IGCSE Business Studies Ch 29: International Economy

Cambridge IGCSE Business Studies

Chapter 29: Business and the International Economy

This chapter explains how businesses are affected by the international economy. It covers globalisation, free trade, protectionism, tariffs, quotas, multinational businesses, host-country impacts, exchange rates, appreciation, depreciation and the effects on importers and exporters.

GlobalisationFree tradeProtectionismMultinationalsHost countriesExchange rates

Topic 1: Globalisation and free trade

Globalisation links national economies and makes it easier for businesses to trade, invest and compete internationally.

1. Globalisation

Globalisation is the increase in worldwide trade and the movement of people and capital between countries.

It means national economies and businesses are becoming increasingly connected. A business may buy materials from one country, manufacture in another country, sell online to customers in many countries and compete with foreign firms in its own market.

Diagram showing globalisation linking trade, people, capital, transport and digital communication

2. Reasons for increased globalisation

Three important reasons explain why globalisation has increased.

1. More free trade agreements

Countries have reduced barriers such as tariffs and quotas. This makes international trade easier.

2. Better transport and communication

Cheaper and faster transport, telecommunications, internet services and e-commerce make it easier to sell internationally.

3. Growth of emerging economies

Countries such as those in Asia have developed strong manufacturing industries and can export large quantities at competitive prices.

3. Free trade

Free trade agreements exist when countries agree to trade without barriers such as tariffs and quotas.

Free trade increases international competition, consumer choice and opportunities for businesses to enter foreign markets.

Exam point: free trade can improve living standards by allowing consumers to buy cheaper imports and by encouraging countries to produce goods in which they have a competitive advantage.

Topic 2: Opportunities, threats and protectionism

Globalisation can help businesses grow, but it can also expose them to stronger foreign competition.

4. Opportunities from globalisation

Infographic comparing opportunities and threats from globalisation

Access to new markets

Businesses can export to customers in other countries. Larger market → higher potential sales → higher possible profit.

Lower production costs

Businesses may locate factories in countries where wages and other production costs are lower.

Cheaper imported materials

Businesses may buy cheaper raw materials and components from overseas suppliers.

Import products for resale

Businesses can import foreign products and sell them in their domestic market.

5. Threats from globalisation

More foreign competition

Imported products may be cheaper or better quality. Local businesses may lose sales.

Competition from multinationals

Large multinational companies may have economies of scale, strong brands, more finance and the ability to employ skilled workers.

Loss of employees

Skilled employees may move to international businesses offering higher wages and better opportunities.

Important: globalisation can be both an opportunity and a threat. Increased competition may cause some businesses to fail, but it can also encourage businesses to become more efficient.

6. Protectionism

Protectionism occurs when a government protects domestic businesses from foreign competition using measures such as import tariffs and import quotas.

Governments may use protectionism because cheap foreign imports could reduce sales of domestic businesses, cause domestic firms to close and increase unemployment.

7. Import tariff

An import tariff is a tax placed on imported goods. It increases the price of imports.

Tariff→imports more expensive→domestic goods more competitive→domestic sales may increase

8. Import quota

An import quota is a restriction on the quantity of a product that may be imported.

Lower supply of imported products may increase their prices and encourage consumers to buy more domestically produced goods.

9. Protectionism vs free trade

Protectionism	Free trade
Protects domestic businesses.	Encourages international competition.
May protect jobs.	May lead to lower consumer prices.
Uses tariffs and quotas.	Removes tariffs and quotas.
Reduces foreign competition.	Gives consumers greater choice.

Exam balance: protectionism may help domestic businesses and jobs, but free trade may give consumers cheaper products and more choice.

Topic 3: Multinational businesses

Multinational businesses operate in more than one country and can strongly affect shareholders, employees, suppliers, governments and host countries.

10. Multinational business

A multinational business (MNC) has production or service operations in more than one country.

