An Introduction to Globalisation

- Globalisation is the economic integration of different countries through increasing

freedoms in the cross-border movement of people, goods/services, technology and finance

Businesses that trade internationally import and export goods and services

- Imports are goods and services bought by people and businesses in one country from
another country.

 Imports result in money leaving the country, which generates extra revenue for
foreign businesses.

- Exports are goods and services sold by domestic businesses to people or businesses in
other countries.

 Exports generate extra sales revenue for businesses selling their goods abroad

Reasons for Globalisation

 The world is developing beyond national markets to become one large market
o Global brands can be purchased in most countries
o Workers can move between different countries with relevant ease
o Finance can be transferred across borders instantly using technology

Key Reasons for Increased Globalisation

Reason  Explanation

Advances in - The rapid development of communication technology has

technology significantly reduced trade barriers
- The internet has made it easier for businesses and individuals to
connect and collaborate across borders
Trade - Many countries have adopted policies that promote free trade and
liberalisation signed trade agreements.
- The removal of quotas and tariffs on goods crossing borders has
made global trade smoother.
- The formation and growth of trade blocs such as the EU and
NAFTA have opened up trade between groups of countries
Transportation - Containerisation and improvements in air and long-distance rail
improvements travel have made it more cost-effective and efficient to move goods
and people across long distance.
Political and - Many countries have implemented economic and political reforms
economic to open up their markets to foreign investment
reforms - This has created opportunities for businesses to operate in new
 markets and has contributed to global integration as overseas
business practices are absorbed

Cultural - Increased awareness of other cultures through media,

awareness entertainment and education has encouraged a more interconnected
world
- This has led to the sharing of ideas, values and lifestyles across
borders, which has increased consumer demand for diverse
brands from around the world

The Opportunities & Threats of Globalisation

Globalisation offers significant opportunities to businesses and can have

positive impacts on whole industries

Business Opportunities as a Result of Globalisation

Opportunity
Impact on Businesses

Market  Businesses can export their

expansion products to other countries

o Exporting can help a

business spread risks by
avoiding reliance on the
economic stability of one
country to achieve success

 They can also expand into new

markets which is likely to lead
to higher sales
volumes and increased revenu
e

o E.g. Fashion brand Jack

Wills opened its first retail
store in Germany with a
further 11 international
stores planned over the
year. This helped it to
increase its sales revenue by
more than 4%
Lower costs  Businesses can buy cheaper raw
materials and
components from abroad

o This reduces their direct

costs and may lower
the break even point and
increase
their competitiveness

 Production can be located in

countries with lower land and
labour costs

o This reduces indirect

costs which can help to
increase profitability

Access to  Businesses can import and sell

resources different goods and services in
their home country

o This allows them

to broaden their product
range and increase their
domestic customer base

o If they are the first or only

business to offer these
products, they may gain
a competitive
advantage over rivals,
potentially leading to
increased market share

 Businesses may build production

or processing facilities in countries
where key resources or
suppliers are located in order
to reduce transportation costs
and ensure supply

 Globalisation can also create threats

to businesses and industries that may face new competitive and
operational challenges
Business Threats as a Result of Globalisation

Threat Impact on Businesses

Competition  Businesses may struggle to

from foreign compete with larger, more
brand imports established international
rivals who have lower costs,
greater marketing power and more
significant economies of scale

 Domestic consumers may

be more attracted to well-
known international
brands than domestic alternatives

Multinational  Large international businesses

business may be more attractive as
domination employers to the most highly-
skilled workers

o Domestic businesses
may struggle to compete
with pay, conditions and
chances for development
that large firms can offer

 Supply chains become focused

on meeting the needs of large
businesses and may lack the
flexibility required by smaller
domestic businesses

Cultural,  Adapting products and services to

social and diverse cultural preferences can be
environmental challenging and expensive
concerns

 Businesses need to be sensitive

to local customs, languages,
and social norms to avoid
 cultural misunderstandings that
could harm their reputation

 Businesses need to understand

and comply with different
environmental regulations and
address concerns from
customers about
sustainability of their global
operations

Exam Tip

Globalisation is unlikely to be entirely negative or entirely positive for a

business; for most it is a matter of getting used to the increasingly global
nature of trade. Consider how a business mitigates the
threats and makes the most of the opportunities globalisation
presents. Businesses that find creative ways to maintain or improve
their market position in the face of increased international competition
are likely to succeed

Import Tariffs and Quotas

Import Tariffs

 A tariff is a tax placed on imported goods from other countries

o E.g. Tennis rackets imported into the UK from China have a

tariff of 4.7%

 A tariff increases the price of imported goods, which helps shift

demand for that product or service from foreign businesses
to domestic businesses
When the USA places a tariff on imported cheese from Britain, the
price of British cheese in the USA rises

 American customers are more likely to purchase American

cheese now that the tariff has made British cheese more
expensive

The benefits of tariffs

 They protect infant industries so they can eventually become

more competitive globally

 An increase in government tax revenue

 Reduces dumping by foreign businesses as they cannot sell below

the market price

The disadvantages of tariffs

  Increases the cost of imported raw materials, which may affect
businesses that use these goods for production, leading to higher
prices for consumers

 Reduces competition for domestic firms, who may become more

inefficient and produce poor-quality products for their customers

 Reduces consumer choice as imports are now more expensive

and some customers will be unable to afford them

Exam Tip

Students are often confused about who pays the tariff. It is not the foreign
company, but the domestic company who pays the tariff. In our cheese
example above, any retailers in the USA who import cheese from Britain
have to pay the tariff (import tax) when it crosses the border into the USA.
This policy may help cheese manufacturers in the USA but it harms any
other business that imports and sells foreign cheese as it raises their costs
of production.

