Chapter 2Hong Kong and the Global Economy
Short Question
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How do foreign firmsbenefitfrom China’s entry into the World Trade Organisation?(6marks)
Answer:
Benefits:
As China opens up its market, foreign firms can invest in industries which are openup to foreign investment.
With the reduction intariffs,foreign firms may find it more profitable to sell their products in China.
With the reduction in quotas,foreign firms can sell more products to China and achieve economies of scale. Production costs are reduced as a result.
Openness and transparency in business dealings have increased. They find it easier to tackle business problems in China.
(Any three of the above, 2 marks each)
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How can a shipping company make use of technology to expand its market?(6marks)
Answer:
Ways to expand its market:
The shipping company can provide better service to customers by building a system which allows its customers to trace their shipments anytime onits website.
The shipping company can search information about their customers on the Internet. It can thus better know their customers and tailor products to their needs.
The shipping company can find new customers via the Internet. By using search engines such as Google and Yahoo!, it can locate customers it intends to target.
The shipping company can build a website so that customers can easily get information about the company online.
Advances in information and communication technology may help lower transport costs. The shipping company can thus develop new routes to penetrate new markets.
(Any three of the above, 2 marks each)
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What favourable economic factors does Hong Kong possess? (4 marks)
Answer:
As the Hong Kong dollar is pegged to the US dollar, Hong Kong hasa stable exchange rate.
The tax rate in Hong Kong islow.
Hong Kong hasno foreign exchange controls.
Hong Konghas adopted a laissez-faire policy which allows free trade and a free market.
Hong Kong allows free flow of capital.
Hong Kong has a good financial infrastructure.
(Any four of the above, 1 mark each)
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How does Hong Kong serve as an important service centre for the Mainland?(2 marks)
Answer:
Hong Kong provides a wide range of financial and business services to individuals and firms in the Mainland, like banking and finance, insurance, transport, accounting, marketing and sales promotion. (2 marks)
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State three reasons why multinational corporations oftenlocate their productionfacilities, marketing and head offices in different countries. (3 marks)
Answer:
Reasons:
●The company can escape tariffs.
●The companycan lower its production costs.
●Labourcostsand land may be cheaper in other countries.
●The company can enter into foreign markets.
(Any three of the above, 1 mark each)
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YY Company Ltd is a Hong Kong-based household products manufacturer. It set up its own factory in China many years ago. Its products are mainly sold in the US and Europe. Due to the sharp increases in wages, rent and operating costsin Hong Kong, the board of directors of YY Company Ltd decided to shut down its head office in Hong Kong and relocate to China.They believe Chinawill become more international after the countryhosts the Olympic games.
They relocation will not change any managerial jobs. However, all junior staff will be laid off.
(a)What problems will YY Company Ltd likely encounter with the relocation?(4 marks)
(b)How does the relocation benefit YY Company Ltd?(3 marks)
(c)State three factors that a firm must consider in deciding whether to relocate its head office to another country. (6 marks)
Answer:
(a)
As different governments may have different regulations and restrictions, the company will face legal problems.
Business practices in Chinaare different from thoseinHong Kong. For example, personal connections are particularly important in China. As the property rights system and the contract law system are underdeveloped, businessmen have to rely on guanxi to obtain approval from government officials. If they do not have connections, their investment plans may be delayed. Corruption in the Mainland is also a serious problem.
There are cultural differences between Hong Kong andChina. Mainland workers have a different culture and working norm. Hong Kong managers will find it difficult to manage Mainland workers.
YY Company Ltd is likely to face a human resources problem, i.e., loss of labour. Experienced managers in Hong Kong may not want to work in China. It will be difficult to hire skilled labour in the Mainland.
Relocation can pose the threat of falling service standards for YY Company Ltd.YY Company Ltd need to maintain a high service standard.
(Any two of the above, 2 marks each)
(b)
YY Company can enjoylower production costs, e.g., rent and labour.(1 mark)
There is no need to coordinate offices in Hong Kong andChina. Administrative costs can be reduced.(1 mark)
Logistics and supply chain management can be simplified.(1 mark)
(c)Factors to be considered:
Economic factors: tax rate, price level, inflation, interest rate, foreign exchange control
Technological factors: Information and Communication Technology, communication network
Social and cultural factors: population structure, age distribution, sex ratio, working norm and culture
Physical factors: infrastructure(e.g., roads, ports), climate, natural environment and physical location
Political factors: legal system, laws and regulations of the government
(Any three of the above, 2 marks each)
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The following figure describes the operation of Highway, a computer manufacturer.
