*

Types of Banks
Central banking The Bank of England as the country's central bank plays the major role in controlling the British monetary system and it is at the hub of most banking activity. The Bank of England is controlled by a court of directors appointed by the state. This court consists of a governor, a deputy governor and sixteen directors. Functions of the Central Bank: It is the government's bank. It manages the government's banking accounts, for example for the Exche uer and other government departments. It advises the government on formulation of monetary policy and assists the government in carrying out the monetary policy. It handles the arrangements for government borro!ing" short# term" through the sale of Treasury Bills, and long#term" management of government stocks It manages the exchange e ualisation account and through this the Bank can influence the value of sterling by selling or buying pounds to affect foreign exchange market prices. It controls the note issue" The Bank has the sole responsibility for the issue of bank notes in England and $ales. It is the bankers' bank" Each of the clearing banks has an account !ith the Bank. The clearing banks keep about the half of their li uid reserves deposited at the Bank %short call money& and use these for settling debts among themselves. The commercial banks rely on the Bank if they run short of money or re uire loan. It has international responsibilities" The Bank provides services for other central banks and for example for the I'(. It is the lender of last resort" If the commercial banks run short of cash they recall deposits they have in the money market. This leaves the discount houses short of funds, but The Bank 'lends as last resort' to the discount houses at a higher rate of interest. Other banks and financial institutions: Discount houses: They accept very short#term deposits in return for a lo! rate of interest They use funds to purchase a variety of assets, e.g. treasury bills, bills of exchange and guilt#edged securities They provide immediate finance for companies by discounting reliable bills of exchange ) they buy them for less then their face value and resell them and charge a higher rate of discount to achieve a profit Clearing banks: They accept deposits of money They provide a system of payments mechanism They provide a !ide range of services They handle the exchange and settlement of che ues

Trustee Savings Bank (TSB) It is a fully fledged bank that offers a variety of services similar to the other clearing banks" current, deposit, savings and investment account, credit transfer facilities, overdrafts, personal and mortgage loans, combined credit and che ue guarantee card, travel che ues and foreign currency. State banks The +ational ,avings Bank operated through the -ost office The +ational .irobank" financially independent from the -ost /ffice erchant banks They are private firms that offer highly specialised services almost exclusively for business customers. Their main activities" 0cceptance house activities" they lend their name to a bill of exchange issued by less !ell#kno!n traders, so that it becomes more acceptable because of the bank's good reputation. They confirm the buyer1s ability to pay for the product Issuing house activities" they sponsor first issues of companies' shares , and they are intermediaries bet!een companies seeking capital and those !illing to provide it. 2apital market activities" they accept larger deposits, provide finance for hire# purchase, advise on company problems such as capital reorganisations, offer consultancy services etc. Foreign banks There area bout 344 foreign banks in 5ondon. They provide services and credit to companies from their o!n countries operating in Britain, but some of them make substantial sterling loans to British borro!ers, too. Banking in the !S" In *6*7, the 2ongress established the (ederal 8eserve ,ystem and re uired all national banks to belong to this system. ,tate banks !ere invited to join and many did. +o! most 0merican banks belong to the (8,, !hich regulates banking in 0merica. The nation is divided into *9 (ederal 8eserve :istricts. There is one (ederal 8eserve Bank in each district. They operate under the centralised control of the (ederal 8eserve Board in $ashington. It consists of ; members appointed by the -resident and approved by the ,enate for a *3#year term. This Board makes most of the major decisions for (8,. The (ederal 8eserve Banks do not business !ith individuals or business firms. They serve only the (ederal .overnment and the members banks of (8,. The (ederal 8eserve Banks serve t!o main purposes" The (ederal .overnment uses them to handle its o!n banking needs. The (ederal 8eserve Banks also handle the sale of bonds issued by the <, 0dministration

The (ederal 8eserve Banks provide important services to the member banks. 'ember banks are re uired by la! to set aside a part of their depositors' money . This is called their reserve and each bank must deposit its reserve in the (8B that serves its (ederal 8eserve :istrict.

=ocabulary :eposit Treasury bill .ilt#edged securities Bill of exchange bet>t %bank t>mak?rben&, de lehet let>t is @incstArjegy BiBtonsAgos Allamk?tv>nyek IdegenvAltCD vAltC ) felt>tel n>lkEli fiBet>si felsBClFtAs, amit vki alAFrAsAval kiAllFt vki mAsnakD a cFmBettet arra utasFtja, hogy meghatAroBott idGben fiBessen ki egy adott ?ssBeget vagy egy biBonyos sBem>ly sBAmAra, vagy a dokumentum bemutatCjAnak. vAltCt lesBAmFtolni, disBkontAlni klFring bankok, BsFrC bankok ) olyan bankok, melyek tagjai a 5ondon Bankers 2learing Bank 0ssociation#nek, mely lehetGv> tesBi a csekk# >s k>sBp>nBforgalom elsBAmolAsAt 0ngliAban takar>kp>nBtAr sBAmlahitel, hiteltHll>p>s ) folyCsBAmla# hitel, meghatAroBott hatAr>rt>kig vAltoBC ?ssBeggel r>sBletre vAsArol vAltCbankD olyan p>nBint>Bet, melynek tev>kenys>gei k?B> tartoBik a vAltCk >rt>kesFt>se akAr elfogadAssal, akAr garanciAval. =alCjAban garantAlja aB Aruk vAsArlCjAnak vagy importGr>nek p>nBEgyi helyBet>t aBBal, hogy vAllalja a vAltCk?teleBetts>get, aBaB alAFrAsAval igaBolja, megerGsFti, hogy a vevG illetve aB importGr aB Arut ki tudja fiBetni kibocsAtChABD olyan p>nBint>Bet, mely a vAllalatok tGBsdei beveBet>s>ben, illetve r>sBv>nyeik kihelyeB>s>ben >s a tGken?veked>st c>lBC tovAbbi tranBakciCk lebonyolFtAsAban seg>dkeBik sBakosodott kereskedelmi bank

To discount a bill of exchange 2learing Banks

,avings bank /verdraft

To buy on the hire#purchase system 0cceptance houseI accepting house

Issuing house

'erchant bank

Banking services
The varied services of the financial sector are carried out by a large number of financial institutions !hich all have one thing in common" they all collect funds from the public and then use these funds to make loans and investments 2ommercial banks %kno!n as clearing banks& provide a very !ide range of services to costumers. 2ore banking operations can be classified as traditional branches of banking, electronic transfers and non#financial branches of banking. *. Traditional branches of banking include the follo!ing services" :eposits" can be collected from private depositors or from public depositors. 5ending" conditions" the three 2's of credit %character J capacity J capital&"business loans, consumer's loans" repayment terms and interest rates are usually arranged by the borro!er, mortgages" contracts by !hich the o!ner of property %the mortgagor& borro!s money, giving the lender %the mortgagee& an interest in the property as security for the loan, there are 9 basic types of mortgage %against real estate Ion personal property& bankers' services" current#account services, deposit#account services savings#account services 9. The ne!est service provided by financial institutions is electronic banking" 0T'" 0utomated Teller 'achines" they tan dispense cash from the client's current account. 02K" 0utomated 2learing Kouses" they make debit and credit transfers bet!een banks easier, uicker and safer -/," -oint of sale terminals" computeriBed cash registers connected to a bank's computer terminal. If a consumer buys something and pays by card it automatically transfers the re uired amount of any purchase to the store's account 7. Banking businesses include a lot of non#banking services" Executor and trustee services" banks are allo!ed to handle real estates or personal property on the basis of trusteeship !hen people dieD they manage pension funds as !ell. Investment services" safe custody of demand deposits Insurance services Economic information Internet Banking Internet#based branches provide comfortable and rapid settlement of transactions. It is open for 93 hours a day and it is easy to reach !ith an internet connection. ,ervices" 5oading statement of your account in the same form that you !ould receive by post. Lou can give a transfer order to one account or a group transfer order to several, different accounts

Lou can open credit accounts, currency account %transfer in currency, exchange operations, tying up& or securities deposit account 8etail customers can open savings accounts and handle deposit accounts.

To !hom it is recommended" To retail customers !ith a current account To companies !ith small turnover To one#man businesses 0dvantages" Lou can settle the transfers more easily !ith computer programs. There is no need to fill in transfer order forms. It is a safe system therefore there is no need for confirmation. It provides more efficient cash#flo! management. +ote" The customer has to sign an internet banking contract !ith the bank and then he !ill get the necessary soft!are to be able to connect to the system. ,ome banks do not re uire soft!are. =ocabulary branch statement of account transfer order group transfer order currency account tying# up securities deposit account one#man business turnover cash#flo! management bankfiCk sBAmlakivonat AtutalAsi megbFBAs csoportos AtutalAsi megbFBAs deviBasBAmla lek?t>s >rt>kpapFrsBAmla egysBem>lyes vAllalkoBAs forgalom likviditAs %p>nBforgalom& menedBsel>s

Business Organisations
Business organisations are extremely diverse and can be classified according to their legal form, siBe, o!nership or industry sector.

#$ The sole trader

The individual carries on business in his or her name, so assumes all the rights and duties of the business. If the business is sued for breach of contract %sBerBGd>ssBeg>s&, it means suing the individual and if the business does not have the resources to meet any claim, the claim must be met out of the private resources of the individual. They have limited capital resources. 8isk capital is provided by the proprietor or close personal backers and loan capital is often made available against the security of the individual assets. The sole trader may suffer by not being able to exploit the economies of scale %volumengaBdasAgossAg& available to larger firmsD on the other hand, in many personal services, smallness and the personal touch can be a strong selling point. "dvantages The sole trader has" (reedom in running the business. (lexibility. -ersonal control over the business. -ersonal contact !ith staff and customers. Ke does not have to share the profit. Disadvantages ,ources of finance are limited %it is difficult to borro! money&. Therefore gro!th is restricted. There is limited scope for economies of scale. Ke has to take full responsibility. There is no continuity %if he is ill, there is no one to run the business&.

%$ &artnership (t'rsul's( kb$ BT)

T!o or more persons combine their resources and expertise to form a business unit. -artnerships are formed by contract bet!een the parties. The main items in a -artnership 0greement are the terms specifying e.g." The nature of business and date of commencement. The amount of capital subscribed by each partner. The basis on !hich profits !ill be determined and allocated. 'anagement responsibilities of each partner %sleeping partner ) csendestArs" providing capital but not taking part in the running of the company&. =oting rights, the role of each partner, arrangements concerning finances, banking, book# keeping, authority to sign contracts, etc. "dvantages There are additional sources of finance. -artners share responsibilities. -artners share losses too. There is more scope for specialisation. Disadvantages Each partner is jointly liable for the debts incurred by other partners. The !ithdra!al of any one partner or an additional partner causes the automatic

termination of the partnership. -artnership is a common form of business organisation !ith accountants, solicitors, dentists, language teachers, etc.

)$ *oint +enture (k,-,s .-leti v'llalko-'s)

Ooint ventures are formed by t!o or more persons or companies co#operating in some special business activity in !hich there is some risk of loss, but a reasonable hope of profit. The parties in the venture share the costs and the profits in agreed proportions. This arrangement exists in banking, insurance and publishing. Ooint ventures are usually temporary, but they can become permanent too.

/$ 0i1ited co1panies: private li1ited (0td$) public li1ited (&lc$)

The legislation of most countries allo!s for organisations to be created that have a separate legal personality from their o!ners. In Britain" 5td. %limited& or -lc %public limited&, in the <,0" Inc. %incorporated& in Kungary 8t. The act of incorporation creates a ne! legal entity distinct from the shareholders !ho o!n the company. 2ompanies can make contracts and they can sue and be sued. The company is fully liable for its debts but the shareholders enjoy the privilege of limited liability, !hich means that investors are only liable to lose the amount of money they have put into the business and their private possessions cannot be taken a!ay to meet the debts if the business fails. The founders are re uired to lodge a 'emorandum of 0ssociation and 0rticles of 0ssociation !ith the 8egistrar of 2ompanies %c>gbFrCsAg& and to pay certain fees. e1orandu1 of "ssociation (T'rsas'gi s-er-2d3s) It includes the name of the company, its purpose, its registered office or premises, the amount of authorised share capital, a statement as to !hat the limit of liability !ill be if the company is !ound up !ith unpaid debts, the object clause, i.e. the scope !ithin !hich the company can exercise its separate legal personality. "rticles of "ssociation (43s-v3nyt'rsas'gi alaps-ab'ly) It regulates the relations bet!een the company and its members and bet!een the members themselves, e.g. nominal capital %face value of shares&, the issue and transfer of shares, the rights of shareholders, meeting of members, the appointment of directors, etc.&. It also sets out the right of directors and shareholders. There are additional re uirements in relation to a public limited company. 0 private company cannot appeal to the public to subscribe to a share issue. It must sell its shares by private negotiations !ith individuals. 0 public company can offer its shares and debentures to the public. The invitation to the public to subscribe to shares means that public limited companies are under a greater obligation to disclose information, especially if they seek a uotation on the ,tock Exchange. -ublic limited companies are re uired to provide

information to investors e.g. to the public. They must produce the 0nnual 8eport !hich consists of the follo!ing financial statements" &rofit 5 0oss "ccount %eredm>nykimutatAs&" records the revenue and expenses of the company over a given financial period. "udited Balance Sheet %auditAlt m>rlegkimutatAs&" gives a snapshot of the firm1s financial positionD !hat it o!ns and !hat o!es. Cash Flo6 State1ent %p>nBforgalmi kimutAs&" examines the changes in cash resulting from business activities.

Co1pany "d1inistration The shareholders are the o!nersD they have the ultimate say in the business but the running of the business is done by directors !ho are elected to the board by shareholders. In theory control over a company lies !ith the shareholders in general meetings. 0nnual .eneral 'eetings %dividends are declared&. Extraordinary .eneral 'eetings to discuss special business %alterations to the 'emorandum and 0rticles of 0ssociation&.

(or most matters a simple majority is re uired to pass a resolution but certain issues need a ;MP majority. 0td$: advantages and disadvantages "dvantages Enjoys more economies of scale than partnerships. There are more capital raising possibilities. The business has greater continuity. 'embers enjoy limited liability. Disadvantages ,hares cannot be offered to the public. 0ccounts are not private. It can prove to be difficult to raise capital.

&lc$: advantages and disadvantages "dvantages Enjoys economies of scale. ,hare transfer is easy. It is relatively easy to raise capital. The business enjoys maximum continuity. 'embers enjoy limited liability. It is relatively easy to borro! money. Disadvantages (ormation involves considerable documentation. ,hare transfer can lead to take#over. There is too much red tape. There is a lack of privacy, annual report must be made public.

