The role of business in the economy

Discover the basic concepts of microeconomics and all those factors that are relevant for the proper functioning of a business.

If in the previous installment of this informative cycle we revealed the fundamental concepts to understand the economy from a macro point of view, in this one we are going to discover it through microeconomics. As we discussed in the previous issue, while macroeconomics focuses on more global indicators such as GDP, the unemployment rate or the CPI, microeconomics focuses on more specific aspects such as individuals, families and companies, and the functioning of the markets in which they operate. Consider the decisions each one makes to meet certain goals of their own. The basic elements on which microeconomic analysis focuses are goods, prices, markets and economic agents. The sum of the individual behavior of these economic agents is what will determine the evolution of the economy as a whole, that is, the macroeconomy. Among all the agents of the economy (families, companies, public sector and foreign sector, etc.), this installment wants to delve into the important figure of companies.

THE COMPANIES

Companies are part of the base of the markets. The welfare of a society depends largely on the results of companies. The link between the citizen and the company is not only established when the latter is an employee or a client, but the actions of both on a day-to-day basis affect both. People influence consumption, they are the ones who decide whether to spend or save, which directly affects the turnover of companies. For their part, these generate competition in the markets and improve the quantity and quality of supply.

If companies do well it will be reflected in the economy. Business success will therefore have repercussions on the well-being of all. To achieve this success, four very important factors must be taken care of: the product (goods or services), marketing, financing and productivity.

The product, whether it is a good or a service, is the most important thing a company has, it is its essence and it must always be cared for. You also have to look for new ways to improve it and make it more competitive.

To achieve business success it is necessary that the product is sold and for that it is necessary to promote it. Marketing is in charge of that, one of the areas that have grown the most in recent years. The first television space of the year, sponsoring the Spanish National Team or shooting an advertisement with someone famous are very common advertising practices that entail a huge outlay of money and are part of huge marketing campaigns that usually pay off. A significant fact is the importance that this budget item that is assigned to advertising and marketing of a company can have. There are also, of course, cheaper methods that rely more on creativity, but are still vital to success.

For everything to go ahead and to be able to innovate, financing is needed, this is necessary to be able to start the business activity (to be able to rent a premises, buy machinery, hire staff…). Financing can be internal -generated by the company’s own activity- or external -through banks, debt issuance, capital increases, etc.-. External financing is more demanding and will only bet on the most convincing projects. Currently there is a problem of lack of financing because the crisis situation makes it difficult for new ideas to enter the market and because the agents who put up the money are also going through a delicate moment.

Finally, for a company to be successful, it needs to be productive. Productivity is the relationship between the production obtained by a production system and the resources used to obtain said production, that is, how much has been produced with the resources used and the time used: efficiency. Low productivity can be the consequence of poor management that fails to get the most out of all the resources it has. The higher the productivity, the lower the number of hours that must be used to achieve objectives. It is also important to have an efficient operating system and updated machinery among other things. Spain is at the head of hours worked per year in Europe with an average of 1,775 hours. It has only reduced its working day in the last 60 years by 13 percent, when the average for developed countries is 25 percent. This may suggest that productivity in Spain is lower.

INTERNATIONAL INVESTMENT

The entry of foreign capital into a country is a good sign of its economic health and profitability. The investment helps improve companies and generates a greater and better offer for consumers. The Bank of Spain indicates that Spain’s direct investment abroad in 2009 was 6,227 million euros, decreasing by 88 percent compared to 2008, which amounted to 51,102 million euros.

Regarding international investments in Spain, the figures also show a significant decrease: in 2009 they were 5,124 million euros, with a decrease of 90 percent compared to the investment in 2008, which is estimated at 50,035 million euros. euros. These data reflect the lack of confidence of investors in the Spanish economy, as well as the situation of uncertainty in the markets, although it is true that direct foreign investment has decreased throughout the world.

Investing in international companies is positive for companies because, apart from increasing their business, it helps them to diversify and reduce risks.