Government Policy, Multinationals, and Global Trade

Government's Role in the Economy

One of the roles of most governments is to provide a range of public services. This might include:

• Healthcare
• Education
• Defence
• Care for the elderly
• Child protection
• Policing
• Refuse collection
• Judicial system
• Transport networks

Taxation and Fiscal Policy

The money raised from taxation is used by a government to help fund its spending on public services. Businesses and individuals pay taxes.

Types of Taxation

• Indirect Taxes: Levied on spending, e.g., Value Added Tax (VAT) paid when buying goods and services.
• Direct Taxes: Charged on income, e.g., income tax, corporation tax.

Fiscal Policy Defined

Fiscal policy involves using changes in taxation and government expenditure to manage the economy.

Government Influence on Business Activity

Infrastructure Provision

In most countries, the government is responsible for developing and maintaining the nation's key infrastructure. This includes building schools, hospitals, roads, bridges, dams, railway systems, power generators, and government offices. These projects can cost millions or billions of dollars.

Legislation and Regulation

One of the roles of the government is to provide a legal framework in which businesses can operate and ensure that vulnerable groups are protected.

Consumer Protection

Consumers want to buy good quality products at a fair price and receive good customer service; they do not want to buy goods that may be dangerous or overpriced. Some firms may:

• Increase prices higher than they would be in a competitive market
• Engage in price fixing
• Restrict consumer choice by market sharing
• Raise barriers to entry by spending huge amounts of money on advertising, which smaller companies could not match

For example:

• Sale of Goods Act 1979: This states that products sold by businesses must be of an appropriate quality and fit for the purpose.
• Food Safety Act 1990: This law means that food should be fit for human consumption and comply with safety standards.

Competition Policy

• Encourage the growth of small firms: If more small firms are encouraged to join markets, there will be more competition. With more small firms, the market is less likely to be dominated by one very large firm.
• Lower barriers to entry: If barriers to entry are lowered or removed, then more firms will join a market. This will make it more competitive.
• Introduce anti-competitive legislation: Many countries have laws that help to encourage competition. Some countries have special bodies or agencies that are responsible for managing all policy relating to competition and consumer protection.

Environmental Legislation

Business activity can have a negative impact on the environment. For example, water pollution may be caused by businesses dumping waste into rivers, streams, canals, lakes, and the sea. Air pollution may be caused by releasing waste or gases into the air.

One approach used by many governments is to pass new laws to minimize the damage done by businesses to the environment. If businesses fail to comply with environmental laws, they may be fined or forced to close until the problem is solved.

Trade Policy and Protectionism

Protectionism means the use of trade barriers to protect domestic producers. It can be used to:

• Protect jobs if foreign competitors threaten the survival of domestic producers.
• Protect infant industries (new industries that are yet to get established).
• Prevent dumping (where foreign producers sell goods in another country often below cost).
• Raise revenue tariffs.

Governments can use trade barriers to restrict trade:

• Tariffs: A tax on imports, which makes them more expensive.
• Quota: A physical limit on the quantity of imports allowed into a country.
• Subsidy: Financial support given to a domestic producer to help compete with overseas firms.
• Administrative Barriers: The use of strict health and safety or environmental regulations and specifications to make importing more awkward.

Multinational Corporations (MNCs)

Multinationals contribute about 10 percent to world GDP and about 66 percent to global exports.

Development and Growth of MNCs

• Economies of Scale: Multinationals enjoy lower costs because they can exploit economies of scale.
• Marketing: Some multinationals rely on marketing, such as Starbucks and McDonald's. They protect their brand with patents, use heavy advertising, and innovate to attract customers.
• Technical and Financial Security: Most multinationals have developed advanced technologies and built a large bank of knowledge.

Benefits for Multinational Corporations

• Larger Customer Base: MNCs can boost sales revenues by selling to global markets, helping to increase profits and win market share from competitors.
• Lower Costs: Many multinationals reduce transport costs by setting up factories in new countries, shortening the distance from production sites to markets.
• Higher Profile: Multinationals enjoy a higher market profile. Companies with strong brand names are recognizable.
• Avoiding Trade Barriers: One benefit of becoming a multinational is the ability to avoid trade barriers.
• Lower Taxes: MNCs can reduce the amount of tax they pay on profits by basing head offices in countries with lower taxes.

Benefits of MNCs for Host Countries

• Increase in Income and Employment: Multinationals create new jobs in developing countries.
• Increase in Tax Revenue: Profits made by multinationals are taxed by the host nation.
• Increase in Exports: Output produced by a multinational in a particular country is recorded as output for that country.
• Transfer of Technology: Multinationals provide foreign suppliers with technical help, training, and other information.
• Improvement in Human Capital: Governments try to spend more on education to improve the country's human capital to attract multinationals.
• Enterprise Development: Multinationals may provide the skills and motivation needed for enterprise.

Possible Drawbacks of MNCs for Host Countries

• Environmental Damage: Multinationals may cause environmental damage, for example, by using products like coal and oil, or through coal mining.
• Exploitation of Less Developed Countries: Some multinationals may encourage developing countries to rely on producing primary products. Multinationals may pay lower wages. Taxes paid to the host nation are often minimal, reducing the amount of profit put back into the country by the multinational.
• Repatriation of Profits: Where a multinational returns the profits from an overseas venture to the country where it is based, typically from a developing country to a developed country.
• Lack of Accountability: Some argue that because multinationals are so large and powerful, they lack accountability.

International Trade Fundamentals

International trade allows countries to:

• Obtain goods that cannot be produced domestically.
• Obtain goods that can be bought more cheaply from overseas.
• Improve consumer choice.
• Provide opportunities for countries to sell off surplus commodities (an amount of something that is more than what is needed or used).

Key Trade Definitions

• Exports: Goods and services sold overseas.
• Imports: Goods and services bought from overseas.
• Visible Trade: Trade in physical goods.
• Invisible Trade: Trade in services.
• Balance of Trade (or Visible Trade): The difference between visible exports and visible imports.
• Transactions: Business deals or actions, such as buying or selling something.
• Exchange Rate: The value of one currency in terms of another.
• Interest: The price of borrowed money (and the reward to savers).
• Monetary Policy: Using changes in interest rates and the money supply to manage the economy.