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 rent or labour costs, the domestic firm will be less able to pass on the cost increase by raising prices as this will result in a more than proportionate fall in quantity demanded, and a fall in total revenue. Fall in profits due to increase in costs of production 1. As stated in the preamble, foreign fi rms have also been offshoring their production overseas. For example, Apple has offshore production of some components of iPhones to countries such as China and Taiwan. Such actions by foreign firms will drive up the demand for factors of production, such as land and labour, in these countries, and results in an increase in costs of production in the form of higher wages and rent. This has reduced the profits that can be earned by domestic firms, who may not even be selling the same goods and services as these foreign firms, but uses the same factors of production. 2. For domestic firms who are in direct competition with these foreign firms, the fall in demand as explained earlier, will result in a fall in the scale of production. This will reduce the ability of domestic firms to exploit internal economies of scale and results in an increase in average cost of production. Thus, profits will fall. In conclusion, domestic firms fear expansion by foreign firms as they are likely to bring about a fall in revenue as well as increased costs. Level descriptors Level Out of 10 marks Descriptors Level 3 8-10 Displays full slew of sk ills across AO1, AO2 and AO3: • Thorough knowledge displayed by explaining how expansion by foreign firms affects a domestic firm’s revenue and costs • Clear and coherent analysis, grounded by economic concepts, frameworks and principles • Good use of relevant examples • Considers at least 3 ways in which revenue and costs are affected. Level 2 5-7 Displays AO1 and AO2 skills: • Answers are relevant to question but undeveloped explanation of impact on costs and revenue • Answers that only consider either revenue or cost • Must consider at least 2 ways in which revenue and cost are affects • Limited use of examples; pure theoretical answer Level 1 1-4 Uneven display of AO1 and AO2 skills: • Smattering of points • Many conceptual errors • Fails to address question requirement (For example considers increase in revenue or fall in costs)

3 (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] Question analysis Approach Command Word Discuss the view: balanced answer + EV Question Type Strategies End Point Whether cultivating brand loyalty is the best way to respond to increased competition Content and Context Content Thesis • How cultivating brand loyalty reduces the problem of increased competition from foreign firms Anti-thesis • Limitations of cultivating brand loyalty • How other strategies can also be used to respond to increased competition from foreign firms Context Not provided – to provide own examples Suggested Answer for Part b In view of the expansion by foreign firms as explained above, domestic firms can respond by building brand loyalty or by other means. Thesis: Building brand loyalty can help domestic firms respond to increased competition from foreign firms How building brand loyalty works: Domestic firms can build brand loyalty through generating actual or perceived differences. For example, domestic firms can engage in advertising campaigns to market the superior quality of its products to those produced by foreign firms. For example, domestic Singapore banks such as DBS, OCBC and UOB still maintain a strong brand loyalty among local consumers as their historical performance have been more stable, as compared to foreign banks which have generally taken a greater blow during the 2008 Global Financial Crisis. Developing a strong brand loyalty will reduce the degree of substitutability and cross price-elasticity of demand (XED) the domestic firms’ products with respective to the foreign substitutes. First, this will mean a smaller fall in demand due to the entry of foreign firms, as consumers are less likely to switch their consumption patterns due to the strong brand loyalty. Second, reducing the XED value will also make the domestic firm less susceptible to the foreign firm’s pricing strategy, since a fall in price of the foreign firm’s products will only result in a less than proportionate fall in demand. Thus, profits will only be reduced to a smaller extent. Anti-Thesis (1): Building brand loyalty has its limitation in helping domestic firms respond to increased competition from foreign firms 1. Building brand loyalty takes time. In today’s globalised world, the entry of foreign firms into different markets is happening rapidly. It is almost impossible for any domestic firms to have sufficient time to build brand loyalty