6.3 Business and the International Economy

Business must increasingly have an international outlook to survive and thrive. 6.3 is all about examining the opportunities and threats for all businesses, and stakeholders in the interconnected global economy. You may be asked questions like this:

Past Paper Question Example 
Paper 1  (c) Outline how the appreciation of country B’s exchange rate might affect ABC. [6]
Paper 2 (a) Explain four reasons why globalisation may impact a business [8]

6.3.1 The Importance of Globalisation

The concept of globalisation and the reasons for it

Globalisation is the increased interconnectedness and worldwide movement of goods, services, capital and people.

Globalisation impacts every business and consumer.

  • Half of all the world’s products are made in China, including 70% of the world’s mobile phones.
  • Global brands like Apple, Toyota, Coca-Cola and McDonalds aren’t restricted to one country but are available easily globally. In fact there are only two countries where you can’t buy Coca-Cola  (North Korea and Cuba).
  • Services also operate across borders. Google, Facebook, Alibaba, Netflix, and global Banks like HSBC are all easily available internationally. Netflix is now available in 190 countries.
  • Businesses and individuals invest capital  globally and aren’t restricted to their own country,  China’s Belt and Road promises to invest 40-80 trillion dollars in investment projects impacting 138 countries.
  • People increasingly move to countries where there are more opportunities or where their skills are in demand. Even the IGCSE you are studying now is an international qualification, allowing students the opportunity to a high standard of education and access to the top universities around the world.

Businesses must adapt to a global marketplace.

Opportunities and threats of globalisation for businesses

Businesses can expand to offer products and services in other countries. But business will face increased competition for customers in their own country.

Businesses can benefit from increased investment from MNC entering their home market. For example construction companies building factories for Apple in China.

But they may face stiffer competition. Local restaurants will suffer when Mc Donalds enters a new market.

Businesses have the opportunity to manufacture goods abroad and lower production costs or source suppliers and components from other countries.

But will quality be maintained? Will this damage the firm’s reputation if workers rights aren’t respected in foreign countries?

Many Multinational Corporations (MNC) have products manufactured in China.
Opportunities and Threats of Globalisation for Businesses
+   Expansion into international markets
+  MNC’s invest in international markets
+  Moving production internationally can decrease costs
X Increased competition in home market
X Moving production internationally may damage brand image 

The impact of globalisation will depend on the size of the business and what service they offer. Small local businesses may not be affected as much as larger businesses, but it’s best to assume that all businesses now operate in a global marketplace, and must be ready for the opportunities and threats that will bring.

So what can governments do to try and counter the threats of globalisation?

Why governments might introduce import tariffs and import quotas

In order to protect businesses and jobs in their own countries, governments may introduce tariffs or quotas.

Tariffs are a tax on imports. For example, if Toyota manufactures a car outside Indonesia the consumer must pay a 45% tariff. A $10,000 car will become $14,500. Toyota have adapted by manufacturing their cars in factories inside Indonesia, so consumers will not have to pay the additional tariff.

Quotas are a limit on imports. In Nov 2019 China limited the import of cotton from the USA to 900,000 tonnes, in response to US tariffs on Chinese exports of manufactured goods. 

Here we see the disadvantage of raising trade barriers like quotas and imports. The USA will fight back with tariffs on smartphones, China will retaliate with tariffs on USA’s soya beans. If two countries continue to raise tariffs and quotas on products  from each other this is known as a trade war.

6.3.2 Reasons for the Importance and Growth of Multinational Companies. (MNCs):

Benefits to a business of becoming a multinational and the impact on its stakeholders

Multinational corporations (MNC) are businesses that sell goods and services internationally or have production in more than one country.

Think of any international brand, and it will be a multinational corporation. For example Apple, Google, Alibaba, Nike, Coca Cola and Huawei.

The size, success and profitability of  these companies is staggering and can be difficult to comprehend. In recent years Amazon’s revenues have been greater than the nation of  Kuwait, and Apple’s Gross Domestic Product is greater than Portugal’s GDP. Indeed, if Apple was a country it would be the 47th largest in the world by GDP.

So why have MNC’s become so huge, powerful and successful? And are MNCs beneficial or a negative influence on national economies?

MNCs can produce their goods in countries where costs are low and sell at high prices where higher income consumers are based. Nike can make a pair of Air Max for $30 in Vietnam  and sell them for $200 in the United States.

