Long-Term Investment Decisions: Economics of Globalization

This essay delves into the long-term investment decisions faced by a microwaveable food company, analyzing pricing strategies, the impact of government policies on production and employment, and the complexities of expansion through capital projects. It examines the role of government regulation in ensuring industry fairness and explores methods for aligning the interests of stockholders and managers. The essay emphasizes the importance of product differentiation for maintaining inelastic demand and discusses the need for careful capital budgeting, including generating project proposals, estimating cash flows, and conducting thorough project reviews. Furthermore, it addresses the potential conflicts of interest between stockholders and managers, suggesting solutions such as deferred stock options to promote synergy and shared gains tied to company performance. Desklib provides access to this document along with a variety of study tools and solved assignments for students.

Running head: LONG-TERM INVESTMENT DECISIONS
Long-Term Investment Decisions
Name of the Student:
Name of the Professor:
Course Title: Economics of Globalization
Date: 18/02/2018

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Table of Contents
1. Plan for the managers in the microwaveable food company to follow in selecting pricing
strategies:.........................................................................................................................................2
2. Major effects of government policies on production, employment and the company:..............3
3. Determination of whether the regulation of the government helps in assuring the overall
industry fairness:..............................................................................................................................4
4. Main complexities under expansion via capital projects and actions needed for addressing such
complexities:....................................................................................................................................5
5. Creation of convergence between the interests of stockholders and managers:..........................7
References:......................................................................................................................................9

2LONG-TERM INVESTMENT DECISIONS
1. Plan for the managers in the microwaveable food company to follow in selecting pricing
strategies:
A healthy option food or low calorie is a new concept, which has acquired immense
interest in the current era. The schools, restaurants and even the prisons are providing healthy
food (Chatterji, 2017). This is because the individuals wish to spend healthier lifestyle. The
company intends to keep its product prices highly inelastic. This signifies that the strategy of
pricing would have no effect on the perceptions and the buying behaviors of the customers. Such
demand is observed in situations where the products or services are indispensable and the
consumers have to purchase them. However, the case is not identical for microwaveable food
products.
The function of demand, which is related to microwaveable food containing low calorie,
relies heavily on merchandise price, substitute products, overhead related to advertisement and
the earnings of the consumers. With the help of elasticity and demand, it is evaluated that the low
calorie microwaveable food company fits into the monopolistically competitive market. Such
market is compared through a reasonable number of sellers and purchasers (Bowen et al., 2015).
Due to this, the consumers could switch over to another brand for buying products at a lower
price. However, the monopolistic organizations conduct product differentiation and thus, they
bring additional customers.
Profit = Total revenue - Total cost = PQ - TC
In accordance with the first order condition of profit maximization,
MR - MC = 0

3LONG-TERM INVESTMENT DECISIONS
MR = MC; here P is not fixed
Based on the elasticity considered, it could be observed that the demand related to low
calorie microwaveable manufactured products is inelastic in nature. In order to maintain the
feasible inelasticity of the products, it is necessary for the company to distinguish its
merchandise from the other products of the organizations. If it is able to offer a dissimilar
product from its rivals to the customers, then the customers might not be able to find substitutes
easily. This would create the demand for the identical product, which is inelastic in nature
(Dominici & Roblek, 2016). It is identified that with the increasing product differentiation, there
would be increase in market power. Hence, it would be sensible for the company to conduct
dynamic product differentiation for arriving at majority of its profits.
2. Major effects of government policies on production, employment and the company:
Most individuals are of the notion that regime is needed for regulating the market. The
only replacement for a regulated market is the unregulated market. A market could be either
regulated or unregulated. However, to a certain extent, there needs to be presence of intervention
or regime regulation. This could be carried out in the form of government regulation (Dunning,
2014). There is often an urge of denouncing government as waste without taking into account
that the government could manage certain things better in contrast to the private sector. For
instance, managing externalities, providing public goods, enforcing contracts and supplying
exchange medium are few things, which the government could take care better than the private
sector.
However, debate is inherent regarding the limits of the government and the specified
activities to be included in such limits. As commented by Froeb et al., (2015), it is not possible

