On the 24th May the new collation government released details of its plan to make £6.2 billion of savings (see HM Treasury press release). As part of this package, The Department for Business, Innovation and Skills (BIS) – headed by Business Secretary, Vince Cable – will make savings of £836 million, equivalent to 3.9% of its budget. One of the areas identified by BIS for ‘savings’ is the higher education budget, which will lose £200 million. Also targeted are the Regional Development Agencies (RDAs) in England. These are the strategic drivers of economic development in the English regions. They will lose £74 million from BIS as well as a further £196 million from other government departments.
So what is the Department for Business, Innovation and Skills charged with doing? Well, according to the BIS website it is charged with
…building a dynamic and competitive UK economy by: creating the conditions for business success; promoting innovation, enterprise and science; and giving everyone the skills and opportunities to succeed. To achieve this it will foster world-class universities and promote an open global economy.
In describing what BIS does, BIS states that it
…brings all of the levers of the economy together in one place. Our policy areas – from skills and higher education to innovation and science to business and trade – can all help to drive growth.
In other words, the BIS is intended to be a key player in affecting the UK’s long-term rate of economic growth. Since 1948 the average annual rate of growth of the UK economy, as measured by constant-price GDP (real GDP), is 2.4%. Of course, a key question is how we might do better. But, there is a significant disagreement amongst economists about the role that government should play in advancing long-term economic growth. This debate largely centres both on how activist a government should be and on the types of policy that a government should pursue.
The ’case for industrial activism’ is made in the leading article of The Independent on 25 May. It nicely encapsulates some of the policy issues surrounding long-term growth and, in reflecting on the cuts to BIS, identifies the role it believes BIS should play.
…we need to think clearly about the proper role for the state in the private sector. There is no future in a return to the heavy-handed statism of the 1970s or the discredited policy of trying to “pick winners”. The guiding principle as far as industrial policy is concerned is that government should do what the free market will not, or cannot. The function of the DBIS should be to increase Britain’s long-term growth potential.
This means supporting industries that cannot get funding from the capital markets and funding important research that would otherwise go unperformed. Most of all, it means education. Britain cannot compete successfully with the rising economic powers of China and India, which have access to a vast pool of cheap workers, on labour costs. Our only hope for advantage lies in our human capital. That makes the case for intensive vocational and advanced skills training.
Therefore, industrial activism, as envisaged by The Independent is about correcting for market failures and ensuring that there is sufficient investment in education and training.
The Confederation of British Industry, which describes itself as the ‘UK’s top business lobbying organisation’, in its press release of 19 May identified the following as ‘essential’ for delivering growth:
• Establishing competitive business taxes
• Developing a strong banking system
• Skilling students for the future and strengthening apprenticeships
• Attracting and cultivating enterprise and industry
• Prioritising energy security
• Working towards a low-carbon economy
• Developing the infrastructure for economic growth
The CBI too identifies the significance of skills. But, it believes that in the previous decade growth was driven too much by government spending (as well as by unsustainable growth in the financial sector). It argues that the private sector, along with trade, needs to be ‘the growth engine for the future’.
What is interesting about the proposed cuts to BIS is that they very visibly draw attention to the differences that exist among commentators, industrialists and economists as to industrial policy. In particular, they ignite the debate about the most effective role that a government can play in promoting long-term growth. Don’t expect too much agreement any time soon!
Press Releases
Government announces £6.2 billion of savings in 2010-11 HM Treasury (24/5/10)
Private sector growth and public sector reform needed to restore economy CBI (19/5/10)
Articles
The case for industrial activism Independent (25/5/10)
Public sector deficit cuts: Higher education and RDAs hit hard in BIS efficiency savings plan eGov Monitor (25/5/10)
George Osborne outlines details of £6.2 billion spending cuts BBC News (24/5/10)
Government axes £836 billion from business budget Growing Business (24/5/10)
Department for Business, Innovation and Skills hit hard by spending cuts Training Journal, Martin Kornacki (24/5/10)
Business department hammered as Osborne swings the axe Management Today (24/5/10)
Big cuts signal end to activism Financial Times, Jean Eaglesham, Andrew Bounds and Clive Cookson (24/5/10)
Businesses take a pounding as coalition cuts hit home London Evening Standard, Hugo Duncan (24/5/10)
Vince Cable explains spending cuts u-turn Newsnight (24/5/10)
Questions
- What do you understand by long-term growth? How does this differ from short-run growth?
- Evaluate the argument advanced by The Independent for industrial activism? What sort of policies might fall under this description?
- In considering the CBI’s list of influences on long-term economic growth outline what role you think government could play and what policies it could enact.
- Do you think the savings being made by BIS signal a new policy approach to delivering long-term economic growth in the UK?
