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ADRIENNE KŐHALMI GAZDASÁGI ANGOL Középfokú szakmai nyelvvizsga szóbeli témakörök 1 2 Témakörök és altémák középfokon (B2) A témakörök nem lexikális számonkérésére irányulnak. szakmai tudás Mérési céljuk annak vizsgálata, hogy a vizsgázó szakmai háttérismereteinek birtokában milyen szinten képes a szakmai beszédközösséget jellemző sajátos nyelvhasználatra, illetve előre jelezzük, hogy a vizsgázó milyen mértékben és módon lesz képes szakterületén szakmai feladatok megoldására a nyelv e sajátos használata révén. Európai integráció 1 Létrehozásának céljai, bővítési hullámok 2 A Monetáris Unió (célok, tagsági kritériumok, tagországok) 3 Az EU tagság előnyei, a tagországok közötti problémák, egyes országok távolmaradásának okai Globalizáció 4 A globalizáció jellemzői, előnyei és hátrányai 5 A multinacionális vállalatok 6 A globalizáció ellenes mozgalmak céljai Piac és gazdaság 7

A piac szabályozó szerepe a gazdaságban 8 Fontosabb piacgazdasági modellek főbb jellemzői (pl. japán, amerikai modell) 9 A magyar piac jellemzői, változásai, fogyasztói magatartások és szokások Munkaerőpiac 10 A magyar munkaerőpiac jellemzői 11 A munkahelykeresés folyamata (módjai, csatornái, állásinterjú) 12 A munkaerő mobilitásának kérdései az EU-ban és Magyarországon Adózási rendszerek 13 Az adózás szerepe az állam szempontjából, 14 Főbb adónemek jellemzői (direkt és indirekt adók) 15 Az adózás átláthatósága, adófegyelem, adócsalás Környezetvédelem 16 Globális fenyegetések (felmelegedés, ózonlyuk, víz-, levegő-, talaj-, zajszennyezés) 17 Energiaproblémák, alternatív energiaforrások (víz, szél, geotermikus energia, biomassza) 18 A hulladékok problémája (mennyiségük, tárolásuk, újrafelhasználásuk, veszélyes hulladékok) Vállalkozási formák 19 Magyarországra és a célnyelvi ország(ok)ra jellemző

vállalkozási formák 20 Fúziók és felvásárlások, multinacionális vállalatok 21 Egy vállalat felépítésének bemutatása Bankrendszerek 22 A jegybank működése és feladatai 23 A kereskedelmi bankok jellemzői 24 Banki szolgáltatások az ügyfél szempontjából Tőzsde, befektetések, pénzpiacok 25 A tőzsde szerepe a gazdaságban 26 A tőzsde működése 27 Tőzsdei befektetések és befektetők Nemzetközi kereskedelem 28 Magyarország kereskedelmi kapcsolatai 29 Magyarország és a célnyelvi ország(ok) közötti kereskedelmi kapcsolatok 30 Kereskedelmi protekcionizmus (okok és eszközök) Marketing 31 A marketing (összetevői, fajtái, szerepe) 32 A reklám (reklámcsatornák, reklámtechnikák) 33 A reklám és a vásárló, a sikeres reklám Telekommunikáció, Internet 1 A telekommunikáció a XXI. században (szerepe a gazdaságban és a társadalomban) 2 Elektronikus pénzügyi, kereskedelmi, stb. szolgáltatások 3 A távmunka előnyei/hátrányai a

munkaadó és munkavállaló szempontjából A magyar gazdaság aktuális problémái 1 Magyarország aktuális gazdasági helyzete, középtávú kilátásai 2 Magyarország és a célnyelvi ország gazdasági kapcsolatai 3 Magyarország, mint EU tagország A célnyelvi ország(ok) gazdaságának aktuális problémái 4 A célnyelvi ország(ok) aktuális gazdasági helyzete, középtávú kilátásai 5 A célnyelvi ország(ok) kapcsolata az EU-val. 6 A célnyelvi ország és Magyarország gazdasági kapcsolatai Társadalom és gazdaság 7 Az öregedő társadalom problémái 8 Társadalmi egyenlőség, faji, nemi, életkor szerinti diszkrimináció a gazdaságban 9 Szociális ellátó rendszerek (egészségügy, oktatás, nyugdíjrendszer) 2 1 Types of Banks Central banking The Bank of England as the countrys 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 the 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 governments bank. It manages the governments banking accounts, for example for the Exchequer 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 borrowing: short- term: through the sale of Treasury Bills, and long-term: management of government stocks • It manages the exchange equalisation 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 Wales. • It is the bankers bank: Each of the clearing banks has an account with the Bank. The clearing banks keep about the half of their

liquid 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 require loan. • It has international responsibilities: The Bank provides services for other central banks and for example for the IMF. • 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 low 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 3 2 Clearing banks: • They accept deposits of money • They provide a system of payments mechanism • They provide a wide range of services They handle the exchange and settlement of cheques 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 cheque guarantee card, travel cheques and foreign currency. State banks The National Savings Bank operated through the Post office The National Girobank: financially independent from the Post Office Merchant banks They are private firms that offer highly specialised services almost exclusively for business customers. Their main activities: • Acceptance house activities: they lend their name to a bill of exchange issued by less well-known traders, so that it becomes more acceptable

because of the banks good reputation. They confirm the buyer’s ability to pay for the product • Issuing house activities: they sponsor first issues of companies shares , and they are intermediaries between companies seeking capital and those willing to provide it. • Capital 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 400 foreign banks in London. They provide services and credit to companies from their own countries operating in Britain, but some of them make substantial sterling loans to British borrowers, too. Banking in the USA In 1913, the Congress established the Federal Reserve System and required all national banks to belong to this system. State banks were invited to join and many did Now most American banks belong to the FRS, which regulates banking in America. The nation is divided into 12 Federal Reserve

Districts. There is one Federal Reserve Bank in each district They operate under the centralised control of the Federal Reserve Board in Washington. It consists of 7 members appointed by the President and approved by the Senate for a 14-year term. This Board makes most of the major decisions for FRS. The Federal Reserve Banks do not business with individuals or business firms. They serve only the Federal Government and the members banks of FRS. The Federal Reserve Banks serve two main purposes: • The Federal Government uses them to handle its own banking needs. The Federal Reserve Banks also handle the sale of bonds issued by the US Administration • The Federal Reserve Banks provide important services to the member banks. Member banks are required by law to set aside a part of their depositors money . This is called their reserve and each bank must deposit its reserve in the FRB that serves its Federal Reserve District. 4 Vocabulary Deposit Treasury bill Gilt-edged securities

Bill of exchange To discount a bill of exchange Clearing Banks Savings bank betét (bank témakörben), de lehet letét is Kincstárjegy Biztonságos államkötvények Idegenváltó; váltó = feltétel nélküli fizetési felszólítás, amit vki aláírásával kiállít vki másnak; a címzettet arra utasítja, hogy meghatározott időben fizessen ki egy adott összeget vagy egy bizonyos személy számára, vagy a dokumentum bemutatójának. váltót leszámítolni, diszkontálni klíring bankok, zsíró bankok = olyan bankok, melyek tagjai a London Bankers Clearing Bank Association-nek, mely lehetővé teszi a csekk- és készpénzforgalom elszámolását Angliában takarékpénztár Overdraft számlahitel, hiteltúllépés = folyószámla-hitel, meghatározott határértékig változó összeggel To buy on the hire-purchase system Acceptance house/ accepting house részletre vásárol váltóbank; olyan pénzintézet, melynek tevékenységei közé tartozik a váltók

értékesítése akár elfogadással, akár garanciával. Valójában garantálja az áruk vásárlójának vagy importőrének pénzügyi helyzetét azzal, hogy vállalja a váltókötelezettséget, azaz aláírásával igazolja, megerősíti, hogy a vevő illetve az importőr az árut ki tudja fizetni kibocsátóház; olyan pénzintézet, mely a vállalatok tőzsdei bevezetésében, illetve részvényeik kihelyezésében és a tőkenövekedést célzó további tranzakciók lebonyolításában segédkezik szakosodott kereskedelmi bank Issuing house Merchant bank 5 The European Union The European Union, then known as the European Economic Community, was set up in 1958. The six member countries (West Germany, France, Italy, Belgium, the Netherlands and Luxembourg) committed themselves, in the Treaty of Rome, to establishing a Common Market. By the late 1990s the EU consisted of 15 countries They included the original six plus countries such as the UK, Spain, Ireland, Greece and

Sweden. At that time other countries such as Slovenia, Hungary and Bulgaria were hoping to join in the future. Four basic types of economic integration 1. Free trade area (FTA): Tariffs are abolished among FTA members (there are no internal tariffs) but each member retains its own external tariff against non-FTA countries, eg. NAFTA, EFTA, 2. Customs union (CU): Members set a common policy for trade and tariff with non-members The EEC was a customs union. 3. Common Market: Abolition of restriction on mobility of production factors such as labour and capital. 4. Complete economic integration: Fiscal and monetary policies are unified to create even greater economic harmonisation. This level implies a degree of political integration This is the direction in which the EU is moving. There are some advantages to businesses operating in countries belonging to a customs union or common market. • Firms operating within customs unions have free access to markets, which would otherwise be

protected by tariffs or quotas. In this way British firms, for example, have access to all other EU markets. For many firms this provides them with the opportunity to operate in EU markets in much the same way that they would at home. • Firms will have access to the most appropriate factors of production. A British firm might purchase cheap land in Southern Portugal for a new factory location, skilled designers from Italy or capital equipment from France. 6 • • • Customs unions provide firms with 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 EU provides firms with access to 360 million consumers. Businesses operating within a common market will be protected from competition from outside this area by an external business. Such protection allows businesses to be sheltered from the potentially damaging effects of competition such as price wars. Increased competition from European

firms may act as an incentive for British firms to increase efficiency and standards. There are, however, disadvantages for businesses operating within a customs union or common market. • Before Britain joined the EU, British firms could buy goods and services from the lowest cost producers around the world. Foodstuffs were imported in huge quantities from New Zealand and the USA in this way Since joining the EU, however, British firms have had to pay far more for foodstuffs from New Zealand and Australia because of the common external tariff. • Whilst a British based firm will have free access to other EU markets, businesses based in these markets will also have access to the UK market. Such competition may reduce the market share, which domestic businesses have established. • Protection from external tariffs is not always beneficial to firms operating from within 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 deterioration in the firms performance • Firms may have to adapt their marketing strategies to suit the needs of consumers in each country within the customs union. For example, surveys have found that of the thousands of products commonly sold in European supermarkets, only a small proportion are widely on sale in identical format in at least the four largest countries. The four freedoms Free movement of goods, services and capital: The first step in the creation of the internal market was to eliminate all the customs duties levied on imports and exports between the member states. In the EU 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. Member states also succeeded in freeing all capital movements. Free movement of persons: Nationals of countries who are signatories to the Schengen Convention may move freely

across borders without passport or administrative requirements. a, Geographical mobility is a person’s right to go and stay in another member state to seek employment. b, Occupational mobility covers people’s right to pursue whatever occupation they wish. c, Social integration refers to workers’ right to all the general welfare benefits available in the given member state The Treaty of Maastricht The Maastricht Treaty was approved in 1991. It calls for establishing the European Economic and Monetary Union (EMU) and also a political union. The EMU 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 GDP and public debt as a percentage of GDP would be reasonably similar. The political union involves a number of issues, such as a common European citizenship, joint foreign, defence, immigration and policing policies

and the harmonisation of social policy concerning working conditions and employees’ rights. Some countries, such as France and Germany want closer European integration, others such as the UK and Denmark want less centralised control. EU policies and business The European Union has economic policies, which are designed to help businesses within member countries. These policies vary from employee protection and consumer protection to transport and energy policies. Here we will concentrate on three policies and their effects on business. 7 The Common Agricultural Policy (CAP): This policy operates in all EU countries and accounted for approximately half of the EUs 590 billion budget in 1998. Article 39 of the Treaty of Rome states 5 objectives of agricultural policy: • to increase the productivity of agriculture; • to ensure a fair standard of living for farmers; • to stabilise markets; • to guarantee supplies; • to ensure fair prices. The EU guarantees farmers a fixed

