opportunities and threats of globalisation for businesses

6.2 External Influences – Globalisation

1. What is Globalisation?

Globalisation is the process by which businesses and markets operate on an international scale, allowing goods, services, ideas, capital and technology to move freely across national borders.

2. Why Globalisation Is Happening – Main Drivers

• Technological advances – faster communications, the internet and sophisticated information systems.
• Reduced transport costs – cheaper air, sea and road freight.
• Trade liberalisation – removal of tariffs and quotas through WTO agreements and regional trade blocs.
• Deregulation & privatisation – opening previously protected industries to competition.
• Growth of multinational companies (MNCs) – firms seeking new markets, resources and efficiencies.
• Consumer demand for variety – desire for foreign brands and products.

3. Government Protection – Tariffs and Quotas

Governments may use protectionist measures to achieve economic objectives such as protecting domestic employment, supporting infant industries or improving the balance of payments.

• Tariff – a tax on imported goods that raises their price, making domestic alternatives more competitive. Example: the UK imposes a 25 % tariff on imported steel to support its domestic steel manufacturers.
• Quota – a limit on the quantity of a good that can be imported, directly protecting domestic producers.

4. Opportunities and Threats of Globalisation for Businesses

4.1 Opportunities (Cambridge terminology)

• Market expansion – access to larger, overseas customer bases.
• Economies of scale & lower production costs – larger output reduces average cost per unit; off‑shoring to low‑wage countries.
• Access to resources – raw materials, technology and specialised skills not available locally.
• Innovation and knowledge transfer – exposure to international best practice stimulates product development.
• Risk diversification – operating in several markets reduces dependence on a single economy.
• Strategic asset seeking – acquisition of brands, patents or distribution networks abroad.

4.2 Threats (Cambridge terminology)

• Foreign competition – overseas firms entering the domestic market, leading to price pressure.
• Exchange‑rate volatility – fluctuations in currency values affect import costs and export revenues.
• Political, legal and regulatory risk – unstable governments, trade barriers, differing standards.
• Supply‑chain vulnerabilities – dependence on distant suppliers can cause delays or shortages.
• Cultural mis‑alignment – products or marketing that do not suit local tastes.
• Ethical and environmental concerns – pressure to cut costs may lead to poor labour standards or pollution, risking reputation.

4.3 Comparative Overview

5. Exchange‑Rate Changes – Definitions and Business Impact

Depreciation – a fall in the value of the home currency relative to foreign currencies (e.g., £1 falls from $1.30 to $1.10).
Appreciation – a rise in the value of the home currency relative to foreign currencies.

5.1 Impact on Export‑oriented Firms

• Depreciation makes exports cheaper for foreign buyers → demand may rise → higher export revenue.
• Appreciation makes exports more expensive → foreign demand may fall → lower export revenue.

5.2 Impact on Import‑oriented Firms

• Depreciation makes imports more expensive → cost of imported raw materials or components rises → profit margins can be squeezed.
• Appreciation makes imports cheaper → input costs fall → profit margins may improve.

5.3 Simple Illustration (UK importer of US‑made electronics)

• At £1 = $1.30, a $1,000 gadget costs £769.
• After depreciation to £1 = $1.10, the same gadget costs £909 – a £140 increase in cost.

6. Multinational Companies (MNCs)

MNCs are firms that operate in more than one country. Their growth is driven by three main motives (Cambridge terminology):

• Market‑seeking – to sell in new overseas markets.
• Resource‑seeking – to obtain raw materials, cheaper labour or specialised skills.
• Efficiency‑seeking – to achieve economies of scale, lower production costs and improve profitability.

6.1 Benefits to the Home Country

• Higher profits repatriated home.
• Technology transfer and improved managerial expertise.
• Employment in overseas subsidiaries (e.g., expatriate staff).

6.2 Benefits to the Host Country

• Foreign direct investment (FDI) and capital inflow.
• Job creation and skill development.
• Tax revenues and contribution to the balance of payments.

7. Business‑Cycle Stages and Their Impact on Firms (6.1.1)

The business cycle has four recognised stages:

1. Growth – rising output and employment; demand for exports often increases.
2. Boom – output near capacity; inflationary pressures may lead to exchange‑rate appreciation.
3. Recession – falling output and rising unemployment; foreign demand may contract, hurting exporters.
4. Slump – prolonged low activity; firms may cut overseas investment and focus on domestic survival.

Example: A UK retailer during a global recession may see reduced sales in its overseas stores, prompting cost‑cutting measures such as renegotiating supplier contracts.

8. Government Economic Objectives (6.1.2) and Related Policy Tools

Cambridge requires knowledge of the four main objectives and how they influence global business.

• Growth – policies: subsidies for export‑oriented firms, tax incentives for R&D, infrastructure investment.
• Full employment – policies: protectionist tariffs, public‑sector job programmes, training schemes.
• Price stability – policies: interest‑rate adjustments, exchange‑rate interventions, monetary‑policy targeting inflation.
• Balance of payments – policies: import quotas, export promotion grants, exchange‑rate controls.

9. Ethical & Environmental Dimensions (6.3)

• Externalities – production abroad can generate negative spill‑over effects (pollution, waste) not reflected in market prices.
• Sustainable development – meeting present needs without compromising future generations (e.g., renewable energy, carbon‑reduction targets).
• Legal controls – international conventions (Kyoto Protocol), EU directives and host‑country regulations set minimum standards.
• Reputational risk – poor labour practices or environmental damage can lead to consumer boycotts, loss of brand value and reduced sales.

10. Case Study – UK Clothing Retailer Expanding Globally

A UK‑based retailer decides to source fabrics from Bangladesh and open stores in the Middle East.

10.1 Opportunities

• Fabric costs are ~40 % lower than in the UK – improves gross margin (economies of scale & lower production costs).
• Middle‑East stores tap a market with high disposable income – market expansion.
• Learning local fashion trends enhances product design – innovation & knowledge transfer.
• Operating in two regions diversifies risk – risk diversification.
• Acquisition of a regional distribution network provides strategic asset seeking.

10.2 Threats

• Political instability in Bangladesh could disrupt supply – political & supply‑chain risk.
• Fluctuating pound‑to‑dollar rates affect fabric costs – exchange‑rate volatility.
• Cultural differences require adapted marketing – cultural mis‑alignment.
• Negative press about labour standards in Bangladesh may damage brand reputation – ethical & reputational risk.
• Potential UK tariffs on imported textiles could raise costs – protectionist policy.

11. Key Points to Remember

• Globalisation creates both opportunities (market expansion, economies of scale, access to resources, innovation, risk diversification, strategic asset seeking) and threats (foreign competition, exchange‑rate volatility, political/legal risk, supply‑chain vulnerability, cultural mis‑alignment, ethical/environmental risk).
• Governments may use tariffs, quotas or other measures to protect domestic employment, infant industries and the balance of payments.
• Depreciation makes exports cheaper and imports more expensive; appreciation has the opposite effect. Firms often use hedging to manage exchange‑rate risk.
• MNCs grow for market‑seeking, resource‑seeking and efficiency‑seeking reasons and bring benefits to both home and host economies.
• The stage of the business cycle influences export demand and cost pressures; awareness of macro‑economic trends is essential for strategic planning.
• Four government economic objectives – growth, full employment, price stability, balance of payments – shape policies that affect global business.
• Ethical and environmental considerations are increasingly important; sustainable sourcing and compliance with legal standards protect reputation and long‑term profitability.
• Effective global strategies rely on thorough market research, risk assessment, local partnerships and continuous monitoring of political, economic and cultural changes.