6.2. Business and the international economy
- Syllabus
- 0264–2027–2028
- Topic
- 6.2
- Level
- —
Learning objectives
6.2.1The importance of globalisation• reasons for globalisation: improved transport links, technological change including communication, free trade agreements, newly industrialised countries• opportunities and threats of globalisation for businesses• import tariffs and import quotas• effects of import tariffs and import quotas on businesses6.2.2Multinational companies (MNCs)• advantages to a business of becoming an MNC• advantages for the country where an MNC is located, e.g. jobs, exports, increased choice, investment• disadvantages for the country where an MNC is located, e.g. increased competition, environmental damage, exploitation of natural resources, repatriation of profits6.2.3External costs and benefits• external costs and external benefits of business decisions6.2.4Exchange rates• appreciation and depreciation of an exchange rate• how changes in exchange rates can affect businesses which import and export products and services, e.g. price, costs, competitiveness Note: candidates will not be assessed on exchange rate calculations.
How globalisation creates opportunity and pressure
Globalisation is the growing connection between countries through trade, investment and business operations. It accelerates when moving goods, information and businesses across borders becomes easier, cheaper or more worthwhile.
| Reason | How it increases globalisation |
|---|---|
| improved transport links | faster or cheaper movement makes distant suppliers and customers practical |
| technological change and communication | businesses can coordinate production, promotion, orders and service across countries |
| free trade agreements | fewer tariffs, quotas or other barriers allow more cross-border trade |
| newly industrialised countries | rapid economic growth creates expanding markets and new production or sourcing opportunities |
| Opportunity | Matching threat |
|---|---|
| access to more customers can raise sales and spread risk | foreign competitors can take customers or force prices and margins down |
| wider supplier and labour choices may lower costs or improve quality | long supply chains can add delay, coordination and quality risk |
| larger markets can support expansion and economies of scale | demand, regulation and trade barriers can differ between countries |
| Import control | Meaning | Effect on businesses |
|---|---|---|
| tariff | a tax on imported goods | raises an importer's cost; a foreign exporter may raise price and lose competitiveness, or absorb the tax and accept a lower margin |
| quota | a limit on the quantity imported | restricts supply and potential sales; exporters may need another market, while protected domestic producers may face less imported competition |
Globalisation does not guarantee higher profit. The result depends on the product, added competition, transport and coordination costs, and whether a tariff or quota affects the business's inputs, its exports or its competitors.
Who gains when a business becomes multinational?
A multinational company (MNC) has production or service operations in more than one country. Becoming multinational can strengthen the business, but the country hosting its operations can receive both benefits and costs.
| Advantage to the business | Mechanism |
|---|---|
| reach new markets | local operations can increase sales and market share |
| lower operating cost | cheaper labour, materials or government incentives may reduce production cost |
| avoid trade barriers | producing inside the market can avoid tariffs or quotas on finished imports |
| locate near customers or inputs | shorter transport routes can lower cost and improve responsiveness |
| spread risk and remain competitive | operations in several markets reduce reliance on one country and may match rivals' expansion |
| Possible host-country advantage | Possible host-country disadvantage |
|---|---|
| jobs and incomes | low wages, poor conditions or mainly low-skill work |
| investment and infrastructure | influence over government or displacement of local firms |
| more exports and tax revenue | profits repatriated to the MNC's home country or tax reduced |
| greater consumer choice and competition | local businesses face stronger competition |
| new production capacity | pollution, environmental damage and exploitation of natural resources |
Judge the net effect by asking how many lasting jobs and supplier links are created, how much value and tax stay in the country, what resources are used, and whether environmental and competitive damage can be controlled.
An MNC is defined by operations in more than one country, not simply by exporting there. A benefit to the company is also not automatically a benefit to the host country; identify whose costs and gains are being assessed.
Costs and benefits beyond the business
An external cost or benefit is an effect of a business decision on third parties who were not directly involved and do not receive appropriate compensation. It sits outside the business's own revenue and costs, but it still matters to society.
| Business decision | External cost to third parties | External benefit to third parties |
|---|---|---|
| open or expand a factory | noise, waste or air and water pollution; extra congestion | local employment and supplier sales; tax revenue or improved infrastructure may support the area |
| use land or natural resources | loss of space, habitats or resources available to others | restoration, new access or services can benefit nearby communities when provided |
Trace the full chain. Factory traffic can increase congestion, which adds journey time and pollution for residents who did not choose the production decision. A new factory can also raise orders for local suppliers, increasing activity and income beyond the company itself.
Do not label every business expense an external cost. Wages, rent and materials paid by the firm are private costs. The external part is the uncompensated effect on people or organisations outside the transaction.
Exchange rates: import costs and export competitiveness
An exchange rate compares the value of one currency with another. An appreciation means the home currency rises in value and buys more foreign currency; a depreciation means it falls in value and buys less.
| Change in the home currency | Business that imports | Business that exports |
|---|---|---|
| appreciation | foreign inputs become cheaper in home currency, reducing cost and allowing a lower price or higher margin | the export price becomes dearer to foreign buyers, so competitiveness and demand may fall |
| depreciation | foreign inputs become dearer, raising cost and possibly price or reducing margin | the export price becomes cheaper to foreign buyers, so competitiveness and demand may rise |
A bicycle producer that imports most raw materials but sells abroad can face both effects at once. After depreciation, material costs rise while its bicycles appear cheaper in foreign markets. Profit improves only if the gain in export sales and revenue outweighs the higher input cost and any price response.
The direction is predictable, but the size of the effect is not. It depends on the share imported or exported, whether prices change, customer responsiveness, contracts and competitors. Candidates explain these effects; exchange-rate calculations are outside this syllabus.