Investment is essential for the growth of any economy, but none more so for an economy recovering from a severe downturn, such as the UK. Not only will it bring in much needed money and then create jobs for UK residents, but it will also continue to build ties between the UK and the world’s fastest growing economy.
George Osborne has been in China promoting business opportunities for investment in the UK and one such investment is into Manchester Airport. The ‘Airport City’ Project will be a combined effort, or a Joint Venture, between the Greater Manchester Pension Fund, the UK’s Carillion Plc and Beijing Construction Engineering Group. The plan is to create offices, hotels, warehouses and manufacturing firms, bringing in thousands of jobs in the process, thus providing a much needed boost to the British economy. Britain is already one of the top nations attracting Chinese investment, with more than double the amount of any other European nation. George Osborne is clearly in favour of further improving business ties with China, saying:
I think it shows that our economic plan of doing more business with China and also making sure more economic activity in Britain happens outside the City of London is working…That’s good for Britain and good for British people.
However, the benefit of such investment from China into the UK, is not just of benefit to our domestic economy. China will also reap benefits from its involvement in projects, such as the development of Manchester’s airport. The Managing Director of BCEG, Mr Xing Yan, said:
To be included in such an interesting and unique development is a real honour…We see our involvement in Airport City as an extension of the memorandum of understanding between China and the UK, where we have been looking to further explore joint infrastructure opportunities for some time.
The airport investment by China is only one of many of its recent forays into the UK economy. Other investments include plans to rebuild London’s Crystal Palace and plans to create a third financial district near London’s City Airport.
Some may see more Chinese involvement in UK business as a threat, but for most it is viewed as an opportunity. An opportunity that both Boris Johnson and George Osborne will undoubtedly exploit as far as possible, with the hope that it will generate income, employment and growth. The following articles consider this investment opportunity.
Manchester Airport Group announces jobs boost The Telegraph, David Millward (13/10/13)
China’s BCEG joins UK Manchester airport joint venture Reuters (13/10/13)
Manchester Airport to receive investment from China BBC News (13/10/13)
George Osborne hails China’s airport investment The Telegraph (13/10/13)
Chinese group in $1.2bn British airport development deal The Economic Times (13/10/13)
China in £800m Manchester airport deal Financial Times, Elizabeth Rigby and Lucy Hornby (13/10/13)
Boris and Osborne in China to push trade Sky News, Mark Stone (13/10/13)
What does China own in Britain? BBC News (14/10/13)
Questions
- What is a joint venture? What are the advantages and disadvantages of a joint venture relative to other business structures?
- How important are political ties with China?
- Do you view Chinese investment in the UK as an opportunity or a threat? Make a list for each side of the argument, ensuring you offer explanations for each reason.
- What macroeconomic benefits will the development of the Manchester Airport bring to the city?
- Will there be wider economic benefits to the rest of the UK, despite the investment being located in Manchester?
- Using the AD/AS model, illustrate and explain why investment is so important to the recovery of the UK economy.
Valued by private investors at more than $10 billion, the future listing on the stock market of Twitter, is an eagerly anticipated event. The necessary forms have been submitted to the US Securities and Exchange Commission (SEC) ahead of the initial public offering (IPO). Twitter will be looking to avoid the mistakes made by Facebook when they were first listed in May last year. Twitter has also announced its intentions to purchase MoPub, which is a firm specialising in mobile advert exchanges.
So, what will this listing mean for Twitter? The public will now be able to purchase shares in Twitter, in much the same way as you can buy shares in RBS or Facebook. The financial performance of Twitter will come under much greater scrutiny from its shareholders, who will be interested in short term returns and long term stability. Becoming a public limited company will attract investors and is likely to provide a much larger scope for expansion for Twitter. However, as yet no details have been released on a likely date for the flotation or on the prices we can expect.
One thing Twitter will be trying to avoid is a repeat of the problems that beset Facebook and indeed of the problems that other public listings have created for giants such as Google, Zynga and Groupon. When Facebook moved to public ownership, its share prices initially fell below its IPO and subsequently Facebook lost more than half its value. More recent success in mobile advertising has restored the fortunes of this company, but Goldman Sachs, which is handling Twitter’s transition will be looking to avoid a similar occurrence. As Sam Hamadeh from PrivCo (a firm that gathers data on private companies) said:
Twitter will learn from Facebook’s flawed playbook and do the opposite … Unlike Facebook, which waited too long to IPO (until its growth rate decelerated), Twitter will IPO at just the right inflection point: while revenue grows in triple digits.
Twitter is a rapidly growing business, but still has significant scope for expansion and this move to public ownership may be just the thing. Setting the right IPO and the right date will be crucial, as a multitude of factors can and do affect the price of shares listed on the stock market. Twitter will also need to ‘focus on doing the right stuff’ to make a success of the listing and its purchase of Mopub looks to be a step in the right direction. For now, all we can do is speculate, but if the launch is successful, then the founders of Twitter are likely to bring in hundreds of millions of dollars each.
Twitte files for IPO The Telegraph, Sophie Curtis (13/9/13)
Twitter plans stock market listing (see also) BBC News (13/9/13)
Twitter files for IPO, hopes to avoid Facebook’s mistakes Independent, Nikhil Humar and James Vincent (12/9/13)
Facebook shares close 11% below flotation price BBC News (21/5/12)
Twitter fails to answer key IPO questions Financial Times, Richard Waters and April Dembosky (13/9/13)
Twitter IPO: how much is it worth? The Guardian, Juliette Garside (13/9/13)
Twitter IPO: Tech float successes and disasters The Telegraph, Gabrielle Putter and Szu Ping Chan (13/9/13
Twitter to see ‘strong demand’ for share sale BBC News (13/9/13)
Twitter IPO: Firm in stock market launch bid Sky News (13/9/13)
Questions
- What are the characteristics of a public limited company? Are there advantages and disadvantages?
- Which factors affect (a) the supply of shares and (b) the demand for shares?
- What mistakes were made by Facebook when it made the transition to public ownership?
- How does advertising generate revenue for Twitter?
- How might you go about valuing Twitter or Facebook?
- Companies such as Twitter and Facebook have hundreds of millions of subscribers. Are there network externalities of this?
- Twitter is purchasing MoPub. What type of takeover would you classify this as?
The growth of emerging economies, such as China, India and Brazil brings with it both good and bad news for the once dominant countries of the West. With growth rates in China reaching double digits and a much greater resilience to the credit crunch and its aftermath in these emerging nations, they became the hope of the recovery for the West. But, is it only benefits that emerge from the growth in countries like China?
Chinese business has grown and expanded into all areas, especially technology, but countries such as the USA have been reluctant to allow mergers and takeovers of some of their businesses. Notably, the takeovers that have been resisted have been in key sectors, particularly oil, energy and technology. However, it seems as though pork is an industry that is less important or, at least, a lower risk to national security.
Smithfield Foods is a US giant, specialising in the production and selling of pork. A takeover by China’s Shuanghui International Holdings has been approved (albeit reluctantly) by the US Committee on Foreign Investment. While the takeover could still run into obstacles, this Committee’s approval is crucial, as it alleviates concerns over the impact on national security. The value of the deal is some $7.1bn, including the debt that Shuangui will have to take on. While some see this takeover as good news, others are more concerned, identifying the potential negative impact it may have on prices and standards in the USA. Zhijun Yang, Shuanghui’s Chief Executive said:
This transaction will create a leading global animal protein enterprise. Shuanghui International and Smithfield have a long and consistent track record of providing customers around the world with high-quality food, and we look forward to moving ahead together as one company.
The date of September 24th looks to be the decider, when a shareholder meeting is scheduled to take place. There is still resistance to the deal, but if it goes ahead it will certainly help other Chinese companies looking for the ‘OK’ from US regulators for their own business deals. The following articles consider the controversy and impact of this takeover.
US clears Smithfield’s acquisition by China’s Shuanghui Penn Energy, Reuters, Lisa Baertlein and Aditi Shrivastava (10/9/13)
Chinese takeover of US Smithfield Foods gets US security approval Telegraph (7/9/13)
US clears Smithfield acquisition by China’s Shuanghui Reuters (7/9/13)
Go-ahead for Shuanghui’s $4.7bn Smithfield deal Financial Times, Gina Chon (6/9/13)
US security panel approves Smithfield takeover Wall Street Journal, William Mauldin (6/9/13)
Questions
- What type of takeover would you classify this as? Explain your answer.
- Why have other takeovers in oil, energy and technology not met with approval?
- Some people have raised concerns about the impact of the takeover on US pork prices. Using a demand and supply diagram, illustrate the possible effects of this takeover.
- What do you think will happen to the price of pork in the US based on you answer to question 3?
- Why do Smithfield’s shareholders have to meet before the deal can go ahead?
- Is there likely to be an impact on share prices if the deal does go ahead?
On 5 and 6 April, there was a conference on conscious capitalism in San Francisco. In January, a new book, Conscious Capitalism: Liberating the Heroic Spirit of Business, by John Mackey and Rajendra Sisodia, was published. Many in the business world are enthusiastic about this seemingly new approach to business, which focuses on broader social, environmental and ethical goals, rather than simple profit maximisation.
As the Washington Times review linked to below states:
“Conscious Capitalism” promotes a business culture that embodies “trust, accountability, caring, transparency, integrity, loyalty and egalitarianism.” The management ideal of “Conscious Capitalism” contains four key elements of “decentralization, empowerment, innovation and collaboration.” Above all, this exemplary form of business practice relies on careful attention to four tenets: higher purpose and core values, stakeholder integration, conscious leadership and conscious culture and management.
So how realistic is this vision of caring capitalism? There may be a few inspiring businesspeople, truly committed to improving the interests of the various stakeholders of their business and society more generally, but could it become a model for business in general? And if so, does this require education, monitoring and regulation? Or can a libertarian approach to business generate an environment where conscious and caring capitalists flourish and succeed better than those with a more narrow focus on profit?
The following videos and articles discuss conscious capitalism and the arguments of those, such as John Mackey, founder and co-CEO of Whole Food Market, who advocate it.
Webcasts
Conscious capitalism The Economist, John Mackey (15/3/13)
Conscious Capitalism: Heroes of the Business World Conscious capitalism, April in San Francisco (5/4/13)
It’s Not Corporate Social Responsibility Conscious capitalism, John Mackey (Jan 13)
Articles, reviews and information
Conscious Capitalism: Creating a New Paradigm for Business Whole Planet Foundation, John Mackey
Companies that Practice “Conscious Capitalism” Perform 10x Better Harvard Business Review, Tony Schwartz (4/4/13)
4 Ways to Become a (More) Conscious Capitalist Inc., Francesca Louise Fenzi (8/4/13)
The New Management Paradigm & John Mackey’s Whole Foods Forbes, Steve Denning (5/1/13)
Book Review: ‘Conscious Capitalism’ Washington Times, Anthony j. Sadar (20/3/13)
Book Review: Whole Foods Co-CEO John Mackey’s Conscious Capitalism Huffington Post, Christine Bader (28/1/13)
Chicken Soup for a Davos Soul Wall Street Journal, Alan Murray (16/1/13)
Conscious business Wikipedia
Questions
- What are the features of conscious capitalism?
- Do firms “get the shareholders they deserve”?
- How might firms that are not pursuing conscious capitalism be persuaded to become more conscious and more caring?
- How does conscious capitalism differ from corporate social responsibility?
- What would you understand by “conscious consumers”? How might their behaviour differ from other consumers?
- Why might firms engaging in conscious capitalism become more profitable than firms that have a simple aim of profit maximisation?
- What reforms, both internal within a firm and in the legal environment, does John Mackey advocate? Do you agree with his suggestions? What else do you suggest?
The English Premier League (EPL) has negotiated a record TV deal which will generate £5.5 billion of revenue over the next 3 years – beginning in the season 2013–14. This represents a 70% increase on the previous deal. Controversy has arisen over some initial proposals put forward by the EPL as to how the money will be spent. The owners of the clubs in the Championship of the English Football League (EFL) are particularly concerned about the size of the proposed payments to the three teams relegated from the EPL.
Some 30 years ago the money generated from the sale of television rights was equally shared between all the teams in the then four divisions of the English Football League (EFL). In 1992 the top division of the English Football League broke away and formed the English Premier League (EPL). This newly formed EPL negotiated a separate television deal and kept the majority of the money. However, some payments were and still are made to the teams in the EFL and to organisations such as the League Managers Association and Professional Footballers Association. For example in 2011-–12 the EPL donated £189.4 million of the £1.2 billion generated from that year’s TV deal.
The majority of the money donated by the EPL is spent in two main ways. First, some money is redistributed to all the teams in the EFL: i.e. The Championship, League 1 and League 2. These are known as ‘solidarity payments’ and in 2011–12 the EPL spent £49.8 million on this scheme. Each club in the Championship received £2.3 million. It has been proposed that the amount paid into this scheme should be increased by 5% in the season 2013–14. Second, a relatively large amount of money is paid over a four-year period to the three teams relegated each season from the EPL into the Championship. These are known as ‘parachute payments’ and in the season 2011–12 the EPL spent £90.9 million on this scheme. The rationale for having parachute payments is to help the relegated teams adjust their wage bills to the much lower revenue streams that come from playing in the Championship. Proposed changes to the scheme are outlined in Table 1.
The chairmen of the football league clubs met on the 20th March 2013 and a number of them expressed concerns about the relatively large increase in the parachute payments compared to the solidarity payments. They were particularly concerned that the changes to the funding would damage the competitive balance of the Championship.
Competitive balance refers to how the most talented players are distributed amongst the teams in a league. For example, are the majority of the most talented footballers playing for just a couple of the teams? In this case the league is competitively imbalanced and the teams with the best players will tend to win far more games than the other teams. The outcome of the league will be very predictable. If the most talented players were more evenly spread across all the teams in the league, then it would be more competitively balanced. Matches and the outcome of the league would become more unpredictable.
Does the level of competitive balance matter? Some sports economists have argued that it may have a significant impact on the success of the league. This is because fans may value the unpredictability of the results. It follows that closer and more unpredictable results will generate higher match-day attendances and increase the revenues of the clubs.
This is an interesting argument and is the opposite of what economic theory would predict for most markets. For example, the standard prediction would be that as firms outperform their rivals, they generate more revenue and profit. If they manage to drive all their rivals out of business, they would become a pure monopoly and make large abnormal profits. However in professional team sports the outcome may differ significantly. If the unpredictability of the league is highly valued by fans, then teams will generate more revenue when they have strong and evenly matched rivals.
It has been reported that further discussions about the distribution of the money will take place this month with the owners of the championship clubs arguing that there should be smaller increases in parachute payments and much larger increases in solidarity payments. Representatives of the EPL have argued that the parachute payments do not distort competition and make the championship predictable. They point out that at present only one of the top six teams in the championship (Hull) receives parachute payments, while only one of the teams promoted from the Championship in the season 2012–13 (West Ham) received these payments.
Articles
Premier League warned over rich and poor split in wake of TV deal The Guardian, Owen Gibson (19/3/13)
Championship clubs angered by Premier League parachute boost Daily Mail, Charles Sale (6/2/13)
Football league is to lessen the advantage of parachute payments The Guardian, Owen Gibson (20/3/13)
Championship clubs warn Premier League over hike in parachute payments for relegated teams The Independent, Majid Mohamed (20/3/13)
Increased parachute payments could lead to a salary cap in the Championship The Post, A. Stockhausen (21/3/13)
Scudamore:Parachute payment system fair Eurosport, Andy Eckardt (22/3/13)
Parachute payments more than a softened landing The Daisy Cutter, Richard Brook (21/3/13)
Questions
- What factors will influence the size of the attendance at a football match?
- To what extent do you think that the money generated from the sale of television rights should be equally shared between all the clubs in the English Premier League and the English Football League
- Can you think of any ways of measuring the competitive balance of a football league?
- Explain why a very competitively imbalanced league may reduce the revenue for all the clubs in that league?.
- In traditional economic theory it is assumed that firms aim to maximise their profits. What do you think is the objective of a typical football club in the English Premier League?
Investment is essential for the growth of any economy, but none more so for an economy recovering from a severe downturn, such as the UK. Not only will it bring in much needed money and then create jobs for UK residents, but it will also continue to build ties between the UK and the world’s fastest growing economy.
However, the benefit of such investment from China into the UK, is not just of benefit to our domestic economy. China will also reap benefits from its involvement in projects, such as the development of Manchester’s airport. The Managing Director of BCEG, Mr Xing Yan, said:
