Business and the international economy Revision Notes

Globalisation is the process by which businesses and economies become increasingly interconnected and operate on an international scale. It involves the integration of markets, production, and communication across countries.

Several factors drive globalisation: technological advancements (such as the internet and improved transport), trade liberalisation policies that reduce barriers to international trade, and the movement of capital and labour across borders. These factors enable businesses to expand beyond their domestic markets and access resources worldwide.

• Globalisation means international integration of markets and businesses.
• Technology improvements reduce costs and time for communication and transport.
• Trade liberalisation lowers tariffs and quotas, encouraging cross-border trade.
• Capital and labour mobility allow businesses to invest and hire internationally.

Globalisation offers businesses several advantages. Access to larger international markets allows firms to increase sales and profits. Companies can source cheaper raw materials and labour from different countries, reducing production costs.

Businesses can also benefit from economies of scale by producing larger quantities for global markets. Additionally, globalisation facilitates knowledge transfer and innovation through exposure to international competition and collaboration.

• Access to new and larger markets increases sales potential.
• Lower input costs improve profit margins.
• Economies of scale reduce average costs.
• Exposure to global competition drives innovation and efficiency.

Despite opportunities, globalisation presents challenges. Increased competition from foreign firms can threaten domestic businesses, especially those less efficient or with higher costs.

Businesses must also navigate different legal, cultural, and regulatory environments, which can increase complexity and costs. Exchange rate fluctuations can affect pricing and profitability for firms involved in importing and exporting.

Furthermore, global supply chains can be vulnerable to disruptions such as political instability or pandemics.

• Greater competition may reduce market share and profits.
• Complex regulations and cultural differences require adaptation.
• Exchange rate volatility affects costs and revenues.
• Supply chain risks increase with international dependence.

Governments impose import tariffs, which are taxes on imported goods, to protect domestic industries from foreign competition. Tariffs increase the cost of imported products, making domestic goods relatively cheaper and more attractive to consumers.

Tariffs can also be used to generate government revenue and to influence trade balances by reducing imports. However, tariffs may lead to higher prices for consumers and potential retaliation from trading partners.

• Tariffs raise import prices to protect local producers.
• They generate government income from imports.
• Tariffs can reduce trade deficits by limiting imports.
• Possible negative effects include higher consumer prices and trade disputes.

Import quotas set a physical limit on the quantity of a particular good that can be imported during a specific period. Quotas protect domestic industries by restricting foreign competition and ensuring a minimum market share for local producers.

Quotas can help preserve jobs and support infant industries but may lead to shortages and higher prices. Like tariffs, quotas can provoke retaliatory measures from other countries and reduce the variety of goods available to consumers.

• Quotas limit the volume of imports to protect domestic firms.
• They help maintain employment in local industries.
• Quotas can cause supply shortages and price increases.
• Retaliation and reduced consumer choice are possible drawbacks.

A multinational company (MNC) is a business organisation that operates in more than one country. It has its headquarters in one country (the home country) and production or service facilities in other countries (host countries).

MNCs typically have a centralised management structure but adapt their products or services to local markets. They often have significant financial resources, advanced technology, and global brand recognition.

Examples of MNCs include companies like Coca-Cola, Toyota, and Unilever, which operate factories, offices, or sales networks across multiple countries.

• Operate in multiple countries beyond their home base.
• Have centralised control but local adaptation.
• Possess large financial and technological resources.
• Examples: Coca-Cola, Toyota, Unilever.

MNCs expand internationally to access new markets, increase sales, and achieve higher profits. By entering foreign markets, they can reach more customers and diversify their revenue sources.

They also seek to reduce production costs by locating operations in countries with cheaper labour, raw materials, or favourable tax regimes. This cost advantage improves competitiveness.

Access to natural resources unavailable in the home country motivates MNCs to invest abroad. Additionally, technological advances and improved communication make managing international operations easier, encouraging expansion.

• Access to larger and diverse markets increases sales potential.
• Lower production costs through cheaper labour and resources.
• Access to raw materials not available domestically.
• Technological and communication improvements facilitate global management.

MNCs benefit their own business by increasing sales, profits, and market share through global presence. They can spread risks by operating in multiple economies, reducing dependence on one market.

Stakeholders such as employees may gain from better job opportunities, training, and higher wages compared to local firms. Shareholders benefit from potentially higher returns due to global operations.

Consumers can access a wider variety of products and services, often at lower prices due to economies of scale achieved by MNCs.

