Business Studies

26 Business and the International Economy

 Multinational Company: An organisation that has operations in more than one country.

 Globalisation: The process by which countries are connected with each other because of the
trade of goods and services.

Reasons for globalisation

 The use of information and communications technology has helped to make international
expansion easier for many companies by minimising language barriers.

 More efficient methods of transportation have helped to break down geographical barriers. For
example perishable food items such as fruits and vegetables can be shipped anywhere in the world.

 Free trade agreements also assist business operations by improving economic and technical
cooperation. Free trade agreements are considered to be an important way of opening up foreign
markets. Most free trade agreements aim to reduce trade barriers between member countries by
creating favourable trade and investment policies. Countries wanting to trade with each other from a
trade bloc and reach a common agreement to lower trade barriers within the member countries.

 Trade bloc: a group of countries that trade with each other and are usually part of a free trade
agreement.

Characteristics of globalisation

 Growth in international trade

 Dependency on the global economy

 Global recognition of brands

 Greater movement of products, services, people and money.

 Company operating in more than one country.

Opportunities and threats of globalisation

Opportunities Threats

1. Businesses can access more markets, 1. Local businesses in the host country may
which may lead to an increase in sales. suffer as foreign companies start to sell
their products at a cheaper price.
2. Labour may be cheaper in host nations
and so businesses can gain from lower costs. 2. Exchange rate fluctuations may cause
lowering of profits.
3. Due to increased competition, businesses
operate more efficiently and reduce costs due to 3. Increased competition for both local and
cost effective innovations and economies of scale. international businesses.
Reduction in costs will lead to greater profits. They
can also offer their products at reduced prices, 4. The marketing and distribution costs for
encouraging sales. the international business will increase.

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Trade bloc: A group of countries that trade with each other and are usually part of a free trade
agreement.

Home country: the domestic country where a multinational starts/first establishes its operations.

Host country: the foreign country where a multinational sets up its operations.

Why governments introduce import tariffs and quotas?

Globalisation offers consumers a wider choice of products and services, but this may cause problems
for businesses in the host country. Multinational companies can often supply products and services at
cheaper prices than local businesses. Smaller businesses sometimes cannot compete and may have to
close down, with the loss of jobs. If multinationals start to take over the trade in the host country, this
can have a damaging effect on the local economy. As local businesses and shops close, there will be less
choice for consumers and unemployment may rise. For these reasons, government often try to control
the amount of international trade. Two of the main ways they use are tariffs and quotas.

Tariffs

A tariff is a tax applied to the value of imported and exported goods.

A government may place a tariff on imports so as to reduce imports into the country. The tariff
increases the cost of imported goods, and businesses then have to sell the goods at a higher price. This
reduces local demand for the goods and benefits local businesses as they have less competition.

Government may also put tariffs on the export of essential items such as foot to ensure that the
country has enough of them. Restriction on imports and exports is important because every country’s
economic objective is to have a positive balance of payments. The import tariff also earns revenue for
the government.

Quotas

A Quota is a physical limit on the quantity of goods that can be imported and exported.

Quotas on imports benefit local producers as there are less foreign goods in the market and they face
less competition. However, customers might be disappointed as there are limited suppliers of popular
products.

Quotas are set on the import of certain commodities, either from specific countries or globally. The may
be set with or without consultation with the exporting countries. Exporting countries may suffer as they
will only be able to sell a limited amount of goods to the country that has a quota.

Factors required for a positive environment in a host country

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Economic factors  There should be little or no restrictions on foreign
investments, so that the foreign company that is going
to start operations will have fewer regulations to deal
with and will be able to establish itself easily.

 Tax incentives and stable currencies of the host country

will aid the MNC s financially and help increase overall
profits.

Social and political factors  Security and safety in the host country must be
considered so that the physical assets of the MNC as
well as its employees are safe.

 Productivity of the workforce is very important if the

MNC wants to deliver goods on time and be profitable.

 Skilled workers need to be available and lower paid

than in other locations to help firms perform efficiently,
as well as keep their labour cost low.

 Political stability and legal controls are required. A

change in government may change the legal framework
or change policies that may affect the business ( for
example, the corporation tax rate or the minimum wage
rate may changed.)

Infrastructure  Good infrastructure, such as roads, transportation, and

communication, can help firms operate more efficiently.

 Reliable power supply, with as little downtime as

possible, is a key resource needed for businesses to
operate.

Operational factors  They must be close to the source of material, resources

and sales outlets. This will reduce the firms
transportation costs.

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  Cost of factory lease, space and land use must be
considered. The lower cost, the more profit the MNCs
will make.

 A reliable supply of raw material at a reasonable price is

important. This will ensure timely production of goods
at reasonable prices.

Multinational Companies (MNCs)

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.

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  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 rate: The rate at which one country’s currency can be exchanged for that of another.

The Factors affecting exchange rate:

 Demand

• Demand increase exchange rate rise

 Supply

• Increase in demand increase the supply- drop the value

Depreciation

 Depreciation: if the value of the currency goes down with respect to another.

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 Appreciation

 Appreciation: If the value of the currency increases with respect to another currency.

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 Impact on country

More imports may lead to a decrease in

balance of payments.

Local businesses compete with cheaper

imported goods and reduce costs and
selling price. This may reduce inflation. A fall in exports may result in a fall in a GDP
and unemployment in the affected sectors