7$ Special for1s of businesses

ultinational corporation: 0 company !hich is based in one country but also operates in a number of countries !here it o!ns factories and outlets. 8olding co1pany: The leading company of a group of companies that holds all or more than M4P of the shares of the other %subsidiary& companies. Charitable trust: 0 trust for relieving poverty, for the advancement of education or religion or for the good of the public in other !ays. They have to be registered, but normally they are not re uired to pay income tax. &ublic sector organisations: .overnments have traditionally been involved in providing goods and services that cannot be sensibly provided by market forces, for example, defence, education, basic health services.

9$ 8ungarian co1pany for1s

The 4T The joint stock form %8T& is principally suitable for larger investments. Banking and insurance businesses must be incorporated as 8T1s. 'inimum capitalisation is K<(94 million. 0ll stocks may be held by one shareholder, but this shareholder has unlimited liability in case of bankruptcy. 0 designated certified auditor must be employed, and an annual audit is re uired. 2ontrol of the company is vested in a board of governors ans!erable to the stockholders. -referred stock may not exceed M4P of capitalisation. 2onvertible bonds may not make up more than M4P of ordinary share capital. The :FT The @(T is by far the most popular incorporated business form for both foreign and domestic investors. 0 @(T cannot solicit additional shareholders publicly. The minimum capitalisation is K<( 7 million. /ne half of nominal capital must be paid in at the time of registration, and all remaining capital must be paid in !ithin one year. &artnerships (BT) -artnerships may be established by Kungarian and foreign individuals or companies either by themselves or together !ith Kungarian individuals or companies. 0lthough the number of partners is not restricted %BT& partnerships must have at least one unlimited partner. 'anagement responsibility falls solely on the unlimited partner%s&.

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Business and Society

#$ Business and social constraints Businesses affect the societies in !hich they operate. 0 sole trader running a small grocery store may benefit local residents by opening for a fe! hours on a ,unday. /n the other hand such a business may have negative effects. 2anned drinks bought from the shop may be left in the street. /pening on a ,unday may lead to more traffic in the area. :ecisions made by a multinational company can have a huge impact in many different countries. (or example, it may decide to relocate its factory from one country to another. This is likely to lead to a fall in income and employment in the country that the company has left. The ne! location may gain from more jobs, the building of infrastructure, such as roads, and perhaps spending on health care and community projects. These examples sho! that businesses do not operate in isolation. The decisions they make can affect a range of other groups and individuals. The businesses can be seen as part of the societies in !hich they operate. 0s a result, governments often pass la!s and set regulations to control the conduct of businesses. 2onsumer la!s try to ensure that businesses do not deliberately mislead consumers. Employment la!s attempt to provide safe !orking conditions and set standards for !orking hours and payments. ,uch la!s tend to set the legal minimum in terms of the !ay in !hich businesses behave. Ko!ever, do businesses have any further responsibilities to societyR ,hould businesses consider the implications of their decisions upon society and not just take into account !hether these decisions help the business to achieve its objectivesR (or example, a cement factory may have emissions !ithin legal limits. The local community might argue that the emissions cause health problems amongst children and the elderly in the area. ,hould the business try to reduce the emissionsR ,ome !ould argue that businesses are self#regulating. They do not need to be controlled by government. If they ignore the vie!s of society, consumers !ill not buy their products. They !ill lose trade and perhaps go out of business. /thers argue that, !ithout external regulation, businesses may have negative effects upon society. -eople !ho are adversely affected by business activity may not be in a position to influence the business. The children and elderly people living near the cement factory may not buy cement. The young and old may not be able to exert any outside pressure by complaining to the management of the business. %$ Business and stakeholders /ne !ay of condiering the impact of business upon society is to vie! all of the groups affected by the behaviour of a business as stakeholders. The stakeholders in a business are likely to include customers, employees, shareholders, suppliers, government, local communities and businesses, financial institutions and other creditors. Businesses have tended to be influenced mainly by customers, employees and shareholders. Increasingly, ho!ever, other groups are affecting business behaviour. (or example, some businesses !ill only supply their products to other businesses that have an ethical or environmental policy. ,ome pension companies !ill not invest in businesses that sell arms.

**

This suggests that businesses need to have a greater ,/2I05 8E,-/+,IBI5ITL to groups beyond those immediately involved in the business. )$ Business ethics The !ay in !hich businesses respond to issues such as the sale of arms or health risks from pollution may depend on their ETKI2,. Ethics are the values and beliefs !hich influence ho! individuals, groups and societies behave. (or example, an electricity generating business may be operating !ithin legal emissions limits. Ko!ever, it may feel that it has to change its production methods to reduce emissions even further because it believes businesses should !ork to!ards a cleaner environment. In part the ethics of a business !ill depend upon the values of its employees. Ko!ever, the ethical stance of the business is likely to be determined by the values of senior managers, directors and other important stakeholders. It !ill also be influenced by codes of conduct !hich may operate in the industry. The term ETKI205 is used to refer to businesses !hich explicitly recognise the importance of social responsibility and the need to consider the effects of its actions upon stakeholders. Business ethics are examined in detail in unit 77. It is possible that a business follo!ing an ethical policy may" S attract customers and employees !ho agree !ith its policyD S have to change its operations to fit in !ith this policy, for example approving certain suppliersD S have to set a policy for all the business in areas such as recruitment and marketing. /$ Business and the environ1ent It is possible that the activities of business can have certain beneficial effects on the environment. (or example, a ne! factory may be built in a derelict area. The ne! premises may be landscaped, improving the vie!. 0 grass area built might have a bench !hich could be used by pedestrians. Businesses are becoming more and more a!are of the need to consider the environment in their operations. 'any critics of certain business activities suggest that they have a negative effect on the environment in the surrounding area. ,ome of the negative effects of business activity include" S air pollution caused by the discharge of emissions into the atmosphere and traffic visiting retail outletsD S !ater pollution as a result of the dumping of !asteD S congestion from employees going to !ork or consumers visiting retail outletsD S noise from factories and trafficD S destruction of natural habitats from the building of premises. Ko! might these effects be controlledR There are la!s, such as the 2lean 0ir 0ct, !hich try to restrict the environmental impact of business activity. The government and the E< have planning regulations and legislation affecting the location of businesses. Taxes on petrol and diesel are often raised in an attempt to reduce the use of transport.

*9

In many areas, businesses are becoming responsible for regulating their o!n behaviour. The ethics of a business can affect the extent to !hich it controls its impact on the environment. ,ome businesses have adopted their o!n stringent codes of practice and policies to control their activities. It is likely that attempts to control the effect on the environment by businesses !ill lead to" S increased costs in the short termD S the attraction of customers !ho agree !ith the policy of the businessD S a change in production methods. 7$ &ressure groups -8E,,<8E .8/<-, are groups !ithout the direct political po!er to achieve their aims, but !hose aims lie !ithin the sphere of politics. They usually attempt to influence local government, central government, businesses and the media. They aim to have their vie!s taken into account !hen any decisions are made. ,uch influence can occur directly, through contact !ith politicians, local representatives and business people, or indirectly by influencing public opinion. The use of pressure groups is one !ay in !hich stakeholders can exert influence over those making decisions !ithin a business. -ressure groups can represent stakeholders directly involved !ith the business, such as employees or shareholders. They can also represent those not directly involved in the business, such as local communities or consumer groups. There is a number of !ays in !hich pressure groups can affect firms. S -ressure groups often seek to influence the behaviour of members of the public about a particular product, business or industry. (riends of the Earth attempt to persuade the public to use cars less and public transport or bicycles more in order to reduce emissions into the atmosphere. This campaign, if successful, !ould have important implications for a !ide range of firms involved in the transport industry. S -olitical parties, through their representatives in -arliament, are able to pass la!s !hich regulate the activities of businesses. Therefore it is not surprising that many pressure groups devote resources to lobbying politicians. 0n example of this is the attempt by the anti#smoking group, 0,K, to change the la! so that all advertising of tobacco is made illegal. S The actions of pressure groups can reduce the sales of firms. This is often most successfully achieved !hen efforts are targeted at particular firms. 2onsumers are then called upon to boycott these firms. S (irms can face increased costs as a result of the activities of pressure groups. This may involve ne! production processes or !aste disposal methods. (irms may have to counteract any negative publicity from a pressure group. (or example, many believe that the campaign to attract visitors to the ,ellafield nuclear site !as a result of the negative publicity from environmental groups. S Businesses !ith a tarnished reputation as a result of pressure group activity may find it more difficult to recruit employees.

*7

Ko! might businesses react to pressure groupsR S By positively responding to the issues raised by pressure groups. It !as argued that pressure from .reenpeace contributed to ,hell's decision not to dump the Brent ,par oil platform in the +orth ,ea in *66M. Instead it !as dismantled and used to build a ferry uay in +or!ay. ,imilarly, local pressure groups have been successful in persuading some firms to change building plans and landscape nearby areas. S Through promotions and public relations. (irms can attempt to counteract negative publicity through their o!n promotional and public relations !ork. (or example, a number of oil companies !hich have been criticised for their impact upon the environment have sought to deal !ith this by promoting the Tgreener' aspects of their industry, such as the availability of lead free petrol. S 0 number of leading firms either lobby politicians themselves or pay for the services of professional lobbyists to represent their interests. S 5egal action. $here pressure groups make false allegations about a business, this can be dealt !ith by the legal system. (or example, allegations by pressure groups that 'c:onald's !ere contributing to the destruction of the 0maBonian rainforest !ere dealt !ith through legal action in the courts.

*3

Business and the ;nviron1ent

:uring the *6Q4's, the industrialised countries became more conscious of the degradation of the environment. By the *6641s, in almost every sphere of environmental protection the key criterion for policy !as the idea of sustainability, i.e. the reduction of all forms of environmental degradation to levels that do not cause lasting damage or permanent loss. $e have to take into consideration not only the costs of a business but the externalities as !ell. (or example, if a factory producing cement !hich is located in a small to!n the firm may dispose of some of its !aste in a local river or discharge dust into the atmosphere. 5orries making deliveries to the factory may disturb the local residents. The factory may be sited close to a local beauty spot, ruining the vie!. These are examples of spill#over effects or EUTE8+05ITIE,. The costs to the !hole of the society, the ,/2I05 2/,T, are made up of private costs of the businesses plus +E.0TI=E EUTE8+05ITIE, The ne! kinds of technologies used in our modern age can disrupt the balance of nature. 0ll different plants and animals in a natural community are in a state of balance. This balance is achieved by the plants and animals interacting !ith each other and !ith their non#living surroundings. The plants of the community are the producers, they use carbon dioxide, !ater an nitrogen to build up their tissues using energy in the form of sunlight. The food relationship bet!een the different members of the community %plant#eating animals, flesh# eating animals& are kno!n as food chains or food !ebs. If !e intervene into this, !e can disrupt the balance of nature and cause global environmental damage.

#$ Deforestation
It has been estimated that tropical rainforests are being cut do!n and burned at the rate of ** million hectares a year # about 94 hectares a minute. 0t this rate all tropical rainforests !ill have disappeared !ithin QM years. 0s a result of the spread of environmental destruction some 9M44 plant species and more than *.*44 species and subspecies of mammals, birds, amphibians, reptiles and fish are threatened !ith extinction. <ntouched tropical forest could contribute to the balance of nature. If !e cut do!n most of the trees, !e can cause soil erosion" rain can !ash a!ay the fertile layer of the soil. 0fter this no plants can gro! there. ,o !e can disturb the balance of food chain.

%$ &ollution
'anufacturing and other business activities pollute the air, the !ater and the soil. 2hemicals and pollutants get into the air. Because of this acid rain may fall, !hich can damage plants and through plants animals, too. /ceans and seas cover ;4P of the !orld. They are heavily damaged by pollution, habitat destruction and overfishing.

)$ The depletion of the o-one layer$

The oBone layer shields the earth from excessive ultraviolet radiation. It becomes even thinner because of the frenon gas, !hich can be found, for example, in deodorants. 8ecently companies and firms make environment#friendly, oBone#friendly products. $e can find a sign, e.g. a globe sign on these.

*M

/$ The <reenhouse ;ffect

The greenhouse effect is caused by an increase in the amount of carbon dioxide in the atmosphere. It leads to changes in the Earth's climate. The amount of carbon dioxide in the atmosphere !ill double in the next M4 years and the temperature !orld!ide !ill rise by 9 2elsius. 0lthough a temperature rise of 9 2elsius may not seem significant, the local effects may be much greater" In polar regions a rise of *4 2 by 949M is expected and in +orthern Europe a rise of 3 2. The southern states of the <,0 can expect hotter summers and less rainfall, leading to !orse conditions in agriculture, and the 'editerranean region !ill be much drier and hotter than no!. 0s a conse uence of a temperature rise, the polar icecaps !ill start to melt and the oceans !ill expand as more sno! as ice melt. It is predicted that the level of the sea !ill have risen by 4.M to *.M metres by 949M and this !ill affect many lo!# lying areas of the !orld. 'illions of people today live less than one meter above the sea level. -erhaps the first effects are already being felt.

7$ =uclear po6er
$e use nuclear energy to produce electricity. But po!er stations make a lot of nuclear !aste too, and people have been afraid of the possible disasters since the 2hernobyl disaster. Besides, there is the problem of the safe disposal of radioactive !aste.

9$ The ><reens? as a political po6er

The .reen -arty1s share of the vote !ent up from Bero to *MP in the recent European elections. They are a radical political force and unlike other parties they are against nuclear po!er and nuclear !eapons. The .reen -arty attempts to exert pressure on public policy and to influence industry.

@$ ;nviron1ental pressure groups

The three main non political environmental pressure groups are the (riends of Earth, .reenpeace, and the $orld!ide (und for +ature %$$(D Term>sBetv>delmi =ilAgalap&. These organisations have been !orking for many years, raising funds and raising public a!areness of the need to protect the environment. Their activity is to propose specific solutions to specific problems. If a po!er station is planned or a ne! motor!ay is to be built, they !ant to make sure it is done !ith the least possible damage to the environment. 8ecently !e can choose environment#friendly, oBone#friendly products. 2ompanies that are not Tgreen' !ill lose business to those !ho have a green image. .reenpeace" -eaceful direct action by .reenpeace has invoked the po!er of public opinion !hich, in turn, has forced changes in the la! to protect !ildlife and to stop the pollution of the environment. 8ecent results" -rotest voyage into a nuclear test Bone # the test !as disrupted -rotection of the !hales # commercial !haling is banned

*N

-rotest against dropping barrels of radioactive !aste # dumping nuclear !aste and chemicals at a sea has been stopped.

*;

The ;uropean !nion

The European <nion, then kno!n as the European Economic 2ommunity, !as set up in *6MQ. The six member countries %$est .ermany, (rance, Italy, Belgium, the +etherlands and 5uxembourg& committed themselves, in the Treaty of 8ome, to establishing a 2ommon 'arket. By the late *664s the E< consisted of *M countries. They included the original six plus countries such as the <@, ,pain, Eire, .reece and ,!eden. 0t that time other countries such as ,lovenia, Kungary and Bulgaria !ere hoping to join in the future. Four basic types of econo1ic integration #$ Free trade area (FT"): Tariffs are abolished among (T0 members %there are no internal tariffs& but each member retains its o!n external tariff against non (T0 countries, eg. +0(T0, E(T0, %$ Custo1s union (C!): 'embers set a common policy for trade and tariff !ith non# members. The EE2 !as a customs union. )$ Co11on arket: 0bolition of restriction on mobility of production factors such as labour and capital. /$ Co1plete econo1ic integration: (iscal and monetary policies are unified to create even greater economic harmonisation. This level implies a degree of political integration. This is the direction in !hich the E< is moving. There are some advantages to businesses operating in countries belonging to a customs union or common market. (irms operating !ithin customs unions have free access to markets !hich !ould other!ise be protected by tariffs or uotas. In this !ay British firms, for example, have access to all other E< markets. (or many firms this provides them !ith the opportunity to operate in E< markets in much the same !ay that they !ould at home. (irms !ill have access to the most appropriate factors of production. 0 British firm might purchase cheap land in ,outhern -ortugal for a ne! factory location, skilled designers from Italy or capital e uipment from (rance. 2ustoms unions provide firms !ith large markets to sell to. The bigger the market a firm is selling to, the greater the economies of scale it is able to benefit from. The E< provides firms !ith access to 7N4 million consumers. Businesses operating !ithin a common market !ill be protected from competition from outside this area by an external business. ,uch protection allo!s businesses to be sheltered from the potentially damaging effects of competition such as price !ars. Increased competition from European firms may act as an incentive for British firms to increase efficiency and standards. There are, ho!ever, disadvantages for businesses operating !ithin a customs union or common market. Before Britain joined the E<, British firms could buy goods and services from the lo!est cost producers around the !orld. (oodstuffs !ere imported in huge uantities from +e! Vealand and the <,0 in this !ay. ,ince joining the E<, ho!ever, British

*Q

firms have had to pay far more for foodstuffs from +e! Vealand and 0ustralia because of the common external tariff. $hilst a British based firm !ill have free access to other E< markets, businesses based in these markets !ill also have access to the <@ market. ,uch competition may reduce the market share !hich domestic businesses have established. -rotection from external tariffs is not al!ays beneficial to firms operating from !ithin a common market. This is because being sheltered from external competition may result in less incentive for a firm to become more efficient. In the long run, this may lead to a deterioration in the firm's performance. (irms may have to adapt their marketing strategies to suit the needs of consumers in each country !ithin the customs union. (or example, surveys have found that of the thousands of products commonly sold in European supermarkets, only a small proportion are !idely on sale in identical format in at least the four largest countries.

The four freedo1s Free 1ove1ent of goods( services and capital: The first step in the creation of the internal market !as to eliminate all the customs duties levied on imports and exports bet!een the member states. In the E< goods, services move freely and at the same time common customs rules and rates are applied in relation to products and services coming from outside the area. 'ember states also succeeded in freeing all capital movements. Free 1ove1ent of persons: +ationals of countries !ho are signatories to the ,chengen 2onvention may move freely across borders !ithout passport or administrative re uirements. a( <eographical 1obility is a person1s right to go and stay in another member state to seek employment. b( Occupational 1obility covers people1s right to pursue !hatever occupation they !ish. c( Social integration refers to !orkers1 right to all the general !elfare benefits available in the given member state The Treaty of aastricht

The 'aastricht Treaty !as approved in *66*. It calls for establishing the European Economic and 'onetary <nion %E'<& and also a political union. The E'< is designed to result in a common currency. In order to introduce a common currency, member states should bring their monetary and fiscal policies closer together so that inflation rates, budget deficits as a percentage of .:- and public debt as a percentage of .:- !ould be reasonably similar. The political union involves a number of issues, such as a common European citiBenship, joint foreign, defence, immigration and policing policies and the harmonisation of social policy concerning !orking conditions and employees1 rights. ,ome countries, such as (rance and .ermany !ant closer European integration, others such as the <@ and :enmark !ant less centralised control.

*6

;! policies and business The European <nion has economic policies !hich are designed to help businesses !ithin member countries. These policies vary from employee protection and consumer protection to transport and energy policies. Kere !e !ill concentrate on three policies and their effects on business. The Co11on "gricultural &olicy (C"&): This policy operates in all E< countries and accounted for approximately half of the E<'s M64 billion budget in *66Q. 0rticle 76 of the Treaty of 8ome states M objectives of agricultural policy" to increase the productivity of agricultureD to ensure a fair standard of living for farmersD to stabilise marketsD to guarantee suppliesD to ensure fair prices. (armers are guaranteed a fixed minimum price by the E< for their produce. The E< !ill buy up any amount that farmers produce at this price. (armers could, of course, al!ays sell on !orld markets if the market price !as higher. If the market price drops belo! the minimum, ho!ever, 20- maintains the price to farmers, thus guaranteeing their income. (or farmers the 20- guarantees them a price for their produce so that they are not at the mercy of fluctuations in price. This means that fe!er farmers !ill go out of business during difficult years and, to some extent, their incomes !ill be guaranteed. The 20- has a number of problems associated !ith it. /verproduction" The setting of high, guaranteed prices has often caused excess supplies of a variety of agricultural products. 0ny excess supply is purchased by E< authorities. They prevent it from being sold on markets by storing it, resulting in butter mountains, !ine lakes etc. Kigh prices" The minimum price set by the E< for agricultural products as part of 20- is very often higher than the price !hich !ould have resulted !ithout their intervention. It is consumers and businesses such as food retailers !ho suffer as a result of these high prices. -urchasing excess supplies of agricultural products is expensive for the E<. It is possible that the money spent on this could be better diverted to projects such as providing grants to firms engaged in producing ne! high technology products. It prevents non#E< countries from competing in E< markets. It therefore represents an obstacle to the signing of international trading treaties. 4egional policy The 4egional Fund: This provides funds to member states to help reduce unemployment in depressed parts of the E<. It also aims to encourage development in areas on the edge of the E<, such as ,outhern Italy and +orthern Ireland. (or example, construction firms may !in contracts to build ne! roads, or industrial units could be financed through the 8egional (und. ,imilarly, firms may receive investment grants if they locate in particular parts of the E<.

94

Social policy The Social Chapter: The 'aastricht Treaty !as signed by all E< member states in :ecember *669. /ne section of this treaty is the ,ocial 2hapter. The aim of the ,ocial 2hapter is to standardise !orking conditions throughout the E< so that all !orkers !ithin the community are guaranteed basic rights. These include the follo!ing" 0 minimum !age to be paid to all !orkers. 0 maximum !orking !eek. 0 minimum paid holiday per year. The freedom to join a union. 0ccess to appropriate training. The right to be consulted and informed about company plans The protection of young !orkers. The <@ initially opted out of the ,ocial 2hapter, !hen all other E< nations signed it. Ko!ever, the <@ signed up to the ,ocial 2hapter after the election of a 5abour government in *66;. $hat might be the implications of the ,ocial 2hapter for businessesR $orkers may be better motivated. This should make them more effective and productive employees, able to raise the efficiency of the firm for !hich they !ork. Industrial relations may improve as employees are involved in making company decisions and consulted about the !ork !hich they carry out. It may raise the labour costs of those firms currently employing !orkers at !ages belo! the minimum level set out in the 2hapter. Those firms expecting their employees to !ork longer than maximum may also find their costs rise as they are re uired to employ more people. Kigher labour costs may make it more difficult for E< based firms to compete !ith businesses in lo! !age countries, such as 2hina or ,outh @orea. The Single ;uropean arket

0 major event in the E<'s move to!ards free trade !as the signing of the ,ingle European 0ct in *6QN, !hich established a ,I+.5E E<8/-E0+ '08@ET !hich came into being on 7* :ecember *669. :espite the existence of a customs union for over 74 years, there !ere still many non#tariff barriers to trade in the E<. This 0ct aimed to remove those barriers bet!een E< member countries. The effects of this should be to encourage the freer movement of people, goods, services and capital. Three categories of barriers !ere removed. Barriers 6hich prevented entry into 1arkets$ (or example, differing technical standards !ere re uired of products by different member states. This made it difficult for firms to enter certain markets. 0lso, the practice of public sector contracts being given only to domestic firms prevented free trade. Barriers 6hich caused fir1sA costs to rise$ /ften complex documents !ere needed in order to move goods from one country to another. 0lso, there !ere long delays !aiting to get exports through customs posts. Barriers 6hich lead to the 1arket being distorted$ ,uch barriers are said to prevent firms from competing on e ual terms. They included differing rates of =0T in E< countries and subsidies given by E< governments to domestic industries.

9*

+ot all firms have been affected to the same degree by the ,ingle 'arket. In some industries, very fe! barriers to trade existed bet!een E< countries before :ecember *669. (irms operating in such industries have seen little or no changes to their situation. Ko!ever, in other industries, !here trade barriers !ere high, the ,ingle 'arket has resulted in major changes for those firms operating !ithin them. $hat effects has the ,ingle 'arket had on firms in member countriesR -roduct standards. (irms have, for example, had to alter their products so that they meet ne! product standards. 'any firms have had to improve the safety aspects of their products in order to meet ne! E< regulations. Karmonisation of tariffs and taxes. There have been attempts to harmonise =0T rates throughout the E<. (or businesses this may mean that the selling prices of their products rise or fall in line !ith =0T rate changes. In the <@, a number of products such as childrens1 clothes and books, !hich had previously not attracted any =0T, no! have to face this tax as the <@ seeks to fall into line !ith other E< countries. 0ttempts have also been made to harmonise EU2I,E :<TIE, on products such as petrol, tobacco and spirits. This has affected the price at !hich these products are sold and, therefore, the businesses marketing them. Ease of trading. The reduction in the number of customs posts, and the amount of paper!ork !hich is re uired for goods traded bet!een E< countries, should save businesses time and reduce costs. The single European currency E<8/-E0+ '/+ET08L <+I/+ %E'<& became a reality in Oanuary, *666 !hen a single European currency !as introduced. 0t that time, eleven of the fifteen member states of the E< signed up to the single European currency, kno!n as the euro. (our member states of the E<, including the <@, delayed the decision to join the single currency in *666. They indicated that they !ould decide !hether or not to join at a later date. In *666 participating countries fixed their exchange rates so that they could not move against each other and against the euro. In 9449 euro notes and coins !ere to be available. In order to manage the single currency a European 2entral Bank %E2B&, based in (rankfurt, !as established. 0mongst other things the European 2entral Bank is responsible for setting interest rates throughout the eleven participating countries. It !as argued that European 'onetary <nion !ould have a number of benefits for businesses !ithin the euro Bone" " reduction in transactions costs: It is expensive for a business to change currencies !hen trading abroad. There are administration expenses in exchanging the currencies and possible charges. The costs of exchanging one currency for another are eliminated if all trading bet!een countries is done in euros. (or example, a (rench business exporting telecommunications e uipment to Italy !ill no longer have to convert Italian lira into (rench francs. It has been estimated that the savings made from the introduction of the single European currency !ould be bet!een 4.9M to 4.M percent of national income for a member country. " reduction in uncertainty: The uncertainties of trading are reduced for those businesses !ithin the euro Bone. It has been argued that greater stability !ithin the euro Bone !ould lead to greater confidence amongst businesses, thus leading to more trade bet!een member countries. /ne reason for stability is because there is no possibility of exchange rate fluctuations. (luctuations in exchange rates can make it difficult for importers and exporters to kno! !hat price they !ill receive or have to

99

pay for future transactions. (or example, a ,panish business that received the value of M44,444 lire instead of N44,444 for a sale as a result of a fall in the value of the pound !ill find that its profit margins are cut. ,ome businesses try to hedge against rising prices by stockpiling stocks of components, !hich can be expensive. It could also be argued that the control of monetary policy by the E2B !ould not lead to sudden, large changes in interest rates, for example. The control of interest rates to restrict inflation should also lead to more stable conditions in !hich businesses may operate. Businesses may also have a greater choice of finance if the euro encourages more investors in stock exchanges. Transparent prices: pricing all products and services in one currency makes price differentials for products in different countries more obvious. This may sho! that a company is offering good value for money in the products it is selling. 2ompanies that charge different prices in different countries may decide to reduce their prices to be more competitive, or to round up prices, !hich may increase profits. 2ompanies !ill also be able to see the prices of competitors more easily. erger activity: The introduction of a single currency !ill make cross#border mergers bet!een businesses in member countries easier. They !ill each have the same pricing and accounting system, !hich should help the coordination of the business.

&roble1s The i1pact of the ;CB: The European 2entral Bank's central role in setting interest rates and controlling monetary policy for all nations !ithin the euro Bone could have a damaging effect upon businesses. This is because the interest rates and monetary policy pursued by the E2B !ill reflect the needs of the member countries as a !hole. If there are inflationary pressures in the euro Bone the E2B is likely to pursue tight monetary polices, such as the raising of interest rates. Ko!ever, there may be particular countries !ithin the euro Bone !hich do not have inflationary pressures, but !hich are seeking to avoid recession. ,uch countries !ould also be subject to tight monetary policies, but for them it !ould be inappropriate. These policies could help drive these countries into recession !ith damaging effects for business.

;! institutions
The ;uropean Council is made up of the Keads of ,tate or Keads of .overnment and the -resident of the European 2ommission assisted by the (oreign 'inisters and a member of the 2ommission. It meets t!ice a year in the capital of the member country !hose head of state or government is currently the -resident of the 2ouncil of 'inisters. It does not make la!s and it is not involved in WroutineW decision making but it does make key political decisions on many of the most important, most sensitive, and most controversial matters facing the E<. The Council of inisters, based in Brussels, is the real po!er behind the bureaucracy. It is the main decision#making body. It is entrusted !ith deciding major policy issues for the E<. The ;uropean Co11ission !ith its head uarters in Brussels, is the E<'s !atchdog or Wcivil serviceW. Its commissioners are nominated by the governments of the E< countries for five# year rene!able terms. The 2ommission has various duties, five of !hich are of particular importance"

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Initiates E< policies. Kas major responsibilities !ith regard to the management, supervision and implementation of E< policies. Together !ith the 2ourt of Oustice ensures that E< la! is respected. 8epresents the E< in many of its external relations. 0cts as a mediator and conciliator.

The ;uropean &arlia1ent is elected by direct universal suffrage. It normally sits in ,trasbourg !here full plenary sessions, open to the press and public, are held for one !eek each month. The representatives are seated in -arliament by political party, not nationality. It functions as a political driving force and it is also a supervisory body !ith the po!er to approve the appointment of the European 2ommission and to dismiss it on a censure motion carried by a t!o#thirds majority. The Court of *ustice is the chief judicial body of the E<.