Quotas

 An import quota is a government-imposed limit on the amount

of a particular product allowed into the country

 Restricting the physical quantity of imports means that domestic

businesses face less competition and benefit from a higher market
share

o More of the domestic demand is now met by domestic

businesses

The benefits of import quotas

 To meet extra demand, domestic businesses may need to hire

more workers, which reduces unemployment and benefits the wider
economy

 The higher prices for the product may encourage new businesses
to start up in the industry

 Countries are able to easily change import quota as market

conditions change

 Foreign countries view quotas as less confrontational to their

business interests than tariffs
 o Their exporters can still sell their goods at a higher price in
domestic markets (but a limited amount of it)

The disadvantages of import quotas

 Quotas limit the supply of a product and whenever supply is limited,

the price of the product rises

 They may generate tension in the relationship with trading partners

 Domestic firms may become more inefficient over time as the use
of quotas reduces the level of competition

Multinational Companies
 A multinational company (MNC) is a business that is registered in one country but
has manufacturing, processing and/or service outlets in many different countries
o E.g. Starbucks headquarters are in Washington, USA but they have 32,000
stores in 80 countries

Diagram: Examples of Multinational Companies

Well-known multinational businesses include BP, General Electric (GE), McDonalds and
FedEx

 Factors such as globalisation and deregulation have contributed to the growth of

MNC’s

 MNC’s often choose locations based on factors such as cost advantages and access
to markets
 o Nike originates from the USA, but 50% of their manufacturing takes place in
Mexico, China, Vietnam and Indonesia due to the lower production costs in
these countries

Benefits of Becoming a Multinational

1. Economies of scale: as they operate globally, they are able to increase their output
and benefit from lowered costs created by economies of scale
2. Increased profit: much of their profit is sent back to their home country. This point is
debatable, as many MNCs have offshore bank accounts and do not bring the profit
back home
3. Create employment: new jobs are created in host countries each time a new facility
is setup, and this raises income, which helps to improve the standard of living in that
country
4. New markets: MNCs can identify potential markets and begin to sell there
5. Transportation costs: MNCs are able to setup facilities closer to their customers,
which reduces transportation costs
6. Risk management: By selling in many national markets, the risk of failure is
reduced; e.g. if Egypt goes through a recession (with sales falling there), then this
could be less impactful due to rising sales in a strong German market
7. Tax incentives: MNCs are able to increase their profits by setting up in countries
with low corporation tax - or countries that offer MNCs a tax break (no tax) for their
first 5–10 years of operation
8. Avoidance of protectionism: MNCs can establish bases in countries that are
operating protectionist measures & by doing so, they avoid the measures, e.g. A
Chinese MNC may set up shop in the USA and produce there, thus avoiding import
tariffs on products exported from China to the USA

Impact of MNCs on Stakeholders

 MNCs can have both positive and negative impacts on business stakeholder
groups, including employees, local communities, governments, consumers and
suppliers

The Impact of MNCs on Stakeholders

Stakeholder Positive Impacts Negative Impacts

Employees  MNCs create good-quality  MNCs may exploit

jobs with opportunities for local workers if
advancement employment
regulation is weak or
 They offer more not enforced
competitive wages than
local businesses
 Limited job
creation for local
  They provide better workers as they
working conditions than may relocate
local businesses workers from their
own country to work
abroad (Chinese
companies are
notorious for this)

Local  MNCs often invest to  MNCs often

communities improve infrastructure such cause damage to
as roads, transportation and local
access to water and environments during
electricity the production
process

 They establish charitable

initiatives that may have a  They may
positive effect on the local leave unsightly
community production
facilities behind once
they have extracted
 They pay taxes and business all of the resources
rates to local councils/ and left the country
authorities which are
reinvested back into the local
community  They often erode
local cultures as
global brands and
products become
dominant, forcing out
traditional products

Consumers  MNCs  They often

increase choice/quality for cause existing
consumers as the introduce businesses to
new products and brands fail, leading to
increased prices due
to a lack of
competition

Suppliers  MNCs increase demand for  They demand low

their raw prices from
materials/components suppliers and
extended credit
periods, impacting
their cash flow

Shareholders  MNCs generate high  Their focus on

 profits that may result in growth may
generous dividends mean profits are
reinvested rather
than shared with
investors

Benefits to a Country of Hosting an MNC

 Many governments are in favour of MNCs establishing in their country as there
are benefits to the wider economy, but their presence can also have negative
consequences
 The extent to which their activities are regulated and the behaviour of individual
companies determine the overall effect