Russia is now ranked alongside Zimbabwe on the worldwide corruption index, despite the fact that the Russian authorities have been doing their best to tackle it. The Russian bribery ‘industry’ is worth some $300 billion per year and those who can be bought include several government officials.
The Russian economy is in much need of foreign investment, but the growing world of bribery is deterring international businesses from investing in Russia. Not only will they face the costs of building and running the business, but they are also likely to face substantial costs in trying to get the paperwork through, as IKEA found. Having said that they would never resort to bribery, IKEA had to pay $4 million for investment in local infrastructure and donate a further $1 million for local government projects just to get the 300+ permits they needed to begin construction. This then led to further bribes and a number of lawsuits. For some companies, the delays caused by not paying a bribe may actually cost more than the bribe itself.
The following webcast and articles look at the case of IKEA and the push by foreign businesses to avoid the clutches of Russian bribery.
Webcast
Russian bribes culture hits international business BBC News (14/5/10)
Articles
Foreign firms pledge not to give bribes in Russia BBC News (21/4/10)
IKEA masters rules of Russian business The Moscow Times (14/5/10)
Russians are spending twice as much on bribes Prime Time Russia (13/5/10)
Data Source
Corruption Perceptions Index 2009 Transparency International 2009
Questions
- Why is Russia in need of significant foreign investment? How would it help the economy?
- Can we classify IKEA (or any other company that uses bribery) as a risk-lover? Explain your answer.
- If a foreign firm wants to invest in Russia, which type of expansion do you think would be the easiest and the least open to bribery?
- IKEA began building without the necessary permits, but then ‘the bureaucrats took advantage of the situation’. Was IKEA operating under conditions of risk or uncertainty?
- In the article ‘IKEA masters rules of business’, Lennart Dahlgren said: “If we had waited to receive them all, we would have lost years”. What economic concept is being referred to?
- To what extent is government intervention and international co-operation needed to tackle corruption in Russia?
Whilst a new version of Windows may make the headlines, it’s not Windows that is the main source of profit for Microsoft: it’s Office, with it’s suite of appplications – Word for word processing, Excel for spreadsheets, PowerPoint for presentations, Access for databases, FrontPage for web pages and Outlook for e-mail. But Office is under threat from two sources.
First, despite that fact that Microsoft’s share of the office applications market has remained fairly constant at around 94%, it is facing increased competition from free alternatives, such as Google docs and Google Apps, and OpenOffice from Oracle (see also).
Second, the demands of users are changing. With the growing use of social networking and file sharing, and with a more mobile and dispersed workforce, Microsoft Office needs to adapt to this new environment.
With the launch of Office 2010, these issues are being addressed. The following articles examine what Microsoft has done and whether it is a good business model
Microsoft Office 2010 takes aim at Google Docs BBC News (11/5/10)
Office 2010: banking on Apps Sydney Morning Herald, David Flynn (11/5/10)
Microsoft’s two-pronged strategy for Office 2010 BBC News, Tim Weber (12/5/10)
Revamped Microsoft Office Will Be Free on the Web New York Times, Ashlee Vance (11/5/10)
Microsoft Predicts Fastest-Ever Adoption of New Office Software Bloomberg Businessweek, Dina Bass (12/5/10)
Questions
- Discuss the business logic of giving away products free.
- Discuss the likely success of Microsoft’s response to the changing market conditions for office applications software.
- Explain what is meant by ‘cloud computing’. What opportunities does this provide to Microsoft and what are the threats?
- What is meant by ‘network economies’? How do these benefit Microsoft? How is Sharepoint relevant here?
- Are network economies likely to increase or decrease for Microsoft in the future?
Two of America’s airlines have agreed to merge to form the world’s largest carrier. The deal between United and Continental Airlines is worth £2.1 billion and the management of the two companies hope that the new airline, to be called United Airlines, will bring cost savings of some £800 million per year. Last year, the two companies lost a total of £900 million. It is also hoped to increase revenues by providing more routes and more effective competition against rivals, such as Delta Air Lines.
But just how significant will any economies of scale be and to what extent will they involve job losses? Certainly the merger has been greeted with caution by the Air Line Pilots Association and unions such as the International Association of Machinists and Aerospace Workers. Also, will the larger company be able to compete more effectively to the benefit of consumers, or will the increased market power see a rise in fares?
