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Macroeconomics, microeconomics and the construction industry

Introduction: The construction industry is considered as one of the important industries in the world, however in Europe the percent of workers in this sector is 7% (OECD,2008). this industry relates to construct and maintain the buildings such as; houses, schools, hospitals, factories, offices, roads, bridges, ports and other constructions. the construction industry were developed to contain several sectors and departments in order to manage construction projects especially large projects such as the government’s construction projects which include highway streets and infrastructures of the cities.
This industry like other large investments also needs a specific management system to reach desired aims and objectives of each project. This report will analyze the relationship between macroeconomics and the construction industry, and to evaluate and discuss the effect of / on macroeconomics of this industry.
Construction Industry: From the civil engineering view, the construction industry can be defined as a process which relates to build and assemble of infrastructure. activities of the construction in UK may be classified according to three types which are: the residential works (homes, offices and others) which are sharing around 26 % construction output in England, non residential works with 56 % of total English construction’s output , in addition the infrastructure works are considered small, an example in France (36% of total output) with very large population , in other words in this case a large infrastructure is required. also, it can be noted that industry of the construction across Germany, France, US and UK is heavily skewed towards firm investments where they are considered less important than the other types of investments.(Dean Kashiwagi, et al. , 2009) These types are summarized in Figure (1).
Figure (1): Types of Construction Industry 2.1 Construction Industry Structure (CIS): The most important factors which effect on the CIS are the performance and the competition between three types of construction discussed previously, and the general CIS will discuss in Table (1):
Table (1): Construction Industry Structure. Negotiated-Bid
Owner selects vendor
Negotiates with vendor [1]
Vendor Performs
Best Value
Performance and price
Contractor creates baseline plan
Contractor justifies and measures deviations
Contractor is technical expert
Unstable Market
Price Based Specifications, standards and qualification based
Management, direction, control and inspections by client’s professional
Client professional is technical expert/ decision maker
From Table (1), it can be noted that the Unstable Market is less performance and competition, the Negotiated-Bid achieves high performance with less competition, the Price Based has high competition due to the price with low performance however this type depends on minimizing the costs. Best Value is considered an important target depends on the investor achievement either high performance or competition by performing a good management between two factors of evaluation.
2.2 Gross Domestic Income (GDP): It is a measure of the total amount of service and goods which produced by people in specific country during one year. And it shows the productivity of country so it relates to the national account and macroeconomics.
Table (2) gives an indication for the industrial construction of UK, France, Germany and USA in 1999:
Table(2): GDP of the construction industry in 1999 [2] Country
0.650 0.722 France
0.973 1.343 Germany
0.978 1.147 USA
1.000 1.000 Table (1) shows that the percent of the GDP in UK is about 65% which is small in comparison with the other countries especially USA which reaches to 100 % GDP for all construction investments.

How And Where Organisations Like Burger King Invest Economics Essay

Critically analyse how Dunning’s OLI paradigm seeks to explain the why, how and where organisations such as Burger King invest?
According to Dunning (1979:p.274), the eclectic paradigm resulted from his dissatisfaction with existing theory of international production: the Hymer-Kindleberger approach, the product-cycle theory, and the internalisation theory. The three were considered to be partial explanations of international production. Henceforth, he proposed an alternative line of development which “tried to integrate the existing theories in a general and ‘eclectic’ model in which “the subject to be explained is the extent and pattern of international production” (Dunning, 1991: p.124).
The paradigm is a blend of three different theories of foreign direct investment = O L I, each piece focusing on a different question. Theory states that the extent, form and pattern of multinational activity are determined by the existence of three sets of advantages.
