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Globalisation and Multinational Companies Overview

May 15, 2025

6.3 Business and the International Economy

Table of Contents

  1. The Importance of Globalisation
    • The concept of globalisation and the reasons for it
    • Opportunities and threats of globalisation for businesses
    • Why governments might introduce import tariffs and import quotas
  2. Reasons for the Importance and Growth of Multinational Companies (MNCs):
    • Benefits to a business of becoming a multinational and the impact on its stakeholders
    • Potential benefits to a country and economy where an MNC is located
    • Potential drawbacks to a country and economy where an MNC is located
  3. Impact of Exchange Rates
    • Depreciation and appreciation of an exchange rate
    • How exchange rate changes can affect businesses as importers and exporters

6.3.1 The Importance of Globalisation

Concept of Globalisation

  • Definition: Increased interconnectedness and worldwide movement of goods, services, capital, and people.
  • Examples:
    • Half of the world's products made in China.
    • Global brands (Apple, Toyota, Coca-Cola, McDonald's) available worldwide.
    • Services like Google, Netflix, and HSBC operate globally.
    • Capital and people also move globally, exemplified by China's Belt and Road initiative.

Opportunities and Threats of Globalisation for Businesses

  • Opportunities:
    • Expand products and services internationally.
    • Increased investment from MNCs entering home markets.
    • Lower production costs by manufacturing abroad.
  • Threats:
    • Increased competition in home markets.
    • Possible damage to brand image due to quality control or workers' rights issues.

Government Interventions

  • Import Tariffs: Taxes on imports to protect domestic industries (e.g., Toyota in Indonesia).
  • Import Quotas: Limits on imports (e.g., China's cotton import limits from the USA).
  • Trade Wars: Escalating tariffs and quotas between countries.

6.3.2 Importance and Growth of Multinational Companies (MNCs)

Benefits of Becoming an MNC

  • Profitability and Scale:
    • Significant revenue surpassing some national GDPs.
    • Economies of scale reduce costs and spread R&D expenses.
  • Market Access:
    • Bypass tariffs by operating in target markets (e.g., Tesla in China).
    • Diversification reduces risk (e.g., Coca-Cola’s global operations).

Impact on Host Countries

  • Benefits:
    • Investment and job creation (e.g., tech giants in Ireland).
    • Greater consumer choice and improved services.
  • Drawbacks:
    • Difficulties for local businesses competing with MNCs.
    • Profit repatriation instead of local reinvestment.
    • Tax avoidance strategies reducing local tax revenues.

6.3.3 Impact of Exchange Rates

Understanding Exchange Rates

  • Exchange Rate: Determines the value of currencies relative to each other.
  • Example: Comparing the cost of goods between countries using exchange rates.

Depreciation and Appreciation

  • Depreciation: Currency loses value compared to others.
  • Appreciation: Currency gains value compared to others.

Effects on Businesses

  • Depreciation:
    • Import prices rise, increasing production costs.
    • Export prices fall, potentially boosting sales abroad.
  • Appreciation:
    • Import prices fall, reducing production costs.
    • Export prices rise, potentially reducing competitiveness abroad.