Business & the
International Economy
Globalisation, multinational companies (MNCs), import tariffs and quotas, and the impact of exchange rate changes on businesses.
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The process by which businesses, people and governments around the world are becoming more interconnected and interdependent through trade, communication, investment and movement of people.
Reasons for Globalisation
Opportunities & Threats for Businesses
- Larger global markets — increases potential sales and revenue
- Cheaper labour and raw materials available in other countries — reduces costs
- Spread business risk by operating in multiple markets
- Economies of scale with larger global output
- Access to new technologies, skills and knowledge from abroad
- Attract foreign investment and talent
- Increased competition from cheaper foreign businesses — may lose market share
- Exchange rate fluctuations can affect costs and profitability
- Cultural and language differences create marketing challenges
- Political instability or changing laws in foreign markets
- Supply chain disruption — longer and more complex supply chains
- Domestic job losses if production moves abroad (offshoring)
Government Responses: Trade Barriers
Governments may protect domestic businesses from foreign competition by introducing trade barriers. Click each one to explore.
A tax placed on imported goods, making them more expensive for buyers in the domestic market.
Raises the price of imports → domestic goods become more price-competitive → protects local businesses and jobs. Also generates government revenue.
- Protect domestic industries from cheap foreign competition
- Raise government revenue
- Protect jobs in domestic industries
- Protect infant industries still growing
- Retaliate against unfair trade practices
A limit on the quantity of a specific good that can be imported into a country in a given time period.
Restricts the supply of foreign goods → reduces competition for domestic producers → prices may rise for consumers as supply is limited.
- Directly limit the volume of foreign competition
- Protect domestic industries and jobs
- Manage the trade deficit (reduce imports)
- Protect national security or strategic industries
A complete ban on all imports (or sometimes exports) from a specific country — the most extreme form of trade barrier.
Totally excludes foreign competition from that country → domestic producers face no competition from that source → often causes retaliation.
- Political sanctions against a country (e.g. human rights violations)
- National security — preventing trade with hostile nations
- Economic pressure to force policy change
- Retaliation for unfair trade practices
Government payments made to domestic producers to lower their costs of production, allowing them to sell at a lower price.
Reduces the cost of domestic goods → domestic producers can undercut foreign prices → consumers may prefer cheaper domestic goods → imports fall naturally.
- Makes domestic goods cheaper than imports
- Supports key industries (e.g. farming, energy)
- Helps infant industries compete globally
- Keeps strategic industries viable (e.g. defence)
Why Governments Introduce Trade Barriers
📇 Globalisation Flashcards
Click to flip each card.
A tariff is a tax on imported goods — it affects price. A quota is a physical limit on the quantity imported — it affects supply. Both protect domestic producers but in different ways.
To protect domestic industries from cheap foreign competition. To generate government revenue. To protect jobs. To protect infant industries growing to become competitive. To retaliate against unfair trade practices.
Opportunity: Access to larger global markets increases potential sales revenue. Threat: Increased competition from cheaper foreign businesses may cause the firm to lose market share.
Improvements in transport (containerisation, air freight), digital technology and the internet, free trade agreements reducing barriers, growth of MNCs, deregulation of financial markets, and migration of labour.
Tariff = tax on price. Quota = limit on quantity. Always give BOTH sides of globalisation in exam answers — opportunities AND threats. Link threats to specific business impacts (e.g. exchange rate risk → lower profit margins) for higher marks.
A business that has operations (factories, offices, subsidiaries) in more than one country, though it is usually headquartered in one country.
Examples: Apple (USA), Toyota (Japan), Nestlé (Switzerland), Samsung (South Korea), Shell (Netherlands/UK), McDonald’s (USA)
| Host Country | The country in which an MNC operates but which is NOT its country of origin (headquarters). |
| Repatriation of Profits | When an MNC transfers profits made in a host country back to its home country rather than reinvesting them locally. |
Benefits to a Business of Becoming an MNC
Impact on Stakeholders
| Stakeholder | Impact of Becoming an MNC |
|---|---|
| Shareholders | Higher profits from global markets → increased dividends and share value. But higher risk from operating in unstable countries. |
| Employees (home country) | Risk of job losses if production moves abroad. But management roles and HQ jobs may grow. |
| Employees (host country) | New employment opportunities. But wages may be lower than in the home country. |
| Customers | Greater product availability. Prices may fall due to lower production costs. |
| Government (home) | Loss of tax revenue and jobs if operations move abroad. But home-country brands gain global prestige. |
| Government (host) | Tax revenue and jobs gained. But risk of profit repatriation — money leaves the economy. |
Impact on the Host Country
- Creates jobs — reduces unemployment in the local area
- Increases exports and foreign exchange earnings for the country
- Technology & skills transfer — new management techniques and training
- Tax revenue for the host government
- Increased consumer choice and competition
- Infrastructure investment — roads, utilities, facilities
- Multiplier effect — MNC wages spent locally, supporting other businesses
- Local businesses lose sales to MNC competition — may close
- Profit repatriation — money leaves the economy back to home country
- Jobs may be low-paid, low-skilled or temporary
- Environmental damage — large-scale production, pollution
- Cultural displacement — local traditions and customs may be marginalised
- Footloose risk — MNC may leave if costs rise, causing sudden unemployment
- Political influence — MNC may lobby for favourable treatment
📇 MNC Scenario Flashcards
Click to reveal the answer.
