Business Studies (0450) | Business and the international economy

🌍 Business and the International Economy: Your Essential Study Notes 🌍

Welcome to one of the most exciting chapters in Business Studies! Don't worry if words like "globalization" and "exchange rates" sound complicated—we are going to break them down into simple, easy-to-understand parts.

This chapter looks at how the big, wide world outside your country affects local businesses. No business is an island! Understanding these external factors is key to making smart decisions and passing your exams. Let's get started!

🚀 Section 1: Globalization and the Changing World

What is Globalization?

Globalization is the process by which the world's economies, cultures, and populations are becoming increasingly interconnected, largely due to cross-border trade in goods and services, technology, and flows of investment.
Think of it this way: The world is becoming one massive market where everyone can buy and sell from everyone else.

How Globalization Impacts Businesses

Globalization creates both big opportunities and serious threats for enterprises:

Opportunities (Reasons to be Happy 😊):

• Access to New Markets: Businesses can sell their products to billions of new customers in other countries, leading to massive growth potential.
• Cheaper Raw Materials/Labour: A business can source materials or manufacturing services from countries where costs (like wages) are lower, reducing production expenses.
• Access to New Technology: Faster communication and transport means businesses can quickly adopt the latest technologies from anywhere in the world.

Threats (Reasons to be Careful 😟):

• Increased Competition: Local businesses suddenly face competition from huge international rivals who might offer better quality or lower prices.
• Cultural and Language Barriers: Marketing and selling internationally requires careful adaptation to different tastes and languages, which is costly.
• Legal and Tax Differences: Dealing with different laws, taxes, and trade rules in every country is complex and expensive.

🏦 Section 2: Multinational Companies (MNCs)

Defining a Multinational Company (MNC)

A Multinational Company (MNC) is a large business organization that has its head office in one country (the Home Country) but operates (produces or sells) in several other countries (the Host Countries).
Examples: Coca-Cola, McDonald’s, Samsung.

Impact of MNCs on Host Countries

When an MNC sets up a factory or office in a foreign country, it has a significant impact. These impacts are a popular exam topic, so know the pros and cons!

Advantages for the Host Country:

• Job Creation: MNCs provide employment, reducing unemployment rates.
• Tax Revenue: MNCs pay local taxes, boosting the government’s income, which can be spent on public services.
• Improved Infrastructure: To support their operations, MNCs often pay for or pressure governments to improve roads, communication, and power supplies.
• Introduction of New Skills and Technology: Local workers learn modern production methods and management skills.

Disadvantages for the Host Country:

• Repatriation of Profits: MNCs usually send their profits back to their home country instead of reinvesting them locally, draining money from the host economy.
• Increased Competition: Small local businesses struggle to compete with the huge resources and low prices of the MNC.
• Exploitation of Labour: Sometimes, MNCs pay very low wages or ignore local environmental and safety standards.
• Political Influence: Very large MNCs can sometimes pressure the host government for special tax breaks or favourable laws.

💱 Section 3: Exchange Rates

This section often causes the most confusion, but it is purely logical. Follow the steps, and you'll master it!

What is an Exchange Rate?

The Exchange Rate is the price of one currency in terms of another.
Example: $1 = €0.90 (This means one US dollar buys 90 euro cents).

Movement of Exchange Rates

Exchange rates constantly change based on supply and demand.

• Appreciation (Strengthening): When the value of a currency rises compared to another.
  Example: $1 moves to $1 = €1.10. The Dollar has appreciated—it buys more Euros now.
• Depreciation (Weakening): When the value of a currency falls compared to another.
  Example: $1 moves to $1 = €0.80. The Dollar has depreciated—it buys fewer Euros now.

The Impact of Exchange Rate Changes (The Crucial Part!)

Changes in the exchange rate directly affect international trade—exports and imports. We use the terms "strong" (appreciated) and "weak" (depreciated) currency.

Case 1: Currency APPRECIATES (becomes stronger)

Your currency buys more foreign currency.

• Imports: Become Cheaper. If the Dollar is stronger, US businesses can buy European goods for fewer Dollars.
• Exports: Become More Expensive. Foreign customers need more of their currency to buy US goods, making US products less competitive overseas.

Case 2: Currency DEPRECIATES (becomes weaker)

Your currency buys less foreign currency.

• Imports: Become More Expensive. US businesses need more Dollars to buy the same European goods.
• Exports: Become Cheaper. Foreign customers need less of their currency to buy US goods, making US products more competitive overseas.

🛡️ Section 4: Trade Protectionism (Trade Barriers)

What is Free Trade?

Free Trade is when goods and services can be traded between countries without any restrictions or barriers imposed by governments.

What is Protectionism?

Protectionism refers to government actions and policies that restrict or restrain international trade, often with the intent of protecting local industries from foreign competition.

Types of Trade Barriers

Governments use two main tools to restrict trade:

• 1. Tariffs (Customs Duties): A Tariff is a tax placed on imported goods. This increases the cost of the imported product, making the local alternative more appealing.
  Analogy: Imagine a foreign car costs $20,000. If the government adds a $5,000 tariff, the final price is $25,000, making the locally produced car look better value.
• 2. Quotas: A Quota is a physical limit on the quantity of a certain good that can be imported into a country over a specific period. This directly limits supply.
  Example: A country allows only 10,000 tonnes of foreign rice to be imported per year.

Reasons for Protectionism (Why Governments Intervene)

Governments often use these barriers for several key reasons:

1. Protecting Local Jobs: If cheaper imports flood the market, local companies may shut down, leading to job losses. Barriers protect these domestic employment levels.
2. Protecting Infant Industries: New, small domestic industries need time to grow and become efficient before they can compete globally. Barriers help shield them initially.
3. Preventing Dumping: Dumping occurs when a foreign country sells goods in another country at a price below their true cost of production. Barriers combat this unfair competition.
4. Raising Government Revenue: Tariffs are a source of income for the government.

Impact of Trade Barriers on Stakeholders

• Consumers: Face higher prices (due to tariffs) and less choice (due to quotas and lack of competition).
• Local Businesses: Benefit from less competition and are protected from cheaper imports, allowing them to potentially increase prices and profits.
• Exporters: May suffer if other countries retaliate by placing tariffs on their goods, making it harder for them to sell abroad.

Key Takeaway for the Chapter

The international environment is unpredictable! Businesses must constantly monitor exchange rates, potential trade barriers, and the actions of large MNCs to survive and succeed on the global stage. Be ready to evaluate the trade-offs involved in working across borders.