Business | Business and the international economy

Welcome to the World of International Business!

Hello! This chapter, Business and the International Economy, might sound large and complex, but don't worry. It's actually about how the business activities you’ve already studied connect across borders—like how the clothes you wear might be designed in Europe but made in Asia.

Understanding this chapter is vital because every major business today is affected by global trends, from the prices of raw materials to the strength of your local currency. Let’s break down how the world affects the business environment!

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1. Globalisation and World Trade

What is Globalisation?

Globalisation is the process by which the world is becoming increasingly interconnected as a result of massively increased trade and cultural exchange.

In simple terms, it means the world feels smaller. Things move faster, whether it's money, products, information, or people.

Key Causes of Globalisation:

• Technology: Faster internet and communication (e.g., video calls) make managing staff in different countries easy.
• Transport: Cheaper and faster shipping (e.g., container ships) lowers the cost of moving goods around the world.
• Trade Barriers Reduced: Governments have agreed to fewer taxes and rules on international trade.

The Impact of Globalisation on Businesses

Globalisation offers massive opportunities, but it also creates tough competition.

Benefits of Globalisation (Opportunities):

• Wider Markets: Businesses can sell their products to billions of new customers around the world.
• Cheaper Resources: Companies can source raw materials or manufacture goods in countries where costs (especially labour) are lower.
• Increased Choice for Consumers: Shoppers get access to products from all over the globe, often at lower prices.

Drawbacks of Globalisation (Threats):

• Increased Competition: Local businesses face intense competition from huge foreign companies entering their market.
• Pressure on Wages: Companies might move production overseas, leading to job losses in the home country.
• Cultural Challenges: Businesses must adapt their products to suit different tastes, languages, and cultures, which can be expensive.

2. Imports, Exports, and the Balance of Payments

Every country tracks how much money leaves and enters its economy through trade. This is measured using Imports and Exports.

Imports

Imports are goods or services bought into one country from another country.
Memory Aid: Imports = In! (Money leaves your country to pay for them).

Example: A UK company buying coffee beans from Brazil is an import for the UK.

Exports

Exports are goods or services sold out of one country to another country.
Memory Aid: Exports = Exits! (Money enters your country when they are sold).

Example: A US software firm selling its program to a customer in Germany is an export for the USA.

Balance of Payments (Trade Balance)

The Balance of Payments records all financial transactions between one country and the rest of the world. The most studied part is the Balance of Trade (Goods and Services).

• Trade Surplus: When the value of Exports is greater than the value of Imports (Money coming in > Money going out). This is usually good for the economy.
• Trade Deficit: When the value of Imports is greater than the value of Exports (Money going out > Money coming in). This means the country is borrowing or selling assets to pay for its consumption.

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3. Multinational Companies (MNCs)

What is an MNC?

A Multinational Company (MNC), sometimes called a Transnational Company (TNC), is a business that operates or has facilities (like factories or offices) in more than one country.

Examples: Coca-Cola, Apple, Samsung, McDonald's.

Why do MNCs locate operations abroad? (Reasons for FDI)

MNCs engage in Foreign Direct Investment (FDI) when they set up operations overseas. They do this for several strategic reasons:

1. Access to new markets: To sell their products directly to a large population (e.g., setting up a factory in India to sell to Indian consumers).
2. Cheaper labour: To reduce production costs by locating manufacturing in countries with lower wage rates.
3. Access to raw materials: To be closer to essential resources, reducing transport costs.
4. Avoid trade barriers: If a country imposes high taxes on imports, an MNC might set up a local factory to avoid that tax.

Impact of MNCs on Host Countries (The countries they enter):

• Benefits: Creation of new jobs, injection of money and foreign investment, introduction of new technology and skills, increased competition benefiting local consumers.
• Drawbacks: Local businesses may be forced to close due to competition, MNCs might exploit local workers with low wages, profits are often sent back to the MNC’s home country (leakage), and they can influence local government policies.

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4. Exchange Rates: Understanding Currency Strength

Don't worry if this seems tricky at first. The exchange rate is simply the price of one currency in terms of another.

Example: If the exchange rate is $1 = €0.90, it means one US dollar can buy 90 Euro cents.

Appreciation (A Stronger Currency)

Appreciation means the value of a currency has increased compared to another. Your currency can now buy more of the foreign currency.

Analogy: You are shopping abroad. If your currency appreciates, your holiday spending money goes further!

Depreciation (A Weaker Currency)

Depreciation means the value of a currency has decreased compared to another. Your currency can now buy less of the foreign currency.

Analogy: You are shopping abroad. If your currency depreciates, everything feels more expensive!

Impact of Exchange Rates on Businesses

The strength of a currency has a direct and opposite effect on importers and exporters.

Scenario 1: Currency Appreciation (Currency gets Stronger)

• Effect on Exports (Selling abroad): Your goods become more expensive for foreigners to buy. This usually leads to a decrease in exports.
• Effect on Imports (Buying abroad): Foreign goods become cheaper for domestic businesses to buy. This usually leads to an increase in imports.
• Overall impact: Good for consumers (cheaper imports), bad for businesses that export.

Scenario 2: Currency Depreciation (Currency gets Weaker)

• Effect on Exports (Selling abroad): Your goods become cheaper for foreigners to buy. This usually leads to an increase in exports.
• Effect on Imports (Buying abroad): Foreign goods become more expensive for domestic businesses to buy. This usually leads to a decrease in imports.
• Overall impact: Good for businesses that export, but causes inflation (rising prices) for consumers due to expensive imports.

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5. Trading Blocs and Protectionism

Trading Blocs

A Trading Bloc is a group of countries within a geographical area that agree to reduce or eliminate trade barriers (like tariffs) between them. They act like a special "club" for trade.

Examples: The European Union (EU), the North American Free Trade Agreement (NAFTA/USMCA), ASEAN (Association of Southeast Asian Nations).

Impact of Trading Blocs on Businesses:

• Opportunity (Inside the Bloc): Businesses gain access to a larger market with no tariffs, making trade easier and cheaper within the member countries.
• Threat (Outside the Bloc): Countries outside the bloc face higher barriers (like tariffs) when trying to sell goods to the bloc members. This can make them less competitive.

Protectionism (Stopping Free Trade)

Protectionism refers to government policies designed to protect domestic industries from foreign competition. It is the opposite of free trade.

Tools of Protectionism:

1. Tariffs: These are taxes placed on imported goods. A tariff makes the foreign product more expensive, encouraging consumers to buy the cheaper, domestically produced alternative.
2. Quotas: These are physical limits placed on the quantity of a certain good that can be imported over a specific time period.
3. Subsidies: Payments made by the government to domestic firms to lower their production costs, allowing them to compete better against foreign imports.

Why use Protectionism? Governments often argue it saves local jobs and allows new domestic industries to grow without being instantly crushed by massive foreign competitors.