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

Glocalisation

The adaptation of global products or services to suit local markets, considering cultural and regional preferences —> think global, act local

Ethnocentric approach

Treating an overseas market like its domestic market, making no adaptations to its marketing

Pros and cons of ethnocentric approach

Pros:

• Economies of scale

• Lower costs due to less market research needed

Cons:

• The product may not be suited to global markets

• Local brands may be more popular

Polycentric approach

Businesses adapt its marketing and branding to tailor its products to each market e.g. KitKat wasabi in Japan

Pros and cons of polycentric approach

Pros:

• Higher sales

• Improved customer satisfaction

• Improved loyalty

Cons:

• Expensive

• Inconsistencies in branding due to decentralised approach

Geocentric approach

A balanced approach where a business adapts aspects of marketing to meet local needs while maintaining consistent global branding e.g. McDonald’s

Pricing in global markets

Pricing is adjusted based on levels of income in regions and the cost of production

Adjusting products in global markets

Products may need to be adjusted to meet the cultural needs of a market (geo/poly/ethno)

Promotion in global markets

Promotion needs to be adapted to match the language of consumers without causing offence

Place in global markets

Adapting distribution channels to the way consumers buy products e.g. online shopping or physical stores

Cultural diversity

Recognising the ideas, customs and behaviours of groups in society in a global market —> businesses need to take into account these cultural differences