Business and the International Economy

Globalisation and International Trade

Globalisation is defined as the increase in worldwide trade and the movement of people and capital across international borders. This process is driven by free trade agreements, which allow countries to trade with no barriers such as tariffs or quotas, as well as improved travel links and advanced communication through e-commerce. Additionally, the rapid industrialisation of developing and emerging countries has contributed to the export of large volumes of goods and services globally.

Businesses can leverage globalisation to increase sales and profits by entering new foreign markets and accessing cheaper materials and labour. However, this environment also presents significant threats, particularly through increased competition from foreign firms that may offer higher quality or cheaper products. Domestic firms may also struggle with employee retention as workers leave for better pay and conditions offered by international competitors.

Protectionism and Government Intervention

Protectionism occurs when a government introduces trade barriers to protect domestic firms from foreign competition. The primary tools used are import tariffs, which are taxes on imported goods, and import quotas, which are physical limits on the quantity of goods allowed into a country. While these measures help local businesses remain viable, they generally reduce the competitiveness of the market, limit free trade, and slow the overall pace of globalisation by making foreign products more expensive for consumers.

Multinational Companies (MNCs)

Multinational businesses, also known as transnational businesses, are firms that maintain operations in more than one country. Companies choose to become multinationals to lower production costs, extract raw materials, and position production closer to their target markets to avoid transport costs and trade barriers. Operating in multiple regions also allows a firm to spread its risks and remain competitive against global rivals.

For a host country, the presence of an MNC can provide more jobs, an increase in GDP, new technology, and increased tax revenue for the government. Conversely, there are potential drawbacks, such as the exploitation of unskilled workers and the depletion of scarce non-renewable resources. Local firms may also fail to survive against the economies of scale enjoyed by MNCs. Furthermore, the repatriation of profits—sending earnings back to the home country—can limit the economic benefits for the host nation.

Exchange Rate Impacts

The exchange rate identifies the price of one currency in terms of another. An increase in the value of a currency is referred to as appreciation, while a decrease is known as depreciation. These fluctuations significantly impact the profitability and competitiveness of businesses involved in international trade.

Currency depreciation means a currency buys less of another than before. This makes imports more expensive, increasing total costs and reducing profits for local businesses. However, it makes exports cheaper for foreign customers, which typically increases demand, total revenue, and total profits. In contrast, currency appreciation makes imports cheaper, lowering costs for businesses. However, it makes exports more expensive for foreign customers, often leading to a fall in demand and total revenue.