Theme 4

What is FDI?

Foreign direct investment - when a company sets up a new business abroad

How can FDI enable a firm to grow?

• Removes problems exporting

• Reduces transport costs

• Avoids trade barriers

• Access to natural resources = less production costs

• Lower operating costs

Globalisation

Trends towards closer economic, political and cultural ties between countries

What is trade liberalisation?

When governments decide to remove international trade barriers such as tarriffs, quotas and regulations

Opportunities created by trade liberalisation?

• Price of imports will decrease - reducing variable costs for domestic businesses

• Higher profit margins for domestic businesses

• Increased market access to sell products abroad

Threat created by trade liberalisation?

Opens up domestic markets to foreign competition

Factors contributing to increased globalisation

1. Trade liberalisation

2. Political change

3. Reduced transport/communication costs

4. Increased significance of MNCs

5. Migration

6. Growth of the global labour force

Protectionism

Protecting domestic firms by making it harder for foreign companies to export to your country

Pros and cons of tariffs

Pros:

• Help inefficient firms and their suppliers to survive

• General public benefit from increased tax revenue

Cons:

• Imported goods are more expensive for consumers

• Less innovation

Pros and cons of import quotas

Pros:

• Less foreign competition for firms

• More dividends and higher share prices

Cons:

• Limit consumer choice

• Make products more expensive

• Less innovation

Pros and cons of legislation

Pros:

• Less foreign competition for firms

• Higher profits for shareholders

Cons:

• May cause retaliation

Pros and cons of subsidies

Pros:

• Lowers consumer prices

• Preserves jobs in uncompetitive industries

Cons:

• Higher taxation

• Inefficiency if firms rely on them

Trading bloc

A group of countries that agree to reduce or remove trade barriers such as tariffs, quotas and regulations

Benefits of trading blocs

• Protection from foreign firms

• Increased efficiency due to competition in the bloc

EU single market

1. Free movement of goods

2. Free movement of services

3. Free movement of capital

4. Free movement of people

NAFTA

USA + Canada + Mexico

Created more jobs in Mexico (cheaper labour)

Push factors

Negative reasons that drive a business out of a market and into a new international market

1. Saturated markets

2. Competition

3. End of product life cycle

Pull factors

Attractive reasons that draw businesses into new international markets

1. Economies of scale —> improved profit margins

2. Spread risks across different markets/countries

3. Offshoring

Offshoring

When a business relocates operations such as production or logistics to a foreign country in order to reduce labour costs and get a specialised workforce

Outsourcing

When a company uses external companies to perform specific operations or tasks instead of managing them internally

Factors to consider in market attractiveness

• Levels and growth of disposable income

• Ease of doing business

• Quality of infrastructure

• Political stability

• Exchange rates

Disposable income

The money left after paying taxes and essential bills

Ease of doing business

How simple it is for firm to start, operate and grow in a country (taxes, regulations etc)

Infrastructure

Physical and organisational structures in a country e.g. transport, internet and education levels

Factors to consider for a production location

• Skills and availability of workforce

• Infrastructure

• Location in a trading bloc

• Natural resources

• Ease of doing business

• ROI

Reasons for global mergers/joint ventures

• Spreading risk

• Entering new markets or trading blocs

• Securing resources/supplies e.g. backward vertical integration