4.1 Globalisation Edexcel A-Level Business Study Notes

Growing Economies and Gross Domestic Product (GDP)

• Measuring Economic Growth: The growth rate of a nation is quantified by the annual percentage change in its Gross Domestic Product (GDP).
• Emerging Economies Defined: These are economies characterized by increasing growth rates but relatively low income per head, also known as income per capita.     * Examples include India, China, and Brazil.
• Comparison of Growth Rates (UK vs. Emerging Economies):     * UK growth rates are generally lower than those found in emerging economies.     * A primary driver for the faster growth in emerging economies is the expansion of their manufacturing sectors.     * Conversely, the UK has experienced a decline in its manufacturing sector as businesses relocate production to emerging economies to take advantage of lower labor costs and better access to raw materials.
• China's Growth Profile:     * China is currently the world’s largest manufacturing economy and the leading exporter of goods.     * Between $2002$ and $2021$, China's growth rate peaked at approximately $14 \%$.
• United Kingdom's Growth Profile:     * The UK growth rate peaked at approximately $4 \%$ in the year $2000$.     * Data from $2002$ to $2021$ confirms the peak remained around $4 \%$.
• Trend Analysis: A longitudinal comparison reveals that China's growth rate is consistently higher than that of the United Kingdom.

Globalisation and Emerging Economic Power

• Definition of Globalisation: Globalisation is the economic integration of distinct countries facilitated by increasing freedoms in the cross-border movement of people, goods, services, technology, and finance.
• Recent Trends: The last twenty years have been defined by rapid globalisation and the rise of economic power in less economically developed countries (LEDCs).
• Global Integration Impacts: This process has influenced national cultures, facilitated the spread of ideas, and accelerated industrialisation in developing nations.
• Regions of Emerging Economic Power: Significant growth is occurring in countries across Asia, Africa, and other developing regions.
• Country Groupings:     * BRICS: Brazil, Russia, India, China, and South Africa.     * MINT: Mexico, Indonesia, Nigeria, and Turkey.
• The Emerging Middle Class: Emerging economies possess a growing middle class with rising incomes. This demographic shift enables increased spending on both domestic products and imported goods, enhancing the profitability of international firms operating in these markets.

Implications of Economic Growth for Businesses and Individuals

• Impacts on Businesses:     * Increased Profits: Entry into new markets provides access to more customers.     * Income Elastic Demand: As incomes rise in emerging economies, consumers are more likely to purchase goods, leading to higher sales, revenue, and profits.     * Reduced Production Costs: Businesses benefit from cheaper raw materials and lower labor costs when operating in emerging nations.     * Trade Opportunities: Growing demand naturally increases international trade prospects.     * Investment Growth: Expansion-driven businesses are more likely to invest internally, and there is a parallel increase in Foreign Direct Investment (FDI).
• Impacts on Individuals:     * Reduced Unemployment: Increased output demand requires more labor.     * Rising Average Incomes: Employment leads to higher incomes and an improved standard of living.     * Public Service Access: Higher economic activity generates more tax revenue, allowing governments to improve the quantity and quality of public services.

Key Indicators of Economic Growth

• GDP per Capita: Calculated by dividing the total output (GDP) of a country by its total population.     * High GDP per capita is typically linked to a high standard of living.     * It is used to track improvements over time and to compare growth between different countries.
• Health Indicators: Essential for businesses assessing the quality of a potential workforce.     * Key metrics include average life expectancy, infant mortality rate, access to healthcare, and access to clean water.
• Literacy Rates: Refers to the percentage of adults in an economy who can read and write.     * Literacy determines workforce quality and helps businesses understand their target consumer base.     * According to the OECD’s $2016$ International Adult Literacy Survey, differences in average skill levels explain $55 \%$ of the differences in economic growth among OECD countries.
• Human Development Index (HDI):     * Developed by the United Nations, this index measures development quality on a scale from $0$ to $1$ (with $1$ being the highest).     * It combines three specific factors: Life expectancy, education (mean years of schooling), and income (Gross National Income or GNI per capita).     * Limitations of HDI: It does not account for internal inequalities within a country and can be hampered by a lack of reliable data in certain regions.

International Trade and Business Growth Strategies

• Imports and Exports:     * Imports: Goods and services bought by one country from another. In $2022$, the UK’s largest import was cars, valued at approximately $£3.25\text{bn}$.     * Exports: Goods and services sold by domestic businesses to foreign entities. In $2022$, China’s largest export was smartphone manufacturing, valued at approximately $\$21.4\text{bn}$.     * Economic Effect: Exports generate revenue for domestic firms; imports result in money leaving the country and generating revenue for foreign firms.
• Specialisation and Competitive Advantage:     * Specialisation: Occurs when a country or business focuses on a narrow range of goods/services (e.g., Apple in tech; Ghana in cocoa and gold).     * Benefits: Increased quality and quantity of output; lower unit costs through economies of scale; higher profit margins or lower consumer prices; ability to export excess output.     * Competitive Advantage: Gaining an edge over rivals by increasing value added or securing exclusive access to markets, resources, and materials.
• Foreign Direct Investment (FDI):     * Defined as investment by foreign firms resulting in at least a $10 \%$ ownership share in a domestic company.     * Growth Mechanisms: FDI often takes the form of mergers, takeovers, partnerships, or joint ventures (e.g., the formation of EE in $2012$ as a joint venture between Orange [France] and T-Mobile [Germany]).     * Inward FDI: Investment from abroad into the local economy (e.g., the $2017$ Kenya Standard Gauge Railway line funded by Chinese investors).     * Outward FDI: A domestic business expanding operations into a foreign country (e.g., Dyson moving manufacturing from the UK to Malaysia, China, and the Philippines).

