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.