minimum price for their produce. The EU will buy up any amount that farmers produce at this price. Farmers could, of course, always sell on world markets if the market price was higher If the market price drops below the minimum, however, CAP maintains the price to farmers, thus guaranteeing their income. For farmers the CAP guarantees them a price for their produce so that they are not at the mercy of fluctuations in price. This means that fewer farmers will go out of business during difficult years and, to some extent, their incomes will be guaranteed. The CAP has a number of problems associated with it. • Overproduction: The setting of high, guaranteed prices has often caused excess supplies of a variety of agricultural products. EU authorities purchase any excess supply They prevent it from being sold on markets by storing it, resulting in butter mountains, wine lakes etc. • High prices: The minimum price set by the EU for agricultural products as part of CAP is very often

higher than the price, which would have resulted without their intervention. It is consumers and businesses such as food retailers who suffer as a result of these high prices. • Purchasing excess supplies of agricultural products is expensive for the EU. It is possible that the money spent on this could be better diverted to projects such as providing grants to firms engaged in producing new high technology products. • It prevents non-EU countries from competing in EU markets. It therefore represents an obstacle to the signing of international trading treaties. Regional policy The Regional Fund: This provides funds to member states to help reduce unemployment in depressed parts of the EU. It also aims to encourage development in areas on the edge of the EU, such as Southern Italy and Northern Ireland. For example, construction firms may win contracts to build new roads, or industrial units could be financed through the Regional Fund. Similarly, firms may receive investment grants

if they locate in particular parts of the EU. Social policy The Social Chapter: The Maastricht Treaty was signed by all EU member states in December 1992. One section of this treaty is the Social Chapter. The aim of the Social Chapter is to standardise working conditions throughout the EU so that all workers within the community are guaranteed basic rights. These include the following: • A minimum wage to be paid to all workers. • A maximum working week. • A minimum paid holiday per year. • The freedom to join a union. • Access to appropriate training. • The right to be consulted and informed about company plans • The protection of young workers. The UK initially opted out of the Social Chapter, when all other EU nations signed it. However, the UK signed up to the Social Chapter after the election of a Labour government in 1997. What might be the implications of the Social Chapter for businesses? • Workers may be better motivated. This should make them more effective

and productive employees, able to raise the efficiency of the firm for which they work. • Industrial relations may improve as employees are involved in making company decisions and consulted about the work, which they carry out. 8 • • It may raise the labour costs of those firms currently employing workers at wages below the minimum level set out in the Chapter. Those firms expecting their employees to work longer than maximum may also find their costs rise as they are required to employ more people. Higher labour costs may make it more difficult for EU based firms to compete with businesses in low wage countries, such as China or South Korea. The Single European Market A major event in the EUs move towards free trade was the signing of the Single European Act in 1986, which established a SINGLE EUROPEAN MARKET, which came into being on 31 December 1992. Despite the existence of a customs union for over 30 years, there were still many non-tariff barriers to trade in the

EU. This Act aimed to remove those barriers between EU member countries. The effects of this should be to encourage the freer movement of people, goods, services and capital. Three categories of barriers were removed • Barriers, which prevented entry into markets. For example, differing technical standards were required of products by different member states. This made it difficult for firms to enter certain markets Also, the practice of public sector contracts being given only to domestic firms prevented free trade. • Barriers, which caused firms costs to rise. Often complex documents were needed in order to move goods from one country to another. Also, there were long delays waiting to get exports through customs posts • Barriers, which lead to the market being distorted. Such barriers are said to prevent firms from competing on equal terms. They included differing rates of VAT in EU countries and subsidies given by EU governments to domestic industries. Not all firms have been

affected to the same degree by the Single Market. In some industries, very few barriers to trade existed between EU countries before December 1992. Firms operating in such industries have seen little or no changes to their situation. However, in other industries, where trade barriers were high, the Single Market has resulted in major changes for those firms operating within them. What effects has the Single Market had on firms in member countries? • Product standards. Firms have, for example, had to alter their products so that they meet new product standards. Many firms have had to improve the safety aspects of their products in order to meet new EU regulations. • Harmonisation of tariffs and taxes. There have been attempts to harmonise VAT rates throughout the EU For businesses this may mean that the selling prices of their products rise or fall in line with VAT rate changes. In the UK, a number of products such as children’s’ clothes and books, which had previously not

attracted any VAT, now have to face this tax as the UK seeks to fall into line with other EU countries. Attempts have also been made to harmonise EXCISE DUTIES on products such as petrol, tobacco and spirits. This has affected the price at which 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 paperwork, which is required for goods traded between EU countries, should save businesses, time and reduce costs. The single European currency EUROPEAN MONETARY UNION (EMU) became a reality in January, 1999 when a single European currency was introduced. At that time, eleven of the fifteen member states of the EU signed up to the single European currency, known as the euro. Four member states of the EU, including the UK, delayed the decision to join the single currency in 1999. They indicated that they would decide whether or not to join at a later date In 1999 participating countries fixed

their exchange rates so that they could not move against each other and against the euro. In 2002 euro notes and coins were to be available In order to manage the single currency a European Central Bank (ECB), based in Frankfurt, was established. Amongst other things the European Central Bank is responsible for setting interest rates throughout the eleven participating countries. It was argued that European Monetary Union would have a number of benefits for businesses within the euro zone: • A reduction in transactions costs: It is expensive for a business to change currencies when 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 between countries is done in euros. For example, a French business exporting telecommunications equipment to Italy will no longer have to convert Italian lira into French francs. It has been estimated that the savings made from

the introduction of the single European currency would be between 0.25 to 05 percent of national income for a member country. 9 • • • A reduction in uncertainty: The uncertainties of trading are reduced for those businesses within the euro zone. It has been argued that greater stability within the euro zone would lead to greater confidence amongst businesses, thus leading to more trade between member countries. One reason for stability is because there is no possibility of exchange rate fluctuations. Fluctuations in exchange rates can make it difficult for importers and exporters to know what price they will receive or have to pay for future transactions. For example, a Spanish business that received the value of 500,000 lire instead of 600,000 for a sale as a result of a fall in the value of the pound will find that its profit margins are cut. Some businesses try to hedge against rising prices by stockpiling stocks of components, which can be expensive. It could also be

argued that the control of monetary policy by the ECB would 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 which 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 show that a company is offering good value for money in the products it is selling. Companies that charge different prices in different countries may decide to reduce their prices to be more competitive, or to round up prices, which may increase profits. Companies will also be able to see the prices of competitors more easily. Merger activity: The introduction of a single currency will make cross-border mergers between businesses in member countries easier. They will each

have the same pricing and accounting system, which should help the coordination of the business. Problems The impact of the ECB: The European Central Banks central role in setting interest rates and controlling monetary policy for all nations within the euro zone could have a damaging effect upon businesses. This is because the interest rates and monetary policy pursued by the ECB will reflect the needs of the member countries as a whole. If there are inflationary pressures in the euro zone the ECB is likely to pursue tight monetary polices, such as the raising of interest rates. However, there may be particular countries within the euro zone which do not have inflationary pressures, but which are seeking to avoid recession. Such countries would also be subject to tight monetary policies, but for them it would be inappropriate. These policies could help drive these countries into recession with damaging effects for business. EU institutions The European Council is made up of the Heads

of State or Heads of Government and the President of the European Commission assisted by the Foreign Ministers and a member of the Commission. It meets twice a year in the capital of the member country whose head of state or government is currently the President of the Council of Ministers. It does not make laws and it is not involved in "routine" decision-making but it does make key political decisions on many of the most important, most sensitive, and most controversial matters facing the EU. The Council of Ministers, based in Brussels, is the real power behind the bureaucracy. It is the main decision-making body It is entrusted with deciding major policy issues for the EU. The European Commission with its headquarters in Brussels is the EUs watchdog or "civil service". Its commissioners are nominated by the governments of the EU countries for a five-year renewable term. The Commission has various duties, five of which are of particular importance: • • • •

• Initiates EU policies. Has major responsibilities with regard to the management, supervision and implementation of EU policies. Together with the Court of Justice ensures that EU law is respected. Represents the EU in many of its external relations. Acts as a mediator and conciliator. The European Parliament is elected by direct universal suffrage. It normally sits in Strasbourg, where full plenary sessions, open to the press and public, are held for one week each month. The representatives in the Parliament are seated by political party not nationality. It functions as a political driving force and it is also a supervisory body with the power to approve the appointment of the European Commission and to dismiss it on a censure motion carried by a two-thirds majority. The Court of Justice is the chief judicial body of the EU. 10 The labour market The labour market is determined by the forces of demand and supply. The demand 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 workers. • If businesses intend to employ extra staff, they have to make sure that the costs of employing this extra staff are lower than the extra revenue they generate. • With higher wages, companies will employ fewer employees. Certain factors can increase or decrease the demand for labour: • Changes in labour productivity - if workers are able to improve their productivity, the business is more likely to employ extra workers. • Demand for the product - the demand for labour is a derived demand for the products or services that businesses produce. For example a design company may employ extra workers as a result of growing demand for promotions. The supply curve of labour shows the amount of labour, which is supplied to the market at a particular wage rate. Individual

workers • • • • For an individual worker the supply of labour is the number of hours that he/she is prepared to work. As the real wage rate rises, a worker is likely to want to work longer hours. The real wage shows what the wage of the worker can actually buy, so it takes into account the changes in prices of goods. Above a certain real wage rate the number of hours worked will decrease. 11 Supply to an industry • The higher the real wage rate is, the more workers are prepared to offer their services to the labour market. What can lead to changes in the supply of workers to businesses? • • • Improvements in geographical mobility - businesses can attract new employees from other parts of the country. Occupational mobility - how easy it is to move from one type of job requiring certain skills to another type of job requiring another skills. The availability of training schemes Total supply depends on: • • • • Birth and death rates Migration The age

distribution of the population The number of people physically capable of working Wage and employment determination • • In competitive labour markets the price of labour is determined by the interaction of the demand curve for and the supply curve of labour. Equilibrium price: the point at which the demand and supply intersect/meet. Labour market conditions and business Different conditions can influence the demand for and supply of labour: • Government 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 organizations 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 down the equilibrium rate. Labour shortages are likely to have the opposite effect. 12 The Stock Exchange Functions of the Stock Exchange There are stock exchanges in almost every major city in the world, but perhaps the most important ones are in New York, London, and Tokyo. Stock exchanges are markets where securities - shares and bonds, and also options and foreign exchangeare traded. Therefore, what happens on the exchange is crucial to the economy It is the stock exchange where funds to finance companies and government projects can be found, where surplus monies can be invested, where the standing of companies can be evaluated, and where people can either limit their financial risks or lose or gain money by speculation. This element of speculation has resulted in criticism from people who liken stock exchange operations to gambling; in both ventures you can

gain or lose vast fortunes without much effort. But whereas in a gambling casino it is mere chance that determines the winning numbers - and ultimately it will be the owners of the casino who will reap a safe and handsome profit - on the stock exchange it is economic forces that work. Here too the distribution and redistribution of the gains have their role and function in the economy. Without stock exchanges, capitalism could not function efficiently. People buy securities because they want to make a profit. Speculators who hope that the price of stocks and shares will rise and therefore buy them in large quantities in order to sell them later at a higher price are called bulls, and a market in this general mood is called bullish. Speculators who sell their securities in the belief that their price is about to fall are called bears, and a market is bearish when most people want to sell their securities. A speculator who wants to make a profit when he accepts a fall in prices will sell

stocks at todays price for delivery at a later date. He will sell the stocks short, which means he does not own them now, but he hopes he can get them at a lower price when the has to deliver them. The difference between todays price and the lower price in the future is his profit. Shares 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. Whereas in a futures 13 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 within a given period of time. An option to buy is a call option, and an option to sell is a put option. When a speculator thinks that the price of a security is about to go up, he will buy a call option. If - as he has expected - the price has gone up before the expiry date of the option, he will exercise the option, buy the

security at a cheaper price than the current value, and thus make a profit. If the price, however, has fallen, there is no sense in buying the securities. This way he will only lose the option money (premium). The volume and price of the securities traded on the stock exchange are important indicators of the economy. Price fluctuations reflect market expectations about the performance of the economy, though, of course, the speculative character of the market can cause sudden changes in stock prices. A coup in South America, an uprising in Africa, or even the illness of a president may send prices soaring or falling. The most widely quoted indicator of the US stock market is the Dow Jones Industrial Average, which covers the shares of 30 well established companies on the New York Stock Exchange. The FT (Financial Times) index is the London Stock Exchange indicator, and the Nikkei index reflects the mood of the Tokyo exchange. Participants of the Stock Exchange are individuals and

institutional investors (those who collect and invest savings of many others: insurance companies, pension and union funds, unit trusts) Membership: Only Member Firms of Stock Exchange are allowed to take part in dealing on the Exchange floor and outsiders must carry out their buying and selling through them. The Member Firms are called brokers or dealers and some of these specialise as what are known as Market Makers. • Broker/Dealers: they buy and sell shares as agents for public investors. • Market Maker: A dealer who buys and sells shares of any kind on his own account and not as a broker who buys and sells for other persons. Control: The Stock Exchange Council is elected by the members of the S. E Functions: 1. It controls the admission of new Members 2. It disciplines Members who are guilty of misconduct 3. It formulates the Stock Exchange rules 4. It settles disputes between Members 5. It provides settlement and information services to Members 14 EU Expansion Thirteen

applicant countries are presently engaged in the process: Estonia, Latvia, Lithuania, Poland, the Czech Republic, Slovakia, Hungary, Slovenia, Romania, Bulgaria, Malta, Cyprus, Turkey. Accession negotiations are under way with the first twelve, and the objective affirmed at the European Council in Göteborg is to complete them by the end of 2002 with those countries that are ready to join, so that they can take part as members in the European Parliament’s elections of 2004. Main Benefits The benefits of enlarging the Union to include these countries are political, economic, and cultural. The extension of the zone of peace, stability and prosperity in Europe will enhance the security of all its peoples. The addition of more than 100 million people, in rapidly growing economies, to the EU’s market of 370 million will boost economic growth and create jobs in both old and new member states. There will be a better quality of life for citizens throughout Europe as the new members adopt

EU policies for protection of the environment and the fight against crime, drugs and illegal immigration. The arrival of new members will enrich the EU through increased cultural diversity, interchange of ideas, and better understanding of other peoples. Enlargement will strengthen the Union’s role in world affairs – in foreign and security policy, trade policy, and the other fields of global governance. Benefits are already visible. In Central and Eastern Europe, stable democracies have emerged, with democratic institutions and increased respect for minorities. The economic reforms in these countries have led to high rates of economic growth (higher than the EU) and better employment prospects. This process has been helped and encouraged by the prospect of EU membership, and 15 As a result the Union enjoys growing trade with these countries (€17 billion trade surplus in 2000), and this generates employment and growth 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 Union needs to prepare itself adequately to receive them. The Commission makes regular assessments of the progress of the applicant countries. None are yet fully ready, but all have made remarkable progress in the last decade. The criteria for membership were fixed by the European Council in Copenhagen and Madrid: democracy, the rule of law, human rights, respect for minorities; a functioning market economy, and the capacity to cope with competitive pressures, the ability to take on the obligations of membership (in other words, to apply effectively the EU’s rules and policies). The Union itself must prepare for the arrival of new members by: making the institutional changes necessary for enlargement. That means ratifying the Treaty of Nice; meanwhile, the applicant countries are already participating in the ongoing debate

on the future of Europe. Economic Analyses Numerous economic analyses have concluded that the benefits of enlargement outweigh the costs. Although the benefits are relatively larger for the acceding countries, because they start from a lower economic base (their economies represent only about 6% of the GDP of EU-15), there are gains for both sides. Moreover, the future members, already exposed to the challenge of globalisation, will help the Union to surmount it. A key academic study in 1997 by the Centre for Economic Policy Research estimated that accession of countries of Central and Eastern Europe would – even in a conservative scenario – bring an economic gain for the EU-15 of €10 billion, and for the new members of € 23 billion. The latest analysis of business circles argues that there are ‘potentially huge economic and business benefits of taking applicant countries into the EU as soon as possible’. A recent study of the Commission estimates that enlargement could

increase the growth of GDP of the acceding countries by between 1.3 and 21 percentage points annually, and for the existing members it could increase the level of GDP by 07 percentage point on a cumulative basis. Concerning the budgetary consequences of enlargement, the framework has already been decided by the European Council in Berlin, and includes a modest amount (less than 10%) for transfers to the Central and East European countries for the period up to 2006. In the longer term, after 2006, expenditure will depend on a series of decisions to be taken in fields such as agricultural policy, etc. The increase in the budget resulting from enlargement will be a political rather than an economic issue There have been several analyses of the impact of enlargement on the labour market and migratory flows. An extensive study made for the Commission suggested that only about 335,000 people would move to the EU-15 countries from Central and Eastern Europe even if there were free movement of

workers immediately on accession. In fact, the Union has now agreed on a flexible transition period of up to seven years for limiting the inflow of workers from new member states. Costs of non-enlargement Non-enlargement, or a delay in enlargement, would have costs both for the Union and for the applicant countries. Delay in enlarging the single market, and lower economic growth in the applicant countries, would deprive member states of economic benefits. For the applicant countries failure to join the Union would weaken the incentive for economic reform, discourage foreign investment and reduce economic growth. It could thus create political instability in Europe, and even undermine the process of democratisation, with potential repercussions for the Union. Without enlargement, the Union would be less able to combat the problems of organised crime, illegal immigration and terrorism. Disillusion with the Union in the applicant countries would feed Euroscepticism in the member states.

16 Banking services The varied services of the financial sector are carried out by a large number of financial institutions which all have one thing in common: they all collect funds from the public and then use these funds to make loans and investments Commercial banks (known as clearing banks) provide a very wide range of services to costumers. Core banking operations can be classified as traditional branches of banking, electronic transfers and non-financial branches of banking. 1. Traditional branches of banking include the following services: • Deposits: can be collected from private depositors or from public depositors. • Lending: conditions: the three Cs of credit (character + capacity + capital): business loans, consumers loans: repayment terms and interest rates are usually arranged by the borrower, mortgages: contracts by which the owner of property (the mortgagor) borrows money, giving the lender (the mortgagee) an interest in the property as security for the loan,

there are 2 basic types of mortgage (against real estate /on personal property) • bankers services: current-account services, deposit-account services savingsaccount services 2. The newest service provided by financial institutions is electronic banking: • ATM: Automated Teller Machines: they tan dispense cash from the clients current account. • ACH: Automated Clearing Houses: they make debit and credit transfers between banks easier, quicker and safer • POS: Point of sale terminals: computerized cash registers connected to a banks computer terminal. If a consumer buys something and pays by card it automatically transfers the required amount of any purchase to the stores account 17 3. Banking businesses include a lot of non-banking services: • Executor and trustee services: banks are allowed to handle real estates or personal property on the basis of trusteeship when people die; they manage pension funds as well. • 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 24 hours a day and it is easy to reach with an Internet connection. Services: • Loading statement of your account in the same form that you would receive by post. • You can give a transfer order to one account or a group transfer order to several, different accounts • You can open credit accounts, currency account (transfer in currency, exchange operations, tying up) or securities deposit account • Retail customers can open savings accounts and handle deposit accounts. To whom it is recommended: • To retail customers with a current account • To companies with small turnover • To one-man businesses Advantages: • You can settle the transfers more easily with 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-flow management. Note: The customer has to sign an Internet banking contract with the bank and then he will get the necessary software to be able to connect to the system. Some banks do not require software Vocabulary branch statement of account transfer order group transfer order currency account tying- up securities deposit account one-man business turnover cash-flow management bankfiók számlakivonat átutalási megbízás csoportos átutalási megbízás devizaszámla lekötés értékpapírszámla egyszemélyes vállalkozás forgalom likviditás (pénzforgalom) menedzselés 18 Types of securities Securities are financial assets, which represent ownership in or debt of companies. Securities refer to both shares and bonds, which are the two most common types. A share confers on its owner a legal right to the part of the companys profit. It represents ownership in a company and entitles the owner to participate in the distribution of the companys profit.

When an investor buys a share, using the services of a specialist company or broker, he or she becomes a shareholder (stockholder) and owns a part of a company. Shareholders on the other hand, as owners of the company, have no guarantee of their investment. If the company fails, their shares will become worthless Although because of limited liability, shareholders are not responsible for the companys debt. Dividends are paid to shareholders out of profits, which means that if the company has had a weak business performance, no dividends are distributed. The amount of dividend is decided by the Board of Directors 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: • Ordinary shares (common stock or equities): which have no guaranteed amount of dividend but carry voting rights; traded on stock exchanges and represent one of the most important types of security for investors;

fixed unit of the share capital of a company; • Preference shares (preferred stock): an intermediate form of security between an ordinary share and a debenture; in the event of liquidation, they are less likely to be paid off than debentures, but more likely than ordinary shares; preference shares may be redeemable at a fixed or variable date; voting rights are normally restricted; owners are entitled to a fixed rate of dividends which is called practically interest. • Founders shares: shares issued to the founders of a company, who often have special rights to dividends. 19 • Deferred ordinary shares: ordinary share, formerly often issued to the founding members of a company, in which dividends are only paid after all other types of ordinary share have been paid; such shares often entitle their owners to a large share of profit. Shares in public companies may be bought and sold in an open market, e.g a stock exchange Shares 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 elsewhere. Employee share ownership plan (ESOP): method of giving employees shares in the business for which they work. A bond is a type of debt issued in certificate form, on which interest is paid over a certain period of time. On the expiration date (date of maturity) the entire face amount is paid to the owner of the bond. Irredeemable or undated securities do not bear a date at which the capital sum will be repaid or redeemed. A company can borrow money from investors by issuing bonds, loans for fixed periods with fixed interest rates. Bonds may be issued not only by companies, but also by the governments or municipalities. • G stocks or bonds (gilt edged securities): also called gilts; used to raise money to finance government projects; gilts are among the safest of all investments, as the government is unlikely to default on interest or on

principal repayments; issued for a fixed period of time; receive a fixed rate of interest • Local Authority Bonds: issued by local authorities; the money invested represents loan to the authority; usually bought by institutions, but can be bought also by the public; a secure form; pay a fixed rate of interest; there is a fixed date for repayment. • Debentures (járadékkötvény): are similar to bonds; they are issued by companies and are mostly secured, which means that the company guarantees the owners rights over the companys assets; debenture holders are not involved in the management of the company. BONDS Companies finance most of their activities by way of internally generated cash flows. If they need more money they can either sell shares or borrow, usually by issuing bonds. More and more companies now issue their own bonds rather than borrow from banks, because this is often cheaper: the market may be a better judge of the firms creditworthiness than a bank, i.e it may lend

money at a lower interest rate This is evidently not a good thing for the banks, which now have to lend large amounts of money to borrowers that are much less secure than blue chip companies. Bond-issuing companies are rated by private ratings companies such as Moodys and Standard & Poors, and given an investment grade according to their financial situation and performance, Aaa being the best, and C the worst, ie. nearly bankrupt. Obviously higher the rating, the lower the interest rate at which the company can borrow Most 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 liquid, although of course their price on the secondary market fluctuates according to changes in interest rates. Consequently, the majority of bonds on the secondary market are traded either above or below par. A bonds 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. For companies, the advantage of debt financing over equity financing is that bond interest is tax deductible. In other words, a company deducts its interest payments from its profits before paying tax, whereas dividends are paid out of already-taxed profits. Apart from this tax shield, it is generally considered to be a sign of good health and anticipated higher future profits if a company borrows. On the other hand, increasing debt increases financial risk: bond interest has to be paid, even in a year without any profits from which to deduct it, and the principal has to be repaid when the debt matures, whereas companies are not obliged to pay dividends or repay share capital. Thus companies have a debt-equity ratio that is determined by balancing tax savings against the risk of being declared bankrupt by creditors. Governments, of course, unlike companies, do not have the option of issuing equities. Consequently they

issue bonds when public spending exceeds receipts from income tax, VAT, and so on. Long-term government bonds are known as gilt-edged securities, or simply gilts, in Britain, and Treasury Bonds in the US. The British and American central banks also sell and buy short-term (three-month) Treasury Bills as a way of regulating the money supply. To reduce the money supply, they sell these bills to commercial banks, and withdraw the cash received from circulation; to increase the money supply they buy them back, paying with newly created money which is put into circulation in this way. 20 Unemployment Unemployment is concerned with people being out of work. The maintenance of full employment is a central policy aim of governments, but it has been accepted that there is some level of unemployment below which it is not possible to go without the return of inflationary pressure. Any attempt to control the level of employment is further complicated by changes in the size of the labour