(a)What is globalisation? How canHighway take advantage of globalisation?(6 marks)
(b)What makes Highway able to outsource its production process to different countries? (2 marks)
(c)Suggest three advantages a high-tech company like Highway can gain from outsourcing. (6 marks)
(d)Despite the advantages of outsourcing, some manufacturers dislike outsourcing. Suggest three potential problems associated with outsourcing. (6 marks)
Answer:
(a)Globalisation is a series of economic, technological, cultural, social and political changes which have led to the increasing integration and interdependence of people and firms around the world. (2 marks)
Highway can enjoy the following advantages:
Highway can lower its production costs by outsourcing and global sourcing.
Highway can reduce its market risks by expanding its market.
By expanding its market to developing countries, Highway can enjoy economies of scale and production costscan be reduced.
With advances in technology, Highway can improve labour productivity and product quality.
New technology can reduce production and distribution costs.
R & D and new technology can help design better products and product development.
(Any four of the above, 1 mark each)
(b)
Advances in information and communication technology: Highway cancontrol production processes in different places with ICT. (1 mark)
Advances in transport technology: Transport costs are reduced and travel time is shortened. (1 mark)
(c)
Outsourcing providers usually specialisein one area of production of goods and services. A high-tech company can produce better products by outsourcing.
A high-tech company can concentrate on its core functions.
Due to specialisation, outsourcing providers can easily gain access to the latest technology of which a high-tech company can take advantage. Products and services of the high-tech company can thus be improved.
By associating with quality providers, a high-tech company can improve its credibility and build a good image.
Ahigh-tech company can purchase the best products and services.
Since a high-tech company does not own its production facilities, it can more flexibly adjust its production plans. In the fast-changing high-tech industry, this can give a high-tech company greater flexibility in responding to market changes.
Ahigh-tech production facility involves a huge investment. If the product fails, a high-tech company will suffer a huge loss. It is thus less risky to outsource production.
(Any three of the above, 2 marks each)
(d)
There is a long lead time.
Manufacturers may find it difficult to control outsourcing providers. As outsourcing providers may not deliver the products or services on time, this may delay the whole production process.
The company will find it difficult to monitorand control product quality.
If outsourcing is carried out in another country, the company may need to adjust to different time zones.
(Any three of the above, 2 marks each)
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ShoesLandCompany manufactures shoes and has its own retail shops in the US, Canada, England, Germany, Italy, Finland, Spain, Singapore, Japan, Taiwan and Hong Kong. The company has two factories: one in China and one in Thailand. They manufacture the same kind of productsunder the ShoesLand brand name for worldwide distribution. As a result, ShoesLand’s products are sold with a different country of origin in different countries.
ShoesLand’s headquarters is located in the US and it is mainly responsible for research, design and product development. ShoesLand has its own distributors which are mostly department stores and shoechain stores. Recently, sales revenues at department stores have been declining.
(a)Is ShoesLand a multinational corporation? Why?(2 marks)
(b)Why are ShoesLand’s products sold with a different country of origin in different countries? Suggest two reasons for this. (4 marks)
(c)Give two reasons why ShoesLand would like to keep selling its shoes indepartment stores despite declining sales? (2 marks)
Answer:
(a)ShoesLand is a multinational corporation because it has operations in many countries. (2 marks)
(b)Reason:
This helpsdifferentiate its products from its competitors.
Country of origin can affect consumers’ buying decision and impressions.
With a different country of origin, ShoesLand can take advantage of the admissibility, rates of duty, tax treatment and trade preference programmes in different countries.
It may be easier for ShoesLand to comply with a government’s rules and regulations regarding advertising, marketing and distribution in different countries.
(Any two of the above, 2 marks each)
(c)
ShoesLand can maintain its image.
With mere exposure in department stores, ShoesLand can advertise its products.
ShoesLand can build upa good reputation.
(Any two of the above, 1 mark each)
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Amy established a slimming company many years ago in Hong Kong. It provides slimming body treatment, healthy food, diet and exercise advices. With the slimming trend of recent years, her business has been booming. She has noticed that the trend is spreading to China. Therefore she plans to expand intoChina. She will start with Shenzhen and open a slimming company there.
(a)What are Amy’s challenges inpenetrating the China market? (4 marks)
(b)What are the advantages of her expansion plan?(4 marks)
(c)How can Amy reduce the risks associated with her expansion plan?(3 marks)
(d)How can Amy compete with large slimming companies in China?(4 marks)
Answer:
(a)
China has different rules and regulations. Amy may face legal problems.
Due to the different culture, the consumer behaviour of Mainland customers will be different from that of Hong Kong customers.
Business practices in China are different from those inHong Kong. For example, personal connections are particularly important in China. As property rights and contract law are underdeveloped, businessmen have to rely on guanxi to obtain approval from government officials. If they do not have connections, their investment plans may be delayed. Corruption in the Mainland is also a serious problem.
There are cultural differences between Hong Kong andChina. Mainland workers have a different culture and working norm.
Amy needs to coordinate the shops in Hong Kong andChina.
Amy should strictly control the service quality of the Mainland centre. Otherwise, thereputation of her slimming company may be harmed.
(Any four of the above, 1 mark each)
(b)
As the local market is saturated,profits will decrease. The expansion plan can widen the market opportunities for Amy’s company.
The local market can be very competitive. With expansion in the Mainland, Amy’s slimming company can avoid direct competition with Hong Kongcompanies.
Expanding the company into other countries can reduce market risks.
Sales and revenues can also be increased.
The expansion plan can build agood reputation and imagefor the company.
(Any four of the above, 1 mark each)
(c)In order to reduce risk, Amy can:
undertake a questionnaire. Amy can learn about the preferences and tastes of Shenzhen customers and adjust her products and services accordingly. This can lower the chance of failure.
conduct marketing research. Amy can get more information about China from the Internet, newspapers and magazines. She can also attend seminars and exhibitions. With this information, she can understand the business environment in China in a more comprehensive way. China’s social, political and legal environment has a great impact on business practices. Amy can make better business decisions with this information. The chance of failure is reduced.
make a field trip to China. Amy can observe the business practices of the industry. She can explore the business opportunities for her company. It is also important for her to analyse industry threats beforehand so that she can be well-prepared. Risk can then be minimised.
Amy’s company provides goods and services to customers in Hong Kong. Amy can test the market in Shenzhen first so that less investment is involved. Amy can also learn if her products are accepted by Mainland customers. If not, she can withdraw.
(Any three of the above, 1 mark each)
(d)
Amy can launch innovative products or services to attract customers.
Amy should keep her company’s operation flexible so that it can respond to market changes quickly.
Amy can maintain a close relationship with her customers. She can also customiseher services to the individual needs of customers to provide better services to them.
Amy can tailor her products and services to cater for the needs of a particular group of customers.
(Any two of the above, 2 marks each)
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Tai Tai manufactures quality die cast models and exports them to Europe and the US.For many years, Tai Tai’s products have been highly appealing to foreign collectors. Tai Tai designs its products in Hong Kong and has them manufactured atits own factory in China.
Recently, Tai Tai has found many similar low-priced products in China. Sometimes, the design is exactly the same as its own products but lower priced. The management of the company is very concerned about this. As they are considering expanding their market to China, they are afraid they cannot compete with the low-priced products. Their business will be badly hurt.
Eric, the CEO of the company,attributes the problem to the outsourcing of the printing process. He is thinking of havingthe company’s own factory carry out the whole production process.
(a)State three possible reasons why Tai Tai should outsource its printing process.(3 marks)
(b)How does Eric’s decision benefit Tai Tai?(4 marks)
(c)What can Tai Tai do in the face of competition from the low-priced die cast models in China?(4 marks)
(d)Should Tai Tai tailor its products to China’s market? Give two reasons to support your answer. (3 marks)
Answer:
(a)Reasons:
Outsourcing can lower production costs.
Specialisation of production processescan enhance printing quality.
Tai Tai lacks equipment.
Tai Tai lacks skilled labour, knowledge and techniques.
A huge investment is involved in buying printing equipment.
Printing operating costs are high.
Printing is an occasional production process.
With outsourcing, flexibility can be increased in meeting the changing business environment.
(Any three of the above, 1 mark each)
(b)
His decision can increase production efficiency so that Tai Tai can get the needed materials in time. This can avoid production delays which are caused by outsourcing.
Logistics and supply chain managementcan be simplified. Tai Tai can monitor and control the quality directly.
Administrative and transport costs can be reduced. Tai Tai will not need to coordinate among different factories.
The through train production line can reduce the threat of design theft.
(Any two of the above, 2 marks each)
(c)
Tai Tai can apply for patens before launching the product on the market.
Customers may want more apart from the products itself. Collectors may value the brand name as well. Tai Tai can add more value to its products so that customers can tell the differencebetween genuine products and counterfeit products (e.g., genuine products are marked with a number. A certificate issued by Tai Tai can come with the product etc.)