MNCs may take natural resources from other countries. For example, huge oil MNCs like Shell and BP drill for oil all over the Middle East, Africa and Asia in order to secure oil at the lowest prices.

MNC’s can also get around tariffs and restrictions by operating in other countries. Many car companies, like Tesla and Volkswagen, have located factories in China to gain unrestricted  access to the huge market for cars in China. 

In order to compete, many MNCs need huge economies of scale in order to spread the cost of research and development,  and keep average costs down. Car manufacturers must operate in many countries to achieve these economies of scale.

Operating in more than one country also spreads risk, also known as diversification.  If Coca-Cola operates in 180 different countries, if one country is in recession and there are falling sales this will not  have a large impact on Coca-Cola’s global profits.

For investors, MNC expansion is positive as it means more potential profits. Workers in the multinationals home country can be the biggest losers if a factory or office is relocated to another country where labour costs are lower. 

Potential benefits to a country and economy where a MNC is located

So do MNCs have a positive or negative impact on national economies? Well this is a hugely complex question but there are overarching benefits and drawbacks.

When MNC’s set up production or support facilities in a country it can lead to a large investment in the local economy and jobs for local people.

Apple, Google and Facebook have all invested millions if not billions of euros setting up their European headquarters in Ireland and employing hundreds of thousand of highly paid workers. 

MNC’s also allow greater choice and better service for consumers. Popular brands like Amazon and McDonalds  are hugely popular when they start operating in a new country.

Multinational’s brands Starbucks and McDonalds are popular across the globe.

Potential drawbacks to a country and economy where a MNC is located

Many local businesses in direct competition with MNCs, will find it difficult to survive. If Starbucks starts operating in a country, local coffee shops will find it harder to keep their customers.

MNC’s take the profits earned in a foreign country and send them back or “repatriate” the profits to their home country. Critics of MNC’s argue the profits should be  re-invested in the host country where MNC’s earned the profits.

Furthermore, MNC’s are highly skilled at paying as little tax as possible in foreign countries, as they attempt to repatriate profits. In 2017, Starbuck paid an effective tax rate of 3% on over £200 million pounds of profit in the UK. 

6.3.3 Impact of Exchange Rates

If you have travelled outside your country you have probably enjoyed checking out other currencies (another country’s money). But how do you figure out if what you are buying is more expensive or cheaper. We use the exchange rate to figure it out.

1 euro is worth about 5 Malaysian Ringgit (MYR) , so if you can buy a coffee for 10 MYR in Kuala Lumpur you are getting a much better deal than in Paris, where a coffee can cost 5 euros or 25 MYR.  

If a movie ticket costs 10 MYR or in Malaysia and 5 euros or  in France, where is the cheaper location to go to the movies?

We use the exchange rate to calculate the comparative price of movie tickets in both locations.

Exchange Rate: 1 Euro = 5 MYR

Price of Movie Ticket in Malaysia = 10 MYR or 2 Euros

Price of Movie Ticket in France = 5 euro or 25 MYR

Therefore, it is much cheaper to buy a movie ticket in Malaysia.

Businesses have to do exactly the same calculations when figuring out the costs and revenue of operating in a different country. With increased globalisation there are billions of these calculations and exchanges happening every day. 

Depreciation and appreciation of an exchange rate

What adds an extra level of complication is that the exchange rates are changing all the time. Since the Brexit referendum the British Pound has fallen 20% against the dollar. So we can say that the value of the pound is depreciating against the dollar, while the value of the dollar is appreciating against the pound. 

How exchange rate changes can affect businesses as importers and exporters of products

Let’s take the example of Mini based in the UK, but selling it’s cars world wide.

If the pound depreciates in value, import prices rise. So the cost of components for its cars will increase. The costs of production will increase and this will mean lower profits.

But export prices fall, so when a mini is sold in the US it will be cheaper than its competitors, which will lead to increased sales and higher profits. 

If the pound appreciates in value, it means import prices fall, so the cost of components for its cars will decrease.

But export prices rise, so when a mini is sold in the US it will be more expensive than its competitors which will lead to decreased sales. 

Impact of Exchange Rate Depreciation on BusinessImpact of Exchange Rate Appreciation on Business
Import prices riseImport prices fall
Export prices fallExport Prices Rise

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