force. Measuring unemployment It is possible to measure unemployment in various ways. In the UK, unemployment has been measured by the number of people claiming unemployment-related benefits. To claim benefits people must declare that they are out of work and be capable of, available for and actively seeking work during the week in which the claim is made. This is known as the claimant count measure. One problem with this measure is that it does not include people who are unemployed but who do not register. In the late 1990s the UK government indicated that it wanted the main measure to be the International Labour Force (ILO) measure of unemployment. This is based on a survey of people. To be unemployed a person has to be out of work, have looked for work in the last four weeks and be able to start work in the next two weeks. Types of unemployment There is a number of different types of unemployment. Seasonal unemployment: Some workers are employed on a seasonal basis. In the

construction, holiday and agricultural industries, workers are less in demand in winter because of the climate. Seasonal unemployment can therefore be high In summer it may fall, as these workers are hired. It is difficult in practice for governments to `solve this type of unemployment, which may always occur. In producing unemployment statistics, governments often adjust the figures to allow for seasonal factors. 21 Search and frictional unemployment: These two types of unemployment are very similar. FRICTIONAL unemployment occurs when people are moving between jobs. Usually it only lasts for a short amount of time For example, an electrician who had been working in the North East may have a few weeks `off before starting a new job in London. It is not seen as a serious problem by government SEARCH unemployment, however, can last longer This type of unemployment occurs when people are searching for a new job. The greater the information on job opportunities, the lower search

unemployment is likely to be. Structural unemployment: STRUCTURAL unemployment is caused by changes in the structure of a countrys economy, which affect particular industries and occupations. Examples include the decline of the coal and steel industries in the second half of the twentieth century. Between 1963 and the mid-1990s almost half a million jobs were lost in the coal mining industry. This indicates the size of the problem in the UK Because certain industries have traditionally been located in particular parts of the country, their decline can have a dramatic effect upon those regions. As a result, structural unemployment is closely linked with regional unemployment It may also result from changes in demand for the goods and services produced by particular sectors of the economy. For example, there has been a decline in demand for natural fibres such as jute as a result of the development of synthetic products. Technological unemployment: This occurs when new technology

replaces workers with machines. For example, new technology introduced to the newspaper industry has meant the loss of many print workers jobs. Cyclical or demand-deficient unemployment: CYCLICAL unemployment results from the cycles, which occur in most economies. These ups and downs in economic activity over a number of years are known as the business cycle In a recession, at the `bottom 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 and offices in the economy. Real wage unemployment: High real wages mean that workers will want to supply more labour than businesses want to employ. This results in unemployment In other words, it is argued that workers price themselves out of jobs. There are vacancies, but businesses will only be willing to pay wages, which are lower than workers are prepared to accept. Voluntary and involuntary unemployment: Some suggest that unemployment can be voluntary

or involuntary. Voluntary unemployment occurs when workers refuse to accept jobs at existing wage rates. Involuntary unemployment occurs when there are not enough jobs in the economy at existing wage rates. Economists sometimes talk about the natural rate of unemployment. This is the percentage of workers, which are voluntarily unemployed. This is also referred to as the non-accelerating inflation rate of unemployment (NAIRU) This is because it is the rate of unemployment that can be sustained without an increase in inflation. Any attempt to reduce unemployment below this level will simply result in an increase in prices. Unemployment due to obstructions to the labour market: Monetarist believe that this is the major cause of long term unemployment. They see the excessive bargaining power of trade unions as being especially important They believe that workers are then priced out of work by excessive increases in real wages. They also see excessively high unemployment benefit as a cause

of longer search time, thus increasing the number of unemployment at a given time. Government responses to unemployment • • • 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 lower taxation and/or increase public spending. It might increase effective demand (by removing restrictions on credit creation by the banking system and/or by lowering interest rates to induce both individuals and businesses to borrow 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 power of the unions by legislation. More modest wage increases might help to price people back into work. Alternatively, the government might reduce the real value of benefits in order to make jobs on low wages more attractive. It might also reduce the higher

rates of taxes on income and profits to encourage entrepreneurial activity and so encourage job creation. Where specific industries or regions are worst affected, it might use a policy of direct subsidy and regional aid measures in order to maintain existing jobs in the short term whilst encouraging the creation of new job. 22 Hungary and the EU Accession in progress Hungary concluded an Association Agreement with the European Communities in December 1991, which has been in force since 1 February 1994. The Agreement 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 freetrade area between the EU and Hungary. In March 1994, Hungary was the first country of the region to formally apply for EU membership. At the Luxembourg European Council in December 1997 it was finally decided to launch the accession negotiations with six of the applicant

countries, among them Hungary. The negotiations with Hungary were launched on 30 March 1998. Since then, Hungary has participated in eight meetings of the Accession Conference at ministerial level. A so-called Regular Report on the progress of each of the candidate countries on the way towards accession is published every autumn. In these reports, the Commission services identify the remaining shortcomings and tasks to be carried out prior to accession to meet the political, economic and legal "Copenhagen criteria" for accession, with particular emphasis on enforcement and institutional capacity. On the basis of the Regular Reports, Accession Partnerships are drawn up, which outline the most important short- and medium term priorities that have to be tackled by the respective candidate country in the near future. In December 2000, the European Council in Nice endorsed a "roadmap" for the completion of the negotiations, including a calendar for dealing with all

topics (so-called "chapters") over three Presidencies from the beginning of 2001 to mid-2002. This would enable the fulfilment of the European Council’s determination (stated at Laeken in December 2001) to bring the accession negotiations with the candidate countries that are ready to a successful conclusion by the end of 2002, so that those countries can take part in the European Parliament elections in 2004 as members following ratification of the accession treaty by the European Parliament and the Parliaments of the 15 Member States and of the candidate country. 23 The European Council agreed with the report of the Commission, which considers that, if the present rate of progress of the negotiations and reforms in the candidate States is maintained, Cyprus, Estonia, Hungary, Latvia, Lithuania, Malta, Poland, the Slovak Republic, the Czech Republic and Slovenia could be ready. The negotiating process is accompanied by regular meetings of a number of bodies under the

Europe Agreement, such as the Association Council and the Association Committee, the EP-Hungary Joint Parliamentary Committee. These forums provide the occasion to review progress in Hungary’s preparations for accession, notably in the light of the Accession Partnership priorities, and in bilateral relations under the Europe Agreement. In addition, a system of sub-committees has been established as a forum for technical discussions. Pre-Accession Assistance From 2000 onwards, the EU foresees a combined total of around € 220 million of Pre-accession assistance to Hungary on an annual basis from the three EU instruments. The PHARE programme that has been providing support to the countries of Central and Eastern Europe since 1989 allocated to Hungary € 1 030 million during the period 1992 to 1999, € 119.8 million in 2000 and € 108,8 million in 2001 In 2002 Hungary will be entitled to € 120.7 million This figure includes the additional Institution Building allocation (€ 24,7

million) in support of the Action Plan for Administrative and Judicial Capacity. 1999 Funds were fully contracted by the end of September 2001 2002 programming is advancing well and approximately € 38 million of Institution Building projects are ready for approval in February 2002. Hungary received € 88 million from ISPA (Instrument for structural policies for pre-accession) in 2000 and € 90.8 million in 2001 The support was roughly divided in equal terms for environment and transport projects. During the first two years of its operation 100% of the ISPA allocation has been committed. The Hungarian SAPARD programme (Special Accession Programme for Agricultural and Rural Development) was adopted by the Commission in October 2000. 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 will amount

to € 50.5 during the period 2000-2006, of which € 387 million will be the EU-contribution 24 Stock Exchanges around the world The London Stock Exchange The London Stock Exchange provides a range of services for companies and investors: • Company Services - the London Stock Exchange provides a number of markets which allow companies large and small to raise capital, and a range of services to increase the profile of the companies on our markets. • Trading Services - the London Stock Exchange gives market users access to a welldeveloped trading environment with a proven record of stability and flexibility. • Information Services - the London Stock Exchange provides high quality real-time price information to market users worldwide, as well as historical and reference data. Supporting 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 with others, the Exchange helps to track the performance of the markets through various indices. A brief history 1760: 150 brokers kicked out of the Royal Exchange for rowdiness form a club at Jonathans Coffee House to buy and sell shares. 1773: Members vote to change the name to Stock Exchange. 1801: The London Stock Exchange becomes a regulated Exchange. 1914: The Great War meant the Exchange market closed at the end of July until the new year. 1972: Her Majesty the Queen opened the Exchanges new 26-storey office block with its 23,000 sq ft trading floor. 1986: 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. 1995: AIM is launched - a market for growing companies. 1997: Shareholders vote for us to become a public limited company and we become London Stock Exchange plc. 25 There are two basic markets on the London Stock Exchange: • TechMARK is an international

market for innovative technology companies on the Stock Exchange. Since its launch in 1999, techMARK has established itself as a leading global market for shares in businesses at the cutting edge of technological innovation. • AIM is a global market for young and growing companies from all over the world. AIM is specially tailored to suit growing businesses, wherever in the world they are based - and its entry rules have been designed to reflect these companies unique requirements. AIM provides a central focus for investors who understand growing companies and are eager to invest in their potential. Listing on the Exchange offers companies worldwide the opportunity to grow by raising funds from one of the worlds deepest pools of capital. Companies of all kinds are attracted to list in London by its deep liquidity, widespread equity culture and sophisticated investment community. Many UK and international companies come to London to raise new capital, or to have their shares more

widely marketed and traded. Companies can raise capital both at the time of going to the market and, subsequently, by issuing securities for cash. Access to equity or debt finance gives companies greater flexibility to fund expansion and development programmes - or to reduce borrowings. Companies on the main market come from all sectors of business - including information technology, electronics, financial, retail and industrial The size of UK companies varies enormously, from those with a market capitalisation of Ł1m to those with a market cap of more than Ł150 bn. A 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. A 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. Catering for emerging market issuers London has the worlds most active international equity market, with more international trading taking place than on any other exchange in the world. One of the principal methods for emerging markets issuers to raise capital is through the listing of depositary receipts (or DRs). These are certificates that represent ownership 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 with local exchange approval and settlement systems simplifying settlement arrangements with the custodian managing any differences between the issuers home country and that of the investor. Euro-denominated products can be listed on the Exchange and

include the: euro-denominated depository receipt (EDR), euro convertible bond (ECB) and euro-denominated eurobond (EEB). In addition, it is possible to list shares denominated in euros Alongside its strong equity market, the London Stock Exchange operates an important debt market. In recent years, a growing number of eurobonds from both the UK and abroad have been listed in London. The New York Stock Exchange The NYSE (New York Stock Exchange) is an agency auction market. The essential point is that trading at the NYSE 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. 1. Brief History The New York Stock Exchange traces its origins back more than 200 years, to the signing of the Buttonwood Agreement by 24 New York City stockbrokers and merchants in 1792. Centuries of growth and innovation later, the