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;! ;Bpansion
Thirteen applicant countries are presently engaged in the process" Estonia, 5atvia, 5ithuania, -oland, the 2Bech 8epublic, ,lovakia, Kungary, ,lovenia, 8omania, Bulgaria, 'alta, 2yprus, Turkey. 0ccession negotiations are under !ay !ith the first t!elve, and the objective affirmed at the European 2ouncil in .?teborg is to complete them by the end of 9449 !ith those countries that are ready to join, so that they can take part as members in the European -arliament1s elections of 9443. ain Benefits The benefits of enlarging the <nion to include these countries are political, economic, and cultural. The extension of the Bone of peace, stability and prosperity in Europe !ill enhance the security of all its peoples. The addition of more than *44 million people, in rapidly gro!ing economies, to the E<1s market of 7;4 million !ill boost economic gro!th and create jobs in both old and ne! member states. There !ill be a better uality of life for citiBens throughout Europe as the ne! members adopt E< policies for protection of the environment and the fight against crime, drugs and illegal immigration. The arrival of ne! members !ill enrich the E< through increased cultural diversity, interchange of ideas, and better understanding of other peoples. Enlargement !ill strengthen the <nion1s role in !orld affairs X in foreign and security policy, trade policy, and the other fields of global governance. Benefits are already visible. In 2entral and Eastern Europe, stable democracies have emerged, !ith democratic institutions and increased respect for minorities. The economic reforms in these countries have led to high rates of economic gro!th %higher than the E<& and better employment prospects. This process has been helped and encouraged by the prospect of E< membership, and by the E<1s financial assistance. 0s a result the <nion enjoys gro!ing trade !ith these countries %Y*; billion trade surplus in 9444&, and this generates employment and gro!th in the member states. Conditions for Success To achieve these benefits, the conditions for a successful enlargement must be respected" The future members need to fulfil all the criteria for membership. The <nion needs to prepare itself ade uately to receive them.

The 2ommission makes regular assessments of the progress of the applicant countries. +one are yet fully ready, but all have made remarkable progress in the last decade. The criteria for membership !ere fixed by the European 2ouncil in 2openhagen and 'adrid" democracy, the

9M

rule of la!, human rights, respect for minoritiesD a functioning market economy, and the capacity to cope !ith competitive pressures, the ability to take on the obligations of membership %in other !ords, to apply effectively the E<1s rules and policies&. The <nion itself must prepare for the arrival of ne! members by" making the institutional changes necessary for enlargement. That means ratifying the Treaty of +iceD mean!hile, the applicant countries are already participating in the ongoing debate on the future of Europe. ;cono1ic "nalyses +umerous economic analyses have concluded that the benefits of enlargement out!eigh the costs. 0lthough the benefits are relatively larger for the acceding countries, because they start from a lo!er economic base %their economies represent only about NP of the .:- of E<# *M&, there are gains for both sides. 'oreover, the future members, already exposed to the challenge of globalisation, !ill help the <nion to surmount it. 0 key academic study in *66; by the 2entre for Economic -olicy 8esearch estimated that accession of countries of 2entral and Eastern Europe !ould X even in a conservative scenario X bring an economic gain for the E<#*M of Y*4 billion, and for the ne! members of Y 97 billion. The latest analysis of business circles argues that there are Zpotentially huge economic and business benefits of taking applicant countries into the E< as soon as possible1. 0 recent study of the 2ommission estimates that enlargement could increase the gro!th of .:- of the acceding countries by bet!een *.7 and 9.* percentage points annually, and for the existing members it could increase the level of .:- by 4.; percentage point on a cumulative basis. 2oncerning the budgetary conse uences of enlargement, the frame!ork has already been decided by the European 2ouncil in Berlin, and includes a modest amount %less than *4P& for transfers to the 2entral and East European countries for the period up to 944N. In the longer term, after 944N, expenditure !ill depend on a series of decisions to be taken in fields such as agricultural policy, etc. The increase in the budget resulting from enlargement !ill be a political rather than an economic issue. There have been several analyses of the impact of enlargement on the labour market and migratory flo!s. 0n extensive study made for the 2ommission suggested that only about 77M,444 people !ould move to the E<#*M countries from 2entral and Eastern Europe even if there !ere free movement of !orkers immediately on accession. In fact, the <nion has no! agreed on a flexible transition period of up to seven years for limiting the inflo! of !orkers from ne! member states. Costs of nonCenlarge1ent +on#enlargement, or a delay in enlargement, !ould have costs both for the <nion and for the applicant countries. :elay in enlarging the single market, and lo!er economic gro!th in the applicant countries, !ould deprive member states of economic benefits. (or the applicant countries failure to join the <nion !ould !eaken the incentive for economic reform, discourage foreign investment and reduce economic gro!th. It could thus create political

9N

instability in Europe, and even undermine the process of democratisation, !ith potential repercussions for the <nion. $ithout enlargement, the <nion !ould be less able to combat the problems of organised crime, illegal immigration and terrorism. :isillusion !ith the <nion in the applicant countries !ould feed Euroscepticism in the member states.

9;

8ungary and the ;!

"ccession in progress Kungary concluded an 0ssociation 0greement !ith the European 2ommunities in :ecember *66*, !hich has been in force since * (ebruary *663. The 0greement covers trade#related issues, political dialogue, legal approximation and other areas of co#operation, including industry, environment, transport and customs and aims at progressively establishing a free# trade area bet!een the E< and Kungary. In 'arch *663, Kungary !as the first country of the region to formally apply for E< membership. 0t the 5uxembourg European 2ouncil in :ecember *66; it !as finally decided to launch the accession negotiations !ith six of the applicant countries, among them Kungary. The negotiations !ith Kungary !ere launched on 74 'arch *66Q. ,ince then, Kungary has participated in eight meetings of the 0ccession 2onference at ministerial level. 0 so#called 8egular 8eport on the progress of each of the candidate countries on the !ay to!ards accession is published every autumn. In these reports, the 2ommission services identify the remaining shortcomings and tasks to be carried out prior to accession to meet the political, economic and legal W2openhagen criteriaW for accession, !ith particular emphasis on enforcement and institutional capacity. /n the basis of the 8egular 8eports, 0ccession -artnerships are dra!n up, !hich outline the most important short# and medium term priorities that have to be tackled by the respective candidate country in the near future. In :ecember 9444, the European 2ouncil in +ice endorsed a WroadmapW for the completion of the negotiations, including a calendar for dealing !ith all topics %so#called WchaptersW& over three -residencies from the beginning of 944* to mid#9449. This !ould enable the fulfilment of the European 2ouncil1s determination %stated at 5aeken in :ecember 944*& to bring the accession negotiations !ith the candidate countries that are ready to a successful conclusion by the end of 9449, so that those countries can take part in the European -arliament elections in 9443 as members follo!ing ratification of the accession treaty by the European -arliament and the -arliaments of the *M 'ember ,tates and of the candidate country. The European 2ouncil agreed !ith the report of the 2ommission, !hich considers that, if the present rate of progress of the negotiations and reforms in the candidate ,tates is maintained, 2yprus, Estonia, Kungary, 5atvia, 5ithuania, 'alta, -oland, the ,lovak 8epublic, the 2Bech 8epublic and ,lovenia could be ready. The negotiating process is accompanied by regular meetings of a number of bodies under the Europe 0greement, such as the 0ssociation 2ouncil and the 0ssociation 2ommittee , the E-# Kungary Ooint -arliamentary 2ommittee. These forums provide the occasion to revie! progress in Kungary1s preparations for accession, notably in the light of the 0ccession -artnership priorities, and in bilateral relations under the Europe 0greement. In addition, a system of sub#committees has been established as a forum for technical discussions.

9Q

&reC"ccession "ssistance (rom 9444 on!ards, the E< foresees a combined total of around Y 994 million of -re# accession assistance to Kungary on an annual basis from the three E< instruments. The -K08E programme that has been providing support to the countries of 2entral and Eastern Europe since *6Q6 allocated to Kungary Y * 474 million during the period *669 to *666, Y **6.Q million in 9444 and Y *4Q,Q million in 944*. In 9449 Kungary !ill be entitled to Y *94.; million. This figure includes the additional Institution Building allocation %Y 93,; million& in support of the 0ction -lan for 0dministrative and Oudicial 2apacity. *666 (unds !ere fully contracted by the end of ,eptember 944*. 9449 programming is advancing !ell and approximately Y 7Q million of Institution Building projects are ready for approval in (ebruary 9449. Kungary received Y QQ million from I,-0 %Instrument for structural policies for pre# accession& in 9444 and Y 64.Q million in 944*. The support !as roughly divided in e ual terms for environment and transport projects. :uring the first t!o years of its operation *44P of the I,-0 allocation has been committed. The Kungarian ,0-08: programme %,pecial 0ccession -rogramme for 0gricultural and 8ural :evelopment& !as adopted by the 2ommission in /ctober 9444. It foresees the improvement of the competitiveness of the agricultural sector and processing industry focusing on environmental protection and seeks to enhance the adaptation capabilities of rural areas. The average annual public expenditure !ill amount to Y M4.M during the period 9444#944N, of !hich Y 7Q.; million !ill be the E<#contribution.

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<lobalisation
Dhat is globalisationE .5/B05I,0TI/+ is the term used to describe the gro!ing integration of the !orld's economy. It is suggested that as globalisation takes place, national economies are becoming integrated into a single 'global economy' !ith similar characteristics. There are interrelationships throughout the !orld bet!een related businesses, bet!een competitors and bet!een businesses and consumers. :ecisions taken in one part of the !orld affect other parts. Businesses base decisions on !hat is happening in the '!orld market' rather than national markets. Evidence of the integration of the !orld's economy can perhaps be seen in businesses that design and market their products to a !orld market, such as 2oca#2ola. This product is sold in many countries throughout the !orld. 2onsumers in different countries recognise the product easily and have similar tastes for the product. 2oca#2ola is able to market its products !orld!ide. It has close relationships !ith businesses in other countries, some of !hich manufacture 2oca#2ola products. Three important aspects of globalisation might be identified" The gro6ing i1portance of international trade: Bet!een *6Q4 and *664 the volume of international trade almost doubled. In part, this can be accounted for by increases in production during the same period. Ko!ever, since *63M, increases in production have been far outstripped by increases in the volume of international trade. The rise of the 1ultinational business: The operation of multinational companies can be seen in many countries around the !orld. (amiliar products and brand names appear !orld!ide. This is a trend !hich accelerated in the latter part of the t!entieth century. (or example, by *66M the production of foreign branches of multinational companies generated [;,444 billion. This exceeded global exports of goods and services by 94 per cent. The operation and effects of multinationals are discussed later in this unit. The e1ergence of businesses 6hich think globally about their strategy " ,uch businesses base their strategic decisions on the global market rather than national markets. (or example, a business may make parts for a product in several different countries and assemble them in another because this is the most cost effective and efficient method to get the product to its consumers. They !ill tend to make use of their business's competitive advantage by locating production !herever it is most efficient. This means businesses !ith !idely spread net!orks of research, component production, assembly and distribution. Factors affecting globalisation It could be argued that certain factors have contributed to the gro!th of globalisation. Technological change has played an important role in globalising the !orld's economy. 'ore po!erful computers and communications technology have allo!ed the easy transfer of data. The internet is beginning to revolutionise the !ay in !hich consumers purchase products. The cost of transportation has fallen$ The deregulation of business: Throughout the *6Q4s and *664s many businesses !ere privatised in countries throughout the !orld. The removal of restrictions on foreign businesses operating in former communist countries also increased the ability of businesses to operate globally. +e! markets such as po!er generation !ere opened up to foreign competition. The liberalisation of trade: Trade protection has been reduced due to the operation of organisations such as the $T/. Consu1er tastes and their responses have changed: 2onsumers in many countries are more !illing to buy foreign products. The gro6th of e1erging 1arkets and co1petition: +e! markets have opened up in countries that have seen a gro!th in their national income. Examples might include countries in ,outh East 0sia and the more successful former communist countries in Eastern Europe. 0s businesses in these countries have become more successful, they have been able to compete in $estern economies. The effects of globalisation on business .lobalisation has had many effects upon businesses throughout the !orld. The impact of globalisation has not been evenly spread. ,ome business, for example those in telecommunications, have !itnessed dramatic

74

changes. /thers, such as small businesses serving niche markets in localised areas, may have been little affected by globalisation. There is a number of effects of globalisation upon businesses. ,ome provide opportunities !hilst others present threats" Co1petition: The impact of globalisation on many larger businesses has been to dramatically increase the level of competition !hich they face. There is a number of reasons for this" (oreign competition has increasingly entered markets previously served mainly or exclusively by domestic businesses. :eregulation has meant that many businesses !hich previously had little or no competition are no! opened up to the forces of global competition .lobalisation has provided opportunities for ne!, innovative businesses to enter markets and compete !ith all comers including !ell established industry leaders. (or example, 'icrosoft, Intel, 2ompa and :ell, all relative ne!comers to the computer industry, !ere able to compete effectively against the market leader IB'. KL-E82/'-ETITI/+ has been used to describe competition in the ne! global economy. This term refers to the disruption of existing markets by flexible, fast moving businesses. eeting consu1er eBpectations and tastes: 2ompetition by businesses seeking to meet customer needs in increasingly effective !ays has raised customer expectations in many markets. Businesses must no! meet ever greater consumer demands about uality, service and price. They must also provide the greater choice of products expected by purchasers. The global market has made predicting consumer preferences more difficult. (or example, fe! businesses predicted the huge rise in the popularity of mobile phones or the speed !ith !hich consumers !ould accept the internet. ;cono1ies of scale: Businesses able to build a global presence are likely to enjoy a larger scale of operations. This !ill enable them to spread their fixed costs over a larger volume of output and reduce unit output costs. 0 larger scale of operations also allo!s businesses to exercise po!er over suppliers and benefit from reduced costs. (or example, global hotel chains such as Koliday Inn and 'arriott are in a position to benefit from volume discounts from catering supply companies. Choice of location: Businesses !ith a global presence can choose the most advantageous location for each of its operations. $hen locating its operations, a business may consider" 8eduction of costs. (or example, +ike's decision to locate its shoe manufacturing operations in countries such as 2hina and =ietnam !as perhaps based on cost reduction factorsD Enhancement of the business's performance. -roduction and service facilities are located in parts of the !orld !hich are likely to improve factors such as product or service uality. (or example, 'icrosoft may have taken this into account !hen deciding to locate its research laboratories in 2ambridge. ergers and Foint ventures: Businesses are increasingly merging or joining !ith others often in other countries, in order to better provide its goods or services to a global market. Both manufactures and retailers are operating on a global basis. 0 manufacturer, for example, may merge !ith another in order to make products in the country in !hich they !ill be sold. ultinationals 0 '<5TI+0TI/+05 company is an organisation !hich o!ns or controls production or service facilities outside the country in !hich it is based. This means that they do not just export their products abroad, but actually o!n production facilities in other countries. These companies usually have interests in at least four countries, but there are many !hich operate in a huge range of countries throughout the !orld. There is a number of reasons !hy firms become multinationals" To avoid protectionist policies. By actually producing !ithin a particular country, a firm can usually avoid any tariffs or uotas !hich that country may impose. This is !hy Oapanese car firms, such as +issan, Toyota and Konda, have established themselves !ithin E< countries in recent years. The globalisation of markets. +ational boundaries, many believe, are becoming irrelevant for firms as instant communications and high speed travel make the !orld seem smaller. This is sometimes referred

