Business and the International Economy

Globalisation: the world is becoming more interconnected, leading to increasing

worldwide trade & people moving.
The reasons for globalisation include:
More Free-Trade Agreements and economic unions between countries have
replaced protection for industries. Consumers can purchase with few or no
import controls.
Improved and cheaper travel links and communication between countries made
it easier to transport goods globally. Interest also allows easy price comparisons,
and online/e-commerce allows orders to be placed anywhere.
Many ‘Emerging market countries‘ are industrialising very rapidly. They can
sell globally at cheaper prices because of the loss of growth of the firms and
industries.
The Opportunities and Threats of Globalisation to a Business include:

Potential Opportunities for

Effect 1 Effect 2
Business

They are expensive to

sell abroad, and
Start selling exports to other
Increase potential sales, foreign consumers
countries -opening up
especially online sales. buy the products even
foreign markets.
if they are popular at
‘home‘.

Open factories/operations in Cheaper to make goods Quality good? Ethical

other countries (become a outside than issues? Expensive or
multinational) domestically. difficult to set up
Potential Opportunities for
Effect 1 Effect 2
Business

operations in other
countries?

Products need
Import products from other maintenance and
No trade restrictions,
countries to sell to partly repairs. Will
more profitable to buy,
customers in ‘home‘ the needed parts be
could sell domestically.
country. available from the
foreign producer?

Cheaper purchases of
Import materials and
supplies from other Are suppliers
components from other
countries will free trade reliable? Does greater
countries. But still produce
and reduce costs. distance add too
final goods in the ‘home‘
Materials can be much transport costs?
country.
supplied ‘online‘.

Potential Threats to
Effect 1 Effect 2
Businesses

Increase imports into If competitors offer Increased competition

the home market from cheaper products, domestic forces local firms to be
foreign competitors. sales fall. more efficient.

Increase investment Create further competition Local firms become

from multinationals to - Multinationals that afford suppliers to
 Potential Threats to
Effect 1 Effect 2
Businesses

multinationals, and
set up operations in the the best employees may
their sales could
home country. have economies of scale.
increase.

In some professions,
Employees may leave It might encourage
employees have more
businesses that cannot local businesses to use
choices about where they
pay the same or more various motivational
work - businesses will
than international methods to keep their
have to make more effort
competitors. workers.
to retain them.

Why Government Might Introduce Import Tariffs and Import Quotas

Import Tariffs: tax placed on imported goods in the country.
Import Quota: a restriction on the quantity of a product that can be imported.
Protectionism: when a government protects domestic businesses from Foreign
competition using tariffs and quotas. This reduces employment incomes.
Import tariffs increase the prices of imported goods, making them less
competitive than locally produced goods.
Import quotas decrease the quantity of imported goods; increasing the price
means less availability, thus increasing sales for domestic products.
Multinational Companies (MNCs)
Multinational (Transnational) Company: a company that has factories or service
operations in more than one country
It is not just selling products abroad; it is having operations abroad
The benefits of a business and its impact on becoming international:

Benefits to business Impact to stakeholders

New market Higher dividends

Easier to obtain raw materials as they can Opportunity to live and work
be closer abroad

Suppliers increase/decrease
Avoid trade barriers and import taxes
depending on the location

Government gains higher/lower

Low Labour costs
taxes

Spread risk (if there are low sales in one

country and high sales in another)

Benefits to the business Benefits to the country

Producing goods at lower costs Jobs are created

Investments in the
Closer to resources (i.e. oil) development of infrastructure
in the country

Closer to market More exports

Avoid expensive taxes on the import of goods Tax – more money to the
(i.e. Korean cars (KIA) being produced in the
 Benefits to the business Benefits to the country

EU to benefit from free trade) government

Spread risks (if there are low sales in one Increased product choice for
country and high sales in another) consumers

Advantages to Host Country Disadvantages to Host Country

Influence the government and

New investment economy (bringing outside influences
and culture).

More export increases the Due to MNCs ' expertise and activity,
international competitiveness of the existing firms will likely be pushed
country out of the market.

Fewer imports keep domestic

Depletion of scarce resources and
businesses active and prevent the BoP
endangerment of natural sites.
deficit.

Jobs created reduced unemployment. Profits flow out of the country.

Increase tax paid to the government. Often, unskilled work is created.

More competition helps increase the

productivity and efficiency of
domestic businesses.

Exchange Rates
Exchange Rate: the price of one currency in terms of another currency.
For example, 1 Euro is equivalent to 1.2 Dollars
Currency Appreciation: when the value of a currency increases.
It can buy more of another currency
1 euro = 1.2 dollars, to 1 euro = 1.5 dollars.
Currency Depreciation: when the value of a currency decreases.
It can buy less of another currency.
1 euro = 1.2 dollars, to 1 euro = 1 dollar.
2 things influence the exchange rate of a currency:
Demand for the Currency: if many people want to buy the currency, the price
will increase because there is a ‘limited’ number of currencies (so it leads to
appreciation).
Supply of Currency: if the central bank prints more money, the supply increases,
but the demand is still the same, so the value is lower (leading to depreciation).
Exchange Rates Can Affect Businesses By:

If it Appreciates If it Depreciates

Import prices rise: your currency is

Import prices fall: since your currency
worth less, so you need more to buy
can buy more of the other currency.
other currencies.

Export prices rise: your currency is Export prices fall: it is worth less, so
worth more, so it is more expensive for other currencies can buy your
other currencies to buy it. currency for less than theirs.
This means that if the currency appreciates:
The product’s price in other countries will increase
The business will make more profit
Businesses can lower the price and still make the same amount of money as
before – it is more competitive.
If the currency depreciates:
The product’s price in other countries will decrease
less profit will be made
Businesses need to raise the price to make the same amount of money as before
– less competitive.