the importance of international trading links and their impact on business and business decisions

6.1 External Influences – International

Objective

To understand why international trading links are vital for modern business and how political, legal, economic, social, technological, environmental and competitive influences shape strategy and decision‑making.

1. What is International Trade?

• International trade: exchange of goods, services and ideas across national borders.
• Globalisation: increasing inter‑dependence of economies through trade, investment, migration and technology.
• Trade links: formal links (free‑trade agreements, customs unions, common markets) and informal links (cultural ties, diaspora networks, historic relationships) that facilitate or constrain trade.

2. Political & Legal Influences

• Government policies
  • Privatisation – selling state‑owned enterprises to private owners.
  • Nationalisation – government takeover of private firms (e.g., strategic utilities).
  • Export subsidies – financial support to make exports cheaper.
  • Import licences & quotas – permission or limits on quantities that can be imported.
• Trade regulations
  • Tariffs – taxes on imported goods.
  • Anti‑dumping duties – extra tariffs to counter selling below cost.
  • Quotas and non‑tariff barriers (technical standards, sanitary measures).
  • Customs procedures – documentation, valuation and clearance requirements.
• Legal frameworks
  • Health & safety and product standards (e.g., CE marking, US FDA).
  • Intellectual‑property rights – patents, trademarks, copyrights.
  • Sanctions & embargoes – prohibitions on trade with particular countries (e.g., Iran sanctions).
  • Regulatory divergence – differences between major blocs (EU vs. US data‑privacy rules, post‑Brexit UK standards).
• Example – Brexit: UK’s departure from the EU created separate regulatory regimes, new customs checks and additional compliance costs for firms exporting to Europe.

3. Economic Influences

• Macro‑economic objectives – growth, full employment, price stability; they affect consumer purchasing power abroad.
• Government intervention to correct market failure
  • Subsidies for renewable energy to overcome negative externalities.
  • Tax incentives for research & development.
• Fiscal & monetary policy
  • Tax rates, public spending, interest rates – influence investment decisions and cost of finance.
• Exchange‑rate regimes
  • Fixed (e.g., Hong Kong USD peg)
  • Floating (e.g., GBP)
  • Managed float (e.g., China’s RMB)

  Volatility can erode profit margins; firms may need hedging strategies.

• Economic cycles – recessions or booms in key export markets can force firms to diversify geographically.

4. Social & Demographic Influences

• Cultural norms – language, religion, values shape product positioning, branding and advertising.
• Demographic change
  • Local – ageing population, urbanisation.
  • National – shifting income distribution, migration.
  • Global – emerging middle class in Asia and Africa.
• Community pressure & CSR
  • Ethical sourcing, fair‑trade, environmental stewardship.
  • Local community expectations (e.g., “green” manufacturing).
• Example – Japanese consumers’ preference for compact, high‑quality electronics drives UK exporters to redesign product dimensions and packaging.

5. Technological Influences

• Information & Communication Technology (ICT) – e‑commerce platforms, digital payment systems and cloud services enable direct sales to overseas customers.
• Automation & AI – lower production costs, improve quality, make off‑shoring more attractive.
• R&D collaboration – joint research projects with foreign universities or multinational R&D centres accelerate innovation.
• Technology transfer – sharing of manufacturing processes, software or patents between partner firms.

6. Environmental Influences

• Regulatory standards – emissions limits, waste‑management directives (e.g., EU Green Deal), product‑eco‑labeling.
• Resource scarcity – pressure to source sustainable raw materials (e.g., responsibly sourced timber).
• Consumer expectations – growing demand for “green” products can be a market entry advantage.

7. Competitive & Supplier Influences

• Global competition – multinational rivals may have cost, brand or technology advantages.
• Supplier reliability – political instability, natural disasters or trade restrictions in supplier countries increase supply‑chain risk.
• Strategic sourcing – diversification of suppliers, dual‑sourcing and near‑shoring to mitigate disruption.

8. International Trade Agreements & Organisations

Multinational Enterprises (MNEs) – firms that own or control production facilities in more than one country. Advantages: economies of scale, local market knowledge, risk diversification. Disadvantages: complex management, cultural clashes, exposure to multiple regulatory regimes.

