Scale of Operations

SCALE OF OPERATIONS:

The cost advantage that arises with increased output of a product. Economies of scale arise because of the inverse relationship between the quantity produced and per-unit fixed costs; i.e. the greater the quantity of a good produced, the lower the per-unit fixed cost because these costs are shared over a larger number of goods. Economies of scale may also reduce variable costs per unit because of operational efficiencies and synergies. Economies of scale can be classified into two main types: Internal – arising from within the company; and External – arising from extraneous factors such as industry size.

Economies of Scale and International Trade

One important motivation for international trade is the efficiency improvements that can arise because of the presence of economies of scale in production. Although economists wrote about these effects long ago, models of trade developed after the 1980s introduced economies of scale in creative new ways and became known as the “New Trade Theory.”

In this chapter, the barest essentials of economies of scale models are developed to explain the rationale for trade with this production feature. The chapter also presents the monopolistic competition model of trade that incorporates an obvious feature of the real world, namely, the presence of heterogeneous goods.

The WTO can cut the cost of doing business internationally

Many of the benefits of the trading system are more difficult to summarize in numbers, but they are still important.

They are the result of essential principles at the heart of the system, and they make life simpler for the enterprises directly involved in trade and for the producers of goods and services.

Trade allows a division of labor between countries.

It allows resources to be used more efficiently and effectively for production. But the WTO’s trading system offers more than that. It helps to increase productivity and to cut costs even more because of important principles enshrined in the system, designed to make life simpler and clearer.

Imagine a situation where each country sets different rules and different customs duty rates for imports coming from different trading partners. Imagine that a company in one country wants to import raw materials or components copper for wiring or touch screens for electronic equipment, for example for its own production.

It would not be enough for this company to look at the prices offered by suppliers around the world. The company would also have to make separate calculations about the different duty rates it would be charged on the imports (which would depend on where the imports came from), and it would have to study each of the regulations that apply to products from each country. Buying copper or touch screens would become very complicated. That, in simple terms, is one of the problems of discrimination.

Imagine now that the government announces it will charge the same duty rates on imports from all countries, and will use the same regulations for all products, whether imported or locally produced. Life for the company would be much simpler. Sourcing components would become more efficient and cost less.

Non-discrimination is just one of the key principles of the WTO’s trading system. Others include:

Transparency (clear information about policies, rules and regulations)

Increased certainty about trading conditions (commitments to lower trade barriers and to increase other countries’ access to one’s markets are legally binding)

Simplification and standardization of customs procedure, removal of red tape, centralized databases of information, and other measures to simplify trade, known as “trade facilitation”.

Together, they make trading simpler, cutting companies’ costs. That, in turn, means more jobs and better goods and services for consumers.

“Trade facilitation” has become an important subject in the Doha Round negotiations. Red tape and other obstacles are like a tax on trade. The saving from streamlining procedures could be 2% –15% of the value of the goods traded, according to estimates by the Organization for Economic Cooperation and Development (OECD). The Peterson Institute for International

Economics estimates that it could add $117.8 billion to the world economy (global GDP). The World Bank says that for every dollar of assistance provided to support trade facilitation reform in developing countries, there is a return of up to $70 in economic benefits

WALMART TO SCALE BACK INTERNATIONAL OPERATIONS:

The largest retailer in the world, Wal-Mart has said it will close approximately 50 under-performing stores in China and Brazil due to an increasingly tough global economic outlook. Credit: walmart.com

Wal-Mart is scaling back its international operations and has detailed plans to shutter poorly performing stores in two of its biggest international markets and concentrate on opening additional smaller operations across the US.

The move was motivated by what the world’s largest retailer sees as an increasingly “tough” and “unpredictable” global economic environment.

According to the Arkansas-based company, the strategy calls for the construction of just 14 million square feet of new store space in international markets this year, down from its previously forecasted goal of 20 million to 22 million square feet.

In addition, Wal-Mart will close approximately 50 under-performing stores in Brazil and China. Bentonville, Arkansas-based Wal-Mart entered Brazil in 1995 with two supercenters and three Sam’s Clubs in the state of São Paulo. After 15 years, the company had become the third largest retailer in Brazil.

Its brands there include BIG, Bompreço, Hiper Bompreço, Magazine, Maxxi, Mercadorama, Nacional, Sam’s Club, Supermercado Todo Dia, TodoDia, Walmart and Walmart Posto.

Walmart China began operations in 1996 with the opening of a supercenter and Sam’s Club in Shenzhen. It currently operates stores under the Smart Choice, Trust-Mart, Walmart, Walmart Neighborhood Market and Sam’s Club brands.

The stores set to close reportedly represent about 2 percent to 3 percent of its sales in each of those markets.

The company’s Wal-Mart International division added 19 million square feet of store space in fiscal 2013, after first targeting growth of 30 million to 33 million square feet, then lowering that target to 21 million to 23 million square feet.

The company has also scaled back its operations India, saying that it still wants to invest in the country despite the recent dissolution of its joint venture with Bharti Enterprises that left the US company with just the 20 Best Price Modern Wholesale cash-and-carry stores there.