Business and globalisation

What is globalisation?

Globalisation is the process by which businesses, economies, and cultures become increasingly interconnected and interdependent across the world. It has been driven by:

• Improvements in transport (cheaper air/sea freight).
• The internet enabling instant global communication and online trade.
• Reduction of trade barriers (e.g. WTO agreements, EU single market — though the UK left in 2021).
• Growth of multinational corporations.

International trade: exporting and importing

Exporting: selling goods or services to customers in other countries. Importing: buying goods or services from businesses in other countries.

Benefits of exporting for a UK business:

• Access to a larger market — 67m UK consumers vs 8 billion globally.
• Reduces dependence on the UK market (diversification).
• Can exploit a product that is at the maturity or decline stage in the UK but still new in other markets.

Challenges of exporting:

• Currency risk (exchange rate fluctuations).
• Different consumer tastes and regulations in each country.
• Higher logistics costs.
• Language and cultural barriers.

Exchange rates

An exchange rate is the price of one currency expressed in terms of another. Example: £1 = €1.17 (as of mid-2024).

Impact of a strong pound (£ appreciates):

• UK exports become more expensive abroad → fewer exports (bad for exporters).
• UK imports become cheaper → consumers and businesses import more (good for importers). Mnemonic: SPICED — Strong Pound, Imports Cheaper, Exports Dearer.

Impact of a weak pound (£ depreciates):

• UK exports become cheaper abroad → more exports (good for exporters like Rolls-Royce, Diageo).
• Imports become more expensive → higher input costs for businesses that rely on imported materials (bad for importers).

Tariffs and trade barriers

A tariff is a tax imposed on imported goods, making them more expensive to protect domestic businesses from foreign competition.

Impact of a tariff on a UK importer: raises the cost of imported raw materials → increases production costs → may be passed on to customers as higher prices.

Impact of a tariff on a foreign exporter targeting the UK: their goods become more expensive in the UK market → they may lose sales unless they absorb the tariff cost.

Post-Brexit, the UK imposed tariffs on some EU goods and EU imposed tariffs on UK goods — affecting UK manufacturers that relied on EU supply chains.

Multinational corporations (MNCs)

A multinational is a business that operates in more than one country. Examples: Unilever (UK/Netherlands), Shell, HSBC, McDonald's, Apple.

Benefits of MNCs to the UK host country:

• Job creation.
• Technology and knowledge transfer.
• Tax revenue.
• Infrastructure investment.

Drawbacks of MNCs:

• Profit repatriation: profits may be sent back to the home country rather than reinvested locally.
• Tax avoidance: MNCs may use transfer pricing to minimise UK tax liability.
• Cultural homogenisation: local businesses and cultures can be displaced.
• Environmental concerns: lower environmental standards may be exploited.

Edexcel examiner note

Exchange rate questions almost always include a data stimulus (e.g. "£1 = $1.28 in 2022; £1 = $1.22 in 2023"). You must calculate the impact on revenue/costs and state whether this is beneficial or detrimental to the specific business described.