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for any organization to survive without governmental intervention; however, it need not be in-
charge of all the economic activities. This is because absence of government or full government
intervention might lead to an unstable economic scenario. Two primary reasons are inherent due
to which the government is engaged in a market economy and they include formulating rules
related to market exchange and the identical power is used for enforcement. In addition,
minimizing economic insecurity for the individuals not fortunate because of poor health, job
losses and other circumstances is another reason behind the government involvement in a market
economy. Thus, a market economy offers immense opportunities to the individuals; however,
there are risks involved.
3. Determination of whether the regulation of the government helps in assuring the overall
industry fairness:
The primary purpose behind which the government intervenes in the market is the
utilization of public goods as well as private goods, faulty information and in which the
individuals could not determine their own interest to figure out their personal benefits. The
government of US needs to find ways that would aim to benefit the overall society. It is
necessary for the government to intervene in the market economy because in its absence, the
market would be near to inefficiency (Gersbach & Schmutzler, 2014). There is possibility of
mergers and monopoly with the help of market economy, which formulate opportunities for
exploitation of the consumers through greater prices and poor quality goods. In this case,
overseeing the mergers is the primary role of the government along with controlling the market
for obscuring creations of monopoly.
The market economy is concentrated to accomplish optimum production capacity, which
is an aspect that would be missed in case of existence of monopoly (Rodrik, 2017). In the

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absence of regulation of the government, stability in price could not be accomplished, as the
rising competition would result in consistent lower prices. This, in turn, would lead to instability
in price. In situation where there is lack of market regulation, there would be initiation of lower
quality products to represent the low prices offered on the part of the market.
The first instance related to the involvement of the government would be the situation
when the government intervenes at the time organizations are producing higher negative
externalities. This externality could be a manufacturing unit producing smog and it poses some
serious threat. In case, this externality does not impose any threat to the manufacturer, then the
organization would conduct this action, since it does not have any risk of consequence. In the
words of Haque & Azmat (2015), China has thick smog, which compels its citizens to wear mask
along with minimizing outdoor activities for products. A huge portion of these products is shifted
to USA, in which the laws related to environment and government enforcement are strict.
The second instance of the involvement of the government is the requirement for
regulating natural monopolies and banking. The government has designed laws to enforce ability
of protecting the rights of the average Americans from the unjustified business practices like
cartels. These identical rights are allowed to the government of prosecuting Dennis Kozloski
after the person had robbed $600 million from Tyco (Henckel & McKibbin, 2017).
4. Main complexities under expansion via capital projects and actions needed for
addressing such complexities:
It is observed that all the organizations aspire to grow big and in order to ensure this; they
plan to diversify their business horizon. Thus, it is crucial for the managers of the organizations
to plan for the long-term along with allocating resources for enhancing productive capacity,

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developing mechanism for enhancing cost efficiency and expanding the overall asset base. It is
noteworthy that any decision that the managers make constitutes of risk and this would have
direct effect on the current cash flows, future benefits and costs (Hirst, Thompson & Bromley,
2015). Capital budgeting is a technique, which takes into account long-term planning, effective
mechanism for analyzing capital expense demanding research and development, training and
education for staffs, buy-versus-lease decisions and decisions related to mergers and
acquisitions.
The issues related to capital budgeting and expansion require concentrated and careful
efforts and the below-stated steps could be undertaken for addressing such complexities:
 The managers of the microwaveable food company need to generate alternative project
proposals of capital investment for attempting to democratize the method of idea
generation for new capital investments.
 All the stakeholders need to be associated for the generation of new ideas starting from
the factory workers to the board of directors. This would be immensely beneficial for
minimizing the issues.
 An estimate of the cash flows is needed for project proposals.
The following guidelines would be extremely beneficial for the microwaveable food
company to estimate such cash flows:
 The cash flows gauged on incremental basis, which signifies that for any project, the
streams of cash flow need to be depicted through the difference between the streams of
cash flow to the firm depending on the acceptance or non-acceptance of the proposed
project.

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 With the help of marginal tax rate of the microwaveable food company, the measurement
of cash flows needs to be carried out on after-tax basis.
 The indirect costs associated with the project across the organization need to be included
in the computations of cash flow. For instance, if a particular department or division of
the microwaveable food company is planning for a capital investment, which would
affect the costs or revenues of other divisions or departments, these external effects need
to be included in the estimates of cash flow (Masteikiene & Venckuviene, 2015).
 There need not be consideration of sunk costs at the time of project evaluation. Since it is
not possible to avoid the sunk costs, they need not be considered at the time of deciding
whether to accept or reject the project.
 The resource value utilized in the project needs to be gauged in terms of opportunity cost.
Hence, it could be stated that assessing the viability of the project is crucial for the
microwaveable food company to undertake the project. Typically, the project would lead to
initial investment in the first year, which is followed by cash inflows over the succeeding years
and certain criteria are present for analyzing the viability of the project through net present value
or internal rate of return (Perloff & Brander, 2016). Finally, the company needs to conduct an
effective review of the projects for checking the accuracy of the decisions and mid-course
correction could be undertaken, if deemed necessary.
5. Creation of convergence between the interests of stockholders and managers:
It is obvious that there would be conflict of interest between the stockholders and the
managers in an organization. This necessitates the need for the managers in identifying potential
conflicts along with providing solutions to such conflicts (Salvatore & Brooker, 2015). The
primary problem arises from the division of profit between the stockholders and the managers.

