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Example of centrally planned economy

North Korea is an example of a centrally planned economy.

Drawbacks

Lack of competition can lead to poor management, inferior products, supply problems, and shortages of essentials like food and clothing.

Free market economy

Description: Prices and availability of goods and services are determined by supply and demand with minimal state interference. Private companies compete freely, and the market decides purchases.

Example: Countries in Southeast Asia, such as Singapore.

Government intervention

Note: Governments may still intervene to control business activities with significant national economic implications.

Mixed economy

Description: Combines elements of both free market and centrally planned economies. Private companies compete for most goods and services, but the government typically provides public transport, education, healthcare, and utilities.

Examples: Italy and the UK.

Publicly-owned businesses

Governments are major employers and provide various services, primarily funded through taxation. They may also run enterprises that offer services or sell products, the extent of which varies by the country's economic system.

Centrally planned economies

All means of production are government-owned. The government decides on production and distribution, with prices set by the government rather than supply and demand. Consumers have no influence on prices.

Free market economies

Market forces determine the needed goods and services. The state runs only essential enterprises, such as social or national security services.

Mixed economies

Governments provide public interest services and run enterprises. Public enterprises are typically not profit-driven, with the state covering losses. Managers are government-appointed and subject to political changes or pressures.

Historically, many European governments owned numerous companies, but the trend over the past two decades has been towards privatization. These companies are often converted into Public Limited Companies (PLCs) with shares traded on the Stock Exchange.

Types of business ownership

This chapter discusses setting up a business and company structure.

Definition of a company

A company is a management unit that trades under a specific name and manages the use of land, labor, and capital. It makes decisions on production methods and product marketing. A company is distinct from production units like factories, farms, or mines but may control multiple production units. Companies engage in activities across various areas such as research and development, marketing, production, sales, and customer service. They vary in size from individual entrepreneurs to large firms employing thousands.

Types of traders

• Sole Traders: Individual merchants or shopkeepers operating under their own name.
• Trading Firms: Associations of people doing business together.

Both types aim to meet demand by buying and selling goods, often with the help of employees or intermediaries.

Intermediaries

Direct trade between firms is rare; intermediaries often facilitate business transactions.

• Agents: Manage business affairs for others and include:
  • General Agents: Handle general affairs.
  • Special Agents: Employed for specific transactions.
  • Sole Agents: Exclusively represent a firm in a region.
  • Shipping and Forwarding Agents: Send goods to other places.
• Agents earn a commission for their services.
• Commercial Travellers: Obtain orders or sell goods while traveling. They earn a fixed salary plus potential commissions.
• Brokers: Act as intermediaries between buyers and sellers, earning a percentage called brokerage. Types include stockbrokers and ship brokers.
• Proxy: Authorized to act and sign on behalf of another person.

Retail employees

Shopkeepers employ assistants and, in larger shops, shop walkers to guide customers.

Merchant houses

To aid in the distribution of their products, manufacturers often sell through merchant houses or export agents.

Functions of merchant houses

• Buying for Sale Abroad: Purchasing goods on their own account to sell internationally.
• Buying on Behalf of Businesses: Purchasing goods abroad for domestic business houses.

They typically handle general merchandise and can act as both buyers and sellers. Staffed by trading experts with overseas connections, merchant houses charge a small commission for their services. This method spares manufacturers the complexities of distribution, insurance, and shipping.

Direct Method: Large industrial companies often establish their own export departments, managing packing, insurance, shipping, and appointing their own agents overseas.

Types of business ownership: summary

This chapter discusses the various forms of business ownership, focusing on sole traders, partnerships, and companies/corporations.

Sole trader

Definition: A business owned and operated by one person with unlimited liability.

Characteristics:

• Simple to set up with full control and decision-making power.
• Common among small-scale businesses like market stall owners, shopkeepers, window cleaners, carpenters, and car mechanics.

Advantages:

• Direct oversight of all operations.
• All profits go to the owner.
• Quick decision-making.

