Cambridge IGCSE and O Level Business Studies Section 6 External influences on business activity

Exam-style case study answers

The answers have been written by the authors and aim to provide a summary of appropriate content for answering each question.
However, the suggestions provided are not intended to be a definitive guide to all acceptable answers; each response should be
assessed on its own merits.

Marking guidance for case study questions has been provided for Section 1 in the answers documents. However, this same
guidance can be followed when marking the case study below and the other case study questions from the coursebook or the
Cambridge Elevate enhanced edition. Please note, the way marks are awarded may differ in examination to the guidance provided
in this resource.

Case study: Halo Enterprises (pages 340–342)

It is important that students apply their understanding of business concepts to the specific business scenario given in the case
study. For instance, they could make appropriate use of the following features: retail company, manufacturer of beauty products,
eco-certified products, organic products, no testing on animals, eco-friendly packaging, recession, international growth strategy,
exporting, host countries, economic indicators, political indicators. There may be further examples of application which have not
been included here, but for which students could be credited.

Question 1a Explain two benefits that the host country, Country Z, will have because of Halo Enterprises
setting up operations there as a multinational.

Possible answers could Benefits

include • provides employment opportunities
• improves balance of payments
• increases choice of goods and services
• invites knowledge-sharing
• increases tax revenues
• improves country’s reputation

Sample explanation
The host country might benefit from increased employment opportunities. Country Z has 7%
unemployment – this will help to continue the country’s economic growth and will reduce
government spending on benefits for the unemployed.

Question 1b Explain the advantages and disadvantages of the following two countries for Halo Enterprises
when choosing a new location. Which country do you think Halo Enterprises should choose?
Justify your answer.

Possible answers could Country Y Advantages

include • politically stable
• good power and rail infrastructure
• economy is in the growth stage of the economic cycle
• member of a free trade area

Disadvantages
• lower growth rate
• higher inflation and interest rates than Country Z
• more trade barriers than Country Z

© Cambridge University Press 2018 Exam-style case study answers – Section 6

 Cambridge IGCSE and O Level Business Studies Section 6 External influences on business activity

Country Z Advantages
• good transport infrastructure
• economy is at the boom stage of the economic cycle
• lower unemployment than Country Y
• low inflation and interest rates
• hardly any tariffs or quotas
• investment encouraged

Disadvantages
• much smaller population – smaller potential market
• land-locked – might be more difficult to transport goods
to Country Z
• exchange rate is less favourable than Country Y with
respect to country X’s currency

Conclusion • Country Z appears to have more advantages

than disadvantages – the lower inflation rate and
unemployment rate in Country Z and the economy being
in boom, might suggest that consumers have more
real disposable income – this could help HE achieve
better sales – however, political instability of Country Z
might be a problem for the future i.e. uncertainty that
good economic indicators will continue – when will the
economic boom end?

Question 2a Pressure groups are currently posing a threat to multinationals in Country Z. When considering
which country to set up operations in, explain why Halo Enterprises should consider pressure
groups as both an opportunity and a threat.

Possible answers could Opportunities

include • support HE’s environment concerns
• may change government policy

Threats
• effect on local businesses
• boycott of HE’s goods
• damage to HE’s reputation

© Cambridge University Press 2018 Exam-style case study answers – Section 6

 Cambridge IGCSE and O Level Business Studies Section 6 External influences on business activity

Question 2b The exchange rate of Country X’s currency with respect to Country Y’s currency has been
fluctuating in the past year. Explain how each of the following might affect Halo Enterprises if
it decides to export to Country Y. Which of these do you think is the most beneficial for Halo
Enterprises? Justify your answer.

Possible answers could Appreciation of Country X’s • will make Country X’s goods more expensive in
include currency Country Y – higher prices reduce demand/sales

Depreciation of Country X’s • will make Country X’s goods less expensive in
currency Country Y – lower prices increase demand/sales

Conclusion • the depreciation of Country X’s currency is better for

HE exports to Country Y – however, the currency will
also be depreciating against other currencies and this
increases import costs – if HE imports its raw materials,
then the prices of these will rise – the increase in costs
of production might mean that HE has to increase its
prices, which could negate any benefit of currency
depreciation

Question 3a Based on the information in Appendix 2, compare two economic features of Country Y and
Country Z and explain their impact on business activity.