Jobs created for local workers, reducing unemployment. Government receives tax revenue. New technology and management skills transferred to local workforce. Investment in local infrastructure.
Repatriation of profits. Money leaves Vietnam’s economy rather than circulating locally — reducing the multiplier effect and limiting long-term economic development in the host country.
Avoids import tariffs and quotas by producing locally. Lower production costs (cheaper labour/land). Better understanding of local markets. Faster supply to local customers. Tax advantages in host country.
A footloose MNC — one that moves easily between countries to find the lowest costs. Impact on Bangladesh: sudden unemployment, loss of tax revenue, economic hardship for the local community.
Always consider BOTH perspectives: benefits to the MNC itself AND impact on the host country — including both benefits AND drawbacks. The key tension to discuss in evaluate questions: job creation vs repatriation of profits.
The price of one currency expressed in terms of another currency.
e.g. £1 = $1.30 means one British pound buys 1.30 US dollars.
| Appreciation | When a currency INCREASES in value relative to other currencies. e.g. £1 rises from $1.20 to $1.50. |
| Depreciation | When a currency DECREASES in value relative to other currencies. e.g. £1 falls from $1.50 to $1.20. |
| Exporter | A business that sells its goods or services to buyers in other countries. |
| Importer | A business that buys goods or services from sellers in other countries. |
How Exchange Rate Changes Affect Businesses
Click each tab to see the impact of appreciation or depreciation on exporters and importers.
- Exports cheaper for foreign buyers → demand increases
- Sales volume rises — more competitive abroad
- Foreign profits convert back to more £
- Profitability improves even at same price
- Imports become more expensive → costs rise
- May need to raise prices → lose customers
- Profit margins squeezed if costs can’t be passed on
- Raw materials and components cost more
- Exports more expensive for foreign buyers → demand falls
- Less competitive abroad — may lose market share
- Foreign profits convert back to fewer £
- Profitability falls even if sales volume stays the same
- Imports become cheaper → costs fall
- Can reduce prices → attract more customers
- Profit margins improve
- Raw materials and components cheaper
Impact on Prices, Competitiveness & Profitability
| Impact Area | Explanation |
|---|---|
| Prices | If £ depreciates, imported materials cost more → production costs rise → businesses may raise prices to maintain margins, or absorb costs and reduce profit. |
| Competitiveness | Depreciation makes exports cheaper → MORE competitive abroad. Appreciation makes exports more expensive → LESS competitive. Businesses win or lose market share based on exchange rate movements. |
| Profitability | An exporter earning foreign currency finds profits worth MORE when £ is weak (depreciation) and LESS when £ is strong (appreciation) — even if sales volume stays the same. |
📊 Worked Example: UK Exporter
📇 Exchange Rate Flashcards
Click to flip.
BAD. UK goods become more expensive for foreign buyers → demand falls → UK exporter loses competitiveness and market share. Foreign profits also convert back to fewer pounds.
BAD. Imported goods cost more in £ terms → costs rise → business may need to raise prices (risk losing customers) or accept lower profit margins.
Strong Pound: Imports Cheap, Exports Dear. When the pound is strong (appreciation), imports are cheaper but exports become more expensive for foreign buyers.
Imported materials cost more → production costs rise → business may raise prices (risk losing customers) OR absorb costs (profit margins fall). Either way, profitability is under pressure.
Exchange rate calculations will NOT be assessed — focus on the direction and explanation of impact. Always link to all three: prices, competitiveness AND profitability for full marks on exchange rate questions.
World becoming more interconnected through trade, technology, transport and investment.
Larger markets, cheaper inputs, economies of scale, risk diversification, technology access.
Foreign competition, currency risk, cultural barriers, supply chain disruption, offshoring.
Tax on imports — raises price of foreign goods to protect domestic industry and generate revenue.
Limit on quantity of imports — restricts foreign competition directly.
Business with operations in more than one country. HQ in home country; operates in host countries.
Jobs, exports, tax revenue, technology transfer, infrastructure investment, multiplier effect.
Profit repatriation, local competition hit, low wages, environmental damage, footloose risk.
Profits sent back to home country — money leaves host economy, limiting local development.
Currency rises: exports dearer (BAD for exporters), imports cheaper (GOOD for importers).
Currency falls: exports cheaper (GOOD for exporters), imports dearer (BAD for importers).
Strong Pound: Imports Cheap, Exports Dear — essential exchange rate mnemonic.
BritSport manufactures cricket equipment in the UK and exports 60% of its output to South Asia and Australia. The pound has recently appreciated by 15% against major currencies.
- Knowledge (K): Exports become more expensive for buyers in South Asia and Australia (1 mark)
- Application (App): Foreign buyers need more of their own currency to buy the same £ value of goods (1 mark)
- Analysis (An): BritSport may lose sales and market share to cheaper competitors, reducing revenue and profitability (1 mark)
GlobalTech, a US technology MNC, has opened a large manufacturing plant in Vietnam. It employs 3,000 local workers and exports most of its output. However, it sends 90% of its profits back to the USA each year.
- Benefit K+App: Creates 3,000 jobs → reduces unemployment → raises local household incomes (2 marks)
- Drawback K+App: 90% of profits repatriated to USA → money leaves Vietnam’s economy → limits multiplier effect and long-term development (2 marks)
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