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The managers want the profit earned in the form of bonus payments, while the stockholders
desire the profit to be distributed in the form of dividends.
In this case, the synergy of interest between the two groups is essential. In order to ensure
such synergy, deferred stocks could be offered to the managers, which allow the holders to buy
company stocks at a lower rate compared to its current rate. Thus, these are associated with the
performance of the managers and they are provided in the form of bonus (Samimi & Jenatabadi,
2014). In case, there is an improvement in the performance of the microwaveable food
company, there would be increase in capitalized value, in which both the managers and
stockholders make gains.
For instance, in 2009, the average compensation of CEO in Fortune 500 companies had
averaged $7 million. In this amount, 71% constitutes of options-based compensation or deferred
stock compensation for greater performance. In a similar fashion, Procter & Gamble invests
above $3 billion each year in advertisement via Leo Burnett, Saatchi & Saatchi and other
advertisement agencies (Vasin & Gamidullaeva, 2015).
Conventionally, the agencies make flat rate fees evaluated as 15% of the advertisement
dollars expended for the clients. In 1990, Colgate-Palmolive, Procter & Gamble and Ford had
abandoned this flat rate system and they adopted the payment of a baseline fixed fee coupled
with performance bonus. In the current era, the accounting executives in the agencies earn fixed
income; in case, their creative communication is below compelling, while the sales of Procter &
Gamble have remained flat. On the contrary, an effective advertising campaign could fetch
greater bonuses, if the sales growth of Procter & Gamble could be attributed to advertising
(Ward & Begg, 2016). The owners of advertisement agencies, clients and the accounting

9LONG-TERM INVESTMENT DECISIONS
executives are engaged in sharing the risks of consumer whimsy; however, a fixed salary helps in
providing a safety net.

10LONG-TERM INVESTMENT DECISIONS
References:
Bowen, H. P., Baker, H. K., & Powell, G. E. (2015). Globalization and diversification strategy:
A managerial perspective. Scandinavian Journal of Management, 31(1), 25-39.
Chatterji, M. (2017). Economic globalization in Asia. Routledge.
Dominici, G., & Roblek, V. (2016). Complexity theory for a new managerial paradigm: a
research framework. In Neostrategic Management (pp. 223-241). Springer, Cham.
Dunning, J. H. (2014). The Globalization of Business (Routledge Revivals): The Challenge of the
1990s. Routledge.
Froeb, L. M., McCann, B. T., Ward, M. R., & Shor, M. (2015). Managerial Economics. Cengage
learning.
Gersbach, H., & Schmutzler, A. (2014). Does globalization create superstars? A simple theory of
managerial wages. European Economic Review, 71, 34-51.
Haque, M. Z., & Azmat, F. (2015). Corporate social responsibility, economic globalization and
developing countries: A case study of the ready made garments industry in
Bangladesh. Sustainability accounting, management and policy journal, 6(2), 166-189.
Henckel, T., & McKibbin, W. J. (2017). The economics of infrastructure in a globalized world:
issues, lessons and future challenges. Journal of Infrastructure, Policy and
Development, 1(2), 254-272.
Hirst, P., Thompson, G., & Bromley, S. (2015). Globalization in question. John Wiley & Sons.

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Masteikiene, R., & Venckuviene, V. (2015). Changes of Economic Globalization Impacts on the
Baltic States Business Environments. Procedia Economics and Finance, 26, 1086-1094.
Perloff, J. M., & Brander, J. A. (2016). Managerial Economics and Strategy. Prentice Hall.
Rodrik, D. (2017). Populism and the Economics of Globalization (No. w23559). National
Bureau of Economic Research.
Salvatore, D., & Brooker, R. F. (2015). Managerial economics in a global economy. Oxford
University Press.
Samimi, P., & Jenatabadi, H. S. (2014). Globalization and economic growth: Empirical evidence
on the role of complementarities. PloS one, 9(4), e87824.
Vasin, S. M., & Gamidullaeva, L. A. (2015). Methodical approach and tools to improve the
efficiency of managing of the innovation potential in the context of economic
globalization. Review of European Studies, 7(3), 124.
Ward, D., & Begg, D. (2016). Economics for business. McGraw-Hill.