
            policy even less effective than before. Finally the role and functions of central
            banks, including the European Central Bank, have now become more
            complex and more difficult to manage. All of the above add up to an
            inevitable conclusion – the ability of the nation state or regional economic
            bloc to determine its own economic future has definitely been reduced and is
            likely to be reduced further in the future. In the next chapter we consider
            how the nation state can be understood as an economic system by applying
            some basic economic analysis.


❏ ❏ ❏ End of Chapter SUMMARY ❏ ❏ ❏ ❏ ❏ ❏ ❏ ❏ ❏ ❏ ❏
         In this chapter there are a number of key concepts and relationships with which you should now
         be familiar. In particular:

         ■ The historical antecedents of globalisation
         ■ The different definitions of globalisation
         ■ The type of indicators of globalisation and their drawbacks
         ■ The key drivers of globalisation
         ■ The relationship between the global economy and the local economy
         ■ The constraints faced by decision makers imposed by globalisation

         In addition you should be able to explain clearly that globalisation is not just an economic
         phenomenon – it is as much driven by political and social developments and by individual
         perceptions of the ‘world order’. The notion that globalisation could be considered as a ‘state
         of mind’ is a very powerful one and helps to explain the increasing polarisation of opinion as to
         the benefits and dis-benefits of the process itself.

         Lewis, K. (1995) ‘Puzzles in International Financial Markets’ in Grossman, G.
            and Rogoff, K. (eds) Handbook of International Finance Vol. III,
            pp. 1913–71.
         Obstfeld, M. and Taylor, A. (1997) ‘The Great Depression as a Watershed:
            International Capital Mobility over the Long Run’, NBER Working Paper
            No. 5960.
         Shirakawa, M., Okina, K. and Shiratsuka, S. ‘Financial Market Globalisation:
             Present and Future’, Bank of Japan Discussion Paper, No. 97-E-11, Tokyo.

■■■     ANSWERS to Self-Assessment Questions ■ ■ ■ ■ ■ ■
Q1       It could mean many things! First, the small firm may need to consider the
         investment it needs to make in order to meet the quality levels and delivery
         constraints imposed by the global firm. Second, it could mean that the small
         firm’s real competitior(s) are not located within the domestic economy at all –
         they are as likely to be located in economies both within and outwith Europe.
         This is very much the case for small high technology (niche) firms in the EU –
         many of their competitors are in Australia, the USA and the Far East. But

managerial economics for decision making

            because of minimal transport costs (relative to production costs) these competi-
            tors might as well be next door!

Q2          There is a potential conflict here. Not all EU firms are significantly engaged in
            exporting or importing. Therefore the benefits of zero transaction costs to them
            will be zero. This also applies to employees of such firms. However, the removal
            of the ‘option’ to manage interest rates and taxation may well be a hindrance
            to many sectors in the different member states of the EU, and not just the trad-
            able goods sector.


      A                                   bias, 9, 120–1
      absolute numbers, 50                borrowing, 32, 46, 79, 212, 225,
      accounting profit, 245                 277
      Adam Smith, 24                      brand identity, 83, 206, 209,
      advertising, 92, 102, 106, 109,       211, 233–4
        113–14, 127–8, 175                business and macroeconomic
        budget, 195                         performance, 37
        elasticity of demand, 113, 115,   business cycle, 57, 66, 72, 241,
           128                              289
        strategy, 109, 113, 118           business forecasting, 50
      Africa, 5, 7                        business objectives, 71–3,
      agents, 76                            99–100, 102, 224
      agglomeration economies, 155        business regulation, 19
      aggregate demand, 4, 20, 22, 24,
        25, 32, 34, 37, 44                C
      alternative goods, 109              capital, 8–9, 146–8, 152, 157,
      arc elasticity of demand, 114         159, 161
      ASEAN, 5                            capital constraint, 242, 269–74
      assets, 89, 154                     capital rationing, see capital
      assumptions, 25                       constraint
      average,                            captive market, 143
        physical product, 149             cartel, 177 see also oligopoly
        revenue, 83, 103, 175             Cobb–Douglas production
        revenue curve, 84                   function, 147, 151, 158
        total cost curve, 164             collective rationality, 306
                                          comparative performance
      B                                     indicators, 56–62
      back forecasting, 135               competition, 9–13
      backward vertical integration, 91     environment, 235–6
      balance of payments, 66               policy, 19
      banking sector, 45                    strategy, 69, 208, 213, 224,
      bankruptcy, 93                          226–8
      bargaining power, 101                 tendering, 189–91, 193
      barometric forecasting, 118, 133,   complementary good, 108
        136                               composite indices, 137
      barriers to entry, 167, 171–2,      constant price equation, 53, 66
        175, 180, 234, 307                consumer behaviour, 16, 124
      basket of goods and services, 54    consumption, 26–7, 30–1, 34 see
      behaviour, 16, 24, 46                 also aggregate demand
      behavioural model, 71, 99–102         function, 31
      benefit–cost ratio, 271, 276         consumption–investment trade-
      best fit, 128, 133                     off, 243


