Overview
This lecture covers the importance of globalization, the growth and impact of multinational companies (MNCs), and the effect of exchange rate changes on businesses.
Globalization: Definition and Drivers
- Globalization is the free movement of goods, services, and people worldwide in an integrated way.
- Key drivers include free trade agreements, cheaper transport, improved communication (like the internet), and industrialization in emerging countries.
- Globalization increases international trade and business opportunities.
Advantages and Disadvantages of Globalization
- Allows businesses to access foreign markets, increase sales, and profits.
- Enables companies to produce or source products more cheaply due to lower labor and material costs in other countries.
- Increases competition for domestic firms, which may force some local businesses to close.
- Leads to potential job losses and pressure to increase wages and benefits.
Business Opportunities & Impacts from Globalization
- Exporting to foreign countries increases sales but may incur high costs and uncertain demand.
- Setting up operations abroad can reduce costs but may raise quality and ethical concerns.
- Importing goods can be more profitable but relies on reliable suppliers.
- Sourcing materials globally can lower costs but adds transport and reliability risks.
Protectionism
- Protectionism protects domestic industries from foreign competition, often through tariffs and import quotas.
- Tariffs are taxes on imported goods; quotas limit the quantity of imports.
- While protectionism supports local firms, it reduces free trade and can limit globalization.
Multinational Companies (MNCs)
- MNCs operate facilities in more than one country and coordinate from a central head office.
- Benefits for businesses include lower production costs, access to raw materials, proximity to markets, and risk diversification.
- MNCs avoid trade barriers when producing goods in foreign markets.
Impact of Multinationals on Host Countries
- Advantages: create jobs, increase GDP, transfer technology, boost government tax revenue, and offer more product choices.
- Disadvantages: jobs may be low-skilled, locals may face exploitation, local firms may struggle to compete, and profits may be sent abroad.
- MNCs can influence government policies due to their size and power.
Exchange Rate Changes
- Exchange rate = value of one currency expressed in another.
- Fixed exchange rate: currency value set to another currency; floating rate: changes according to market conditions.
- Depreciation: currency loses value; appreciation: currency gains value.
- Appreciation helps importers; depreciation helps exporters but harms importers.
Key Terms & Definitions
- Globalization — the integration of world economies through the free movement of goods, services, and people.
- Free Trade Agreement — deals between countries that remove tariffs and quotas on trade.
- Protectionism — government actions to restrict imports and protect domestic industries.
- Tariff — a tax on imported goods.
- Import Quota — a limit on the amount of specific goods that can be imported.
- Multinational Company (MNC) — a business with operations in multiple countries.
- Exchange Rate — the price of one currency in terms of another.
- Appreciation — an increase in the value of a currency.
- Depreciation — a decrease in the value of a currency.
Action Items / Next Steps
- Answer these questions for review:
- Why is globalization important?
- Why might governments introduce import tariffs and quotas?
- What is a multinational business?
- What are the benefits of multinational businesses to a country?
- Explain depreciation and appreciation of an exchange rate.