Firm Specific Advantages (The O Factor)
A MNE such as BURGER KING a multinational restaurant company if operating a plant in a foreign country would definitely face with additional costs as compared to a local competitor. The additional costs could be due to cultural, legal, institutional and language differences also due to a lack of knowledge about local market conditions and/or the increased expense of communicating and operating at a distance. Therefore, if a foreign firm as said like Burger King is to be successful in another country, it must have some kind of an advantage that overcomes the costs of operating in a foreign market. Either the firm must be able to earn higher revenues, for the same costs, or have lower costs, for the same revenues, than comparable domestic firms.
Since only foreign firms have to pay “costs of foreignness”, they must have other ways to earn either higher revenues or have lower costs in order to able to stay in business. So if the Fast Food Business or any MNE is to be profitable abroad it must have some advantages not shared by its competitors. These advantages must be (at least partly) specific to the firm and readily transferable within the firm and between countries. These advantages are called ownership or firm specific advantages (FSAs) or core competencies. The firm owns this advantage: the firm has a monopoly over its FSAs and can exploit them abroad, resulting in a higher marginal return or lower marginal cost than its competitors, and thus in more profit. These advantages are internal to a specific firm. They may be location bound advantages (i.e. related to the home country, such as monopoly control over a local resource) or non-location bound (e.g. technology, economies of scale and scope from simply being of large size).
Country Specific Advantages (The L Factor) The firm must use some foreign factors in connection with its domestic FSAs in order to earn full rents on these FSAs. Therefore the location advantages of various countries are key in determining which will become host countries for the MNE. Clearly the relative attractiveness of different locations can change over time so that a host country can to some extent engineer its competitive advantage as a location for FDI.
The country specific advantages (CSAs) that influence where an MNE will invest can be broken into three categories: E, S and P (economic, social and political). Economic advantages include the quantities and qualities of the factors of production, size and scope of the market, transport and telecommunications costs, and so on. Social/cultural advantages include psychic distance between the home and host country, general attitude towards foreigners, language and cultural differences, and the overall stance towards free enterprise. Political CSAs include the general and specific government policies that affect inward FDI flows, international production, and intrafirm trade. An attractive CSA package for a multinational enterprise would include a large, growing, high income market, low production costs, a large endowment of factors scarce in the home country, and an economy that is politically stable, welcomes FDI and is culturally and geographically close to the home country. Outside of Burger King’s Americas group (United States and Canada), 37.0 percent of the countries and 24.6 percent of the restaurants are in the Latin American and Caribbean group, yet these countries accounted for only 13.5 percent of the non-Americas group revenue in fiscal 2009. This is largely because many of these countries have very small populations, such as the Cayman Islands, Aruba, and Saint Lucia. So why did Burger King develop a presence in these markets, even though at this writing it is not in countries with much bigger populations, such as India, Pakistan, Nigeria, Russia etc. The answer is largely due to a location factor.
Internalisation Advantages (The I Factor) How they go abroad is another issue. The OLI model argues that external, arm’s length markets are either imperfect or in some cases non-existent. As a result, the MNE can substitute its own internal market and reap some efficiency savings. For example, a firm can go abroad by simply exporting its products to foreign markets; however, uncertainty, search costs and tariff barriers are additional costs that will deter such trade. Similarly, the firm could license a foreigner to distribute the product but the firm must worry about opportunistic behaviour by the licensee.
The OLI model predicts that the hierarchy (the vertically or horizontally integrated firm based on internal markets) is a superior method of organising transactions than the market (trade between unrelated firms) whenever external markets are non-existent or imperfect. The theory predicts that internalisation advantages will lead the MNE to prefer wholly owned subsidiaries over minority ownership or arm’s length transactions. It is therefore the internalisation advantages part of the OLI paradigm that explains why MNEs are integrated businesses, producing in several countries, and using intrafirm trade to ship goods, services and intangibles among their affiliates.
