Business and the

International Economy
Globalization
Globalization is a term used to describe the increases in worldwide trade and
movement of people and capital between countries. The same goods and services
are sold across the globe; workers are finding it easier to find work by going
abroad for work; money is sent from and to countries everywhere.
Some reasons how globalization has occurred are:
• Increasing number of free trade agreements– these are agreements between countries
that allows them to import and export goods and services with no tariffs or quotas.
• Improved and cheaper transport (water, land, air) and communications (internet)
infrastructure
• Developing and emerging countries such as China and India are becoming rapidly
industrialized and so can export large volumes of goods and services. This has caused an
increase in the output and opportunities in international trade, allowing for globalization

Advantages of globalization

• Allows businesses to start selling in new foreign markets, increasing sales and profits
• Can open factories and production units in other countries, possibly at a cheaper rate
(cheaper materials and labour can be available in other countries)
• Import products from other countries and sell it to customers in the domestic market- this
could be more profitable and producing and selling the good themselves
• Import materials and components for production from foreign countries at a cheaper rate.

Disadvantages of globalization

• Increasing imports into country from foreign competitors- now that foreign firms can
compete in other countries, it puts up much competition for domestic firms. If
these domestic firms cannot compete with the foreign goods’ cheap prices and high
quality, they may be forced to close down operations.
• Increasing investment by multinationals in home country- this could further add to
competition in the domestic market (although small local firms can become suppliers to the
large multinational firms)
• Employees may leave domestic firms if they don’t pay as well as the foreign
multinationals in the country- businesses will have to increase pay and conditions to
recruit and retain employees.
When looking at an economy’s point of view, globalisation brings consumers
more choice and lower prices and forces domestic firms to be more efficient (in
order to remain competitive). However, competition from foreign producers
can force domestic firms to close down and jobs will be lost.
Protectionism
Protectionism refers to when governments protect domestic firms from foreign
competition using trade barriers such as tariffs and quotas; i.e. the opposite of
free trade.
Import quota is a restriction on the quantity of goods that can be imported
into the country.
Tariffs are taxes on imports.
Imposing these two measures will reduce the number of foreign goods in the
domestic market and make them expensive to buy, respectively. This will reduce
the competitiveness of the foreign goods and make it easy for domestic firms
to produce and sell their goods. However, it reduces free trade and
globalization.
Free trade supporters say that it is better to allow consumers to buy imported
goods and domestic firms should produce and export goods and services
that they have a competitive advantage in. In this way, living standards across
the globe will improve.

Multinational Companies (MNCs)

Multinational businesses are firms with operations (production/service) in more
than one country. Also known as transnational businesses. Examples: Shell,
McDonald’s, Nissan etc.

Why do firms become multinationals?

• To produce goods with lower costs– cheaper material and labour may be available in other
countries
• To extract raw materials for production, available in a few other countries. For example:
crude oil in the Middle East
• To produce goods nearer to the markets to avoid transport costs.
• To avoid trade barriers on imports. If they produce the goods in foreign countries, the
firms will not have to pay import tariffs or be faced with a quota restriction
• To expand into different markets and spread their risks
• To remain competitive with rival firms which may also be expanding abroad

Advantages to a country of a multinational setting up in their country:

• More jobs created by multinationals

• Increases GDP of the country
 • The technology that the multinational brings in can bring in new ideas and methods into
the country
• As more goods are being produced in the country, the imports will be reduced and some
output can even be exported
• Multinationals will also pay taxes, thereby increasing the government’s tax revenue
• More product choice for consumers

Disadvantages to a country of a multinational setting up in their country:

• The jobs created are often for unskilled tasks. The more skilled jobs will be done by
workers that come from the firm’s home country. The unskilled workers may also be
exploited with very low wages and unhygienic working conditions.
• Since multinationals benefit from economies of scale, local firms may be forced out of
business, unable to survive the competition
• Multinationals can use up the scarce, non-renewable resources in the country
• Repatriation of profit can occur. The profits earned by the multinational could be sent back
to their home country and the government will not be able to levy tax on it.
• As multinationals are large, they can influence the government and economy. They could
threaten the government that they will close down and make workers unemployed if they
are not given financial grants and so on.

Exchange Rates
The exchange rate is the price of one currency in terms of another currency.
For example, €1= $1.2. To buy one euro, you’ll need 1.2 dollars. The demand and
supply of the currencies determine their exchange rate. In the above example, if
the €’s demand was greater than the $’s, or if the supply of € reduced more
than the $, then the €’s price in terms of $ will increase. It could now be €1=
$1.5. Each € now buys more $.
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A currency appreciates when its value rises. The example above is an

appreciation of the Euro. A European exporting firm will find an appreciation
disadvantageous as their American consumers will now have to pay more $
to buy a €1 good (exports become expensive). Their competitiveness has
reduced. A European importing firm will find an appreciation of benefit. They
can buy American products for lesser Euros (imports become cheaper).
A currency depreciates when its value falls. In the example above, the Dollar
depreciated. An American exporting firm will find a depreciation
advantageous as their European consumers will now have to pay less € to
buy a $1 good (exports become cheaper). Their competitiveness has increased.
An American importing firm will find a depreciation disadvantageous. They
will have to buy European products for more dollars (imports become
expensive).
In summary, an appreciations is good for importers, bad for exporters; a
depreciation is good for exporters, bad for importers; given that the goods are
price elastic (if the price didn’t matter much to consumers, sales and revenue
would not be affected by price- so no worries for producers).