Explain the causes and consequences of globalisation
Analyse the impact of exchange rate changes on exporters and importers
Evaluate the role of trading blocs and protectionism
Compare international market entry strategies — exporting, licensing, JV, FDI
Assess the risks of international business — political, economic, cultural
The Global Economy
What is Globalisation?
Definition
Globalisation is the process by which businesses, people and economies become increasingly interconnected and interdependent across national borders — through trade, investment, technology and migration.
Drivers
Technology — internet enables global communication and commerce
UK goods become cheaper for eurozone buyers → exports rise. But imported materials cost more in pounds → input costs rise for UK firms using European inputs.
Depreciation of £ — Exporters Benefit
UK exports cheaper in foreign currency → more competitive abroad
Volume of exports rises (if price elastic demand)
Foreign earnings worth more when converted to £
Example: UK aerospace exports become cheaper for US buyers
Depreciation of £ — Importers Suffer
Imported inputs cost more in £ — higher production costs
Inflation rises as import prices feed through
Firms relying on foreign components squeeze margins
Example: UK retailers importing from Asia face higher costs
Evaluation: The degree of impact depends on price elasticity of demand for exports/imports and how quickly exchange rate changes pass through to prices. Hedging (forward contracts, currency swaps) allows firms to lock in exchange rates and reduce short-term risk.
Trade Policy
Trading Blocs & Protectionism
Trading Blocs
Groups of countries with preferential trade arrangements
Free trade area: No tariffs among members (e.g. CPTPP, USMCA)
Customs union: Common external tariff + free internal trade (e.g. EU Customs Union)
Single market: Free movement of goods, services, capital and people (EU Single Market)
Impact on UK post-Brexit: Lost Single Market access; increased trade friction with EU; new deals being negotiated globally
Protectionism
Tariffs: Tax on imports — raises price of foreign goods to protect domestic producers
Quotas: Limit on quantity of imports
Subsidies: Government funding for domestic industries
Non-tariff barriers: Regulations, standards that effectively restrict trade
US-China trade war (2018–) demonstrated protectionism's disruptive effects on global supply chains
International Entry
International Market Entry Strategies
Exporting: Sell domestically produced goods abroad — lowest risk, lowest cost, lowest control; dependent on distributors/agents
Licensing: Grant a foreign firm the right to use your IP/brand for a fee — royalty income; minimal capital commitment; lose quality control
Franchising: Foreign partner operates under your brand and system — faster expansion; maintain brand standards through agreement
Joint venture (JV): Partner with a local firm — share risk, local knowledge and distribution; share profit; potential cultural conflict
FDI (Foreign Direct Investment): Build/buy operations abroad — maximum control; highest risk and capital commitment; most return potential
Multinational Corporations
MNCs: Opportunities & Challenges
Benefits for Host Country
Employment creation — direct and indirect jobs
Technology and skills transfer
Tax revenue (corporation tax)
Infrastructure investment
Consumer access to global brands and products
Criticisms of MNCs
Profits repatriated to home country — leakage
Transfer pricing to minimise tax in high-tax countries
Cultural homogenisation — displacing local businesses
Labour exploitation in lower-wage countries
Evaluation: The net impact of MNCs depends on the regulatory environment of the host country. Strong governments can negotiate favourable terms (tax minimums, employment requirements, technology transfer clauses). Weak regulatory frameworks allow exploitation.
Risk Assessment
Risks of International Business
Political risk: Government instability, nationalisation, sanctions, trade war — assets and operations threatened
Cultural risk: Misunderstanding local preferences, social norms, business etiquette — product and marketing failures
Legal risk: Different employment, IP, consumer and competition law — compliance costs and liability exposure
Reputational risk: Labour practices in supply chains, environmental performance in lower-regulation markets
Practice Question 1
The pound sterling depreciates from £1 = $1.30 to £1 = $1.10 against the US dollar. A UK car manufacturer exports to the USA. What is the immediate effect?
AUK exports become more expensive in the USA — demand falls
BUK exports become cheaper in the USA — demand likely rises and sterling revenue increases when converted back
CUK imports from the USA become cheaper — component costs fall
DThe UK car's US dollar price rises, reducing competitiveness
B is correct. Pound depreciation means foreign buyers get more pounds per dollar — UK goods are now cheaper in dollar terms. A car priced at £20,000 previously cost $26,000; now it costs $22,000. This makes UK exports more competitive in the US market and the dollar revenues convert to more pounds when repatriated — boosting sterling revenues for the exporter.
Practice Question 2
A UK fashion brand wants to enter the Japanese market quickly with minimal capital risk. Which market entry strategy is most appropriate?
AFDI — build a Japanese manufacturing facility
BLicensing or franchising to a Japanese retail partner
CJoint venture requiring equal capital contribution from both firms
DAcquire a Japanese fashion retailer
B is correct. Licensing or franchising a Japanese partner uses their local market knowledge and distribution networks with minimal capital outlay — the UK brand provides IP/brand rights in exchange for royalties. FDI (A) and acquisition (D) require significant capital; JV (C) requires capital commitment and shared control. Speed + low capital risk = licensing/franchising.
Practice Question 3
A government imposes a 25% tariff on imported steel to protect domestic steel producers. Which of the following is the most likely economic consequence?
ADomestic steel prices fall as foreign competition is eliminated
BSteel-using industries (e.g. car manufacturers) face higher input costs, reducing their competitiveness
CGovernment tax revenues fall as steel imports are eliminated completely
DForeign steel producers immediately invest in domestic production to avoid the tariff
B is correct. Tariffs raise the price of imported steel — protecting domestic producers but raising costs for steel-using industries (car manufacturers, construction, engineering) that now pay more for materials. This reduces their competitiveness globally and may lead to job losses downstream even while protecting jobs upstream in steel. This illustrates why protectionism is complex: protecting one sector may harm others.
Summary
Key Takeaways
Globalisation: Technology, trade liberalisation and FDI have integrated the world economy — creating opportunities and intensifying competition