And this is not the only airline merger. In April, British Airways and Iberia of Spain signed a deal to merge, thereby creating one of the world’s biggest airlines. Other mergers are expected as airlines battle to cope with rising costs and lower passenger numbers in the wake of the global recession. So will such mergers benefit passengers, or will it simply result in less choice and higher fares? The following articles look at the issues
Articles
1st priority for new United-Continental combo: Keep customers, workers happy Chicago Tribune, Julie Johnsson (3/5/10)
Debating future of US Airways Philadelphia Business Today, Linda Loyd (4/5/10)
Arpey points out good, bad of United-Continental deal The Dallas Morning News, Terry Maxon (3/5/10)
US airline merger creates world’s biggest carrier Independent, Nick Clark (4/5/10)
We can’t fix fares, says chief of merging US airlines Telegraph, James Quinn (3/5/10)
United and Continental Airlines to merge BBC News (3/5/10)
British Airways and Iberia sign merger agreement BBC News (8/4/10)
Are mergers good for airlines? BBC News, Edwin Lane (4/5/10)
United boss Glenn Tilton on Continental merger BBC News (3/5/10)
United and Continental bosses’ press conference on merger BBC News (3/5/10)
Data
Aviation Data & Statistics Federal Aviation Administration
TransStats RITA, Bureau of Transportation Statistics
Airline and Airport Statistics European Regions Airline Association
Questions
- What type of merger is the one between United and Continental: horizontal, vertical, conglomerate or a mixture?
- What types of economies of scale can be achieved by a merger of airlines?
- For what reasons may a merger of airlines result in higher revenues?
- To what extent will passengers (a) gain and (b) lose from airline mergers? What determines the size of these gains and losses?
- Is the airline industry an oligopoly? To what extent is there collusion between the various airlines?
- What should be the attitude of regulatory authorities across the world to airline mergers?
The UK has adopted a relatively open market policy towards takeovers of domestic companies by ones from overseas. True, takeovers have to be in accordance with competition legislation, namely the 2002 Enterprise Act, or, in the case of takeovers affecting competition in the UK and at least one other EU country, the EU 2004 merger control measures and Article 102 of the Lisbon Treaty. The EU regulations disallow mergers if they result in ‘a concentration which would significantly impede effective competition, in particular by the creation or strengthening of a dominant position’ (see Economics (7th ed) pages 370–3 or Economics for Business (5th ed), pages 443–50). The UK legislation is similarly concerned with a substantial lessening of competition. But in both cases, competition policy is not concerned with whether the takeover is by a foreign company rather than a domestic one. So should we be concerned?
Interest in this question increased recently with the takeover of Cadbury by Kraft. Many saw it as yet one more example of British companies being taken over by foreign ones. Other examples include the takover in 2008 of Scottish and Newcastle (brewers of Courage, John Smith’s, Fosters and Kronenbourg) by the Carlsberg/Heineken consortium; the sale of the Rover group, with Minis now made by BMW, and Jaguar Land Rover now owned by Tata Motors of India; and the takeover in 2007 of Corus, the Anglo-Dutch steelmaker, by India’s Tata Steel. One of the key complaints about foreign takeovers is when they result in job losses. Although Kraft gave assurances that the Cadbury plant at Keynesham, near Bristol, would remain open, as soon as the takeover was completed, Kraft announced the closure of the Keynesham factory. Tata Steel earlier this year decided to mothball its steelworks at Redcar, on Teesside. It may never re-open.
But there are many arguments on either side about the desirability of takeovers by foreign companies. On the positive side, they may result in investment in new plant and new products and a faster growth of the company. This could result in more employment, not less. They may bring in foreign expertise and give access to new technology; they may be able to achieve various economies of scale through joint operations; productivity may increase. As the article from The Economist states:
For 30 years the consensus has been that Britain has more to gain than to lose from its open embrace of globalisation. … Britain has enjoyed a strong inflow of foreign direct investment. It has consistently attracted more than any other European country. A report on British manufacturing for Policy Exchange, a centre-right think-tank, notes that the openness of the economy “makes Britain a magnet for foreign companies looking for acquisitions on which they can build their manufacturing operations” for Britain and elsewhere.
On the negative side, there may indeed be job losses as ‘rationalisation’ takes place. Head office functions and key research facilities may move abroad. Hostile takovers may result in the stripping of assets for short-term gain, thereby undermining the loing-term viability of the company.
The article from The Economist explores these issues.
Article
Small island for sale The Economist (25/3/10)
Data
A summary of cross-border mergers, acquisitions and disposals by UK companies and foreign companies in the UK can be found at: Mergers & Acquisitions data Office for National Statistics
For statistical bulletins and press releases see: Mergers and Acquisitions involving UK companies Office for National Statistics
For international data on foreign inward and outward direct investment see: Interactive database on Enterprise and Investment UNCTAD
See also: World Investment Report UNCTAD
Questions
- Explain what is meant by the ‘competition for corporate control’. In what ways does this competition affect consumers?
- From the point of view of a multinational company, assess the strategy of acquiring foreign companies by hostile takeovers.
- Has the UK benefited from an open policy towards inward investment and foreign takeovers of UK companies?
- How do short-term flows of funds prior to a takeover impact on the takeover process?
- Compare the trends in inward investment to the UK with outward investment by the UK.
- Examine the arguments for and against the government blocking takeovers if they threaten jobs.