Business and the international economy

- in the past goods were produced locally and sold locally but nowadays goods and
services are being produced by a business in one country and then exported to
countries all over the world
- this has been been made possible by multinational companies
Multinational companies- is an orgnaisation that has operations in more than one
country. Mostly, it has its headquarters in one country and branches and factories in
other countries around the world.

Reasons for globalisation

Globalisation- is the process by which countries are more connected with each other
because of the trade of goods and services
- this has been made possible by efficient information and communication technology
and international transportation which made it possible to break down geographical
and language barriers
- perishable products such as fruits and vegetables can now be shipped anywhere in
the world
- free trade agreements also assist business operations by improving economic and
technical cooperation e..g government reducing or removing trade barriers to make it
easier for goods and services to move from one country to another
- globalisation makes the whole world a single market and brands become recognised
globally and products and services are easily accessible anywhere in the world

Characteristics of globalisation
a. growth in international trade
b. dependency on the global economy
c. greater movement of products, services, people and money
d. companies operating in more than one country
e. global recognition of brands
 Growth of globalisation
- factors that have increased the pace of globalisation are;
i. migration- movement of people form one place to another
ii. improvement of technology- faster and more effective telecommunication and
transportation
iii. free trade agreements between countries- reduction of barriers between member
countries by creating favourable trade and investments policies
- countries wanting to trade with each other form a trader bloc and reach a common
agreement to lower trade barriers within the member countries

Trader bloc- is a group of countries that trade with each other and are usually part of
a free trade agreement
Opportunities and threats of globalisation
-globalisation affects people and businesses in the home country and in the host
country in many ways
Home country- is the domestic country where a multinational starts or establishes its
operations
Host country- is the foreign country where a multinational sets up its operations
Opportunities Threats
- businesses can access more markets, which may lead - local businesses in the host country may suffer as
to an increase in sales foreign companies start to sell their products at a
- labour may be cheaper in host nations and so cheaper price
businesses can gain from lower costs - exchange rate fluctuations may cause lowering of
- due to increased competition, businesses operate profits
more efficiently and reduce costs due to cost effective - competition will increase for both local and
innovations and economies of scale. Reduction in costs international businesses
will lead to greater profits. they can also offer their - the marketing and distribution costs for the
products at reduced prices, encouraging sales international business will increase
- loss of jobs for people from the home country if the
company decides to move its operations to a country
with a cheaper labour force
- globalisation has led to increased demand for goods
and services at the cost of the environment
Why governments introduce import tariffs and import quotas
- multinational companies often supply goods and services at cheaper prices than local
- this damages the local economy as more local companies might be forced to
shutdown due to increased and intense competition
- governments often try to control the amount of international trade through tariffs
and quotas which is also known as protectionism

Protectionism- is when a government protects domestic firms from foreign

competition using tariffs and quotas
Tariffs- is a tax applied to the value of imported and exported goods
- a government may place 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 goods
at a higher price and this reduces local demand of the goods and benefits local
businesses as they have less competition
- the import tariff also earns revenue for the government

Quotas- is a physical limit on the quantity of goods that can be imported and
exported
- quotas on imports benefit local producers as there are fewer foreign products in the
market and they face less competition
- exporting countries will only be able to sell a limited amount of goods to the country
that has a quota

Importance and growth of multinational companies

Multinational companies/Transnational companies - are those with factories,
production or service operations in more than one country
- for multinational companies (MNC’s) to be successful the host country needs to
provide a positive environment in which the business can establish and grow.These
factors include;
 Factor Importance
Economic - there should be little or no restrictions on foreign investments, so that the foreign company
factors 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 financially and help
increase overall profits
Social and - security ans safety in the host country must be considered so that the physical assets of the
political factors 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 employees need to be available and lower paid than in other locations to help perform
efficiently, as well as keep its labour costs 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 be changed)
Infrastructure - good infrastructure such as roads, transportation and communication, can help the firm
operate more efficiently
- reliable power supply, with as little as possible, is a key resource needed for the business to
operate
Operational - it must be close to the source of material, resources and sales outlets. This will reduce the
factors firm’s transportation costs
- cost of factory lease, space and land use must be considered. The lower the cost, the more
profit the MNC will make
- a reliable supply of raw materials at a reasonable price is important . This will ensuretimely
production of goods at reasonable prices

Benefits to a business of becoming a multinational

i. easier access to raw materials- by setting up operations where the raw materials
are easily found, businesses can reduce transport time and costs. This reduces the
business costs of production
ii. lower costs of labour- if there is a plentiful supply of labour in the host country
then it is likely to be available cheaply
iii. economies of scale- multinationals are usually large in size of operation, hence
this makes them enjoy economies of scale
iv. access to bigger markets- they have access to the world wide market which is
one large market
v. lower production costs- energy costs and the purchase or rental of businesses
sites may be cheaper in host countries
vi. spreading of risk- MNCs are not dependant upon one market, their business may
not be badly affected even if one of their markets is in decline or practically
unstable or has a natural disaster
vii. premium pricing- MNCs are able to charge higher prices for globally recognised
brands

- sometimes the environment in the host country can pose a threat to the success of an
MNC. The main threats include;
i. shortage of labour- MNCs might have to hire specialists from other countries
which will be more expensive
ii. lack of information about the local market- this may lead to poor sales as
products wont meet the market demands, needs and wants
iii. language barrier- this may make it hard to communicate with the local
workforce in the host country, which might lead to mistakes
iv. cultural differences- to be accepted, the MNC needs to be sensitive to the
culture of the host country
v. strict regulations- for example different quality standards . This will make it
harder for MNCs to operate in the host country
vi. hostile businesses environment- for example there might be high level of brand
loyalty to existing competitors, or competitors might retaliate through marketing
tactics to defend their market position
vii. expensive labour costs- this will raise the overall costs of the business
viii. local opposition or threat from pressure groups- this can lead to bad publicity
for the MNC
ix. little brand awareness- the MNC may have to spend a lot of money on
advertising
x. currency fluctuation- can affect profits of the MNC
xi. political instability in the host country- can make government decision making
slower and causes delays for the MNCs
- solutions to the above problems can be solved through joint ventures, strategic
alliances or use of local agents, who are are specialist in those host countries and have
more information and influence in that market

Benefits/Advantages of a multinational to the host country

i. increases the choice and quality of goods and services- the local market has
access to a variety of goods and services which are of good quality as a result of
competition
ii. improves the country’s reputation- the fact that a foreign company has decided
to invest in the host country shows it has a positive regulatory and economic
environment
iii. increases employment opportunities- provides employment for local workers
iv. generates income in the form of tax- MNCs pay taxes to the host country’s
government, which will be used to improved public services such as health and
education
v. improves infrastructure- the MNCs may invest in transportation and
communication networks, which benefits the host country
vi. knowledge sharing- new technology and techniques used by the MNC will be
shared with local employees and local companies could learn from them and
improve
vii. improves balance of payments- imports may be reduced as the MNC may be
able to provide the products that were previously imported and exports will
increase as the MNC has a global presence and will export goods

Drawbacks/Disadvantages of a multinational to the host country

i. undue influence on the government- the investment made by the MNCs can be
huge, greatly affecting economic conditions of the host country. MNCs may try
to influence government policies that work in their favour and may not be good
for the host country
ii. increased competition- MNCs are large in size, experts in their area of operation
and cost efficient and can provide quality goods at lower prices. This increases
competition of local businesses which produce the same goods
iii. environmental damage- MNCs main objective is to produce goods quickly and
as cheap as possible and in doing so may ignore their impact on the environment
iv. exploitation of labour- if the host country has high levels of unemployment,
then may MNCs may pay low skilled employees low wages and hire experts from
abroad with high skills
v. repatriation of profits- many MNCs send back (repatriate) the profits that they
earn to their home country, leaving the host country with very little financial
benefit
vi. exploitation of natural resources- the excessive use of natural resources in the
long term may lead to scarcity of that natural resources in the host country
vii. negative social impact- the marketing done by MNCs can greatly affect the
lifestyle, food habits and culture of the host communities, leading to traditional
products and practices to disappear
viii. less sense of social responsibility- as MNCs are mainly driven by profit motives,
they may not pay much attention to health and safety if the laws of the host
country are not strict

The impact of exchange rate changes

Exchange rate- the rate at which one country’s currency can be exchanged for that of
another
- the success of international trade depends a lot on the exchange rate between
currencies
- the main factors affecting exchange rates are demand and supply
- if demand of a currency is high, the exchange rate will rise

Depreciation and appreciation of an exchange rate

- exchange rate changes can have a significant effect on a business in terms of sale,
costs and profits
- changes in exchange rate affect the levels of exports and imports

Effects of depreciation of currency on exporters

Depreciation- a currency is said to depreciate if the value of the currency goes down
with respect to another
- when this happens the exchange rate of that currency falls
 Impact on businesses
Impact on importers Impact on exporters
- imports will appear to be more - exports are relatively cheaper overseas;
expensive this should increase the demand for them
- businesses which rely on imports will - businesses which export will benefit
have to pay more from increased sales

Impact on country
Impact on imports Impact on exports
- if a lot of raw materials and semi - more demand for its currency thus the
finished goods are imported then it could value of the currency rises
trigger inflationary pressure on the
economy
- more exports may lead to an increase in
the balance of payments

Example 1: Depreciation of currency

Jing Chen is in the garment business in Singapore to the USA. If the exchange rate
between the Singapore dollar (SGD) and the US dollar is 1 SGD = 0.78 USD, an
export of garments from Singapore worth SGD 1000 will cost 780 USD (to and
importer in the USA).
If the SGD depreciates and the exchange rate falls to 1 SGD = 0.71 USD then an
export of 1000 SGD costs 710 USD (to an importer in the USA). So the depreciation
in the exchange rate leads to a decrease in export prices in other currencies. Since
exports are relatively cheaper overseas, this should increase the demand for them by
importers.

Effects of appreciation of currency on exporters

Appreciation- a currency is said to appreciate if the value of the currency increases
with respect to another currency
- when this happens, the exchange rate of that currency rises
- an appreciation in exchange rate makes it harder to sell overseas
 Impact on businesses
Impact on importers Impact on exporters
- imports will appear to be cheaper - exports are relatively more expensive
overseas; this may decrease their demand
- businesses selling imported goods or - businesses which export may suffer
relying on imported raw materials will from reduced sales; if so then exporters
benefit from reduced costs may choose to cut their prices, reduce
output and cut back employment levels

Impact on country
Impact on imports Impact on exports
- more imports may lead to a decrease in - a fall in exports may result in a fall in
the balance of payments GDP and unemployment in the affected
sectors
- local businesses compete with cheaper -
imported goods and reduce costs and
selling price. This may reduce inflation

Example 2: Appreciation of currency

Jing Chen is in the garment business in Singapore to the USA. If the exchange rate
between the Singapore dollar (SGD) and the US dollar is 1 SGD = 0.78 USD, an
export of garments from Singapore worth SGD 1000 will cost 780 USD (to and
importer in the USA).
If the SGD appreciates and the exchange rate rises to 1 SGD = 0.81 USD then an
export of 1000 SGD costs 810 USD (to an importer in the USA). So the depreciation
in the exchange rate leads to an increase in export prices in other currencies. Since
exports are relatively more expensive overseas, this may decrease the demand for
them by importers.
 Characteristics of of globalisation

Benefits to a business of becoming a multinational company

Impact of businesses of changes in the exchange rate

Effects of multinationals on the host country