NYSE remains the worlds foremost securities marketplace. Over the years, its commitment to issuers and investors has been unwavering, and its persistent application of the latest technology has allowed it to maintain a level of market quality and service that is unparalleled. The NYSE registered as a national securities exchange with the U.S Securities and Exchange Commission on October 1, 1934 The Governing Committee was the primary governing body until 1938, at which time The Exchange hired its first paid president and created a thirty-three member Board of Governors. The Board included Exchange members, non-member partners from New York and out-of-town firms, as well as public representatives. 26 In 1971 The Exchange was incorporated as a not-for-profit corporation. In 1972 the members voted to replace the Board of Governors with a twenty-five member Board of Directors, comprised of a Chairman and CEO, twelve representatives of the public, and twelve representatives from the

securities industry. Subject to the approval of the Board, the Chairman may appoint a President, who would serve as a director. Additionally, at the Boards discretion, they may elect an Executive Vice Chairman, who would also serve as a director. 2. Mission Statement To add value to the capital-raising and asset management process by providing the highest quality and most cost-effective selfregulated 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. 3. Trading At the NYSE, each listed stock is assigned to a single post where the specialist manages the auction process. NYSE members bring all orders for NYSE-listed stocks to the Exchange floor either electronically or by a floor broker. As a result, the flow 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 liquidity - the ease with which securities can be bought and sold without wide price fluctuations. When an investors transaction is completed, the best price will have been exposed to a wide range of potential buyers and sellers. Each day on the NYSE trading floor an auction takes place. Open bids and offers are managed on The Trading Floor 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. Prices are determined through supply and demand Stock buy and sell orders funnel through a single location, ensuring that the investor, no matter how big or small, is exposed to a wide range of buyers and sellers. Investors must give their brokers specific instructions on how to handle their transactions. Here are some common types of order: A market order tells the broker to buy or sell at the best price currently

available on the NYSE Trading Floor. A 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 will try to get the best price possible for the customer, but the broker cannot sell below or buy above the specified figure. A GTC (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 NYSE is 100 shares. This is referred to as a round-lot Orders for less than 100 shares are referred to as odd-lots. The Tokyo Stock Exchange Main stock market of Japan, located in Tokyo. It opened in 1878 to provide a market for the trading of government bonds newly issued to former samurai. Government 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 1920s and 30s. It was closed from 1945 to 1949, when it opened after being

reorganized by the occupying U.S authorities Today it accounts for more than 90% of all securities transactions in Japan, and it is one of the worlds largest marketplaces for securities. The Nikkei index is the key stock-market index in Tokyo 27 Business Organisations Business organisations are extremely diverse and can be classified according to their legal form, size, ownership or industry sector. 1. 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 (szerződésszegés), 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. Risk 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 (volumengazdaságosság) available to larger firms; on the other hand, in many personal services, smallness and the personal touch can be a strong selling point. Advantages The sole trader has: • Freedom in running the business. • Flexibility. • Personal control over the business. • Personal contact with staff and customers. • He does not have to share the profit. • • • • • Disadvantages Sources of finance are limited (it is difficult to borrow money). Therefore growth is restricted. There is limited scope for economies of scale. He has to take full responsibility. There is no continuity (if he is ill, there is no one to run the business). 28 2. Partnership (társulás, kb BT) Two or more persons combine their resources and expertise to form a business unit. Partnerships are formed by contract between the parties. The main items in a Partnership Agreement are the terms specifying eg: • The nature of business and

date of commencement. • The amount of capital subscribed by each partner. • The basis on which profits will be determined and allocated. • Management responsibilities of each partner (sleeping partner = csendestárs: providing capital but not taking part in the running of the company). • Voting rights, the role of each partner, arrangements concerning finances, banking, bookkeeping, authority to sign contracts, etc. • • • • Advantages There are additional sources of finance. Partners share responsibilities. Partners share losses too. There is more scope for specialisation. • • Disadvantages Each partner is jointly liable for the debts incurred by other partners. The withdrawal of any one partner or an additional partner causes the automatic termination of the partnership. Partnership is a common form of business organisation with accountants, solicitors, dentists, language teachers, etc. 3. Joint Venture (közös üzleti vállalkozás) Joint ventures are formed

by two or more persons or companies co-operating in a special business activity in which there is 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. Joint ventures are usually temporary, but they can become permanent too. 4. Limited companies: private limited (Ltd) public limited (Plc) The legislation of most countries allows for organisations to be created that have a separate legal personality from their owners. In Britain: Ltd. (limited) or Plc (public limited), in the USA: Inc (incorporated) in Hungary Rt The act of incorporation creates a new legal entity distinct from the shareholders who own the company. Companies 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, which 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 away to meet the debts if the business fails. The founders are required to lodge a Memorandum of Association and Articles of Association with the Registrar of Companies (cégbíróság) and to pay certain fees. Memorandum of Association (Társasági szerződés) It includes the name of the company, its purpose, its registered office or premises, the amount of authorised share capital, a statement as to what the limit of liability will be if the company is wound up with unpaid debts, the object clause, i.e the scope within which the company can exercise its separate legal personality. Articles of Association (Részvénytársasági alapszabály) It regulates the relations between the company and its members and between 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 requirements in relation to a public limited company. A private company cannot appeal to the public to subscribe to a share issue. It must sell its shares by private negotiations with individuals A 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 quotation on the Stock Exchange. Public limited companies are required to provide information to investors e.g to the public They must produce the Annual Report which consists of the following financial statements: • Profit & Loss Account (eredménykimutatás): records the revenue and expenses of the company over a given financial period. • Audited Balance Sheet (auditált mérlegkimutatás): gives a snapshot of the firm’s financial position; what it owns and what owes. 29 • Cash

Flow Statement (pénzforgalmi kimutás): examines the changes in cash resulting from business activities. Company Administration The shareholders are the owners; they have the ultimate say in the business but the running of the business is done by directors who are elected to the board by shareholders. In theory control over a company lies with the shareholders in general meetings • Annual General Meetings (dividends are declared). • Extraordinary General Meetings to discuss special business (alterations to the Memorandum and Articles of Association). For most matters a simple majority is required to pass a resolution but certain issues need a 75% majority. Ltd.: advantages and disadvantages • • • • Advantages Enjoys more economies of scale than partnerships. There are more capital raising possibilities. The business has greater continuity. Members enjoy limited liability. • • • Disadvantages Shares cannot be offered to the public. Accounts are not private. It

can prove to be difficult to raise capital. Plc.: advantages and disadvantages • • • • • • Advantages Enjoys economies of scale. Share transfer is easy. It is relatively easy to raise capital. The business enjoys maximum continuity. Members enjoy limited liability. It is relatively easy to borrow money. • • • • Disadvantages Formation involves considerable documentation. Share transfer can lead to take-over. There is too much red tape. There is a lack of privacy, annual report must be made public. 5. Special forms of businesses Multinational corporation: A company, which is based in one country but also operates in a number of countries where it owns factories and outlets. Holding company: The leading company of a group of companies that holds all or more than 50% of the shares of the other (subsidiary) companies. Charitable trust: A trust for relieving poverty, for the advancement of education or religion or for the good of the public in other ways. They have

to be registered, but normally they are not required to pay income tax Public sector organisations: Governments have traditionally been involved in providing goods and services that cannot be sensibly provided by market forces, for example, defence, education, basic health services. 6. Hungarian company forms The RT The joint stock form (RT) is principally suitable for larger investments. Banking and insurance businesses must be incorporated as RT’s. Minimum capitalisation is HUF20 million All stocks may be held by one shareholder, but this shareholder has unlimited liability in case of bankruptcy. A designated certified auditor must be employed, and an annual audit is required Control of the company is vested in a board of governors answerable to the stockholders. Preferred stock may not exceed 50% of capitalisation Convertible bonds may not make up more than 50% of ordinary share capital. The KFT The KFT is by far the most popular incorporated business form for both foreign and

domestic investors. A KFT cannot solicit additional shareholders publicly. The minimum capitalisation is HUF 3 million One half of nominal capital must be paid in at the time of registration, and all remaining capital must be paid in within one year. Partnerships (BT) Partnerships may be established by Hungarian and foreign individuals or companies either by themselves or together with Hungarian individuals or companies. Although the number of partners is not restricted (BT) partnerships must have at least one unlimited partner. Management responsibility falls solely on the unlimited partner(s) 30 Business and Society 1. Business and social constraints Businesses affect the societies in which they operate. A sole trader running a small grocery store may benefit local residents by opening for a few hours on a Sunday. On the other hand such a business may have negative effects. Canned drinks bought from the shop may be left in the street. Opening on a Sunday may lead to more traffic

in the area. Decisions made by a multinational company can have a huge impact in many different countries. For 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 new location may gain from more jobs, the building of infrastructure, such as roads, and perhaps spending on health care and community projects. These examples show 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 which they operate. As a result, governments often pass laws and set regulations to control the conduct of businesses. Consumer laws try to ensure that businesses do not deliberately mislead consumers. Employment laws attempt to provide safe working conditions and set standards for working hours and payments. Such laws tend to set the legal minimum in terms of the

way in which businesses behave. However, do businesses have any further responsibilities to society? Should businesses consider the implications of their decisions upon society and not just take into account whether these decisions help the business to achieve its objectives? For example, a cement factory may have emissions within legal limits. The local community might argue that the emissions cause health problems amongst children and the elderly in the area. Should the business try to reduce the emissions? Some would argue that businesses are self-regulating. They do not need to be controlled by government. If they ignore the views of society, consumers will not buy their products. They will lose trade and perhaps go out of business Others argue that, without external regulation, businesses may have negative effects upon society. People who 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 31 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. 2. Business and stakeholders One way of condiering the impact of business upon society is to view 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, however, other groups are affecting business behaviour. For example, some businesses will only supply their products to other businesses that have an ethical or environmental policy. Some pension companies will not invest in businesses that sell arms. This suggests that businesses need to have a greater SOCIAL RESPONSIBILITY to groups beyond those immediately involved in the

business. 3. Business ethics The way in which businesses respond to issues such as the sale of arms or health risks from pollution may depend on their ETHICS. Ethics are the values and beliefs, which influence how individuals, groups and societies behave For example, an electricity generating business may be operating within legal emissions limits. However, it may feel that it has to change its production methods to reduce emissions even further because it believes businesses should work towards a cleaner environment. In part the ethics of a business will depend upon the values of its employees. However, the ethical stance of the business is likely to be determined by the values of senior managers, directors and other important stakeholders. It will also be influenced by codes of conduct, which may operate in the industry. The term ETHICAL is used to refer to businesses, which 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 33 It is possible that a business following an ethical policy may: • attract customers and employees who agree with its policy; • have to change its operations to fit in with this policy, for example approving certain suppliers; • have to set a policy for all the business in areas such as recruitment and marketing. 4. Business and the environment It is possible that the activities of business can have certain beneficial effects on the environment. For example, a new factory may be built in a derelict area. The new premises may be landscaped, improving the view A grass area built might have a bench, which could be used by pedestrians. Businesses are becoming more and more aware of the need to consider the environment in their operations. Many critics of certain business activities suggest that they have a negative effect on the environment in the surrounding area. Some of the negative effects of business

activity include: • air pollution caused by the discharge of emissions into the atmosphere and traffic visiting retail outlets; • water pollution as a result of the dumping of waste; • congestion from employees going to work or consumers visiting retail outlets; • noise from factories and traffic; • destruction of natural habitats from the building of premises. How might these effects be controlled? There are laws, such as the Clean Air Act, which try to restrict the environmental impact of business activity. The government and the EU 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. In many areas, businesses are becoming responsible for regulating their own behaviour. The ethics of a business can affect the extent to which it controls its impact on the environment. Some businesses have adopted their own stringent codes of practice and policies to control

their activities. It is likely that attempts to control the effect on the environment by businesses will lead to: 32 • increased costs in the short term; • the attraction of customers who agree with the policy of the business; • a change in production methods. 5. Pressure groups PRESSURE GROUPS are groups without the direct political power to achieve their aims, but whose aims lie within the sphere of politics. They usually attempt to influence local government, central government, businesses and the media. They aim to have their views taken into account when any decisions are made Such influence can occur directly, through contact with politicians, local representatives and business people, or indirectly by influencing public opinion. The use of pressure groups is one way in which stakeholders can exert influence over those making decisions within a business. Pressure groups can represent stakeholders directly involved with 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 ways in which pressure groups can affect firms. • Pressure groups often seek to influence the behaviour of members of the public about a particular product, business or industry. Friends 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, would have important implications for a wide range of firms involved in the transport industry. • Political parties, through their representatives in Parliament, are able to pass laws, which regulate the activities of businesses. Therefore it is not surprising that many pressure groups devote resources to lobbying politicians An example of this is the attempt by the anti-smoking group, ASH, to change the law so that all advertising of tobacco is made illegal. • The actions of pressure

groups can reduce the sales of firms. This is often most successfully achieved when efforts are targeted at particular firms. Consumers are then called upon to boycott these firms • Firms can face increased costs as a result of the activities of pressure groups. This may involve new production processes or waste disposal methods. Firms may have to counteract any negative publicity from a pressure group For example, many believe that the campaign to attract visitors to the Sellafield nuclear site was a result of the negative publicity from environmental groups. • Businesses with a tarnished reputation as a result of pressure group activity may find it more difficult to recruit employees. How might businesses react to pressure groups? • By positively responding to the issues raised by pressure groups. It was argued that pressure from Greenpeace contributed to Shells decision not to dump the Brent Spar oil platform in the North Sea in 1995. Instead it was dismantled and used to

build a ferry quay in Norway. Similarly, local pressure groups have been successful in persuading some firms to change building plans and landscape nearby areas. • Through promotions and public relations. Firms can attempt to counteract negative publicity through their own promotional and public relations work. For example, a number of oil companies, which have been criticised for their impact upon the environment have sought to deal with this by promoting the `greener aspects of their industry, such as the availability of lead free petrol. • A number of leading firms either lobby politicians themselves or pay for the services of professional lobbyists to represent their interests. • Legal action. Where pressure groups make false allegations about a business, this can be dealt with by the legal system. For example, allegations by pressure groups that McDonalds were contributing to the destruction of the Amazonian rainforest were dealt with through legal action in the courts. 33

