Business Environment and its impact on Investment (Essay Sample)

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Business Environment and its impact on Investment
Introduction
The main objectives of the business managers are to increase profit and the production out in their firms (Warburton). This is achieved through reduction of production cost (Bragg) and increasing the business output (Rasmussen 28). There are some factors in business environment that hinder the profit maximization. In such cases, business economists intervene in order to analysis the business environment, identify the factors and suggest the corrective policies. These policies suppress or nullify the impacts associated with external factors affecting business profitability (Tucker). The roll of the managers is the implementation of these policies. Business Environmental factors affecting the business decision-making are categorized into two. These are macro-economic factors and the microeconomic factors.
Factor affecting Business management decision making
Micro- economic factors affecting the managerial decision making include the consumers’ rate of income, taxes, the number of consumers in the market, the prices of commodities, the consumer test and preferences and fear for futures changes in prices (Gowdy). These factors affect the supply and the demand of the commodities (Mandler). The management needs to understand the trends of these factors in order to employ relevant and effective policies that will maintain profitability by increasing output relative to the production cost.
Macroeconomic factors affecting management decision making are inflation, interest rates, Gross national product growth, tariffs, unemployment level and others (Blanchard 10). These factors influence the aggregate supply and aggregate demand.
Macroeconomic Aspect
OutputPriceADAD1XMQUnder this aspect, the factor to be illustrated is inflation rate. It affects the aggregate demand and supply hence influencing the manager’s decisions. The impacts of this factor can be demonstrated using Aggregate demand and Aggregate supply model. The dimensions of the model are the level of price at the Y axis and the output level at the X axis.
The aggregate demand curve is negatively sloped. This is because, as the price falls the output demanded increases. The underlying reason for the downward slope of aggregate demand curve is the pigou’s effect. Pigou’s effect state that, as the prices of commodities declines, the real wealth increases. As the real wealth increases the consumers demand more goods . Another explanation for the aggregate demand curve’s negative slope is the interest rate effect. According to interest rate effect, as the prices reduces, the money demand declines which in turn causes the interest rate to fall. Law interest rate increases investment and level of consumption, hence increase in demand. The point beyond Q shows level of low elasticity due to full employment of production factors. On the hand, the supply curve is positively slopped. This is because, as the price increases, the supply goes up (Vane).
The point of equilibrium is at X. In case of inflation, for instance demand- pull- inflation, the demand for commodities rises above the equilibrium level as shown in the curve AD1. This makes management to increase the supply with an aim of satisfying the high demand. Similarly, in case of cost- push- inflation, the management responds by designing policies that increase the demands for their products (Colander 173) in order to exhaust commodity surplus in the market.
Micro-economic Aspect
Quantity OutputPriceSupply CurveDemand CurveXC1PP1QQ1The factor to be illustrated is change in consumer’s income. Alteration in levels of income influences the demand for commodities. An increase in the income shifts the demand curve upwards and reduction in income shifts the demand curve downwards. This can be illustrated graphically
In case the demand increases to the new curve C1 due to increase in consumer income, the price increase to the new level P1 and the quantity supplied increases as well from Q to Q1.
The supply curve for commodity is positively sloped and the demand curve slopes down. The point X is the level where the quantity supplied is equal to the quantity demanded.
Other factors that influence the demand of the commodities are, the price of the commodities, consumer’s expectation about the future price of the commodities, test and preferences and the number of the consumers. If the price of the commodities is low, the consumers are willing to take more and if the price is higher, they purchase less based on the portion of income set aside for consumption. In some instances, the consumers take more of a particular commodity due to fear of its future increase in price. Also the number of consumers affects the demand in that, the higher the number of consumers, the higher the demand in the market. Also, consumers take much of commodities that fully satisfy their needs based on their test and preferences (Willner).
Foreign Investment in Rwanda
Rwanda is a landlocked country, densely populated with most of its citizens occupying rural areas. The kind of farming practiced is subsistence. The main exports are coffee and tea. Unlike in the past, Rwanda has realized an upward trend in its economic growth since the genesis of Millennium era. In 2006, it managed to register an economic growth of 8%.
The macroeconomic conditions in Rwanda includes high interest rates, high rate of unemployment, low inflation rate, low Gross domestic product (GNP), developed communication and transport networks , low tariffs and non-non tariff barriers.
Most of these macrocosmic conditions favors establishment of business firm in Rwanda.
These factors include high unemployment level, low tariffs and non tariffs barriers, developed communication and transportation networks and also Low level of GNP which forces government to reduce economic regulations for investments in order to attract more investors.
The high level of unemployment is due to the failure of government and the private sector to establish investments which increase employment opportunities to the citizens. Deficiency of investments was contributing by the civil war and genocide which was experienced in the past. Before Millennium, several investors feared to establish their investments in Rwanda in fear of re-occurrence of genocide. The government also has not been able to establish investment firms because it is channeling most of its revenues to the reconstruction of facilities destroyed during civil war in 1994. The high unemployment level is an advantage to investors. This is because of the supply of cheap labor. Thse reduces the production cost hence earning high profitability to the investment firms (MacLeod). Therefore availability of labor surplus in Rwanda attracts Investors.
The low level of Gross National product (GNP) is associated with lack of sufficient avenues and policies enabling injections to the economy. Deficiency of investments in Rwanda cause high unemployment levels. This in turn leads to low revenues to the government. The government relies on revenues from taxes imposed on employed workers, business firms and imports. The low level of GNP forces the government to loosen several regulations on investment and lowering tariffs and non tariff barriers. Such government decisions encourage investments.
Improved communication and transport system in Rwanda was greatly contributed by foreign aid agencies. These infrastructures are crucial in transportation of products from the production sites to the market. Also there is an international airline connecting Rwanda and other nations in the world. Rwanda relies on ports from Kenya and Tanzania, which are the neighboring countries. Rwanda also has managed to supply electricity to most of its regions especially in the urban areas and industrialized places. Therefore its established communication and transport system influences investment in the country since it enables easy distribution and transportation of commodities (Ferguson). This in turn lowers cost of production (Halevi). With low cost of production, the investment firms enjoy high profitability (Asplund)
Current Economic Policies in Rwanda
Fiscal Policies
The government of Rwanda applies fiscal policies with an aim of expanding economic activities. These policies reduce the public spending, eliminate domestic financing and improve tax administration efficiency. Rwanda has also introduced royalty taxes on mining.
The two important structures under fiscal policy are public spending structure and tax revenue structure. The tax structure is aimed at imposing taxes on goods and services. These taxes are, VAT, excises tax and fuel levy. Individual taxes on income are also accounted. Another source of tax revenue is tariffs from imports. Rwanda has a single statutory corporate tax rate of 30%. This tax rate helps to reduce incentives for tax avoidance and tax planning.
The public spending structure prioritizes the economic infrastructure, human labor development and other sectors of production. The governme...