Business and the international economy

Welcome to the Global Marketplace!

Ever wondered why your smartphone was designed in one country, its parts made in another, and then put together in a third? That is the world of international business! In this chapter, we are going to look at how businesses operate across borders, why the world is becoming one big market, and how things like exchange rates can change a business's profit overnight. Don't worry if it sounds like a lot; we will take it one step at a time!

1. Globalisation: The World Getting "Smaller"

Globalisation is the process by which countries and businesses around the world become more connected. It is like the whole world is becoming one giant shopping mall.

Why is Globalisation Happening?

There are three main reasons why the world is more connected today:

• Better Transport: Huge container ships and airplanes make it cheaper and faster to move goods around the world.
• The Internet: Businesses can communicate with customers or suppliers in seconds using email, Zoom, or social media.
• Free Trade: Many governments have removed "barriers" (like extra taxes), making it easier to buy and sell between countries.

Opportunities and Threats for Businesses

Globalisation is like a double-edged sword—it has good and bad sides.

The Opportunities (The Good Stuff):
• More Customers: Instead of just selling to people in your own town, you can sell to the whole world!
• Cheaper Materials: A business can buy raw materials from countries where they are cheapest.
• Lower Costs: By producing in huge quantities for the global market, the cost of making each item goes down.

The Threats (The Scary Stuff):
• More Competition: Local businesses now have to compete with giant foreign companies that might be cheaper or better.
• Foreign Brands: Customers might prefer a "cool" international brand over a local one.

Why Governments Step In: Tariffs and Quotas

Sometimes, a government wants to protect its own local businesses from too much foreign competition. They use two main tools:

1. Import Tariffs: This is a tax on goods coming into the country. It makes foreign goods more expensive, so people are more likely to buy local products.
2. Import Quotas: This is a limit on the physical number of goods that can be brought in (e.g., only 10,000 foreign cars allowed per year).

Quick Review: Globalisation connects the world. Businesses get more customers but face more competition. Governments use Tariffs (taxes) and Quotas (limits) to protect local firms.

2. Multinational Companies (MNCs)

A Multinational Company (MNC) is a business that has branches or factories in more than one country. Think of brands like Coca-Cola, Nike, or Samsung.

Why do businesses want to become MNCs?

• To be closer to customers: It is cheaper to build cars in the country where you sell them than to ship them across the ocean.
• To lower costs: They might build factories in countries where wages are lower.
• To avoid trade barriers: If a country has a high tariff on imports, a business can avoid that tax by building a factory inside that country!

Impact on the "Host Country" (Where the MNC sets up)

When a big MNC moves into a new country, it changes things for the people living there.

The Benefits:
• Jobs: They hire local people, which reduces unemployment.
• New Skills: Local workers learn new ways of working and using technology.
• Exports: If the MNC makes goods to sell abroad, it brings more money into the country's economy.

The Drawbacks:
• Hurting Local Businesses: Small local shops might not be able to compete with a giant MNC and might close down.
• Repatriation of Profits: This is a fancy term that means the MNC sends the money it earns back to its "home" country instead of spending it in the local economy.
• Depletion of Resources: They might use up a lot of the host country's natural resources (like water or minerals).

Did you know? Some MNCs have more money than the entire budget of small countries! This gives them a lot of power when negotiating with governments.

3. Exchange Rates: The Price of Money

An Exchange Rate is simply the price of one currency in terms of another. For example, \(1 \text{ USD} = 1.30 \text{ SGD}\).

Appreciation vs. Depreciation

• Appreciation: This is when the value of a currency goes UP. Your money becomes "stronger."
• Depreciation: This is when the value of a currency goes DOWN. Your money becomes "weaker."

How this affects Business (The "SPICED" Trick)

If you find this confusing, remember the mnemonic: SPICED
Strong Pound (Currency) Imports Cheap Exports Dear (Expensive).

If the currency Appreciates (gets stronger):
• Importers are HAPPY: It is cheaper to buy materials from other countries.
• Exporters are SAD: Their products look more expensive to foreign customers, so they might sell less.

If the currency Depreciates (gets weaker):
• Importers are SAD: It costs more to buy materials from abroad, which might force them to raise their prices.
• Exporters are HAPPY: Their goods look cheaper to people in other countries, so they will likely sell more!

Common Mistake to Avoid: Don't assume a "strong" currency is always good for every business. While it's great for a shop that buys parts from overseas (importer), it can be a disaster for a local farmer trying to sell crops to other countries (exporter).

Summary: Key Takeaways

• Globalisation creates a giant world market with more opportunities but more competition.
• Tariffs and Quotas are tools governments use to protect local jobs from foreign imports.
• MNCs bring jobs and technology to countries but can also hurt small local businesses.
• Exchange Rates change the price of international trade. A strong currency makes imports cheap but exports expensive. A weak currency makes imports expensive but exports cheap.

You've reached the end of this section! International business can seem complex because it involves the whole world, but just remember to always think about who is "buying" and who is "selling" across the border. You're doing great!