Business and the Environment During the 1980s, the industrialised countries became more conscious of the degradation of the environment. By the 1990’s, in almost every sphere of environmental protection the key criterion for policy was 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. We have to take into consideration not only the costs of a business but the externalities as well. For example, if a factory producing cement, which is located in a small town the firm may dispose of some of its waste in a local river or discharge dust into the atmosphere. Lorries making deliveries to the factory may disturb the local residents. The factory may be sited close to a local beauty spot, ruining the view. These are examples of spill-over effects or EXTERNALITIES. The costs to the whole of the society, the SOCIAL COSTS are made up of private costs of the businesses plus NEGATIVE

EXTERNALITIES The new kinds of technologies used in our modern age can disrupt the balance of nature. All different plants and animals in a natural community are in a state of balance. This balance is achieved by the plants and animals interacting with each other and with their non-living surroundings. The plants of the community are the producers, they use carbon dioxide, water an nitrogen to build up their tissues using energy in the form of sunlight. The food relationship between the different members of the community (plant-eating animals, flesheating animals) are known as food chains or food webs. If we intervene into this, we can disrupt the balance of nature and cause global environmental damage. 1. Deforestation It has been estimated that tropical rainforests are being cut down and burned at the rate of 11 million hectares a year - about 20 hectares a minute. At this rate all tropical rainforests will have disappeared within 85 years. As a result of the spread of environmental

destruction some 2500 plant species and more than 1.100 species and subspecies of mammals, birds, amphibians, reptiles and fish are threatened with extinction. Untouched tropical forest could contribute to the balance of nature. If we cut down most of the trees, we can cause soil 34 erosion: rain can wash away the fertile layer of the soil. After this no plants can grow there So we can disturb the balance of food chain. 2. Pollution Manufacturing and other business activities pollute the air, the water and the soil. Chemicals and pollutants get into the air Because of this acid rain may fall, which can damage plants and through plants animals, too. Oceans and seas cover 70% of the world. They are heavily damaged by pollution, habitat destruction and overfishing 3. The depletion of the ozone layer The ozone layer shields the earth from excessive ultraviolet radiation. It becomes even thinner because of the Freon gas, which can be found, for example, in deodorants. Recently companies

and firms make environment-friendly, ozone-friendly products We can find a sign, e.g a globe sign on these 4. The Greenhouse Effect The greenhouse effect is caused by an increase in the amount of carbon dioxide in the atmosphere. It leads to changes in the Earths climate. The amount of carbon dioxide in the atmosphere will double in the next 50 years and the temperature worldwide will rise by 2 Celsius. Although a temperature rise of 2 Celsius may not seem significant, the local effects may be much greater: In polar regions a rise of 10 C by 2025 is expected and in Northern Europe a rise of 4 C. The southern states of the USA can expect hotter summers and less rainfall, leading to worse conditions in agriculture, and the Mediterranean region will be much drier and hotter than now. As a consequence of a temperature rise, the polar icecaps will start to melt and the oceans will expand as more snow as ice melts. It is predicted that the level of the sea will have risen by 05 to 15 metres

by 2025 and this will affect many low-lying areas of the world. Millions of people today live less than one meter above the sea level Perhaps the first effects are already being felt. 5. Nuclear power We use nuclear energy to produce electricity. But power stations make a lot of nuclear waste too, and people have been afraid of the possible disasters since the Chernobyl disaster. Besides, there is the problem of the safe disposal of radioactive waste 6. The ‘Greens’ as a political power The Green Party’s share of the vote went up from zero to 15% in the recent European elections. They are a radical political force and unlike other parties they are against nuclear power and nuclear weapons. The Green Party attempts to exert pressure on public policy and to influence industry. 7. Environmental pressure groups The three main non-political environmental pressure groups are the Friends of Earth, Greenpeace, and the Worldwide Fund for Nature (WWF; Természetvédelmi Világalap). These

organisations have been working for many years, raising funds and raising public awareness of the need to protect the environment. Their activity is to propose specific solutions to specific problems If a power station is planned or a new motorway is to be built, they want to make sure it is done with the least possible damage to the environment. Recently we can choose environment-friendly, ozone-friendly products Companies that are not `green will lose business to those who have a green image. Greenpeace: Peaceful direct action by Greenpeace has invoked the power of public opinion, which, in turn, has forced changes in the law to protect wildlife and to stop the pollution of the environment. Recent results: • • • Protest voyage into a nuclear test zone - the test was disrupted Protection of the whales - commercial whaling is banned Protest against dropping barrels of radioactive waste - dumping nuclear waste and chemicals at a sea have been stopped. 35 Free Trade versus

Protectionism The mutual benefits that international trade can provide to all countries participating in it are obvious. To see how countries gain from trade, we can use a very simple example, which involves only two countries. Because of the difference in their climate conditions one can produce oranges and the other apples. Without trade, people in each country would be restricted to the consumption of only one kind of fruit. With the free exchange of goods between them, they have the choice between oranges or apples. Since countries have different quantities of various productive resources, it is necessary for them to distribute them among themselves. Thus, for example in country A, labour may be scarce and expensive, but capital is plentiful, while in country B it may be the other way round. It will then be natural for country A to utilise the cheap labour of country B, and for country B to make use of country As surplus capital. This makes it easy to see how specialization - 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. Japanese cars, Italian shoes, Swiss watches, and Russian vodka are available all over the world. Despite 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 countrys 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 allow emerging industries to grow in a market protected from harsh international competition. Protectionism can be justified to a certain extent - on economic grounds - still it is not the best

policy. Consumers will have to pay higher prices, and subsidies provided to the industries that the government wants to protect may be used inefficiently. Some European governments provide massive subsidies to many of their basic industries at a far higher cost than can be justified by the benefits. 36 Another argument for protection is the employment argument. Advocates of protectionism argue that employment in certain industries is threatened by foreign imports, and it is the governments duty to provide assistance to these industries by imposing protective tariffs or setting import quotas. But if we cut back on imports, then output and employment in our export industries will also fall in the long run. And worse, protection discourages workers and managers from adjusting to the realities of foreign competition. Political considerations will often induce governments to impose embargoes. The problem with embargoes is that they can easily backfire. An embargo may be almost as

damaging to the country that imposes it as to the one on which it is imposed. The smaller a country - the more vulnerable it is to embargoes, while big nations are not very sensitive to them. More important, however, is the fact that effective embargoes are rare Quite often nations disregarding these trade restrictions may benefit from an embargo against a country. Despite the advantages that free trade can give and the difficulties that tariffs, quotas and embargoes can cause, most governments have imposed a vast number of restrictions on international trade around the world. The reason for this is that countries are not in the same economic situation, and they will formulate their policies in their own best interests. Thus, as long as there are economic inequalities and conflicting interests between the nations, the interpretation of the freedom of trade will be different. The majority of economists believe in the comparative cost principle, which proposes that all nations will raise

their living standards and real income if they specialize in the production of those goods and services in which they have the highest relative productivity. Nations may have an absolute or a comparative advantage in producing goods or services because of factors of production (notably raw materials), climate, division of labour, economies of scale, and so forth. This theory explains why there is international trade between North and South, e.g semiconductors going from the USA to Brazil, and coffee going in the opposite direction. But it does not explain the fact that over 75% of the exports of the advanced industrial countries go to other similar advanced nations, with similar resources, wage rates, and levels of technology, education, and capital. It is more a historical accident than a result of natural resources that the US leads in building aircraft, semiconductors, computers and software, while Germany makes luxury automobiles, machine tools and cameras. However the economists

who recommend free trade do not face elections every four or five years. Democratic governments do, which often encourages them to impose tariffs and quotas in order to protect what they see as strategic industries - notably agriculture - without which the country would be in danger if there was a war, as well as other jobs. Abandoning all sectors in which a country does not have a comparative advantage is likely to lead to structural unemployment in the short (and sometimes medium and long) term. Other reasons for imposing tariffs include the following: • To make imports more expensive than home-produced substitutes, and thereby reduce a balance of payments deficit; • As a protection against dumping (the selling of goods abroad at below cost price in order to destroy or weaken competitors or to earn foreign currency to pay for necessary imports); • 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. With tariffs, it is impossible to know the quantity that will be imported, because prices might be elastic. With quotas, governments can set a limit to imports. Yet unlike tariffs, quotas provide no revenue for the government Other non-tariff barriers that some countries use include so-called safety norms, and the deliberate creation of customs difficulties and delays. The General Agreement on Tariffs and Trade (GATT) had the objectives of encouraging international trade, of making tariffs the only form of protectionism, and of reducing these as much as possible. The most favoured nation clause of the GATT agreement specified that countries could not have favoured trading partners, but had to grant equally favourable conditions to all trading partners. The successor of GATT is the World Trade Organization 37 It took nearly 50 years to arrive at the final GATT agreement because until the 1980s, most developing

countries opposed free trade. They wanted to industrialize in order to counteract what they rightly saw 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. Nowadays, however, many developing countries have huge debts with Western commercial banks on which they are unable to pay the interest, let alone repay the principal. Thus they need to rollover (or renew) the loans, to reschedule (or postpone) repayments, or to borrow further money from the International Monetary Fund, often just to pay the interest on existing loans. Under these circumstances, the IMF imposes severe conditions, usually including the obligation to export as much as possible. Quite apart from IMF pressure. Third World governments are aware of the export successes of the East Asian Tiger economies (Hong Kong, Singapore, South Korea and Taiwan), and of

the collapse of the Soviet economic model. They were afraid of being excluded from the world trading system by the development of trading blocks such as the European Union, finalized by the Maastricht Treaty, and the North American Free Trade Agreement (NAFTA), both signed in the early 1990s. So they tended to liberalize their economies, lowering trade barriers and opening up to international trade. 38 Globalisation What is globalisation? GLOBALISATION is the term used to describe the growing integration of the worlds economy. It is suggested that as globalisation takes place, national economies are becoming integrated into a single global economy with similar characteristics. There are interrelationships throughout the world between related businesses, between competitors and between businesses and consumers. Decisions made in one part of the world affect other parts. Businesses base decisions on what is happening in the world market rather than national markets. Evidence of the

integration of the worlds economy can perhaps be seen in businesses that design and market their products to a world market, such as CocaCola. This product is sold in many countries throughout the world Consumers in different countries recognise the product easily and have similar tastes for the product. Coca-Cola is able to market its products worldwide It has close relationships with businesses in other countries, some of which manufacture CocaCola products. Three important aspects of globalisation might be identified: • The growing importance of international trade: Between 1980 and 1990 the volume of international trade almost doubled. In part, this can be accounted for by increases in production during the same period. However, since 1945, increases in production have been far outstripped by increases in the volume of international trade. • The rise of the multinational business: The operation of multinational companies can be seen in many countries around the world. Familiar

products and brand names appear worldwide. This is a trend, which accelerated in the latter part of the twentieth century. For example, by 1995 the production of foreign branches of multinational companies generated $7,000 billion. This exceeded global exports of goods and services by 20 per cent. The operation and effects of multinationals are discussed later in this unit. 39 • The emergence of businesses, which think globally about their strategy: Such businesses base their strategic decisions on the global market rather than national markets. For 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 will tend to make use of their businesss competitive advantage by locating production wherever it is most efficient. This means businesses with widely spread networks of research, component production, assembly and

distribution. Factors affecting globalisation It could be argued that certain factors have contributed to the growth of globalisation. • Technological change has played an important role in globalising the worlds economy. More powerful computers and communications technology have allowed the easy transfer of data. The internet is beginning to revolutionise the way in which consumers purchase products. • The cost of transportation has fallen. • The deregulation of business: Throughout the 1980s and 1990s many businesses were privatised in countries throughout the world. The removal of restrictions on foreign businesses operating in former communist countries also increased the ability of businesses to operate globally. New markets such as power generation were opened up to foreign competition. • The liberalisation of trade: Trade protection has been reduced due to the operation of organisations such as the WTO. • Consumer tastes and their responses have changed: Consumers in