7*

to as the 'global village'. 'ultinationals, !hich are global or international in outlook, are the ideal type of business organisation to take advantage of this situation. The influence of 1ultinationals There is great debate as to the actual effects of multinationals. $hilst there are clear benefits of multinationals operating in a particular country, there are also a number of problems associated !ith them. The balance of pay1ents and e1ploy1ent: /ne benefit of multinationals is their ability to create jobs. This, along !ith the manufacturing capacity !hich they create, can increase the .+- of countries and add to the standard of living. 0s !ell as this, multinationals benefit the balance of payments of a country if their products are sold abroad. The setting#up of a car manufacturing plant by Toyota in :erby helps to illustrate this. +ot only has this plant created jobs, but it has raised the .+- of the <@. The balance of payments has also been helped as a large proportion of the :erby plant's cars are shipped out to other E< nations. Ko!ever, !hilst multinationals can create jobs, they are also capable of causing unemployment for t!o reasons. (irst, they create competition for domestic firms. This may be beneficial, causing local firms to improve their efficiency, but it can also be a problem if it results in these firms cutting their labour force or closing do!n plants. ,econd, multinationals often shift production facilities from one country to another in order to further their o!n ends. The effect of this is that jobs are lost and production is either reduced or completely stopped. In addition, multinationals can have a negative impact upon the balance of payments. This is because many of them receive huge amounts of components from their branches abroad, thus adding to the total uantity of imports. Technology and eBpertise: 'ultinationals may introduce ne! technology, production processes and management styles and techni ues. This has been one of the benefits to $estern countries of Oapanese multinationals. Techni ues such as in#time stock control and management methods such as uality control circles have been successfully used by Oapanese firms in foreign countries. ,uch techni ues have also been adopted by home based firms. These raise the standards of local firms !ho become a!are of these ne! developments. The process by !hich multinationals benefit countries in this respect is kno!n as technology transfer. Technology transfer can be especially important to developing countries, !hich may lack technical expertise and kno!#ho!. Ko!ever, this is not al!ays the case. 'anagers and supervisors are often brought in from the multinationals' home country, !ith little training being given to locally recruited staff. 0s a conse uence locals may be employed in lo! skilled jobs. <overn1ent control: Because of the siBe and financial po!er of many multinationals, there are concerns about the ability of governments to control them. (or example, they may be able to avoid paying corporation tax in particular countries. Taxation can be avoided by the use of T80+,(E8 -8I2I+.. This involves declaring higher profits in those countries !ith lo!er taxation levels, thus reducing the overall tax bill. 0 company may charge subsidiary branches in lo! taxation countries lo! prices for components bought from overseas branches of the same firm. This means that costs in the lo! tax country are kept lo! and high profits can be declared. ,imilarly, subsidiary branches in high tax countries are charged high prices for components bought in from overseas branches. This means little or no profit is recorded.

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Free Trade versus &rotectionis1

Text * The mutual benefits that international trade can provide to all countries participating in it are obvious. To see ho! countries gain from trade, !e can use a very simple example !hich involves only t!o countries. Because of the difference in their climatic conditions. one can produce oranges and the other apples. $ithout trade, people in each country !ould be restricted to the consumption of only one kind of fruit. $ith the free exchange of goods bet!een them, they have the choice bet!een oranges or apples. ,ince countries have different uantities of various productive resources, it is necessary for them to distribute them among themselves. Thus, for example in country 0, labour may be scarce and expensive, but capital is plentiful, !hile in country B it may be the other !ay round. It !ill then be natural for country 0 to utilise the cheap labour of country B, and for country B to make use of country 0's surplus capital. This makes it easy to see ho! specialiBation # more detailed division of labour # among nations becomes possible. The advantages of trade make it possible for each nation to participate # in different degrees # in the global production of goods. Oapanese cars, Italian shoes, ,!iss !atches, and 8ussian vodka are available all over the !orld. :espite the apparent benefits of international trade, governments have erected a variety of barriers to free trade over the years, so that economists sometimes seem to stand alone in their defense of the principle of free trade. The major arguments against free trade are centred on the defense of some national interest" the protection of the country's economy or the defense of the national security. The protection of the infant industry is a popular argument for protection. The idea is that the government should allo! emerging industries to gro! in a market protected from harsh international competition. -rotectionism can be justified to a certain extent # on economic grounds # still it is not the best policy. 2onsumers !ill have to pay higher prices, and subsidies provided to the industries that the government !ants to protect may be used inefficiently. ,ome European governments provide massive subsidies to many of their basic industries at a far higher cost than can be justified by the benefits. 0nother argument for protection is the employment argument. 0dvocates of protectionism argue that employment in certain industries is threatened by foreign imports, and it is the government's duty to provide assistance to these industries by imposing protective tariffs or setting import uotas. But if !e cut back on imports, then output and employment in our export industries !ill also fall in the long run. 0nd !orse, protection discourages !orkers and managers from adjusting to the realities of foreign competition. -olitical considerations !ill often induce governments to impose embargoes. The problem !ith embargoes is that they can easily backfire. 0n embargo may be almost as damaging to the country that imposes it as to the one on !hich it is imposed. The smaller a country # the more vulnerable it is to embargoes, !hile big nations are not very sensitive to them. 'ore important, ho!ever, is the fact that effective embargoes are rare. \uite often nations disregarding these trade restrictions may benefit from an embargo against a country.

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:espite the advantages that free trade can give and the difficulties that tariffs, uotas and embargoes can cause, most governments have imposed a vast number of restrictions on international trade around the !orld. The reason for this is that countries are not in the same economic situation, and they !ill formulate their policies in their o!n best interests. Thus, as long as there are economic ine ualities and conflicting interests bet!een the nations, the interpretation of the freedom of trade !ill be different. Text 9. The majority of economists believe in the comparative cost principle, !hich proposes that all nations !ill raise their living standards and real income if they specialiBe in the production of those goods and services in !hich they have the highest relative productivity. +ations may have an absolute or a comparative advantage in producing goods or services because of factors of production %notably ra! materials&, climate, division of labour, economies of scale, and so forth. This theory explains !hy there is international trade bet!een +orth and ,outh, e.g. semiconductors going from the <,0 to BraBil, and coffee going in the opposite direction. But it does not explain the fact that over ;MP of the exports of the advanced industrial countries go to other similar advanced nations, !ith similar resources, !age rates, and levels of technology, education, and capital. It is more a historical accident than a result of natural resources that the <, leads in building aircraft, semiconductors, computers and soft!are, !hile .ermany makes luxury automobiles, machine tools and cameras. Ko!ever the economists !ho recommend free trade do not face elections every four or five years. :emocratic governments do, !hich often encourages them to impose tariffs and uotas in order to protect !hat they see as strategic industries # notably agriculture # !ithout !hich the country !ould be in danger if there !as a !ar, as !ell as other jobs. 0bandoning all sectors in !hich a country does not have a comparative advantage is likely to lead to structural unemployment in the short %and sometimes medium and long& term. /ther reasons for imposing tariffs include the follo!ing" To make imports more expensive than home#produced substitutes, and thereby reduce a balance of payments deficitD 0s a protection against dumping %the selling of goods abroad at belo! cost price in order to destroy or !eaken competitors or to earn foreign currency to pay for necessary imports&D To retaliate against restrictions imposed by other countries. To protect infant industries until they are large enough to achieve economies of scale and strong enough to compete internationally. $ith tariffs, it is impossible to kno! the uantity that !ill be imported, because prices might be elastic. $ith uotas, governments can set a limit to imports. Let unlike tariffs, uotas provide no revenue for the government. /ther non#tariff barriers that some countries use include so#called safety norms, and the deliberate creation of customs difficulties and delays. The .eneral 0greement on Tariffs and Trade %.0TT& had the objectives of encouraging international trade, of making tariffs the only form of protectionism, and of reducing these as

73

much as possible. The most favoured nation clause of the .0TT agreement specified that countries could not have favoured trading partners, but had to grant e ually favourable conditions to all trading partners. The successor of .0TT is the $orld Trade /rganiBation. It took nearly M4 years to arrive at the final .0TT agreement because until the *6Q4s, most developing countries opposed free trade. They !anted to industrialiBe in order to counteract !hat they rightly sa! as an inevitable fall in commodity prices. They practised import substitution %producing and protecting goods that cost more than those made abroad&, and imposed high tariff barriers to protect their infant industries. +o!adays, ho!ever, many developing countries have huge debts !ith $estern commercial banks on !hich they are unable to pay the interest, let alone repay the principal. Thus they need to rollover %or rene!& the loans, to reschedule %or postpone& repayments, or to borro! further money from the International 'onetary (und, often just to pay the interest on existing loans. <nder these circumstances, the I'( imposes severe conditions, usually including the obligation to export as much as possible. \uite apart from I'( pressure. Third $orld governments are a!are of the export successes of the East 0sian 'Tiger' economies %Kong @ong, ,ingapore, ,outh @orea and Tai!an&, and of the collapse of the ,oviet economic model. They !ere afraid of being excluded from the !orld trading system by the development of trading blocks such as the European <nion, finaliBed by the 'aastricht Treaty, and the +orth 0merican (ree Trade 0greement %+0(T0&, both signed in the early *664s. ,o they tended to liberaliBe their economies, lo!ering trade barriers and opening up to international trade.

7M

"4:;TG=<
#$ Definition of 1arketing
'arketing is the management process responsible for identifying, anticipating and satisfying customers1 re uirements profitably. 'arketers have to identify or anticipate consumer needs, develop products or services that meet the needs better than any competing products or services. They also need to persuade target customers to try the product or service. In the long term they may need to modify their products or services to satisfy changes in consumer needs and market conditions. 'arketers can design particular features, attractive packaging, and effective advertising, that !ill influence consumers' !ants. 'arketing thus combines market research, ne! product development, distribution, advertising, promotion, product improvement and so on.

%$ The selling concept versus the 1arketing concept

'ost management and marketing !riters no! distinguish bet!een selling and marketing . The selling concept assumes that resisting consumers have to be persuaded by vigorous hard# selling techni ues to buy non#essential goods and services. -roducts are sold rather than bought. The marketing concept, on the contrary, assumes that a company's choice of !hat goods and services to offer should be based an the goal of satisfying consumers' needs.

)$ Gdentifying 1arket opportunities H 1arket research

'arketers are al!ays looking for market opportunities # profitable possibilities of filling unsatisfied needs or creating ne! ones in areas in !hich the company is likely to enjoy a competitive or differential advantage %an advantage over competitors in terms of uality, price distribution etc.& 8ather than risk launching a product or service only on the basis of intuition, most companies undertake market research. They collect and analyse information about the siBe of the potential market, about consumers1 reactions to particular product and service features, and so on There are four basic research methods used by marketers" Observation: 8esearchers monitor particular situations or actions of consumers. Today computerised systems allo! marketers to observe consumers' preferences. Survey: $hen conducting a survey marketers need to ask uestions about ne! marketing ideas, product or service preferences. The heart of any survey is a uestionnaire that is mailed to the consumers or is used as the basis of a telephone or personal intervie!. Focus groups: 'embers of the target market %N to *M individuals& are invited to discuss a product concept. ;Bperi1ental research: This can be used to compare responses to the products and services under different circumstances.

7N

'arket segmentation is used to divide the market into distinct groups of buyers !ho have different re uirements or buying habits. /nce a target market has been identified and market research has been conducted, the company has to decide !hat products or services offer.

/$ The 1arketing 1iB

/nce the basic offer, e.g. a product concept has been established, the company has to think about the marketing mix, i.e., all the various elements of a marketing programme. The best kno!n classification of these elements is the T3 -s' " product, % uality, features, style, brand name, siBe, packaging, services and guarantee&, place, %distribution channels, locations of points of sale, transport, inventory siBe, etc.& promotion %advertisingD publicity, sales promotion, and personal selling, & and price %basic list price, discounts, the length of payment period, possible credit terms and so on&. The marketing mix can. be changed during the life of the product if necessary.

7$

arket structure and co1petition

$hen developing and marketing products, companies need to consider competition in the given target market. arket leader: This is the highest market share company !hich retains its position by trying to expand the total market or its market penetration, for example through an aggressive advertising campaign. arket challenger: /ne or more non#market leaders !hich aggressively attack for additional market share. arket follo6er: These are lo! share competitors !ithout the resources to challenge or seriously contend for market leadership.

9$ The pro1otion 1iB

Even a good, attractively priced product has to be made kno!n to its target customers. :uring the introduction and gro!th stages of the standard product life cycle, the producer or the company has to develop product or brand a!areness, inform potential customers or the other members of the distribution channel. "dvertising informs consumers about the existence and benefits of products and services, and attempts to persuade them to buy them. Informative advertising tells us !hat goods are available and gives the facts about them so that a consumer can choose the article that suits him best. 2ompetitive or persuasive advertising tries to persuade people to buy the goods !hether or not they !ant them. Sales pro1otion such as free samples, coupons, price reductions, competitions, and so on are temporary tactics designed to stimulate the sales of the product. (ree samples

7;

combined !ith advertising may generate the initial trial of a ne! product in the introductory stage of the product life#cycle. :uring the maturity and the decline stages marketers can try out promotional tactics such as reduced price packs, discounts, competitions, free gifts, premiums, coupons, special offers, games, and so on. &ublic 4elations (&4) is concerned !ith maintaining, improving or protecting the image of a company or product. /ne of the most important elements of -8 is publicity !hich is any mention of the company1s or product1s name that is not paid for. 'any companies attempt to place stories %e.g. ne!s releases& or information in ne!s media to attract attention to a product or service. -ublicity can have a huge impact on public a!areness that could not be achieved by advertising, or at least not !ithout an enormous cost. 0 lot of research sho!s that people are more likely to read and believe publicity than advertising. &ersonal selling is said to be uite expensive. ,ales people spread information about the company1s products and services and assist customers !ith possible technical problems.