• Increased sales, profits, and market share for the MNC.
• Risk diversification across different economies.
• Improved job opportunities and wages for employees.
• Greater product variety and competitive prices for consumers.

Host countries often gain from MNC investment through job creation, which reduces unemployment and increases income levels. New jobs may include skilled and unskilled positions.

MNCs can bring advanced technology, management expertise, and training, which can improve the productivity and skills of the local workforce.

Foreign direct investment by MNCs can stimulate economic growth, increase government tax revenues, and improve infrastructure through business demands and partnerships.

• Creation of new jobs and reduction of unemployment.
• Transfer of technology and management skills.
• Increased economic growth and government revenues.
• Improvement of local infrastructure and business environment.

MNCs may outcompete and displace local businesses, especially small and medium enterprises, due to their superior resources and economies of scale.

Profits generated by MNCs are often repatriated to the home country, limiting the financial benefits retained locally.

There can be cultural impacts and concerns about exploitation of natural resources or labour standards. Host countries may become economically dependent on MNCs, risking instability if they withdraw operations.

• Displacement and reduced competitiveness of local businesses.
• Repatriation of profits limits local financial gains.
• Potential cultural and social impacts.
• Economic dependency and vulnerability to MNC withdrawal.

An exchange rate is the price of one currency expressed in terms of another currency. It determines how much of one currency can be exchanged for another and directly affects the outcome for international trade.

Exchange rates fluctuate due to various factors such as economic conditions, interest rates, inflation, and market speculation.

Two key terms describe exchange rate movements: depreciation and appreciation. Depreciation means the domestic currency loses value relative to foreign currencies, while appreciation means it gains value. These changes influence the cost of imports and exports for businesses.

• Exchange rate = value of one currency in terms of another.
• Depreciation = fall in value of domestic currency against foreign currencies.
• Appreciation = rise in value of domestic currency against foreign currencies.

When the domestic currency depreciates, it becomes weaker compared to foreign currencies. This means that importing goods priced in foreign currency becomes more expensive because more domestic currency is needed to buy the same amount of foreign currency.

For businesses that import raw materials, components, or finished goods, costs increase, which may lead to higher prices for consumers or reduced profit margins if prices are kept stable.

Conversely, depreciation makes exports cheaper for foreign buyers because they can buy more with their stronger currency. This can increase demand for exported goods, improving sales and potentially profitability for exporting businesses.

• Imports cost more due to weaker domestic currency.
• Importing businesses face higher costs, possibly raising prices or reducing profits.
• Exports become cheaper and more competitive abroad.
• Exporting businesses may see increased sales and profits.

Appreciation means the domestic currency strengthens relative to foreign currencies. Imports become cheaper because fewer domestic currency units are needed to buy foreign currency.

This benefits businesses that rely on imported goods or materials by lowering their costs, which can improve profit margins or allow lower prices to increase competitiveness domestically.

However, exports become more expensive for foreign buyers, which can reduce demand for exported goods. Exporting businesses may face lower sales and reduced profitability as a result.

• Imports cost less due to stronger domestic currency.
• Importing businesses benefit from lower costs and improved margins.
• Exports become more expensive and less competitive abroad.
• Exporting businesses may experience decreased sales and profits.

Exchange rate changes directly affect the pricing strategies of businesses involved in international trade. Increased import costs due to depreciation may force businesses to raise prices, risking loss of customers if competitors maintain lower prices.

Exporters benefit from depreciation by being able to offer lower prices in foreign markets, enhancing competitiveness and potentially increasing market share.

Appreciation allows importers to reduce prices or increase profit margins but can harm exporters who may need to lower prices to maintain competitiveness, squeezing profits or losing sales volume.

• Pricing must adjust to changes in import costs and export demand.
• Competitiveness depends on relative prices in domestic and foreign markets.
• Profitability is influenced by cost changes and sales volume shifts due to exchange rate movements.

Consider a UK business that imports electronic components from the US and exports finished products to Europe.

If the British pound depreciates against the US dollar, the cost of importing components rises, increasing production costs. The business may raise prices domestically or accept lower profits.

At the same time, depreciation makes UK exports cheaper for European customers, potentially increasing sales abroad and offsetting higher import costs if export growth is strong enough.

• Depreciation raises import costs, increasing production expenses.
• Export prices fall in foreign markets, boosting demand.
• Overall profitability depends on balance between higher costs and increased export sales.