many countries are more willing to buy foreign products. • The growth of emerging markets and competition: New markets have opened up in countries that have seen a growth in their national income. Examples might include countries in South East Asia and the more successful former communist countries in Eastern Europe. As businesses in these countries have become more successful, they have been able to compete in Western economies. The effects of globalisation on business Globalisation has had many effects upon businesses throughout the world. The impact of globalisation has not been evenly spread. Some business, for example in telecommunications, have witnessed dramatic changes Others, 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. Some provide opportunities whilst others present threats: Competition: The impact of globalisation on many larger businesses

has been to dramatically increase the level of competition, which they face. There is a number of reasons for this: • Foreign competition has increasingly entered markets previously served mainly or exclusively by domestic businesses. • Deregulation has meant that many businesses which previously had little or no competition are now opened up to the forces of global competition • Globalisation has provided opportunities for new, innovative businesses to enter markets and compete with all comers including well-established industry leaders. For example, Microsoft, Intel, Compaq and Dell, all relative newcomers to the computer industry, were able to compete effectively against the market leader IBM. HYPERCOMPETITION has been used to describe competition in the new global economy This term refers to the disruption of existing markets by flexible, fast moving businesses. Meeting consumer expectations and tastes: Competition by businesses seeking to meet customer needs in increasingly

effective ways has raised customer expectations in many markets. Businesses must now meet ever greater consumer demands about quality, 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 For example, few businesses predicted the huge rise in the popularity of mobile phones or the speed with which consumers would accept the Internet. Economies of scale: Businesses able to build a global presence are likely to enjoy a larger scale of operations. This will enable them to spread their fixed costs over a larger volume of output and reduce unit output costs. A larger scale of operations also allows businesses to exercise power over suppliers and benefit from reduced costs. For example, global hotel chains such as Holiday Inn and Marriott are in a position to benefit from volume discounts 40 from catering supply companies. Choice of location: Businesses with a global

presence can choose the most advantageous location for each of its operations. When locating its operations, a business may consider: • Reduction of costs. For example, Nikes decision to locate its shoe manufacturing operations in countries such as China and Vietnam was perhaps based on cost reduction factors; • Enhancement of the businesss performance. Production and service facilities are located in parts of the world, which are likely to improve factors such as product or service quality. For example, Microsoft may have taken this into account when deciding to locate its research laboratories in Cambridge. Mergers and joint ventures: Businesses are increasingly merging or joining with 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. A manufacturer, for example, may merge with another in order to make products in the country in which they will be sold.

Multinationals A MULTINATIONAL company is an organization, which owns or controls production or service facilities outside the country in which it is based. This means that they do not just export their products abroad, but actually own production facilities in other countries. These companies usually have interests in at least four countries, but there are many which operate in a huge range of countries throughout the world. There is a number of reasons why firms become multinationals: • To avoid protectionist policies. By actually producing within a particular country, a firm can usually avoid any tariffs or quotas, which that country may impose. This is why Japanese car firms, such as Nissan, Toyota and Honda, have established themselves within EU countries in recent years. • The globalisation of markets. National boundaries, many believe, are becoming irrelevant for firms as instant communications and high-speed travel make the world seem smaller. This is sometimes referred to

as the global village. Multinationals, which are global or international in outlook, are the ideal type of business organisation to take advantage of this situation. The influence of multinationals There is great debate as to the actual effects of multinationals. Whilst there are clear benefits of multinationals operating in a particular country, there are also a number of problems associated with them. The balance of payments and employment: One benefit of multinationals is their ability to create jobs. This, along with the manufacturing capacity, which they create, can increase the GNP of countries and add to the standard of living. As well 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 Derby helps to illustrate this. Not only has this plant created jobs, but it has raised the GNP of the UK. The balance of payments has also been helped as a large proportion of the Derby

plants cars are shipped out to other EU nations. However, whilst multinationals can create jobs, they are also capable of causing unemployment for two reasons. First, 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 down plants. Second, multinationals often shift production facilities from one country to another in order to further their own 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 quantity of imports. Technology and expertise: Multinationals may introduce new technology, production processes and management styles and techniques. This has been one of the benefits to

Western countries of Japanese multinationals Techniques such as in-time stock control and management methods such as quality control circles have been successfully used by Japanese firms in foreign countries. Such techniques have also been adopted by home-based firms. These raise the standards of local firms who become aware of these new developments The process by which multinationals benefit countries in this respect is known as technology transfer. Technology transfer can be especially important to developing countries, which may lack technical expertise and know-how. However, this is not always the case. Managers and supervisors are often brought in from the multinationals home country, with little training being given to locally recruited staff. As a consequence locals may be employed in low skilled jobs 41 Government control: Because of the size and financial power of many multinationals, there are concerns about the ability of governments to control them. For example, they

may be able to avoid paying corporation tax in particular countries. Taxation can be avoided by the use of TRANSFER PRICING. This involves declaring higher profits in those countries with lower taxation levels, thus reducing the overall tax bill. A company may charge subsidiary branches in low taxation countries low prices for components bought from overseas branches of the same firm. This means that costs in the low tax country are kept low and high profits can be declared. Similarly, 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. 42 MARKETING 1. Definition of marketing Marketing is the management process responsible for identifying, anticipating and satisfying customers’ requirements profitably. Marketers 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. Marketers can design particular features, attractive packaging, and effective advertising that will influence consumers wants. Marketing thus combines market research, new product development, distribution, advertising, promotion, product improvement and so on. 2. The selling concept versus the marketing concept Most management and marketing writers now distinguish between selling and marketing. The selling concept assumes that resisting consumers have to be persuaded by vigorous hard-selling techniques to buy non-essential goods and services. Products are sold rather than bought The marketing concept, on the contrary, assumes that a companys choice of what goods and services to offer should be based an the goal of satisfying consumers needs. 3. Identifying market opportunities – market research

Marketers are always looking for market opportunities - profitable possibilities of filling unsatisfied needs or creating new ones in areas in which the company is likely to enjoy a competitive or differential advantage (an advantage over competitors in terms of quality, price distribution etc.) Rather 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 size of the potential market, about consumers’ reactions to particular product and service features, and so on There are four basic research methods used by marketers: • • Observation: Researchers monitor particular situations or actions of consumers. Today computerised systems allow marketers to observe consumers preferences. Survey: When conducting a survey marketers need to ask questions about new marketing ideas, product or service preferences. The heart of any survey is a questionnaire that is mailed to the consumers

or is used as the basis of a telephone or personal interview. 43 • • Focus groups: Members of the target market (6 to 15 individuals) are invited to discuss a product concept. Experimental research: This can be used to compare responses to the products and services under different circumstances. Market segmentation is used to divide the market into distinct groups of buyers who have different requirements or buying habits. Once a target market has been identified and market research has been conducted, the company has to decide what products or services offer. 4. The marketing mix Once the basic offer, e.g a product concept has been established, the company has to think about the marketing mix, ie, all the various elements of a marketing programme. The best-known classification of these elements is the `4 Ps’: product, (quality, features, style, brand name, size, packaging, services and guarantee), place, (distribution channels, locations of points of sale, transport,

inventory size, etc.) promotion (advertising; 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. 5. Market structure and competition When developing and marketing products companies need to consider competition in the given target market. Market leader: This is the highest market share company which retains its position by trying to expand the total market or its market penetration, for example through an aggressive advertising campaign. Market challenger: One or more non-market leaders, which aggressively attack for additional market share. Market follower: These are low share competitors without the resources to challenge or seriously contend for market leadership. 6. The promotion mix Even a good, attractively priced product has to be made known to its target customers. During the introduction and growth

stages of the standard product life cycle, the producer or the company has to develop product or brand awareness, inform potential customers or the other members of the distribution channel. • Advertising informs consumers about the existence and benefits of products and services, and attempts to persuade them to buy them. Informative advertising tells us what goods are available and gives the facts about them so that a consumer can choose the article that suits him best. Competitive or persuasive advertising tries to persuade people to buy the goods whether or not they want them. • Sales promotion such as free samples, coupons, price reductions, competitions, and so on are temporary tactics designed to stimulate the sales of the product. Free samples combined with advertising may generate the initial trial of a new product in the introductory stage of the product life-cycle. During 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. • Public Relations (PR) is concerned with maintaining, improving or protecting the image of a company or product. One of the most important elements of PR is publicity, which is any mention of the company’s or product’s name that is not paid for. Many companies attempt to place stories (e.g news releases) or information in news media to attract attention to a product or service. Publicity can have a huge impact on public awareness that could not be achieved by advertising, or at least not without an enormous cost. A lot of research shows that people are more likely to read and believe publicity than advertising • Personal selling is said to be quite expensive. Sales people spread information about the company’s products and services and assist customers with possible technical problems. 7. Advertising media Advertising media can be divided into the following categories:

• • • The print media (newspapers, magazines, direct mail) The broadcast media ( radio and television) Other advertising media: outdoor advertising (posters, illuminated signs) transit advertising, point of purchase displays in shops, and so on. 44 Medium Newspapers Examples of Cost $29,800 for one page, weekday Chicago Tribune Television $1,500 for 30 seconds of prime time in Chicago Direct mail $1,520 for the names and addresses of 40,000 veterinarians Radio $700 for one minute of drive time (during commuting hours, A.M and P.M) in Chicago $84,390 for one page four-color, in Newsweek Magazines Outdoor $25,500 per month for 71 billboards in metropolitan Chicago Advantages flexibility; timeliness; good local market coverage; high believability combines sight, sound and motion; appealing to the senses; high attention, high reach audience selectivity; flexibility; no ad competition within the same medium; personalization mass use; high geographic and demographic

selectivity; low cost Limitations short life; poor reproduction quality; small passalong audience high geographic and demographic selectivity; credibility and prestige, high quality reproduction; long life; good pass-along readership flexibility; high repeat exposure; low cost; low competition long ad purchase lead time; no guarantee of position high absolute cost; high clutter; fleeting exposure, less audience selectivity relatively high cost, junk mail image audio presentation only; lower attention than TV; fleeting exposure no audience selectivity 8. Branding Branded goods are marked with a distinctive name and/or design. A 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. Accordingly, there are product brands and service brands. One of the most important functions of branding is to differentiate the given products or services from those of competitors’. This is referred to as

brand differentiation A brand name is that part of a brand which can be vocalized – the utterable. Examples are Avon, Chevrolet, Disneyland, American Express etc. A brand mark is that part of a brand which can be recognized but is not utterable, such as a symbol, design, or distinctive coloring or lettering. Examples are the Metro-Goldwyn-Mayer lion, and the red K on a Kodak film box. A 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 which a consumer purchases a certain brand without considering alternatives. On the other hand, the term brand switching is used to describe consumer behaviour when consumers are not loyal to a specific brand in a given product category. They are ready to purchase alternative brands as well Brand image is the set of beliefs consumers hold about a particular brand. Brand equity refers to the value of how

such people as consumers, distributors, and sales people think and feel about the brand relative to its competitors over a period of time. 45 Taxation There are several important economic factors that influence management decisions, such as economic growth, inflation, unemployment, the Balance of Payments, taxation etc. In the life of a state, government spending has to be financed either by taxation or by borrowing money. Taxation is essential and cant be avoided It may be imposed on income, expenditure, capital gains or wealth. DIRECT taxes are levied on income and wealth (income tax, corporation tax). INDIRECT taxes are levied on spending money (excise duties, VAT). There is a tendency to associate direct taxation with progressive taxation and indirect taxation with regressive taxation: PROGRESSIVE taxes take a higher percentage of a persons income as income rises. (Combined with welfare payments they can be used to redistribute income in favour of low-income groups).