corporation tax, 20, 86             economies of scale, 83, 91, 152,
cost leadership strategy, 226–7       157, 232
cost of production, 29              elasticities of demand, 112–15
cost plus pricing, see markup       elasticity of supply, 159
cost structure, 106, 164–5          employment, 45, 56
cross-elasticity of demand, 113     EMU, see European monetary
currency convertibility, 4            union
Cyert/March model, 71, 99–101       engineering technique, 165–6
                                    EU, see European Union
D                                   euro, 12–15
debt/GDP ratio, 13                  European Central Bank, 19–20
decomposition analysis, 118,        European monetary union,
  134–5                               12–14, 65
de-globalisation, 8                 European Union, 13, 167
Delphi technique, 122               exchange rate, 19–20, 300
demand constraint, 91–2,            expected NPV, see net present
demand curve, 111–12                  value
demand estimation, 106–7            exports, 5, 16, 25, 28, 50, 57
demand for labour, 27
demand forecasting, 106–7, 133      F
demand function, 108–10             factors of production, 146–7,
demand growth, 94–6                   152, 156, 160
demand measurement, 118             FDI, see foreign direct
demand predictions, 119, 121          investment
demand theory, 108–10               financial constraint, 91–2, 94, 97
demographic spread, 110             financial globalisation, 8, 16
demonstration effect, 11            financial regulation, 19
diffusion indices, see barometric   financial services, 9–10, 18, 20
  forecasting                       fiscal deficit, 13, 15
diminishing marginal returns,       fixed costs, 74, 160, 183
  148                               focus strategy, 226–7, 230
discount factor, 254                foreign direct investment, 4, 5,
discount rate, 254                    7, 11, 16, 18
discounted cash flow, 242,           forward vertical integration, 91
  253–6                             FSM, see financial services
diseconomies of scale, 153          functional relationships, 23–30
displacement, 309–11                future value, 243, 253–4
disposable income, 26, see also
  consumption                       G
dominant firm, 77                    GATS, see General Agreement on
Dorfmann–Steiner condition,           Trade in Services
  197–8                             GATT, see General Agreement on
                                      Trade and Tariffs
E                                   GDP, see gross domestic product
economic blocs, see ASEAN,          General Agreement on Trade
  European Union, North               and Tariffs, 4–5, 8
  American Free Trade Area          General Agreement on Trade in
economic environment, 7, 23–6         Services, 8
economic indicators, 56–9           generic strategies, 227
economic policy, 8, 46,             globalisation, 3–4, 7–14, 15–20
economic profit, 245                 globalisation of production, 49,


