Definition: Globalisation is the process by which businesses or other organizations develop international influence or start operating on an international scale.

Opportunities of Globalisation for Businesses

• Access to new markets - By accessing international markets, businesses can grow their customer base, which may result in increased sales.

• Economies of scale - Businesses can benefit from lower average costs as production increases due to producing larger quantities or sourcing cheaper raw materials.

• Skilled Labour - Businesses are able to hire employees from different regions who may be more skilled or cheaper to employ.

• Increased Innovation - Businesses would gain access to different information and resources globally.

Threats of Globalisation for Businesses

• Increased competition - Entering new markets means there may more more competitors.

• Regulation - Different countries or regions may have different regulations which may be difficult for foreign businesses to adjust to or overcome.

• High Investment - International expansion involves a high amount of investment which may be risky for businesses.

1.5.2 The importance and growth of multinationals

Definition: A business which has business operations in at least one country other than its home country.

Benefits of a Business Becoming a Multinational

• Increased revenue - Multinationals have access to new markets, therefore providing more consumers and growth opportunities.

• Access to cheaper resources - Multinationals may have access to cheaper raw materials and labour if they operate in countries with lower costs.

• Economies of scale - Multinationals can benefit from economies of scale by increasing production and decreasing average costs by bulk-buying or investing in more advanced technology.

• Improved brand awareness - Consumers in other countries will become aware of the business, therefore increasing brand recognition.

Benefits to a Country and/or Economy Where a Multinational Company is Located

• Employment opportunities - Multinationals may create more positions and job opportunities for locals.

• Increased foreign investment - Multinationals can bring capital and investment when they expand which can boost the local economy.

• Technology improvements - Multinationals may bring new ideas or technology which can also benefit the economy and local firms.

• Increased tax revenue - Governments would benefit from receiving increased tax revenue from multinationals.

• Raised living standards - More locals will be employed by multinationals, therefore they may receive better or more consistent wages.

Possible Drawbacks to a Country and/or Economy Where a Multinational is Located.

• Exploitation of resources - Multinationals may consume a large amount of finite natural resources or exploit labour.

• Environmental degradation - Multinationals may contribute to issues such as deforestation and pollution while obtaining and transporting raw materials and goods.

• Threatened local businesses - Some multinationals may be bigger than local firms, therefore these firms may struggle to compete.

• Cultural impact - The introduction of multinationals may impact local traditions and culture.

1.5.3 Exchange rate calculation

Definition: Exchange rate is the price of one currency in terms of another

Formula: Value of currency 1 x Exchange Rate = Value of Currency 2

1.5.4 The impact of exchange rate changes

On international competitiveness

1. Appreciation (increase in currency value):

• Exports become more expensive

• Imports become cheaper

• Reduced foreign demand

2. Depreciation (decrease in currency value):

• Exports become cheaper

• Imports become more expensive

• Increased foreign demand

On importers

1. Appreciation (increase in currency value):

• Importers benefit from cheaper foreign goods.

• Reduced inflationary pressure, therefore businesses may lower prices.

2. Depreciation (decrease in currency value):

• Importers must deal with higher costs of foreign goods.

• Businesses may set higher prices due to a rise in import costs.

• Businesses may seek domestic suppliers to reduce costs.

On Exporters

1. Appreciation (increase in currency value):

• Goods become more expensive for foreign buyers.

• International demand and sales will decrease.

• May become less competitive as some businesses/competitors may operate in countries with weaker currencies.

2. Depreciation (decrease in currency value):

• Exporters will benefit as goods will become cheaper for foreign buyers.

• Demand and sales will increase as products become cheaper when compared to overseas competitors.

• Exporters may become more competitive if they are located in countries with weaker currencies.