Some businesses are owned by private individuals, while others are owned by the state. Businesses owned by private individuals are in the private sector. Businesses owned by the state are in the public sector.
Private sector businessesPrivate sector businesses are owned by individuals, either on their own or in groups. The aim of private sector businesses is to make a profit by providing the goods and services that they produce. The owners of the business receive either the whole or a share of the profit of the business as a reward for investing their money, and often time and other resources in the business.
Businesses in the private sector may be either incorporated or unincorporated. Incorporated businesses are set up as legal entities in their own right. The owners of an incorporated business have limited liability. This means that if the business gets into difficulties and is unable to pay its debts, the owners of the business are not held personally liable, although if the business has to close and its assets sold in order to pay its debts, the owners may lose the money they put into the business.
Unincorporated businesses have no legal existence separate from their owners, and the affairs of unincorporated business are considered to be the same as the personal affairs of its owners. The owners of unincorporated businesses have unlimited liability. This means that the owners of the business are legally responsible for all the affairs of the business. If the business gets into difficulties and cannot pay its debts, the owners of the business are held personally liable for those debts. If necessary the personal possessions of the owners – including their houses – may be sold in order to pay the debts.
The question of limited or unlimited liability is therefore an important consideration when deciding what type of business to set up. We look in more detail at the types of business organization that are found in the private sector in Units 6 and 7.
Public sector organization are owned and run by local or national government on behalf of everybody in the community. They include government department, such as welfare, health and defense, and nationalized industries and public corporations, such as state-owned car manufacturers, national radio and television networks, and postal services.
The main purpose of businesses in the public sector is to provide goods and services that considered too important for the security of the country or the general welfare of society to be left to market forces and firms in the private sector.
Nationalization
Nationalization is the process of taking over the ownership of businesses or industries by the state. A nationalized industry is an industry that has been taken over by the state.
There are many reasons for nationalization: 1. Political – government of planned economies tend to take over the ownership and running of all businesses.
2. National security – certain keys industries, such as power, transport and defense, may be considered too important to be left to private enterprise.
3. Failing industries – these may be nationalized in order to increase levels of investment and maintain employment.
4. Natural monopolies – industries such as power, water and transport that require a national network and co-operation are often nationalized.
5. Providing a service to the public – industries such as health and education may not be available to everybody in society if left to private enterprise where the profit motive may mean that only those who can afford to pay can get the service.
Privatization
Privatization is the process of transferring ownership of businesses or industries from the state to the private sector. A privatized industry is an industry that has been transferred to the private sector. In recent years, many countries have followed a policy of privatization.
The main reasons for privatization are:1. Too much power – it is often left that large nationalized industries have too much power and bring the country to a standstill through strikes or reductions in service provision.
2. Competition – with little or no competition, and the guarantee that the government will continue to provide funds, nationalized industries may become complacent, providing poor services at a high cost.
3. Government interference – government may interfere too much with the running of nationalized industries, causing difficulties for management that lead to inefficiencies.
4. Investment – nationalized industries may suffer from under-investment at times if the government feels the money should go elsewhere.
Everything you buy starts out as a metal or mineral deposit in the earth, as a growing plant, or as an animal living on the land, in the air, or swimming in a river or the sea. Changing it into a useful product and getting it into a shop where you can buy it is a long process that involves businesses in different industrial sectors.
Primary sector businesses
Businesses that produced the unrefined raw materials out of which finished products are made are involved in primary – or first level – production. They are in the primary sector of industry. Examples are: farming, agriculture and fishing, forestry, mining and fuel extraction.
Secondary sector businesses
Businesses that use the raw materials produced by primary industries, and change them into finished items, are involved in secondary – or second level – production. They are in the secondary sector of industry. Examples are: manufacturing, including refining and processing metals and minerals, and artificial fibres, engineering and allied trades, food and drink processing, textiles, footwear and clothing, and construction, which includes domestic and industrial building, and civil engineering, such as road and bridge construction.
Businesses in the secondary sector produce both consumer goods, such as books, food and televisions that are bought by individual consumers, and producer goods, such as machinery, commercial vehicles and parts that are bought by other businesses and used in the production of other goods.
Businesses that provide services are involved in tertiary – or third level – production. They are in the tertiary sector of industry. Examples of tertiary industries are: banking and financial services, insurance, leisure and tourism, transport, retailing and wholesaling, public services, distribution, post and telecommunications, education, and health services.
Producing and supplying products involves businesses in all three industrial sectors. For example, businesses involved in producing a loaf of bread include the farmer who grows the wheat (primary sector), the miller who turns the wheat into flour (secondary sector), the baker who makes the loaf and the shop that sells it (tertiary sector). Transport (tertiary sector) is needed to get the wheat from the farmer to the miller, the flour from the miller to the baker, and the bread from the baker to the bakery.
Each business forms part of a chain of production, and every business is dependent on other businesses in the chain. At each stage, the business adds value to the raw materials as they are changed into a finished product that satisfies the needs of customers.
• Business owned by private individuals or groups are in the private sector.
• Businesses owned by the state are in the public sector.
• Businesses and industries may be taken into state ownership through a process known as nationalization.
• State-owned businesses may be returned to the private sector through a process known as privatization.
• Products go through many stages of production.• The different stages of production of a product are linked in a “chain of production”.
• Businesses may be in the primary sector, secondary sector or tertiary sector, depending on where they are in the chain of production.
Glossary
Private sector: the sector of business consisting of businesses owned by private individuals or groups.
Public sector: the sector of business consisting of businesses owned by the state.Incorporated business: a business that has been established as a legal entity separate from its owners.
Limited liability: a restriction on the liability of the owners of a business for the affairs of the business.
Unincorporated business: a business that has not been set up as an entity separate from its owners.
Unlimited liability: the liability of the owners of a business for the entire affairs and debts of the business.
Primary sector: the sector of industry that produces unrefined raw materials.Secondary sector: the sector of industry that produces finished or part-finished goods.
Tertiary sector: the sector of industry that provides services.
Chain of production: a sequence of stages of production.
Resource: Chris J. Nuttall, IGCSE Business Studies, Cambridge University 2002
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