@$ "dvertising 1edia
0dvertising media can be divided into the follo!ing categories" The print media %ne!spapers, magaBines, direct mail& The broadcast media % radio and television& /ther advertising media" outdoor advertising % posters, illuminated signs& transit advertising, point of purchase displays in shops, and so on. ediu1 =e6spapers ;Ba1ples of Cost [96,Q44 for one page, !eekday 2hicago Tribune [*,M44 for 74 seconds of prime time in 2hicago "dvantages flexibilityD timelinessD good local market coverageD high believability combines sight, sound and motionD appealing to the sensesD high attention, high reach audience selectivityD flexibilityD no ad competition !ithin the same mediumD personaliBation 0i1itations short lifeD poor reproduction ualityD small pass# along audience high absolute costD high clutterD fleeting exposure, less audience selectivity relatively high cost, junk mail image

Television

Direct 1ail

[*,M94 for the names and addresses of 34,444 veterinarians

7Q

4adio

aga-ines

[;44 for one minute of drive time %during commuting hours, 0.'. and -.'.& in 2hicago [Q3,764 for one page four#color, in +e!s!eek

mass useD high geographic and demographic selectivityD lo! cost

audio presentation onlyD lo!er attention than T=D fleeting exposure long ad purchase lead timeD no guarantee of position

Outdoor

high geographic and demographic selectivityD credibility and prestige, high uality reproductionD long lifeD good pass# along readership [9M,M44 per month flexibilityD high for ;* billboards in repeat exposureD metropolitan lo! costD lo! 2hicago competition

no audience selectivity

I$ Branding
Branded goods are marked !ith a distinctive name andIor design. 0 brand is a name, term, sign, symbol, or design, or a combination of these to identify the goods or services of one seller, or a group of sellers. 0ccordingly, there are product brands and service brands. /ne of the most important functions of branding is to differentiate the given products or services from those of competitors1. This is referred to as brand differentiation. 0 brand na1e is that part of a brand !hich can be vocaliBed X the utterable. Examples are 0von, 2hevrolet, :isneyland, 0merican Express etc. 0 brand 1ark is that part of a brand !hich can be recogniBed but is not utterable, such as a symbol, design, or distinctive coloring or lettering. Examples are the 'etro#.old!yn#'ayer lion, and the red @ on a @odak film box. 0 brand label is a simple tag or complex design %graphics& attached to the product. The label might carry only the brand name, and also a great deal of information. Brand loyalty refers to the degree to !hich a consumer purchases a certain brand !ithout considering alternatives. /n the other hand, the term brand s6itching is used to describe consumer behaviour !hen consumers are not loyal to a specific brand in a given product category. They are ready to purchase alternative brands as !ell. Brand i1age is the set of beliefs consumers hold about a particular brand. Brand eJuity refers to the value of ho! such people as consumers, distributors, and sales people think and feel about the brand relative to its competitors over a period of time.

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TaBation
There are several important economic factors that influence management decisions, such as economic gro!th, inflation, unemployment, the Balance of -ayments, taxation etc. In the life of a state, government spending has to be financed either by taxation or by borro!ing money. Taxation is essential and can't be avoided. It may be imposed on income, expenditure, capital gains or !ealth. :I8E2T taxes are levied on income and !ealth %income tax, corporation tax&. I+:I8E2T taxes are levied on spending money %excise duties, =0T&. There is a tendency to associate direct taxation !ith progressive taxation and indirect taxation !ith regressive taxation" -8/.8E,,I=E taxes take a higher percentage of a person's income as income rises. %2ombined !ith !elfare payments they can be used to redistribute income in favour of lo! income groups&. 8E.8E,,I=E taxation means that the gro!th of taxes per cent is smaller than income rises per cent. $e speak about 5I+E08 taxation !hen the gro!th percentage of taxes is e ual !ith the gro!th percentage of income. The main forms of taxation used in the <@ are the follo!ing" I+2/'E T0U" 2harged on all incomes from !ork and self employment above an amount. This amount is dictated by a personal allo!ance plus allo!ances for certain other items such as pension fund premium, etc. T!o rates are charged, a standard rate of 9M per cent to a set amount of taxable income and a 34 per cent rate on income above that level. It directly impacts upon sole traders and partners, and in addition has an indirect impact on all businesses %it reduces the disposable income of consumers&. 2/8-/80TI/+ T0U" 2harged on profits earned by companies. ,mall firms currently pay a lo!er rate than larger ones. 20-IT05 .0I+, T0U" 5evied on the increase in the value of capital !hen it is sold. =0T %=05<E 0::E: T0U&" This is a charge on the value added at each stage of the production process. =0T paid by firms on the cost of inputs is reclaimable. The result is a tax on expenditure by the end user. The current rate is *9#9MP, !ith a Bero rate on certain items like food and children's clothes. 2ertain other goods are tax exempt !hich means that though they don't have to pay =0T on their sales they are not allo!ed to obtain refunds of taxes paid at previous stages of the production process. The E< directives help to harmonise taxation in the ,ingle 'arket. EU2I,E :<TIE," 2hargeable on certain products such as tobacco, !ines and spirits.

34

I+KE8IT0+2E T0U" 0 tax is charged on assets above a given amount !hich are inherited. :omestic householders and businesses pay taxation related to capital values %they are subject to a nationally set rate linked to capital values&. The business rate raises costs and thereby reduces profits for distribution. /ther taxes !orthy of mention" *. +ational Insurance 2ontributions" the employer's contribution is a payroll tax 9. =ehicle Excise :uty on vehicle o!nership, 7. +orth ,ea Taxes %petroleum revenue tax and oil royalties&" levied on oil production. T0U0TI/+ %0+: K/$ T/ 0=/I: IT]&
The primary function of taxation is, of course, to raise revenue to finance government expenditure, but taxes can also have other purposes. Indirect excise duties, for example, can be designed to dissuade people from smoking, drinking alcohol, and so on. .overnments can also encourage capital investment by permitting various methods of accelerated depreciation accounting that allo! companies to deduct more of the cost of investments from their profits, and conse uently reduce their tax bills. There is al!ays a lot of debate as to the fairness of tax systems. Business profits, for example, are generally taxed t!ice" companies pay tax on their profits %corporation tax in Britain, income tax in the <,0&, and shareholders pay income tax on dividends. Income taxes in most countries are progressive, and are one of the !ays in !hich governments can redistribute !ealth. The problem !ith progressive taxes is that the marginal rate # the tax people pay on any additional income # is al!ays high, !hich is generally a disincentive to both !orking and investing. The higher the tax rates, the more people are tempted to cheat, but there is a substantial 'black' or 'underground' economy nearly every!here. In Italy, for example, self#employed people # !hose income is more difficult to control than that of company employees # account for more than half of national income. 5ots of people also have undeclared, part#time evening jobs %some people call this 'moonlighting'& !ith small and medium#siBed family firms, on !hich no one pays any tax or national insurance. 0t the end of *6QN, the :irector of the Italian +ational Institute of ,tatistics calculated the siBe of the underground economy, and added *N.;P to Italy's gross national product %.+-& figure, and then claimed that Italy had overtaken Britain to become the !orld's fifth largest economy. To reduce income tax liability, some employers give highly#paid employees lots of 'perks' %short for per uisites& instead of taxable money, such as company cars, free health insurance, and subsidiBed lunches. 5egal !ays of avoiding tax, such as these, are kno!n as loopholes in tax la!s. 5ife insurance policies, pension plans and other investments by !hich individuals can postpone the payment of tax, are kno!n as tax shelters. :onations to charities that can be subtracted from the income on !hich tax is calculated are described as tax#deductible. 2ompanies have a variety of !ays of avoiding tax on profits. They can bring for!ard capital expenditure %on ne! factories, machines, and so on& so that at the end of the year all the profits have been used upD this is kno!n as making a tax loss. 'ultinational companies often set up their head offices in countries such as 5iechtenstein, 'onaco, the 2ayman Islands, and the Bahamas, !here taxes are lo!D such countries are kno!n as tax havens. 2riminal organiBations, mean!hile, tend to pass money through a series of companies in very complicated transactions in order to disguise its origin from tax inspectors # and the policeD this is kno!n as laundering money.

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Teleco11unications
#$ Gntroduction The telecommunications industry is a fast gro!ing sector. 0ccording to the International Telecommunication <nion %IT<&, industry revenues have steadily increased to reach an all# time high of [*.7; trillion in 9447. There are *.9 billion fixed telephone lines, and *.7 billion people carry mobile phones of decreasing siBe and increasing complexity. 0round NNMm people no! have access to the internet. 2onsumer spending on telecommunications is gro!ing faster than spending in any other category. .lobally, one person in five no! has a mobile phoneD in parts of Europe and 0sia, !here mobiles are most popular, around Q4P of the population # or everyone bet!een the ages of *4 and Q4 # carries one. 0merica is a laggard, !ith mobile#phone penetration at around M4P, but it is catching up. +okia has become the !orld's largest handset maker, !ith nearly 34P of the market. Today's most advanced mobile phones are tiny. They are, in effect, pocket comput# ers, and include all kinds of ne! features such as still and video cameras, colour screens, internet access and games. 'obile telephony is gro!ing fastest in the developing !orld, !here many people's first phone is a mobile. $ireless net!orks can be established more uickly and cheaply than !ired ones, because there is no need to run a !ire into every subscriber's home. 'obile phones are booming in 2hina, !hich no! has more than 944m subscribers # a larger number than any other country # and is adding ne! ones at the rate of Mm a month. But mobile penetration is still lo!, at only *QP, so this gro!th !ill continue for the rest of the decade. There is also vast scope for gro!th in India, !here penetration is just *P but mobile phones are at last taking off. 0ccording to Telecompetition, a market#research firm, 2hina and India !ill account for N4P of ne! mobile subscribers bet!een no! and 94*4. 0nother booming region is central and eastern Europe, !here mobile telephony provides a !ay to bypass fixed#line infrastructure from the ,oviet era. /nce a mobile net!ork is up and running, all that subscribers have to do is buy a handset. -re#paid cards and the sharing of handsets among many users have brought telephony !ithin almost universal reach. %$ Dhat are the proble1s in the sectorE :espite all these good signs, over the past couple of years, fraud, bankruptcy, debt and destruction of shareholder value have become !idespread in the industry. :oBens of firms have gone bankrupt, including .lobal 2rossing, 7N4net!orks, $illiams 2ommunications, =iatel and $orld2om, !hose bankruptcy last year !as the biggest ever. Kundreds of thousands of !orkers in the industry, and particularly at telecoms#e uipment makers, have lost their jobs. )$ Dhat caused the proble1sE 0lthough the industry has continued to gro!, it has not done so in the manner, and above all not to the extent that those in the industry expected. Telecoms is an infrastructure#intensive

39

business, and because infrastructure takes a long time to build, telecoms firms have to predict future demand. Ko!ever, demand !as overestimated in the late *664s. The rise of the internet persuaded many investors that demand for data#net!ork capacity across continents !as about to explode. ,ince *66;, internet traffic has roughly doubled every year. 'uch of the industry, ho!ever, !as convinced that traffic !as doubling every *44 days. :oBens of firms rushed to build ne! fibreoptic net!orks in 0merica, Europe and 0sia. But apart from a brief period in *66M#6N, the figure !as simply !rong. 0s upstart firms spent on vast infrastructure investments, the incumbents in many countries tried to transform themselves into global operators. They expanded their existing net!orks and bought stakes in foreign operators, running up debts in the process. 'ean!hile, European firms thought that the expected increase in demand for fixed#communications capacity !ould be accompanied by a similar increase in demand for mobile capacity, and paid Y*46 billion %[*9M billion& for licences to operate Wthird#generationW %7.& mobile net!orks. They, too, took on debts and they !ere !rong as they overestimated demand. 0round [*M4 billion !as spent building unnecessary telecoms net!orks in 0merica and another [M4 billion in other parts of the !orld. $hen it became clear that the predicted explosion of demand !as not going to happen, operators frantically cut their prices. E uipment#makers' sales collapsed and their share prices tumbled. 2ompanies started to use illegal means to avoid bankruptcy and keep investors. $orld2om set a ne! record for accounting fraud, misclassifying capital expenditure as operating costs and overstating profits by [** billion. $hen it !as found out, the company crashed spectacularly. )$ S S Texting first took off among cost#conscious teenagers. 'ore than one billion text messages are no! sent every day around the !orld, at an average cost of around *4 cents. 8ingtones and screen logos can also be delivered by text message, but cost more. 0ll these messages add up to a huge industry that generates about [34 billion a year. The average mobile#phone subscriber sends 74 messages a month, though in some countries the figure is far higher %9M4 messages a month in ,ingapore& and in others lo!er %seven messages a month in 0merica&. /utside 0merica, the success of texting has been a godsend for operators. Text messages, !hich are limited to *N4 characters in length, re uire minuscule amounts of net!ork capacity and are hugely lucrative. Text#messaging no! accounts for 94P of some operators' revenues, a !indfall that has helped to make up for declining revenues from voice calls. /$ D"& The trouble began !ith $ireless 0ccess -rotocol %$0-&, a simple form of !eb#bro!sing designed for mobile phones, !hich !as introduced by operators !orld!ide from *666. $0!as described as a mobile version of the internet, !hen in fact it !as nothing of the sort. Establishing a connection on a $0- phone and do!nloading any of the limited content

37

available took far too long, and mobile handsets had tiny monochrome screens, !hich further heightened users' frustration. +o !onder $0- !as a flop. 7$ )D technology Let the industry !ent on making the same mistake, promoting technologies rather than creating useful services using those technologies. In 9444, this obsession !ith ne! technology caused Europe's mobile#phone industry to get carried a!ay in buying licences to operate third#generation %7.& mobile net!orks, !hich can support higher voice capacity and faster data do!nloads than existing 9. net!orks. European operators agreed to pay a total of Y*46 billion %[*9M billion& for 7. licences. It soon became clear that paying so much for 7. licences had been a huge mistake. 0s their share prices collapsed, mobile operators !rote do!n the value of their 7. licences. ,ome even handed the licences back to the governments from !hich they had bought them, rather than commit themselves to building expensive ne! 7. net!orks. But !hereas 7. has so far proved an expensive mistake, text#messaging has been a spectacular success, sho!ing that consumers are prepared to use their phones for more than just voice calls after all. Texting took off unexpectedly, !ithout any marketing by operators, but it has no! become a core part of their businesses. (or users, the appeal of texting is that it is a simple, uick and unobtrusive !ay to send someone a message, usually for less than the cost of a voice call. There are no! promising signs that mobile operators have learned from the failure of $0and the success of texting. The industry has devised a ne! plan to encourage customers to adopt data services and thus, it hopes, make a smooth transition to 7.. The breakthrough is that operators are no! talking about services, not technology as customers are more interested in services than technology. The basic idea is the same for all of them" subscribers get a fancy handset !ith a large colour screen and usually a built#in camera. The phone is pre#configured !ith menus and bookmarks offered only by that particular operator, making it easy to do!nload games and access ne!s and other information. 0s !ell as being able to send and receive text messages, subscribers !ith camera phones can also s!ap photos. 0ll of these services are bundled together for a monthly fee. . 9$ DS0 services Oust as their voice businesses have declined in an intense competition !ith mobile operators, ho!ever, a ne! market has opened up for fixed#line operators" broadband internet access. By installing special e uipment at telephone exchanges, operators can supercharge old#fashioned telephone !ires and turn them into fast broadband pipes, using digital subscriber line %:,5& technology. ,ubscribers in Europe and 0merica typically pay around [M4 a month for a :,5 connection, so this provides a valuable ne! source of revenue for fixed#line operators. 0round the !orld, :,5 is booming and has become the dominant means of providing broadband access to homes and small businesses.

