EJC_H2_ECONS_Essay2_Suggested_ans_and_mark_scheme

1 2 Many firms have been aggressively expanding overseas. This expansion not only involves selling products in new markets, but also includes offshoring their production. Such expansion has not been welcomed by domestic firms in these overseas markets. (a) Explain why domestic firms might fear such expansion by foreign firms. [10] (b) Discuss the view that the best strategy for domestic firms to respond to increased competition from foreign firms is to cultivate brand loyalty. [15] Suggested Answer for Part a Question analysis Approach Command Word Explain why – Provide reasons Question Type Consequences End Point Problems of expansion firms by foreign firms on domestic firms Content and Context Content • Impact on revenue of domestic firms • Impact on costs of domestic firms Context Not provided – to provide own examples Introduction As mentioned in the preamble, many firms have been expanding overseas and this has caused tremendous issues for domestic firms. These either involve a fall in revenue or an increase in costs of production, which has negatively affected the profits of domestic firms. Fall in profits due to fall in total revenue 1. With the expansion of foreign firms into domestic markets, this has resulted in a fall in demand for the goods and services produc ed by domestic firms. For example, the entry of Taobao (via both Lazada as well as the Taobao platform) into the Singapore market for electronics has resulted in many consumers who previously purchased from domestic firms such as Courts, to switch towards purchasing from these foreign substitutes. The fall in demand has led to a fall in total revenue for domestic firms, resulting in a fall in profits. 2. Many of these foreign competitors are also producing at a much larger scale as they cater a bigger market in their own countries. Thus, many of the foreign competitors are able to enjoy economics of scale which cannot be enjoyed by relatively domestic firms in countries such as Singapore. The ability to produce at a lower average cost than their domestic rivals has allowed these foreign firms to better engage in price competition due to their cost advantage to chase out these domestic rivals from the market. This can be done by setting a price below the average cost of the domestic firm but yet higher than the average cost of the foreign firm, allowing the foreign firm to continue making supernormal profits. For example, the initial entry of Chinese bike sharing companies, such as Ofo and Mobike, has driven domestic firms such as Obike to such down, as they are unable to compete with the prices offered by Ofo and Mobike.

2 3. The entry of foreign firms also increases the number of substitutes available to domestic consumers. Thus, the demand for a domestic firm’s goods/services will become more price elastic . This means that should that be an increase in cost, for example due to increase in