Diagram: Impact of MNCs on the National Economy

MNCs impact several business metrics in the national economy

Foreign direct investment (FDI)

 There will be an inflow of money into a country if a MNC decides to invest into a
country through foreign direct investment
o This money enriches local firms or citizens, who now have more money
available to spend in the economy
o If this money is reinvested back into the local economy, it may help to
generate new jobs and boost economic growth

Balance of payments

 MNCs can help improve the balance of payments of a country as FDI flows into the
country
 o Any goods and services exported for sale by the MNC will generate further
inflows to the country’s balance of payments
o This is especially beneficial to a country when the MNC is exporting a rare
and valuable raw material, e.g cobalt

Technology and skill transfer

 MNCs can bring new technologies and skills to local businesses

o This will help to improve efficiency and productivity, helping domestic
businesses become more competitive in national and international markets

Consumers

 Customers in countries which host MNCs often benefit from

o Better quality, a wider choice of goods and services and lower prices if
MNCs pass their cost advantages on in the form of lower
prices
o Improved living standards as people may have higher incomes due to job
creation and the resulting reduction in unemployment

Business culture

 Domestic businesses may be influenced by the business culture of MNCs

o E.g. In the 1990s, European businesses adopted the working practices of
Japanese businesses such as Nissan
o Workplaces became more open and employers started to copy ideas such
as Kaizen and continuous improvement

 MNCs may also encourage a culture of entrepreneurship

o This can help boost overall [popover id="-eNPhrJf1dSfjDYU"
label="Economic Growth"]

Tax revenue

 There is the potential for the host country to gain significant tax revenue

 Governments can use tax revenue paid by MNCs to invest in improving public
services and infrastructure

Limitations for a Country of Hosting an MNC

  Multinational companies can also present some challenges, which governments
sometimes struggle to mitigate

Loss of assets

 Assets from the home country are now owned (or partly owned) by foreign
businesses
 Local firms or individuals who have sold the asset may not reinvest the money into
the local economy but may move it abroad or offshore

Balance of payments

 MNCs can have a negative impact on the balance of payments

o If the MNC buys raw materials or equipment abroad (imports), there is a flow
of money out of the country
o If the MNC send profits back to their home country, it will also represent a
flow of money out of the country

Consumers

 In the long run, MNCs can push domestic businesses out of the market, leaving
customers with less choice
o This may lead to MNCs exploiting customers with higher prices and low-
quality products as they have limited choice

Business culture

 MNCs may demonstrate unethical behaviour and have a company culture of

exploitation
o E.g. Bangladesh is used by many clothing brands to produce cheap clothes and
many turn a blind eye to poor working conditions
o This encourages local firms to also ignore the working conditions

Transfer pricing

 MNCs often seek to maximise profits and try to reduce their tax liabilities
o Transfer pricing is a method used by MNCs to shift profits from where they
are generated to countries with lower tax rates
o This is a method of tax avoidance and means that the businesses will deprive
the host country of tax revenue

Exchange Rates Defined

 An exchange rate is the price of one currency in terms of another, e.g. £1 = €1.18
 o International currencies are essentially products that can be bought and sold
on the foreign exchange market (forex)

 The Central Bank of a country controls the exchange rate system that is used in
determining the value of a nation's currency

 Exchange rates are an important economic influence for businesses that import raw
materials and components, and for businesses that export their products

Appreciation and Depreciation of Exchange Rates

 The value of a currency changes over time
o When global demand for the currency rises, the currency appreciates
 Appreciation occurs when the value of a currency rises, e.g. £1 =
€1.18 goes to £1 = €1.25
 Europeans buying goods from the UK now have to pay more in
euros than they did previously
 This appreciation makes exports from the UK relatively more
expensive and imports less expensive

o When global demand for the currency falls, the currency depreciates
 Depreciation occurs when the value of a currency falls, e.g. £1 =
€1.18 goes to £1 = €1.05
 Europeans buying goods from the UK now pay less in euros
than they did previously
 This depreciation makes exports to Europe relatively more
attractive and imports less attractive

 Changing currency values can have a big impact on the business costs and sales
revenue of MNCs

How Changes to Exchange Rates Affect Importers &

Exporters
 The extent to which businesses are affected by currency fluctuations will depend upon
the volume they are importing or exporting and the countries with which these
transactions take place

 Exporting businesses benefit from currency depreciation, whilst importing

businesses benefit from currency appreciation

The Impact on Business of Currency Appreciation & Depreciation

 Change to The Impact on Exporting The Impact on
Currency Businesses Importing Businesses
Value

 Sales are likely to  Costs are likely

fall as products to fall as raw
Appreciation become more materials from
expensive when overseas become
An increase in compared to overseas cheaper
the value of the competitors
£ against other
currencies
 In order to remain
competitive, exporting
businesses may need
to lower prices and
accept lower profit
margins

Depreciation  Sales are likely to  Costs are likely

rise as products to rise as raw
A decrease in become cheaper when materials from
the value of the compared to overseas overseas become
£ against other competitors more expensive
currencies

 Businesses
may seek
domestic
suppliers to
reduce costs and
maintain profit
levels