Factors Contributing to Increased Globalisation

• Trade Liberalisation: The removal or reduction of trade barriers.     * Benefits: Increased market size and economies of scale; lower costs for imported raw materials.     * Drawbacks: Infant industries may struggle to compete; risk of "dumping" (foreign firms selling excess products at unfairly low prices).
• Political Change: Shifts in government attitudes toward trade (e.g., China joining the World Trade Organisation in $2001$).
• Reduced Transport and Communication Costs:     * Innovation in containerisation on large ships has created economies of scale.     * Technological advancements in internet and mobile technology have streamlined connections between buyers and sellers.
• Significance of Transnational Companies (TNCs): TNCs operate in multiple countries with branches worldwide while maintaining a central headquarters (e.g., Nike, headquartered in Oregon, USA, with $1,046$ retail stores globally as of $2022$).
• Migration: Increased movement of people due to transportation improvements and deregulation. In $2022$, the UAE had the highest immigrant proportion at $88 \%$.
• Growth of Global Labour Force: Driven heavily by India and China.     * Results: Greater global demand, falling wages (reducing business costs), and increased entrepreneurship.
• Structural Change: The shift in a country's dominant industry sector (e.g., the UK shifting from manufacturing to the tertiary/service sector over the last $50$ years). Offshoring is a common driver of this change.

Protectionism: Tariffs, Quotas, and Barriers

• Protectionism Definition: Government actions designed to protect domestic industries from foreign competition.
• Tariffs: A tax on imported goods.     * Example: Tennis rackets imported to the UK from China face a $4.7 \%$ tariff.     * Mechanism: Increases the price of imports to shift demand toward domestic products (e.g., US tariffs on British cheese make American cheese more attractive to US consumers).     * Benefits: Protects infant industries, generates tax revenue, reduces dumping.     * Disadvantages: Increases costs of imported raw materials, reduces domestic competition and efficiency, limits consumer choice.     * Clarification: The domestic importing company, not the foreign company, pays the tariff.
• Import Quotas: A physical limit on the quantity of a product allowed into a country.     * Example: China’s quota on Cambodian rice is approximately $5.32\text{m}$ tonnes per year.     * Benefits: Protects domestic market share, reduces unemployment through domestic hiring, less confrontational than tariffs.     * Disadvantages: Supply limits lead to price increases, potential for trade tension, domestic inefficiency over time.
• Government Legislation: Laws restricting imports to protect health or safety.     * Example: The UK ban on US chicken imports due to chlorine washing practices.
• Domestic Subsidies: Payments to domestic businesses to lower production costs.     * Example: Post-Brexit UK solar/agricultural subsidies to farmers.     * Benefits: Helps firms grow and stay competitive; job protection.     * Drawbacks: Risk of retaliation; can foster business inefficiency.

Trading Blocs and Their Impact

• Definition: A group of countries forming an agreement to reduce or eliminate protectionist measures between them, leading to "trade creation."
• Major Blocs:     * European Union (EU): Economic union formed in $1993$. As of Feb $2023$, it had $28$ countries. Features free movement of goods/people and common external tariffs. The UK left in $2020$.     * Association of Southeast Asian Nations (ASEAN): Formed in $1967$; had $10$ members by Feb $2023$. It is a free trade area but does not permit free movement of people.     * USMCA (formerly NAFTA): Agreement between the USA, Mexico, and Canada established in $1994$ (renamed in $2018$). Encouraged US manufacturing relocation to Mexico for lower wages, with tariff-free re-entry into the USA.
• Impact on Businesses (Inside vs. Outside):     * Outside: Faces higher costs, tariff barriers, and stringent legal requirements, leading to reduced sales volume.     * Inside (Benefits): Access to a wider market; external tariff walls (protection from non-members); infrastructure support; free movement of labor (wider pool of workers, potentially lower wages).
• Drawbacks for Businesses Inside the Bloc:     * Increased Competition: Small businesses may struggle; large firms may increase monopoly power (e.g., Aldi and Lidl entering the UK supermarket industry).     * Common Regulations: Compliance with unified rules (e.g., EU Working Time Directive limiting work to $48$ hours per week).     * Retaliation: Non-member countries may retaliate against external tariffs.     * Inefficiency and Trade Diversion: Less competition from the outside can reduce the incentive for efficiency. Trade is diverted from efficient non-member producers to less efficient member producers.