33

Indeed, the technology can help to dissuade customers from giving up their landline telephones, since it uses an existing telephone line !hich can still be used to make calls. (ixed#line operators are no! repositioning themselves as broadband operators. Embracing :,5 re uires incumbent fixed#line operators to do the same as mobile operators" to s!itch from a predominantly voice#based business to one in !hich voice and data are e ual partners. That entails a learning process for operators and, as !ith mobile data services, it means pricing and marketing broadband to appeal to the !idest possible audience. 0lthough broadband is gro!ing fast, in most places this is not fast enough to offset the decline of voice, !hich accounts for ;4#64P of most fixed#line operators' revenues. If they can move a significant proportion of their customers over to broadband, ho!ever, operators should be able to offer a range of ne! data services. @$ Dhat is the future of the sectorE (or the past couple of years, telecoms operators have concentrated on restructuring debt, cutting costs, backing out of bad investments, cleaning up balance sheets and trying to hold on to their customers. +e! management has been installed almost every!here. +e! opportunities for the industry seem to lie in exploiting three main trends. *. The most visible gro!th area is the continuing rise of mobile phones, !hich have overtaken fixed#line phones to become the most !idespread communications devices on earth. Their number is expected to rise from *.7 billion today to 9 billion by 944;, and they are being increasingly used to do much more than make phone calls, providing ne! opportunities for !ireless operators and e uipment makers. 9. The second trend is the gro!th of high#speed or WbroadbandW internet access, !hich is booming in many parts of the !orld. This offers a valuable ne! market for fixed#line operators to compete !ith mobile operators. 7. 0 third promising area is in the corporate#telecoms market. 0s large firms look for !ays to cut costs and move operations overseas, many are adopting ne! internet# based technologies that can interconnect regional offices cheaply and securely and allo! voice and data to flo! over the same net!ork. 'any operators are no! overhauling and simplifying their net!orks to ensure they can implement such Wnext# generation servicesW uickly and efficiently. 0ll three areas involve difficult transitions for telecoms operators. But the mobile#phone industry cannot rely on subscriber gro!th forever. Eventually everyone !ho !ants a mobile phone !ill have one, as has already happened in parts of Europe and 0sia, at !hich point a ne! source of gro!th !ill be needed. The continued health of the mobile#telephony industry depends on being able to deliver data services alongside voice calls, revenues from !hich are flat or declining. 2reating and delivering multimedia services to mobile handsets is, ho!ever, proving to be a lot more complicated than simply providing telephony. ,imilarly, fixed#line operators offering broadband internet connections are having to !ork harder to provide both data and voice services than voice services alone. 0nd in the corporate market the operators face a ne! challenge" the increasing overlap bet!een telecoms and information technology %IT&. If they are to offer next#generation services such as Internet hosting or call#centre outsourcing, net!ork operators must improve their expertise in IT or form partnerships !ith

3M

systems integrators. E uipment vendors also face problems as mobile, broadband and next# generation services re uire ne! e uipment. In short, there are still opportunities in telecoms # but not !here they !ere during the boom. The experience of the past couple of years has demonstrated that there is more to being a telecoms operator than simply o!ning a net!ork. The best prospects revolve around providing complex services, not merely capacity. Transformation seems to more important than construction. /nly by embracing this ne! reality !ill the industry find a !ay out of its troubles. ,ource" The Economist" Z0 ,urvey of Telecoms1 /ct. ** 9447 -olcB @Aroly /ct. *; 9447

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The labour 1arket

The labour market is determined by the forces of demand and supply. The de1and for labour The demand for labour comes from businesses because in order to produce goods and services they need labour. The demand curve for labour is determined by the combined behaviour of individual businesses and their approach to employing !orkers. If businesses intend to employ extra staff, they have to make sure that the costs of employing this extra staff are lo!er than the extra revenue they generate. $ith higher !ages, companies !ill employ fe!er employees. Certain factors can increase or decrease the de1and for labour: 2hanges in labour productivity # if !orkers are able to improve their productivity, the business is more likely to employ extra !orkers. :emand for the product # the demand for labour is a derived demand for the products or services that businesses produce. (or example a design company may employ extra !orkers as a result of gro!ing demand for promotions. The supply curve of labour sho!s the amount of labour !hich is supplied to the market at a particular !age rate. Gndividual 6orkers (or an individual !orker the supply of labour is the number of hours that heIshe is prepared to !ork. 0s the real !age rate rises, a !orker is likely to !ant to !ork longer hours. The real !age sho!s !hat the !age of the !orker can actually buy, so it takes into account the changes in prices of goods. 0bove a certain real !age rate the number of hours !orked !ill decrease.

Supply to an industry The higher the real !age rate is, the more !orkers are prepared to offer their services to the labour market.

Dhat can lead to changes in the supply of 6orkers to businessesE Improvements in geographical mobility # businesses can attract ne! employees from other parts of the country. /ccupational mobility # ho! easy it is to move from one type of job re uiring certain skills to another type of job re uiring another skills. The availability of training schemes

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Total supply depends on: Birth and death rates 'igration The age distribution of the population The number of people physically capable of !orking

Dage and e1ploy1ent deter1ination In competitive labour markets the price of labour is determined by the interaction of the demand curve for and the supply curve of labour. E uilibrium price" the point at !hich the demand and supply intersectImeet.

0abour 1arket conditions and business Different conditions can influence the de1and for and supply of labour: .overnment intervention in the labour market # governments usually intervene in the labour market in order to reach social aims, for example to ensure that all employees are paid at least a minimum amount or to prevent discrimination. Trade unions and professional groups # these organiBations' task is to protect the interests of their members. They usually attempt to increase or maintain the pay levels of their members. Their aim can be also to restrict the supply to a particular market. The amount of unemployment # at higher levels of unemployment businesses are able to recruit from a larger pool of labour, and the increased supply may force do!n the e uilibrium rate. 5abour shortages are likely to have the opposite effect.

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!ne1ploy1ent
<nemployment is concerned !ith people being out of !ork. The maintenance of full employment is a central policy aim of governments, but it has been accepted that there is some level of unemployment belo! !hich it is not possible to go !ithout the return of inflationary pressure. 0ny attempt to control the level of employment is further complicated by changes in the siBe of the labour force. easuring une1ploy1ent It is possible to measure unemployment in various !ays. In the <@, unemployment has been measured by the number of people claiming unemployment#related benefits. To claim benefits people must declare that they are out of !ork and be capable of, available for and actively seeking !ork during the !eek in !hich the claim is made. This is kno!n as the claimant count measure. /ne problem !ith this measure is that it does not include people !ho are unemployed but !ho do not register. In the late *664s the <@ government indicated that it !anted the main measure to be the International 5abour (orce %I5/& measure of unemployment. This is based on a survey of people. To be unemployed a person has to be out of !ork, have looked for !ork in the last four !eeks and be able to start !ork in the next t!o !eeks. Types of une1ploy1ent There is a number of different types of unemployment. Seasonal une1ploy1ent: ,ome !orkers are employed on a seasonal basis. In the construction, holiday and agricultural industries, !orkers are less in demand in !inter because of the climate. ,easonal unemployment can therefore be high. In summer it may fall, as these !orkers are hired. It is difficult in practice for governments to Tsolve' this type of unemployment, !hich may al!ays occur. In producing unemployment statistics, governments often adjust the figures to allo! for seasonal factors. Search and frictional une1ploy1ent: These t!o types of unemployment are very similar. (8I2TI/+05 unemployment occurs !hen people are moving bet!een jobs. <sually it only lasts for a short amount of time. (or example, an electrician !ho had been !orking in the +orth East may have a fe! !eeks Toff' before starting a ne! job in 5ondon. It is not seen as a serious problem by government. ,E082K unemployment, ho!ever, can last longer. This type of unemployment occurs !hen people are searching for a ne! job. The greater the information on job opportunities, the lo!er search unemployment is likely to be. Structural une1ploy1ent: ,T8<2T<805 unemployment is caused by changes in the structure of a country's economy !hich affect particular industries and occupations. Examples include the decline of the coal and steel industries in the second half of the t!entieth century. Bet!een *6N7 and the mid#*664s almost half a million jobs !ere lost in the coal mining industry. This indicates the siBe of the problem in the <@. Because certain industries have traditionally been located in particular parts of the country, their decline can have a dramatic effect upon those regions. 0s a result, structural unemployment is closely

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linked !ith regional unemployment. It may also result from changes in demand for the goods and services produced by particular sectors of the economy. (or example, there has been a decline in demand for natural fibres such as jute as a result of the development of synthetic products. Technological une1ploy1ent: This occurs !hen ne! technology replaces !orkers !ith machines. (or example, ne! technology introduced to the ne!spaper industry has meant the loss of many print !orkers' jobs. Cyclical or de1andCdeficient une1ploy1ent: 2L25I205 unemployment results from the cycles !hich occur in most economies. These ups and do!ns in economic activity over a number of years are kno!n as the business cycle. In a recession, at the Tbottom' of a business cycle, unemployment results from a lack of demand. It is argued that demand is not high enough to employ all labour, machines, land, offices in the economy. 4eal 6age une1ploy1ent: Kigh real !ages mean that !orkers !ill !ant to supply more labour than businesses !ant to employ. This results in unemployment. In other !ords, it is argued that !orkers price themselves out of jobs. There are vacancies, but businesses !ill only be !illing to pay !ages !hich are lo!er than !orkers are prepared to accept. +oluntary and involuntary une1ploy1ent: ,ome suggest that unemployment can be voluntary or involuntary. =oluntary unemployment occurs !hen !orkers refuse to accept jobs at existing !age rates. Involuntary unemployment occurs !hen there are not enough jobs in the economy at existing !age rates. Economists sometimes talk about the natural rate of unemployment. This is the percentage of !orkers !hich are voluntarily unemployed. This is also referred to as the non#accelerating inflation rate of unemployment %+0I8<&. This is because it is the rate of unemployment that can be sustained !ithout an increase in inflation. 0ny attempt to reduce unemployment belo! this level !ill simply result in an increase in prices. !ne1ploy1ent due to obstructions to the labour 1arket: 'onetarist believe that this is the major cause of long term unemployment. They see the excessive bargaining po!er of trade unions as being especially important. They believe that !orkers are then priced out of !ork by excessive increases in real !ages. They also see excessively high unemployment benefit as a cause of longer search time, thus increasing the number of unemployment at a given time.

<overn1ent responses to une1ploy1ent If it is believed that a deficiency in aggregate demand is the cause of unemployment, it is possible to increase demand by use of a package of measures, fiscal and monetary. Thus the government might lo!er taxation andIor increase public spending. It might increase effective demand %by removing restrictions on credit creation by the banking system andIor by lo!ering interest rates to induce both individuals and businesses to borro! for consumption or investment purposes&. If it is believed that imperfections in the labour market are the cause of unemployment, the government might seek to break the po!er of the unions by legislation. 'ore modest !age increases might help to 'price' people back into !ork.

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0lternatively, the government might reduce the real value of benefits in order to make jobs on lo! !ages more attractive. It might also reduce the higher rates of taxes on income and profits to encourage entrepreneurial activity and so encourage job creation. $here specific industries or regions are !orst affected, it might use a policy of direct subsidy and regional aid measures in order to maintain existing jobs in the short term !hilst encouraging the creation of ne! job.

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The Stock ;Bchange

Functions of the Stock ;Bchange There are stock exchanges in almost every major city in the !orld, but perhaps the most important ones are in +e! Lork, 5ondon, and Tokyo. ,tock exchanges are markets !here securities # shares and bonds, and also options and foreign exchange#are traded. Therefore, !hat happens on the exchange is crucial to the economy. It is the stock exchange !here funds to finance companies and government projects can be found, !here surplus monies can be invested, !here the standing of companies can be evaluated, and !here people can either limit their financial risks or lose or gain money by speculation. This element of speculation has resulted in criticism from people !ho liken stock exchange operations to gamblingD in both ventures you can gain or lose vast fortunes !ithout much effort. But !hereas in a gambling casino it is mere chance that determines the !inning numbers # and ultimately it !ill be the o!ners of the casino !ho !ill reap a safe and handsome profit # on the stock exchange it is economic forces that !ork. Kere too the distribution and redistribution of the gains have their role and function in the economy. $ithout stock exchanges, capitalism could not function efficiently. -eople buy securities because they !ant to make a profit. ,peculators !ho hope that the price of stocks and shares !ill rise and therefore buy them in large uantities in order to sell them later at a higher price are called bulls, and a market in this general mood is called bullish. ,peculators !ho sell their securities in the belief that their price is about to fall are called bears, and a market is bearish !hen most people !ant to sell their securities. 0 speculator !ho !ants to make a profit !hen he excepts a fall in prices !ill sell stocks at today's price for delivery at a later date. Ke !ill sell the stocks short, !hich means he does not o!n them no!, but he hopes he can get them at a lo!er price !hen the has to deliver them. The difference bet!een today's price and the lo!er price in the future is his profit. ,hares bought at an agreed price but delivered and paid for later are called futures, and dealing in different financial futures %not only shares& is an important stock market operation. $hereas in a futures market the obligation to deliver securities at some future date at a fixed price is bought and sold, buying an option means buying the right to buy or sell at a given price !ithin a given period of time. 0n option to buy is a call option, and an option to sell is a put option. $hen a speculator thinks that the price of a security is about to go up, he !ill buy a call option. If # as he has expected # the price has gone up before the expiry date of the option, he !ill exercise the option, buy the security at a cheaper price than the current value, and thus make a profit. If the price, ho!ever, has fallen, there is no sense in buying the securities. This !ay he !ill only lose the option money %premium&. The volume and price of the securities traded on the stock exchange are important indicators of the economy. -rice fluctuations reflect market expectations about the performance of the economy, though, of course, sudden changes in stock prices can be caused by the speculative character of the market. 0 coup in ,outh 0merica, an uprising in 0frica, or even the illness of a president may send prices soaring or falling. The most !idely uoted indicator of the <, stock market is the :o! Oones Industrial 0verage, !hich covers the shares of 74 !ell established companies on the +e! Lork ,tock Exchange. The (T %(inancial Times& index is the 5ondon ,tock Exchange indicator, and the +ikkei index reflects the mood of the Tokyo exchange.