9. Benefits of International Trading Links

10. Risks & Challenges

• Exchange‑rate volatility – can turn projected profits into losses.
• Trade barriers – tariffs, quotas, anti‑dumping duties and non‑tariff measures increase cost and reduce competitiveness.
• Political instability – sudden policy shifts, sanctions or civil unrest disrupt operations.
• Sanctions & embargoes – restrict trade with specific countries, requiring careful compliance.
• Cultural differences – mis‑interpretation of advertising, product features or negotiation styles.
• Logistical complexities – longer supply chains, higher inventory holding, risk of delays.
• Environmental compliance – meeting stricter standards may require redesign or additional certification.

11. Strategic Tools for Analysing International Opportunities

• PEST analysis – examines Political, Economic, Social and Technological factors in a target market.
• Porter’s Five Forces (International version) – assesses competitive rivalry, threat of new entrants, bargaining power of buyers & suppliers, and threat of substitutes in the foreign industry.
• Ansoff’s Matrix (Market Development) – decides whether to enter a new market with existing products or develop new products for that market.
• SWOT analysis – combines internal strengths/weaknesses with external opportunities/threats specific to the overseas environment.

12. Impact on Business Decisions

When evaluating an international opportunity, firms must integrate the influences above into the following decision areas.

1. Market entry strategy – export, licensing, franchising, joint venture, wholly‑owned subsidiary (see Table 2).
2. Pricing policy – cost‑plus, market‑oriented or competitive pricing; adjustments for exchange rates, tariffs, local purchasing power and tax regimes.
3. Product adaptation – changes to meet local regulations, cultural preferences, climate conditions or certification requirements.
4. Supply‑chain management – sourcing location, inventory strategy, transport mode, and risk‑mitigation (e.g., dual‑sourcing, near‑shoring).
5. Financial planning – funding overseas operations, hedging currency risk, managing repatriation of profits, and accessing export credit guarantees.

Table 2 – Choosing an Entry Mode

13. Case Study Snapshot – EcoTech Ltd.

Background: UK‑based renewable‑energy manufacturer expanding into Germany.

• Entry mode: Joint venture with a German engineering firm.
• Key international links:
  • Access to German green‑technology subsidies.
  • Local manufacturing reduces transport costs and carbon footprint.
  • Shared R&D accelerates product innovation.

Decisions influenced by international factors:

1. Product adaptation – redesign solar panels to meet German certification (DIN) and aesthetic preferences.
2. Pricing – set Euro‑based prices after analysing six‑month forward EUR/GBP rates and adding a risk premium.
3. Supply‑chain – source silicon wafers from Taiwan for cost competitiveness, while keeping a backup supplier in South Korea.
4. Financial planning – use forward contracts to hedge EUR/GBP exposure and obtain a UK‑government export‑credit guarantee.

14. Summary

International trading links are a pivotal external influence for modern businesses. Political, legal, economic, social, technological, environmental and competitive forces shape the attractiveness of foreign markets and dictate the choice of entry mode, pricing, product design, supply‑chain configuration and financial strategy. Successful firms apply analytical tools (PEST, Porter, Ansoff, SWOT) to balance the significant benefits—market growth, resource access, economies of scale, risk diversification—against challenges such as currency fluctuation, regulatory divergence, cultural differences and supply‑chain complexity.

15. Suggested Activities

1. Research a recent free‑trade agreement (e.g., CPTPP) and discuss its likely impact on a UK‑based consumer‑electronics company.
2. Conduct a PEST analysis for a business considering entry into the Brazilian market, highlighting the most critical factor.
3. Perform a SWOT analysis for a UK fashion retailer planning to export to the Middle East, focusing on cultural and economic elements.
4. Simulate currency‑risk management: calculate how a 5 % depreciation of the GBP against the EUR would affect projected profits from a €10 million export contract.
5. Role‑play a negotiation between a UK firm and a potential joint‑venture partner in India, emphasising legal, cultural and financial considerations.