Possible answers could Economic features

include • GDP growth rate
• inflation
• interest rates
• exchange rates
• unemployment rate
• barriers to entry
• legal controls/regulatory framework

Sample explanation
The unemployment rate is higher in Country Y than it is in Country Z. Country Y’s employment
rate is almost double that of Country Z’s. Consumers in Country Y will have lower disposable
incomes and this will reduce the sales potential in Country Y for HE’s products.

© Cambridge University Press 2018 Exam-style case study answers – Section 6

 Cambridge IGCSE and O Level Business Studies Section 6 External influences on business activity

Question 3b Before Halo Enterprises can set up operations in either of the countries, it needs to put
forward a proposal to the government showing the social costs and benefits of its operations.

The government of Country Z is aware of the increasing threat of pressure groups and wants to
do a very detailed cost–benefit analysis of Halo Enterprises’ proposal before giving it approval.

Explain how Halo Enterprises activities might cause positive and negative externalities. Do you
think the government of Country Z should approve Halo Enterprises’ proposal? Justify your
answer.

Possible answers could Positive externalities • provides employment opportunities

include • improves balance of payments
• increases choice of goods and services
• invites knowledge-sharing
• increases tax revenues
• improves the country’s reputation

Negative externalities • increased competition repatriation of profits

environmental damage exploitation of employees
• negative social impact
• undue influence on government
• less sense of social responsibility
• exploitation of natural resources

Conclusion • the cost benefit analysis should consider whether the

benefits of HE’s proposal outweighs the costs – do
the economic positives outweigh the social and
environmental negatives?

Question 4a What are tariffs and quotas? Explain how they may impact the business activity of Halo
Enterprises if it decides to export to or set up operations in Country Y.

Possible answers could Explains tariffs and quotas, e.g. tax on imports and exports, limits placed on the number of goods
include that can be exported and imported.
Effects
• increases price
• makes HE goods less competitive
• unable to sell enough to earn profit
• cannot satisfy demand in foreign country

Sample explanation
Tariffs are a tax on imports. HE’s goods will be more expensive in Country Y. Country Y imposes
tariffs but Country Z does not. HE will probably sell more in Country Y than in Country Z.

© Cambridge University Press 2018 Exam-style case study answers – Section 6

 Cambridge IGCSE and O Level Business Studies Section 6 External influences on business activity

Question 4b Explain how the following three issues could affect Halo Enterprises. Which do you think is the
most important issue? Justify your answer.

Possible answers could Being ethical • consumers are more aware of ethical issues and many
include may not buy from businesses that behave unethically –
ethical behaviour can increase sales and profits.
• employees can be motivated working for a business that
behaves ethically towards them and in their production
process – it will be easier to recruit and retain employees
• improves the image and reputation of the business,
which helps to attract new investors to help finance
expansion plans

Being environmentally friendly • improves the business’s reputation and helps to gain/
keep customers, employees and investors
• government might fine or close down any business that
causes damage to the environment
• pressure groups might take action to oppose any
business that is seen as not being environmentally
friendly – this might affect production, damage
reputation, reduce sales and profits

Being sustainable • sustainable development requires a business to weigh

up the environmental, social and economic impacts of
its activities – a business is sustainable if it contributes
towards the economic growth of a country and makes
profits while obeying the law, behaving ethically and
being environmentally friendly
• importance of being sustainable could be any of the
advantages a business may gain from being ethical and
environmentally friendly

Conclusion • ethical – helps with brand image, sales, attracting

investment and employee recruitment and retention.
Possible long-term benefits – does HE have an objective
to behave ethically towards its markets and consumers?
• environmentally friendly – how active and powerful
are pressure groups – what are the consequences
of government action against HE if they behave in a
way that harms the environment? – does HE have a
corporate social responsibility (CSR) objective?
• sustainable – is likely to develop as a result of behaving
in an ethical and environmentally friendly way, so it
could be argued that this is the most important issue
for HE

© Cambridge University Press 2018 Exam-style case study answers – Section 6