Disadvantages:

• Unlimited liability risks personal assets if the business fails.
• Limited financial resources and capital.
• No one to share workload or ideas with.

Partnerships

Definition: An association of two or more people or businesses sharing responsibilities and profits.

Characteristics:

• Common in small retail and service businesses like restaurants or courier firms.
• Partners contribute capital and share profits and losses.

Types:

• Unlimited Partnership: All partners have unlimited liability for the business debts.
• Limited Partnership: Some partners only contribute capital and have limited liability, while at least one partner must have unlimited liability.

Advantages:

• Shared responsibilities and workload.
• Combined capital and expertise.

Disadvantages:

• Unlimited partners risk personal assets.
• Potential for disputes among partners.

Companies/corporations

Definition: An association of investors (shareholders) with limited liability.

Characteristics:

• Formed by at least two shareholders.
• Shares represent capital investment, and profits are distributed as dividends.
• Shareholders' liability is limited to their investment.

Types in the UK:

• Private Limited Company (Ltd):
  • Shares not quoted on the Stock Exchange.
  • Shares can only be sold with all shareholders' agreement.
  • Limited liability for shareholders.
• Public Limited Company (Plc):
  • Shares can be freely bought and sold on the Stock Exchange.
  • Requires Pls designation.
  • Limited liability for shareholders.
• US Equivalent: Incorporated companies (Inc), registered with state authorities and regulated by the SEC for share sales.

These business structures offer various advantages and disadvantages, depending on the needs for control, liability, and capital.

Companies can expand through:

• Franchising or licensing
• Setting up a joint venture
• Becoming a holding company
• Becoming a multinational
• Becoming a cooperative

Corporate structure and growth

Many companies seek growth by taking over or merging with existing businesses.

Merger

Two or more companies join to create a single, larger company. This is agreed upon by both companies and usually involves a complete reorganization.

Takeover

One company gains control by purchasing more than half of the shares of another company. This is when a holding company buys enough shares of a target company to control it. If the target company resists, it is called a hostile takeover.

Joint venture

Two or more companies jointly invest in a project without merging. They collaborate on a specific business activity without forming a single entity.

Joint ventures

A joint venture is a business formed by two or more companies, where each invests capital and shares costs and profits in agreed proportions.

There are three types:

• Vertical Joint Venture: Involves companies specializing in different stages of production, such as design and manufacturing in the early stage and wholesale retail in the later stage.
• Horizontal/Lateral Joint Venture: Involves companies at the same stage of production or distribution of goods or services.
• Conglomerate Joint Venture: Involves companies with different business activities, like sweet manufacturing and insurance, often to diversify investments.

Holding companies

A holding company acquires control over another company (the subsidiary) by purchasing 51% of its voting shares. It gains majority control over production and distribution and can diversify into different sectors for a stronger market position.

Multinational companies

A multinational company operates in multiple countries with a complex structure, typically having a parent company and subsidiaries. It produces in various countries but has headquarters in one. These companies invest in developing countries for cheaper labor and raw materials, benefiting more than the host countries as profits usually return to the multinational's home country. Examples include Shell, Coca-Cola, General Motors, and McDonald's.

Cooperatives

Cooperatives are business organizations where all employees have a vote, regardless of their investment or work amount, ensuring no single member dominates. Members have limited liability. Worker cooperatives are owned and controlled by workers who provide or borrow the startup capital and make management decisions collectively. Governments often support cooperatives to combat unemployment with privileges like low-interest loans and tax rebates. However, cooperatives face challenges such as lack of management experience and insufficient financial reserves.

Franchising

Franchising is a system where the franchisor grants the franchisee the right to use its trade name and sell its products. The franchisor benefits from low capital investment in distribution and receives an initial payment and annual profit percentage from the franchisee. The franchisee gets store setup, support, training, and commercial advice while operating independently and benefiting from the franchisor's advertising if the brand is well-known.

Finance and banks

Finance refers to the money or capital available for business use. Banks are establishments where money is kept for those who do not need it immediately and from which money can be borrowed for business purposes. Banks finance businesses by providing necessary capital.