REGRESSIVE taxation means that the growth of taxes percent is smaller than income raises percent. We speak about LINEAR taxation when the growth percentage of taxes is equal with the growth percentage of income. The main forms of taxation used in the UK are the following: INCOME TAX: Charged on all incomes from work and self-employment above an amount. This amount is dictated by a personal allowance plus allowances for certain other items such as pension fund premium, etc. Two rates are charged, a standard rate of 25 per cent to a set amount of taxable income and a 40 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). CORPORATION TAX: Charged on profits earned by companies. Small firms currently pay a lower rate than larger ones. CAPITAL GAINS TAX: Levied on the increase in the value of capital when it is sold. 46 VAT (VALUE ADDED

TAX): This is a charge on the value added at each stage of the production process. VAT 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 12-25%, with a zero rate on certain items like food and childrens clothes. Certain other goods are tax exempt which means that though they dont have to pay VAT on their sales they are not allowed to obtain refunds of taxes paid at previous stages of the production process. The EU directives help to harmonise taxation in the Single Market EXCISE DUTIES: Chargeable on certain products such as tobacco, wines and spirits. INHERITANCE TAX: A tax is charged on assets above a given amount, which are inherited. Domestic 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 Other taxes worthy of mention: 1. National Insurance

Contributions: the employers contribution is a payroll tax 2. Vehicle Excise Duty on vehicle ownership, 3. North Sea Taxes (petroleum revenue tax and oil royalties): levied on oil production TAXATION (AND HOW TO AVOID 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. Governments can also encourage capital investment by permitting various methods of accelerated depreciation accounting that allow companies to deduct more of the cost of investments from their profits, and consequently reduce their tax bills. There is always a lot of debate as to the fairness of tax systems. Business profits, for example, are generally taxed twice: companies pay tax on their profits (corporation tax in Britain, income tax in the USA), and shareholders pay income tax on dividends. Income taxes in most

countries are progressive, and are one of the ways in which governments can redistribute wealth. The problem with progressive taxes is that the marginal rate - the tax people pay on any additional income - is always high, which is generally a disincentive to both working and investing. The higher the tax rates, the more people are tempted to cheat, but there is a substantial black or underground economy nearly everywhere. In Italy, for example, self-employed people - whose income is more difficult to control than that of company employees - account for more than half of national income. Lots of people also have undeclared, part-time evening jobs (some people call this moonlighting) with small and medium-sized family firms, on which no one pays any tax or national insurance. At the end of 1986, the Director of the Italian National Institute of Statistics calculated the size of the underground economy, and added 16.7% to Italys gross national product (GNP) figure, and then claimed that

Italy had overtaken Britain to become the worlds fifth largest economy. To reduce income tax liability, some employers give highly-paid employees lots of perks (short for perquisites) instead of taxable money, such as company cars, free health insurance, and subsidized lunches. Legal ways of avoiding tax, such as these, are known as loopholes in tax laws. Life insurance policies, pension plans and other investments by which individuals can postpone the payment of tax, are known as tax shelters. Donations to charities that can be subtracted from the income on which tax is calculated are described as tax-deductible. Companies have a variety of ways of avoiding tax on profits. They can bring forward capital expenditure (on new factories, machines, and so on) so that at the end of the year all the profits have been used up; this is known as making a tax loss. Multinational companies often set up their head offices in countries such as Liechtenstein, Monaco, the Cayman Islands, and the

Bahamas, where taxes are low; such countries are known as tax havens. Criminal organizations, meanwhile, tend to pass money through a series of companies in very complicated transactions in order to disguise its origin from tax inspectors - and the police; this is known as laundering money. 47 Telecommunications 1. Introduction The telecommunications industry is a fast growing sector. According to the International Telecommunication Union (ITU), industry revenues have steadily increased to reach an all-time high of $1.37 trillion in 2003 There are 12 billion fixed telephone lines, and 1.3 billion people carry mobile phones of decreasing size and increasing complexity. Around 665m people now have access to the Internet Consumer spending on telecommunications is growing faster than spending in any other category. Globally, one person in five now has a mobile phone; in parts of Europe and Asia, where mobiles are most popular, around 80% of the population - or everyone between the

ages of 10 and 80 - carries one. America is a laggard, with mobile-phone penetration at around 50%, but it is catching up. Nokia has become the worlds largest handset maker, with nearly 40% of the market Todays most advanced mobile phones are tiny. They are, in effect, pocket computers, and include all kinds of new features such as still and video cameras, colour screens, internet access and games. Mobile telephony is growing fastest in the developing world, where many peoples first phone is a mobile. Wireless networks can be established more quickly and cheaply than wired ones, because there is no need to run a wire into every subscribers home. Mobile phones are booming in China, which now has more than 200m subscribers - a larger number than any other country - and is adding new ones at the rate of 5m a month. But mobile penetration is still low, at only 18%, so this growth will continue for the rest of the decade. There is also vast scope for growth in India, where penetration is

just 1% but mobile phones are at last taking off. According to Telecompetition, a market-research firm, China and India will account for 60% of new mobile subscribers between now and 2010. Another booming region is central and eastern Europe, where mobile telephone provides a way to bypass fixed-line infrastructure from the Soviet era. Once a mobile network is up and running, all that subscribers have to do is buy a handset. Pre-paid cards and the sharing of handsets among many users have brought telephone within almost universal reach. 48 2. What are the problems in the sector? Despite all these good signs, over the past couple of years, fraud, bankruptcy, debt and destruction of shareholder value have become widespread in the industry. Dozens of firms have gone bankrupt, including Global Crossing, 360networks, Williams Communications, Viatel and WorldCom, whose bankruptcy last year was the biggest ever. Hundreds of thousands of workers in the industry, and particularly at

telecoms-equipment makers, have lost their jobs. 3. What caused the problems? Although the industry has continued to grow, it has not done so in the manner, and above all not to the extent that those in the industry expected. Telecom is an infrastructure-intensive business, and because infrastructure takes a long time to build, telecoms firms have to predict future demand. However, demand was overestimated in the late 1990s. The rise of the internet persuaded many investors that demand for data-network capacity across continents was about to explode. Since 1997, Internet traffic has roughly doubled every year Much of the industry, however, was convinced that traffic was doubling every 100 days. Dozens of firms rushed to build new fibreoptic networks in America, Europe and Asia. But apart from a brief period in 1995-96, the figure was simply wrong As upstart firms spent on vast infrastructure investments, the incumbents in many countries tried to transform themselves into global

operators. They expanded their existing networks and bought stakes in foreign operators, running up debts in the process. Meanwhile, European firms thought that the expected increase in demand for fixed-communications capacity would be accompanied by a similar increase in demand for mobile capacity, and paid €109 billion ($125 billion) for licences to operate "third-generation" (3G) mobile networks. They, too, took on debts and they were wrong as they overestimated demand. Around $150 billion was spent building unnecessary telecoms networks in America and another $50 billion in other parts of the world. When it became clear that the predicted explosion of demand was not going to happen, operators frantically cut their prices. Equipment-makers sales collapsed and their share prices tumbled Companies started to use illegal means to avoid bankruptcy and keep investors. WorldCom set a new record for accounting fraud, misclassifying capital expenditure as operating costs and

overstating profits by $11 billion. When it was found out, the company crashed spectacularly. 3. SMS Texting first took off among cost-conscious teenagers. More than one billion text messages are now sent every day around the world, at an average cost of around 10 cents. Ringtones and screen logos can also be delivered by text message, but cost more. All these messages add up to a huge industry that generates about $40 billion a year The average mobile-phone subscriber sends 30 messages a month, though in some countries the figure is far higher (250 messages a month in Singapore) and in others lower (seven messages a month in America). Outside America, the success of texting has been a godsend for operators. Text messages, which are limited to 160 characters in length, require minuscule amounts of network capacity and are hugely lucrative. Text messaging now accounts for 20% of some operators revenues, a windfall that has helped to make up for declining revenues from voice calls. 4.

WAP The trouble began with Wireless Access Protocol (WAP), a simple form of web browsing designed for mobile phones, which was introduced by operators worldwide from 1999. WAP was described as a mobile version of the Internet, when in fact it was nothing of the sort. Establishing a connection on a WAP phone and downloading any of the limited content available took far too long, and mobile handsets had tiny monochrome screens, which further heightened users frustration. No wonder WAP was a flop 49 5. 3D technology Yet the industry went on making the same mistake, promoting technologies rather than creating useful services using those technologies. In 2000, this obsession with new technology caused Europes mobile-phone industry to get carried away in buying licences, to operate third-generation (3G) mobile networks, which can support higher voice capacity and faster data downloads than existing 2G networks. European operators agreed to pay a total of €109 billion ($125 billion)

for 3G licences. It soon became clear that paying so much for 3G licences had been a huge mistake. As their share prices collapsed, mobile operators wrote down the value of their 3G licences. Some even handed the licences back to the governments from which they had bought them, rather than commit themselves to building expensive new 3G networks. But whereas 3G has so far proved an expensive mistake, text-messaging has been a spectacular success, showing that consumers are prepared to use their phones for more than just voice calls after all. Texting took off unexpectedly, without any marketing by operators, but it has now become a core part of their businesses. For users, the appeal of texting is that it is a simple, quick and unobtrusive way to send someone a message, usually for less than the cost of a voice call. There are now promising signs that mobile operators have learned from the failure of WAP and the success of texting. The industry has devised a new plan to encourage

customers to adopt data services and thus, it hopes, make a smooth transition to 3G. The breakthrough is that operators are now 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 with a large colour screen and usually a built-in camera. The phone is pre-configured with menus and bookmarks offered only by that particular operator, making it easy to download games and access news and other information. As well as being able to send and receive text messages, subscribers with camera phones can also swap photos. All of these services are bundled together for a monthly fee. 6. DSL services Just as their voice businesses have declined in an intense competition with mobile operators, however, a new market has opened up for fixed-line operators: broadband internet access. By installing special equipment at telephone exchanges, operators can supercharge old-fashioned

telephone wires and turn them into fast broadband pipes, using digital subscriber line (DSL) technology. Subscribers in Europe and America typically pay around $50 a month for a DSL connection, so this provides a valuable new source of revenue for fixed-line operators. Around the world, DSL is booming and has become the dominant means of providing broadband access to homes and small businesses. Indeed, the technology can help to dissuade customers from giving up their landline telephones, since it uses an existing telephone line which can still be used to make calls. Fixed-line operators are now repositioning themselves as broadband operators. Embracing DSL requires incumbent fixed-line operators to do the same as mobile operators: to switch from a predominantly voice-based business to one in which voice and data are equal partners. That entails a learning process for operators and, as with mobile data services, it means pricing and marketing broadband to appeal to the widest possible

audience. Although broadband is growing fast, in most places this is not fast enough to offset the decline of voice, which accounts for 70-90% of most fixed-line operators revenues. If they can move a significant proportion of their customers over to broadband, however, operators should be able to offer a range of new data services. 7. What is the future of the sector? For 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. New management has been installed almost everywhere. 50 New opportunities for the industry seem to lie in exploiting three main trends. 1. The most visible growth area is the continuing rise of mobile phones, which have overtaken fixed-line phones to become the most widespread communications devices on earth. Their number is expected to rise from 1.3 billion today to 2 billion by 2007, and they are being

increasingly used to do much more than make phone calls, providing new opportunities for wireless operators and equipment makers. 2. The second trend is the growth of high-speed or "broadband" Internet access, which is booming in many parts of the world. This offers a valuable new market for fixed-line operators to compete with mobile operators. 3. A third promising area is in the corporate-telecoms market As large firms look for ways to cut costs and move operations overseas, many are adopting new internet-based technologies that can interconnect regional offices cheaply and securely and allow voice and data to flow over the same network. Many operators are now overhauling and simplifying their networks to ensure they can implement such "nextgeneration services" quickly and efficiently. All three areas involve difficult transitions for telecoms operators. But the mobile-phone industry cannot rely on subscriber growth forever. Eventually everyone who wants a mobile

phone will have one, as has already happened in parts of Europe and Asia, at which point a new source of growth will be needed. The continued health of the mobile-telephony industry depends on being able to deliver data services alongside voice calls, revenues from which are flat or declining. Creating and delivering multimedia services to mobile handsets is, however, proving to be a lot more complicated than simply providing telephony. Similarly, fixed-line operators offering broadband Internet connections have to work harder to provide both data and voice services than voice services alone. And in the corporate market the operators face a new challenge: the increasing overlap between telecoms and information technology (IT). If they are to offer next-generation services such as Internet hosting or call-centre outsourcing, network operators must improve their expertise in IT or form partnerships with systems integrators. Equipment vendors also face problems as mobile, broadband and

next-generation services require new equipment. In short, there are still opportunities in telecoms - but not where they were during the boom. The experience of the past couple of years has demonstrated that there is more to being a telecoms operator than simply owning a network. The best prospects revolve around providing complex services, not merely capacity Transformation seems to more important than construction. Only by embracing this new reality will the industry find a way out of its troubles. 51 GAZDASÁGI ANGOL Középfokú szakmai nyelvvizsga szóbeli témakörök ADRIENNE KŐHALMI Skype: adriennkohalmi Mail: adrienn.kohalmi@gmailcom