        goals of the firm, 143               managerial constraint, 91, 93, 95
        goods and services, 9–10, 13,       managerial economics, 23, 236
          15–16, 19, 24                     managerial utility, 71, 84–8,
        goods and services market, 26        94–6
        government, 7, 13, 19–20, 24–5,     marginal cost, 73–6, 162, 173,
          29                                 177–8, 179, 183, 197, 322
        gross domestic product, 4, 6–7,     marginal cost curve see marginal
          13, 15–18, 20, 57–9                cost
        gross national income, 34           marginal physical product,
        growth maximisation, 71, 90–3        149–50
          see also Marris growth            marginal product, 159
          maximisation model                marginal revenue, 73–6, 79–80
        GSM, see goods and services         marginal revenue curve, 172–8
                                            market failure, 306–11
        H                                   market rate of interest, see IRR,
        horizontal integration, 91           discounted cash flow
        hurdle rate, 264                    market research, 123–5, 210, 231
                                            market structure, 172–8
        I                                   marketing, see advertising
        imperfect information, 99–100       marketing configuration,
        import penetration, 67               215–16, 218–19
        imports, 4–5, 16, 33                markup, 183–4
        index numbers, 50, 54               Marris growth maximisation
        indifference curves, 87              model, 90, 94–6
        inferior good, 109, 114             mature markets, 204, 212
        inflation, 12, 51, 66–7, 161, 183,   maximin method, 300–1
           253, 263                         MC, see marginal cost
        input suppliers, 115                microeconomic theory, 171
        interest rates, 8, 13, 17, 63, 79   minimax regret method, 301
        internal rate of return, 263–5      monetary union, see EMU
        investment appraisal, 224, 241,     monopoly, 172–5, 180, 191
           253                              MR, see marginal revenue
        investment decisions, 63            multi-product firm, 76
        IRR, see internal rate of return    multi-stage production, 110
        irregular component, 97
        iso-sales analysis, 206             N
                                            NAFTA, see North American Free
        K                                     Trade Area
        kinked demand curve, 176            national expenditure, 30
                                            national income, 30, 34, 50,
        L                                     56–7
        labour, 9, 57, 74, 101, 146–8       neoclassical economic theory,
        law of supply, 141, 146               307
        limit pricing, 173, 175, 177        net present value, see discounted
        linear demand function, 127           cash flow
        long-run cost estimation, 164–7     nominal data, 50–1
        luxury items, 200                   non-perfect competition, 76–7
                                            normal distribution curve, 284–6
        M                                   normal good, 114
        macroeconomic, 1, 19, 23, 41,       North American Free Trade Area,
         56, 63                               5


O                                   RPI, see retail price index
oligopoly, 172, 175–7, 191
operating cost function, 161        S
opportunity cost, 241–2, 244        sales force opinion, 120–1
ordinary least squares, 128         sales maximisation, see
ordinary least squares technique,     penetration price
  162                               satisficing model, 99–100
                                    share price, 89, 92–3
P                                   shareholders, 76, 79–81
payback method, 246                 short-run cost function, see
penetration price, 180–1              operating cost function
perfect competition, 172            simulated store technique,
performance indicators, 56–8          123–4
planning cost function, see long-   single currency, see euro
  run cost estimation               standard error, 129–30
price competition, 176, 184         substitute good, 108, 109
price elasticity of demand, 113,    supernormal profits, 85
  198                               supply curve, 144–5
price leadership, see oligopoly     supply theory, 141–143
price positioning, 184–5            survivor technique, 166–7
price skimming, 179–80
pricing to infer quality, 185       T
probability analysis, 284–6         t-test, 129–30
product life cycle, 232             target market, 205, see also
product mix, 76                        demand function
production function, 147, 158–9     target return pricing, 189
production theory, 146, 151         taxation, 19–20, 31, 34
profit maximisation, 73–7            theory of demand, 108
profit maximising rate of sales      total physical product, see
  growth model, 90–3                   production function
profit related pay, 76               total revenue, 73–5
promotional pricing, 187            total revenue curve, 79–80
protection, 14                      trade restrictions, 220
public policy, 167                  transfer pricing, 189–90
public provision of services, 8
public sector, 55, 167              U
public sector investment, 167       unemployment, 57–8, 125, 220

R                                   V
rate of return, see return on       value for money, 186–7, 306–7,
   capital, discounted cash flow,      311
   IRR                              value maximisation, 89–90
recession, 16–18                    variable cost, 73–4
regional policy, 220                variable cost curve, 161–2, see
regression analysis, 126–31           also short-run cost function
regression equation, 127–8
regression statistics, see          W
   regression analysis              wealth maximisation model, 68
retail price index, 52–6            World Trade Organization
return on capital, 63, 246–9         (WTO), 6, 15
risk adjusted discount rate,


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