Business in a global economy
Businesses increasingly buy, sell, and produce across borders. Global trade brings opportunities and risks.
Why businesses go global
Businesses expand internationally to reach new customers, lower costs, access resources and talent, and spread risk across markets. Large firms such as Apple, Toyota, and Unilever earn most of their revenue outside their home countries.
Ways to enter foreign markets
Options range from low to high commitment: exporting goods, licensing (letting a foreign company use your brand or technology for a fee), franchising (as McDonald's does worldwide), joint ventures with local partners, and foreign direct investment, building or buying operations abroad.
Comparative advantage
Countries and businesses benefit from specialising in what they do relatively best and trading for the rest: comparative advantage. Even if one country is better at producing everything, both gain by specialising where their opportunity cost is lowest.
Barriers to trade
Governments may restrict trade through tariffs (taxes on imports), quotas (limits on quantities), subsidies for domestic producers, and regulations. Cultural differences, language, legal systems, and currency risk also make international business harder.
Trade agreements and organisations
The World Trade Organization (WTO), founded in 1995, sets rules for international trade. Regional agreements, such as the United States-Mexico-Canada Agreement (USMCA, 2020) and the European Union's single market, reduce barriers among members. Trade policy has become more contested in recent years, with rising tariffs.
Exchange rates
When businesses trade across borders, they deal with different currencies. A stronger home currency makes exports more expensive for foreign buyers and imports cheaper; a weaker currency does the reverse. Firms use tools such as forward contracts to manage currency risk.
Global supply chains and ethics
Many products are made across several countries. Global supply chains lower costs but raise questions about labour conditions, environmental standards, and resilience. Disasters such as the 2013 Rana Plaza factory collapse in Bangladesh, which killed over 1,100 garment workers, pushed companies to monitor suppliers more closely.
Worked example
A US company sells software for 100 dollars. When 1 euro equals 1.10 dollars, European customers pay about 91 euros. If the dollar strengthens so that 1 euro equals 1.00 dollar, the same software costs 100 euros. European sales may fall unless the company cuts its dollar price, illustrating currency risk.
Key takeaways
Businesses go global for customers, lower costs, resources, and diversification. Entry modes include exporting, licensing, franchising, joint ventures, and foreign direct investment. Comparative advantage explains gains from specialisation and trade. Tariffs, quotas, subsidies, and cultural differences are barriers. The WTO and agreements like USMCA govern trade. Exchange rates affect prices and profits. Global supply chains raise ethical and resilience concerns.
Flashcard
Selling goods abroad
Check your understanding
A company lets a foreign firm use its brand and technology in exchange for fees. This entry mode is: