Core business refers to the primary concern of an entity. In economics, the core business of an organization is central to the creation of value. Core business is the primary activity that an enterprise carries out in order to participate in the process of value addition. Usually organizations shed off things that do not constitute their core business. They may prefer to outsource activities, which are not part of their core activities.
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Global value chains refer to streams of production running across various parts of the world that improves the merit of a product or service. As raw materials move from the primary producer to manufacturers, followed by retailers and finally to consumers, its value increases.
This happens either because of transportation in a region of greater demand, or by the addition of functionality or form to the product. The value of products that have a global value chain increases as the product passes through various international processing systems
Non-equity modes of entry refer to the processes of getting access to markets without making an investment in those markets. In this sense, a company gains access to a market without injecting capital in any part of that market. The term market here means both as a seller and as a buyer. For instance, a company can decide to outsource the back office functions to another company as its client. If the two companies reside in two different countries, then the foreign company enters the labor market using a non-equity mode of entry.
The term countervailing power of partners refers to the situation where partners balance the impact that each one has on the other. This helps to calm down competition and to allow for successful cooperation.
The main attraction for contract manufacturing is lower costs of labor in the host country. For instance, China handles a lot of contract manufacturing work from Europe and America. The western countries are unable to compete with China due to low labor costs in China. The reverse situation is true for high-tech equipment.
Some countries prefer to use contract manufacturing to take advantage of high-end technologies in other countries. They give manufacturing contracts to countries that have the best technologies in certain areas. For instance, the US processes many orders for military hardware for other countries.
Service outsourcing became popular with the advent of the internet. It is the process where a company gives a maintenance contract to an offshore company to take care of its needs. The most common service that many companies outsource is customer care services, or services that requiring call centers.
Franchising is selling of the permission to use a brand by the franchise owner to a franchisee. The person who wants to hold a franchise usually pays the owner of the franchise a periodical fee for using the branding elements of the franchise. The franchisee saves on the cost of branding, and gets access to an established brand.
Contract farming is planting crops on behalf of a client. The users of this model include companies that rely on agricultural products as their primary source of raw materials. For instance, tobacco farmers receive contracts from tobacco companies because the tobacco companies cannot meet the demand for tobacco leaves on their own.
The mode of entry that generates the highest local value addition is contract manufacturing. This model relies on local resources. This means that for every contract manufacturer in a given country, there is a long supply chain within the country. Contract manufacturing ensures that not just the manufacturer benefits from processing, but his entire supply chain.
This can include farmers, transporters, makers of packaging materials and all the laborers that work with them. In this sense, the impact of one industry in a region becomes profound, supported by contract manufacturing. One factory develops a regional supply chain, which ends up employing many members of the community.
The mode of entry that generates the highest export earnings for a host country is service outsourcing. Service outsourcing is very easy to carry out. A company that needs support to handle inbound calls can sign a contract with a call center located in any part of the world provided there are no significant language and cultural barriers.
The cost of setting up an outsourcing center is not high. In fact, the only equipment that a person needs to handle outsourced work is a computer and an internet link. The rate of pay is very lucrative. The low barriers to entry make it very easy for these jobs to move elsewhere. While service outsourcing pays well, it is very volatile.
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The loss to the US economy from the effects of terms of trade refers to a very interesting dynamic in international trade. Terms of trade refer to the ratio of imports to exports. The economy benefits whenever exports exceed imports. In the case of offshoring, the US sends work to other countries.
The primary benefit is that the American manufacturers enjoy better returns when they move manufacturing to other countries with lower costs of production. The problem is that this increase in the quantity of money that service providers and American manufacturers send to foreign countries makes the US more vulnerable. The balance of trade shifts in a way that can make the US a net importer of goods and services.
Income distribution refers to the pattern of distribution of the money people earn in a country. When the US uses offshoring to enable its manufacturers to compete in the global market, it precipitates an income distribution problem. Offshoring is equivalent to exporting jobs. Manufacturers find it more sensible to send jobs to other countries because American workers are more expensive. The net result is that there are fewer jobs left for US citizens within America. This is one of the costs associated with income distribution.
The main issue raised is that the studies fail to take into account the economic problems of offshoring. The US suffers consequences as a country each time a manufacturer in its soil sends work abroad. This decision may work for the manufacturer because it reduces the cost of production. However, the result is that the value chain leaves America.
It thereby benefits the country where the manufacturing takes place. Alongside the benefits of offshoring, it is important to consider the drawbacks, especially the macroeconomic costs. One benefit does not guarantee that the activity will yield full benefits for a given county.
The first thing that stakeholders should do to make offshoring beneficial to all the parties is increasing the volume of trade between them. The source country loses some jobs whenever it enters into off shoring agreements with any of its trading partners.
If the two countries can increase the overall volume of trade between them, it is possible to offset the loss of jobs in manufacturing with new jobs in commerce. Such an arrangement will make it possible for the two countries to enjoy their competitive advantage without undue fear of trade imbalance.
Secondly, the two countries need to consider how to expand the markets for the finished products or services. Since each country is playing to its strengths, it is possible to produce more than the sum of each country producing on its own. If the two countries combine their capacities, they will have a greater manufacturing capacity to meet the needs of an expanded market.
This will ensure that the country that is offshoring creates more opportunities in marketing for those who lost their jobs to pave way for the offshoring contract. This combination of synergies would result in an equally beneficial symbiotic system.
The third approach that the two countries can use to reduce the impact of offshoring is by having the host country offshore some of its processes to its business partner. This would mean that the country fulfilling the offshoring contracts allows the country owning those contracts to recover some of the jobs by providing the services the host country needs assistance.
For instance, American manufacturers use Chinese and Asian manufacturers to make some products. The Chinese and the Asians should allow Americans to establish businesses in their countries to offer services like design, hospitality, among others to allow American citizens to recover some of the jobs lost to offshoring.