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-articipants of the ,tock Exchange are individuals and institutional investors %those !ho collect and invest savings of many others" insurance companies, pension and union funds, unit trusts& e1bership: /nly 'ember (irms of ,tock Exchange are allo!ed to take part in dealing on the Exchange floor and outsiders must carry out their buying and selling through them. The 'ember (irms are called brokers or dealers and some of these specialise as !hat are kno!n as 'arket 'akers. BrokerKDealers: they buy and sell shares as agents for public investors. arket aker: 0 dealer !ho buys and sells shares of any kind on his o!n account and not as a broker !ho buys and sells for other persons. Control: The ,tock Exchange 2ouncil is elected by the members of the ,. E. (unctions" *. It controls the admission of ne! 'embers. 9. It disciplines 'embers !ho are guilty of misconduct. 7. It formulates the ,tock Exchange rules. 3. It settles disputes bet!een 'embers. M. It provides settlement and information services to 'embers.

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Types of securities
,ecurities are financial assets !hich represent o!nership in or debt of companies. ,ecurities refer to both shares and bonds, !hich are the t!o most common types. 0 share confers on its o!ner a legal right to the part of the company's profit. It represents o!nership in a company and entitles the o!ner to participate in the distribution of the company's profit. $hen an investor buys a share, using the services of a specialist company or broker, he or she becomes a shareholder %stockholder& and o!ns a part of a company. ,hareholders on the other hand, as o!ners of the company, have no guarantee of their investment. If the company fails, their shares !ill become !orthless. 0lthough because of limited liability, shareholders are not responsible for the company's debt. :ividends are paid to shareholders out of profits, !hich means that if the company has had a !eak business performance, no dividends are distributed. The amount of dividend is decided by the Board of :irectors and declared at the annual general meeting of the shareholders. It is expressed as a percentage of the face value of the shares. The common classes of shares are" /rdinary shares %common stock or e uities&" !hich have no guaranteed amount of dividend but carry voting rightsD traded on stock exchanges and represent one of the most important types of security for investorsD fixed unit of the share capital of a companyD -reference shares %preferred stock&" an intermediate form of security bet!een an ordinary share and a debentureD in the event of li uidation, they are less likely to be paid off than debentures, but more likely than ordinary sharesD preference shares may be redeemable at a fixed or variable dateD voting rights are normally restrictedD o!ners are entitled to a fixed rate of dividends !hich is called practically interest. (ounder's shares" shares issued to the founders of a company, !ho often have special rights to dividends. :eferred ordinary shares" ordinary share, formerly often issued to the founding members of a company, in !hich dividends are only paid after all other types of ordinary share have been paidD such shares often entitle their o!ners to a large share of profit. ,hares in public companies may be bought and sold in an open market, e.g. a stock exchange. ,hares in a private company are generally subject to restrictions on sale, e.g. they must be offered to existing shareholders first or the directors' approval must be sought before they are sold else!here. Employee share o!nership plan %E,/-&" method of giving employees shares in the business for !hich they !ork. 0 bond is a type of debt issued in certificate form, on !hich interest is paid over a certain period of time. /n the expiration date %date of maturity& the entire face amount is paid to the o!ner of the bond. Irredeemable or undated securities do not bear a date at !hich the capital sum !ill be repaid or redeemed. 0 company can borro! money from investors by issuing bonds, loans for fixed periods !ith fixed interest rates.

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Bonds may be issued not only by companies, but also by the governments or municipalities. < stocks or bonds %gilt edged securities&" also called giltsD used to raise money to finance government projectsD gilts are among the safest of all investments, as the government is unlikely to default on interest or on principal repaymentsD issued for a fixed period of timeD receive a fixed rate of interest 0ocal "uthority Bonds: issued by local authoritiesD the money invested represents loan to the authorityD usually bought by institutions, but can be bought also by the publicD a secure formD pay a fixed rate of interestD there is a fixed date for repayment. Debentures %jArad>kk?tv>ny&" are similar to bondsD they are issued by companies and are mostly secured, !hich means that the company guarantees the o!ner's rights over the company's assetsD debenture holders are not involved in the management of the company. BO=DS 2ompanies finance most of their activities by !ay of internally generated cash flo!s. If they need more money they can either sell shares or borro!, usually by issuing bonds. 'ore and more companies no! issue their o!n bonds rather than borro! from banks, because this is often cheaper" the market may be a better judge of the firm's credit!orthiness than a bank, i.e. it may lend money at a lo!er interest rate. This is evidently not a good thing for the banks, !hich no! have to lend large amounts of money to borro!ers that are much less secure than blue chip companies. Bond#issuing companies are rated by private ratings companies such as 'oody's and ,tandard ^ -oors, and given an 'investment grade' according to their financial situation and performance, 0aa being the best, and 2 the !orst, ie. nearly bankrupt. /bviously higher the rating, the lo!er the interest rate at !hich the company can borro!. 'ost bonds are bearer certificates, so after being issued %on the primary market&, they can be traded on the secondary bond market until they mature. Bonds are therefore li uid, although of course their price on the secondary market fluctuates according to changes in interest rates. 2onse uently, the majority of bonds on the secondary market are traded either above or belo! par. 0 bond's yield at any particular time is thus its coupon %the amount of interest it pays& expressed as a percentage of its price on the secondary market. (or companies, the advantage of debt financing over e uity financing is that bond interest is tax deductible. In other !ords, a company deducts its interest payments from its profits before paying tax, !hereas dividends are paid out of already#taxed profits. 0part from this 'tax shield', it is generally considered to be a sign of good health and anticipated higher future profits if a company borro!s. /n the other hand, increasing debt increases financial risk" bond interest has to be paid, even in a year !ithout any profits from !hich to deduct it, and the principal has to be repaid !hen the debt matures, !hereas companies are not obliged to pay dividends or repay share capital. Thus companies have a debt#e uity ratio that is determined by balancing tax savings against the risk of being declared bankrupt by creditors. .overnments, of course, unlike companies, do not have the option of issuing e uities. 2onse uently they issue bonds !hen public spending exceeds receipts from income tax, =0T, and so on. 5ong#term government bonds are kno!n as gilt#edged securities, or simply gilts, in Britain, and Treasury Bonds in the <,. The British and 0merican central banks also sell and buy short#term %three#month& Treasury Bills as a !ay of regulating the money supply. To reduce the money supply, they sell these bills to commercial banks, and !ithdra! the cash received from circulationD to increase the money supply they buy them back, paying !ith ne!ly created money !hich is put into circulation in this !ay.

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Stock ;Bchanges around the 6orld

The 0ondon Stock ;Bchange The 5ondon ,tock Exchange provides a range of services for companies and investors" 2ompany ,ervices # the 5ondon ,tock Exchange provides a number of markets !hich allo! companies large and small to raise capital, and a range of services to increase the profile of the companies on our markets. Trading ,ervices # the 5ondon ,tock Exchange gives market users access to a !ell# developed trading environment !ith a proven record of stability and flexibility. Information ,ervices # the 5ondon ,tock Exchange provides high uality real#time price information to market users !orld!ide, as !ell as historical and reference data. ,upporting these activities, the Exchange regulates its markets to give protection to investors and companies and to maintain its reputation for high standards and integrity. In addition, in partnership !ith others, the Exchange helps to track the performance of the markets through various indices.

0 brief history *;N4" *M4 brokers kicked out of the 8oyal Exchange for ro!diness form a club at Oonathan's 2offee Kouse to buy and sell shares. *;;7" 'embers vote to change the name to ,tock Exchange. *Q4*" The 5ondon ,tock Exchange becomes a regulated Exchange. *6*3" The .reat $ar meant the Exchange market closed at the end of Ouly until the ne! year. *6;9" Ker 'ajesty the \ueen opened the Exchange's ne! 9N#storey office block !ith its 97,444 s ft trading floor. *6QN" Big bang" Trading moves from being conducted face#to#face on a market floor to being performed via computer and telephone from separate dealing rooms. *66M" 0I' is launched # a market for gro!ing companies. *66;" ,hareholders vote for us to become a public limited company and !e become 5ondon ,tock Exchange plc. There are t!o basic markets on the 5ondon ,tock Exchange" Tech'08@ is an international market for innovative technology companies on the ,tock Exchange. ,ince its launch in *666, tech'08@ has established itself as a leading global market for shares in businesses at the cutting edge of technological innovation. 0I' is a global market for young and gro!ing companies from all over the !orld. 0I' is specially tailored to suit gro!ing businesses, !herever in the !orld they are based # and its entry rules have been designed to reflect these companies' uni ue re uirements. 0I' provides a central focus for investors !ho understand gro!ing companies and are eager to invest in their potential.

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5isting on the Exchange offers companies !orld!ide the opportunity to gro! by raising funds from one of the !orld's deepest pools of capital. 2ompanies of all kinds are attracted to list in 5ondon by its deep li uidity, !idespread e uity culture and sophisticated investment community. 'any <@ and international companies come to 5ondon to raise ne! capital, or to have their shares more !idely marketed and traded. 2ompanies can raise capital both at the time of going to the market and, subse uently, by issuing securities for cash. 0ccess to e uity or debt finance gives companies greater flexibility to fund expansion and development programmes # or to reduce borro!ings. 2ompanies on the main market come from all sectors of business # including information technology, electronics, financial, retail and industrial The siBe of <@ companies varies enormously, from those !ith a market capitalisation of _*m to those !ith a market cap of more than _*M4 bn. 0 company applying for a listing on the Exchange has first to provide listing particulars giving a complete picture of its" business, trading history, financial record, management, business prospects, information on the securities to be listed and, the terms of any fund raising. 0 company seeking to list its shares needs to appoint an Exchange#approved sponsor to handle its application. This can be a member firm, bank, broker, firm of solicitors, accountants or other financial advisers. 2atering for emerging market issuers 5ondon has the !orld's most active international e uity market, !ith more international trading taking place than on any other exchange in the !orld. /ne of the principal methods for emerging markets issuers to raise capital is through the listing of depositary receipts %or :8s&. These are certificates that represent o!nership of the underlying securities and can be listed and traded independently from the underlying shares. They have a number of attractions for international investors and issuers, including" reducing currency risk by pricing and trading the issue in an accessible international currency helping to avoid difficulties !ith local exchange approval and settlement systems simplifying settlement arrangements !ith the custodian managing any differences bet!een the issuer's home country and that of the investor. Euro#denominated products can be listed on the Exchange and include the" euro#denominated depository receipt %E:8&, euro convertible bond %E2B& and euro#denominated eurobond %EEB&. In addition, it is possible to list shares denominated in euros. 0longside its strong e uity market, the 5ondon ,tock Exchange operates an important debt market. In recent years, a gro!ing number of eurobonds from both the <@ and abroad have been listed in 5ondon. The =e6 Lork Stock ;Bchange The +L,E %+e! Lork ,tock Exchange& is an agency auction market. The essential point is that trading at the +L,E takes place by open bids and offers by Exchange members, acting as agents for institutions or individual investors. Buy and sell orders meet directly on the trading floor, and prices are determined by the interplay of supply and demand. #$ Brief 8istory

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The +e! Lork ,tock Exchange traces its origins back more than 944 years, to the signing of the Button!ood 0greement by 93 +e! Lork 2ity stockbrokers and merchants in *;69. 2enturies of gro!th and innovation later, the +L,E remains the !orld's foremost securities marketplace. /ver the years, its commitment to issuers and investors has been un!avering, and its persistent application of the latest technology has allo!ed it to maintain a level of market uality and service that is unparalleled. The +L,E registered as a national securities exchange !ith the <.,. ,ecurities and Exchange 2ommission on /ctober *, *673. The .overning 2ommittee !as the primary governing body until *67Q, at !hich time The Exchange hired its first paid president and created a thirty#three member Board of .overnors. The Board included Exchange members, non#member partners from both +e! Lork and out#of#to!n firms, as !ell as public representatives. In *6;* The Exchange !as incorporated as a not#for#profit corporation. In *6;9 the members voted to replace the Board of .overnors !ith a t!enty#five member Board of :irectors, comprised of a 2hairman and 2E/, t!elve representatives of the public, and t!elve representatives from the securities industry. ,ubject to the approval of the Board, the 2hairman may appoint a -resident, !ho !ould serve as a director. 0dditionally, at the Board's discretion, they may elect an Executive =ice 2hairman, !ho !ould also serve as a director. %$ ission State1ent

To add value to the capital#raising and asset management process by providing the highest uality and most cost#effective self#regulated marketplace for the trading of financial instruments, promote confidence in and understanding of that process, and serve as a forum for discussion of relevant national and international policy issues. )$ Trading 0t the +L,E, each listed stock is assigned to a single post !here the specialist manages the auction process. +L,E members bring all orders for +L,E#listed stocks to the Exchange floor either electronically or by a floor broker. 0s a result, the flo! of buy and sell orders for each stock is funnelled to a single location. This heavy stream of diverse orders is one of the great strengths of the Exchange. It provides li uidity # the ease !ith !hich securities can be bought and sold !ithout !ide price fluctuations. $hen an investor's transaction is completed, the best price !ill have been exposed to a !ide range of potential buyers and sellers. Each day on the +L,E trading floor an auction takes place. /pen bids and offers are managed on The Trading (loor page on nyse.com by Exchange members acting on behalf of institutions and individual investors. Buy and sell orders for each listed security meet directly on the trading floor in assigned locations. -rices are determined through supply and demand. ,tock buy and sell orders funnel through a single location, ensuring that the investor, no matter ho! big or small, is exposed to a !ide range of buyers and sellers.

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Investors must give their brokers specific instructions on ho! to handle their transactions. Kere are some common types of order" 0 market order tells the broker to buy or sell at the best price currently available on the +L,E Trading (loor. 0 limit order, also called a limited order or limited price order, tells the broker to buy or sell at a specific price or better. The broker !ill try to get the best price possible for the customer, but the broker cannot sell belo! or buy above the specified figure. 0 .T2 %good 'til cancelled& order tells the broker that the order is valid until it is executed or until the investor cancels it. The minimum unit of trading on the +L,E is *44 shares. This is referred to as a round#lot. /rders for less than *44 shares are referred to as odd#lots. The Tokyo Stock ;Bchange 'ain stock market of Oapan, located in Tokyo. It opened in *Q;Q to provide a market for the trading of government bonds ne!ly issued to former samurai. .overnment bonds and gold and silver currencies initially formed the bulk of trade on the exchange, but the trading of stocks came to predominate by the *694s and '74s. It !as closed from *63M to *636, !hen it opened after being reorganiBed by the occupying <.,. authorities. Today it accounts for more than 64P of all securities transactions in Oapan, and it is one of the !orld's largest marketplaces for securities. The +ikkei index is the key stock#market index in Tokyo.