0264 · 6.2.1The importance of globalisation

Globalisation, imports and exports

0:00A bicycle sold in your local shopping centre might contain components made abroad and arrive by sea. Its seller could also receive orders from customers overseas. These connections create opportunities for businesses, alongside extra competition and new risks. By the end of this video, you will understand why international connections grow and how restrictions on imports affect different businesses. Goods are physical products, while services are activities carried out for customers.

0:26Imports are goods and services bought from other countries. Selling goods and services to other countries creates exports. A bicycle retailer buying helmets from abroad is importing, while a local manufacturer selling bicycles overseas is exporting. The same business can do both, so changes in international trade can affect its purchases and sales differently. Globalisation is the increasing freedom of movement of goods, services, capital, people and ideas between countries, so that the world's economies become more closely linked through trade.

0:56Here, capital includes money invested in business activities. An overseas investor can finance a factory, while employees can move abroad for jobs. Ideas also cross borders through designs, technical knowledge and communication. Think of a business as part of a growing network. Its customers, suppliers, investors and employees can increasingly come from different countries. A small clothing seller can order fabric overseas and reach foreign customers through a website. Globalisation therefore changes the choices available to businesses of many sizes, including those that sell mainly within their home country.

Causes of globalisation

1:30Four important reasons for globalisation are improved transport links, technological change including communication, free trade agreements and newly industrialised countries. Together, these changes reduce the practical difficulties of operating across borders. Some make physical journeys easier, while others improve communication or reduce legal restrictions. Each opens connections that businesses can use to buy, sell or organise their activities internationally. Improved transport links make international deliveries faster and cheaper. Container ships carry large quantities, and standard containers transfer easily between ships, trains and lorries.

2:07Air freight provides a faster option for urgent or perishable products. A flower grower can reach distant customers before its products deteriorate, while lower delivery costs make overseas purchases more affordable. Technological change helps businesses communicate and coordinate across long distances. Video calls let managers speak with overseas suppliers without travelling, and shared digital systems provide information about orders. Ecommerce is buying and selling goods and services through the internet.

2:33A small craft seller can display products to foreign customers and accept orders without opening an overseas shop. Free trade agreements are agreements between countries to reduce or remove barriers to trade. These barriers include taxes on imports and limits on quantities entering a country. Reducing restrictions can lower the cost of selling abroad and improve access to foreign customers. Businesses then have a stronger reason to trade with firms and customers in participating countries.

3:00Newly industrialised countries are countries whose manufacturing has grown quickly. Their expanding factories provide additional sources of components and finished products, often at competitive prices. Businesses elsewhere gain more options for purchasing or locating production. As employment and incomes increase within these economies, they can also become growing markets for products from abroad.

Business opportunities from globalisation

3:21Businesses can use globalisation to reach new overseas markets, import cheaper materials, produce in lower-cost countries and form joint ventures. Each opportunity affects a different part of the business. Selling abroad expands its potential customer base, while overseas purchasing changes its costs. Cooperation with a foreign partner can provide resources and knowledge that would take time to develop independently. Revenue is the income a business receives from selling goods or services.

3:48Dunmore Crafts makes decorative bowls and finds buyers overseas through its website. Those additional orders increase sales revenue if customers complete their purchases. Overseas demand can also help the business when sales at home are weak, because customers in different countries may have different buying patterns. Profit is total revenue minus total costs. Importing cheaper materials can increase profit when sales revenue and other costs remain unchanged. For example, a furniture manufacturer might purchase suitable timber from a foreign supplier at a lower delivered price.

4:21The business must include transport charges in its comparison, because the supplier’s price represents only part of the amount paid. Producing in a lower-cost country can reduce spending on wages, premises or materials. A clothing manufacturer might arrange for garments to be made abroad and then delivered to its customers. Managers need to compare the full costs, including transport and supervision. Savings create an advantage when the finished products meet customer requirements and arrive when needed.

4:48A joint venture is an arrangement where two or more businesses work together on a project and share its capital, risks and profits. An overseas partner may understand local customers and already have useful supplier contacts. That knowledge can help a business introduce its products into an unfamiliar country. Each partner puts in less money than going alone would need, although they must agree how decisions will be made.

Threats from globalisation

5:10The same international connections also create threats through foreign competition, loss of market share and skilled employees leaving for jobs abroad. Customers gain access to overseas sellers as well as local firms. Employees can also compare opportunities across borders. A business therefore faces changes in both the products it competes against and the jobs it offers. Foreign competitors entering the home market may offer lower prices or products that customers prefer.

5:34A local shoe manufacturer could lose orders when an overseas rival starts supplying nearby retailers. To retain customers, the domestic business may need to improve its products or reduce prices. Lower prices reduce profit if sales volume and costs remain unchanged. Market share is a business's sales revenue as a percentage of the total sales revenue of the whole market. When customers switch to foreign competitors, a domestic seller can lose market share.

6:01Its position can also weaken if rivals expand faster within a growing market. Managers therefore need to consider their business’s performance relative to competing suppliers. Skilled employees may leave for jobs abroad when overseas employers offer better pay or career opportunities. Losing an experienced technician can interrupt work while the business recruits a replacement. Training someone new creates an additional cost, and suitable applicants may be difficult to find. The employee gains access to wider opportunities, while the original employer faces replacement difficulties.

6:33The overall effect depends on the particular business. A retailer might gain access to cheaper imported products while a domestic manufacturer faces stronger price competition. Even one firm can experience both outcomes through different activities. Globalisation creates wider choices, but managers still need to compare costs, customer demand and the strength of their competitors.

Import tariffs and quotas

6:55An import tariff is a tax on imported goods. Governments can use this measure to make foreign products more expensive and protect domestic producers from competition. The importing business pays the tax to the government. It can then raise its selling price, accept a smaller profit per item, or combine those responses. An import quota is a limit on the quantity of a product that can be imported. This restricts the available supply of the affected foreign product.

7:21Domestic businesses making competing products may receive additional orders when customers find imports harder to obtain. Importers face fewer products to sell, and restricted availability can also push prices upwards. Ashby Cycles sells imported bicycles to customers at two hundred dollars each before a tariff is introduced. A comparable domestic bicycle sells for two hundred and thirty dollars. Assume the tariff is twenty-five per cent of the imported bicycle’s two hundred dollar value.

7:49The retailer passes the entire tax on to customers, and all other charges remain unchanged. The tariff amount equals the value multiplied by the tariff rate divided by one hundred. Two hundred dollars divided by one hundred gives two dollars for one per cent. Multiplying two dollars by twenty-five gives a tariff of fifty dollars. Two hundred dollars plus fifty dollars gives a new customer price of two hundred and fifty dollars.

8:12Before the tariff, two hundred and thirty dollars minus two hundred dollars gives a thirty dollar price advantage for the imported bicycle. With the tariff added, the domestic bicycle becomes the cheaper one, because two hundred and fifty dollars minus two hundred and thirty dollars gives twenty dollars. The imported bicycle’s price has risen by fifty dollars. Customers who mainly compare prices now have a reason to switch to the domestic alternative.

8:36Domestic producers of competing products can gain when imports become dearer or scarcer. A tariff improves their relative price position, while a quota restricts the quantity supplied by overseas rivals. Additional orders can increase their sales revenue. The size of this benefit depends on customer preferences and whether domestic businesses can supply enough suitable products. Businesses that import materials face a different effect. An import tariff on metal raises costs for a domestic manufacturer that uses it to make machinery.

9:05If its selling prices and output remain unchanged, profit falls. A quota on the same material can create shortages, so the manufacturer may have to delay orders or find alternative suppliers. Exporters can also face consequences when another country responds with its own restrictions. A government abroad might introduce import tariffs in return. The original country’s exporters then face higher prices for their products in that overseas destination. If customers switch to cheaper alternatives, those businesses lose orders and receive less sales revenue.

9:38Keep the two restrictions distinct through their direct effects. An import tariff adds a tax payment, while an import quota sets a quantity limit. Price increases depend partly on how importers respond and what alternatives customers have. Always identify the affected product and whether the business imports it, competes against it or sells it abroad.

Applying quotas to businesses

9:57Bluebell Foods makes fruit juice using imported fruit, and domestic alternatives are less reliable. An exam-style question asks you to explain two effects of an import quota on fruit for this business. Explain means set out purposes or reasons, say why and how, supported with relevant evidence. Use the case details to connect the restriction to costs or the ability to fulfil customer orders. The quota reduces the quantity of imported fruit available to Bluebell Foods.

10:24Because domestic alternatives are less reliable, shortages could interrupt juice manufacturing and delay customer orders. The business may also have to pay higher prices for scarce imported fruit. If selling prices and output remain unchanged, those higher costs reduce profit. Questions in Paper One Short Answer and Data Response and Paper Two Case Study use business information as their starting point. Select the connection that fits the business described, then carry the reasoning through to its outcome.

10:52A manufacturer facing expensive imported materials needs a different explanation from a producer competing against finished imports. The affected product determines the relevant business effect. Globalisation is the increasing freedom of movement of goods, services, capital, people and ideas between countries, so that the world's economies become more closely linked through trade. Better transport, communication technology, trade agreements and newly industrialised countries help those connections expand. Businesses gain access to customers, suppliers, production locations and partners.

11:25They also face foreign competition and greater competition for skilled employees. An import tariff is a tax on imported goods. By comparison, an import quota is a limit on the quantity of a product that can be imported. Domestic producers of competing products can gain protection, while businesses buying affected imports face higher costs or shortages. Follow the effect through purchases, prices and customer choices to understand who gains and who loses.