Internalisation within the MNE is designed to reduce market failures by replacing missing or imperfect external markets with the hierarchy of the multinational organisation. One source of natural market failure is the transactions costs which are incurred in overcoming market imperfections or obstacles to trade in all external markets. The higher the costs, the smaller the volume of trade. All markets are faced with the costs of search, communication, specification of details, negotiation, monitoring of quality, transport, payment of taxes and enforcement of contracts. Secondly market failure arises because external markets fail to deal adequately with risk and uncertainty. Thirdly, when governments levy taxes, tariffs and other forms of trade barriers, these regulations create additional costs for firms that reduce profits. Although the regulations generally have a legitimate economic purpose (e.g. raising government revenue), from the firm’s point of view these are exogenous factors distorting international markets. Unrelated firms trading across international borders must pay these taxes.
This means that the choice between the market and the hierarchy is not so simple. There are many different modes of engaging in international production, ranging from simple exporting on the one hand, through subcontracting, licenses and joint ventures, to the polar extreme of a wholly owned subsidiary or branch. Each has its own benefits and costs to the MNE and these vary depending on the home and host countries, potential partners, the market for the product, government and non-governmental barriers to trade, and so on.
In Summary, OLI or eclectic paradigm explaining the existence of multinationals. The O factor answers the “why?” question; that is, why the firm goes abroad. The reason is to exploit its firm specific advantages in other markets and countries; these FSAs allow the firm to overcome the costs of transacting and producing in a foreign location.
The L factor answers the “where?” question of location. Since international production requires the use of foreign factors in conjunction with the firm’s FSAs, the MNE chooses its where to locate its foreign operations by comparing each country’s locational attractiveness in terms of country specific economic, social/cultural, and political factors.
The I factor answers the “how?” question as to what mode of entry the firm uses to penetrate the foreign location. The MNE has a variety of alternative contractual arrangements, ranging from arm’s length international trade through the wholly owned foreign subsidiary, and weighs their relative benefits and costs to determine how the enterprise enters the foreign market and expands its operations over time.
The successful MNE simultaneously combines these ownership, location, and internalisation advantages to design its network of activities and affiliates in ways that maximise its market shares and growth. Finally, as Dunning suggested (1979:p.275) if Burger King or any other MNE engages in FDI it must satisfied above three conditions.
By mid-2009, Burger King was not in any of the following countries: France, India, Nigeria, Pakistan, and South Africa. Critically assess using appropriate economic indicators and criteria the suitability of ONE of these countries as a possible future locations for Burger King. Pakistan, an impoverished and underdeveloped country, has suffered from decades of internal political disputes and low levels of foreign investment from 2001-07, however, poverty levels decreased by 10%, as Islamabad steadily rose development spending. In 2004-07, GDP growth in the 5-8% range was spurred by gains in the industrial and service sectors – despite severe electricity shortfalls – but growth slowed in 2008-09 (GDP 4.3%) and unemployment rose to 14%. Inflation remains the top concern among the public, jumping from 7.7% in 2007 to 20.8% in 2008, and 14.2% in 2009. In addition, the Pakistani rupee has depreciated since 2007 as a result of political and economic instability. The government agreed to an International Monetary Fund Standby Arrangement in November 2008 in response to a balance of payments crisis, but during 2009 its current account strengthened and foreign exchange reserves stabilized – largely because of lower oil prices and record remittances from workers abroad. Textiles account for most of Pakistan’s export earnings, but Pakistan’s failure to expand a viable export base for other manufactures have left the country vulnerable to shifts in world demand. Other long term challenges include expanding investment in education, healthcare, and electricity production, and reducing dependence on foreign donors. Political instability, terrorist attacks, power, gas and water shortage and weak law order control has led to falling trend in FDI. These are the major reasons due to which the foreign investors are not interested in investing their capital in Pakistan.
No investment exists in isolation from the overall economy. Economic indicators are data on key economic variables recorded at regular periods of time that are used to predict, identify and confirm fundamental movements in economic activity. Used judiciously, the information conveyed by economic indicators can help investors to predict the likely movements of the market. The key economic indicators are:
Gross Domestic Product (GDP).