Important exam point: a business is not multinational simply because it sells products in many countries. It must actually operate or produce in more than one country.

11. Why businesses become multinationals

Lower production costs: production may be located where wages or other costs are lower.
Access to raw materials: operations may be located close to resources needed by the business.
Closer to customers: producing near the market can reduce transport costs.
Avoid trade barriers: producing inside a country may allow the business to avoid import restrictions.
Increase market share and spread risk: operating in several markets means falling sales in one country may be offset by rising sales elsewhere.

12. Impact of becoming multinational on stakeholders

ShareholdersEmployeesSuppliersGovernment

Stakeholder	Possible impact
Shareholders	May receive higher dividends if international expansion increases profit.
Employees	May gain promotion opportunities and opportunities to work abroad.
Suppliers	Sales may rise or fall depending on where the multinational chooses to purchase supplies.
Government	Tax revenue may increase, although tax revenue could be lost if the company relocates important operations elsewhere.

13. Benefits and drawbacks of multinationals to the host country

A host country is the country where the multinational establishes operations.

Diagram comparing benefits and drawbacks of multinational businesses to the host country

Benefits to the host country

Job creation may reduce unemployment.
Investment in factories, machinery and technology can increase output.
Products made in the host country may be exported.
The multinational may pay taxes.
More businesses can increase competition and consumer choice.

Drawbacks to the host country

Large MNCs may force local firms out of business.
Profits may be sent back to the home country. This is called repatriation of profits.
Jobs may be mainly low-skilled.
Scarce non-renewable resources may be exploited.
A very large multinational may have excessive influence over the host country's government and economy.

Topic 4: Exchange rates and business effects

Exchange-rate movements change the price of imports and exports, so they can affect costs, sales, competitiveness and profit.

15. Exchange rate

The exchange rate is the price of one currency in terms of another.

Most currencies change in value according to their demand and supply in foreign-exchange markets.

Infographic showing depreciation and appreciation effects on exporters and importers

16–18. Currency depreciation

Currency depreciation occurs when the value of a currency falls compared with other currencies. The currency can buy less foreign currency than before.

DepreciationExports cheaperImports dearer

Effect on exporters

If the home currency depreciates, exported products become cheaper for foreign customers, international competitiveness may improve, export sales may increase, and revenue and profit may increase.

Effect on importers

For a business importing raw materials or products, depreciation means imports cost more in domestic currency. This can increase costs, reduce gross profit, force higher prices and reduce profitability.

19–21. Currency appreciation

Currency appreciation occurs when the value of a currency rises compared with other currencies. The currency can buy more foreign currency than before.

AppreciationExports dearerImports cheaper

Effect on exporters

If the home currency appreciates, foreign customers may face higher prices, exports become less competitive, export sales may fall, and revenue and profit may fall.

An exporter may either reduce the amount it receives per product or increase the foreign selling price and risk losing sales.

Effect on importers

An importing business benefits because foreign goods become cheaper in domestic currency. This may reduce raw-material costs, reduce cost of sales, increase profit and allow lower selling prices.

Clear relationship: importing firms face higher costs after depreciation and lower costs after appreciation.

22. Exchange rate summary

Change in home currency	Exports	Imports
Depreciation	Cheaper	More expensive
Appreciation	More expensive	Cheaper

Business	Depreciation	Appreciation
Exporter	Usually benefits	Usually disadvantaged
Importer	Usually disadvantaged	Usually benefits

23. Exchange-rate calculations: students do not need to worry about exchange-rate calculations. The important requirement is understanding what happens to import and export prices when currencies appreciate or depreciate.

Topic 5: Key definitions and exam checklist

Use this section to revise the definitions and judgement points most likely to appear in exams.

Key definitions

Term	Meaning
Globalisation	Increase in worldwide trade and movement of people and capital.
Free trade	International trade without barriers such as tariffs and quotas.
Protectionism	Government protection of domestic firms from foreign competition.
Import tariff	Tax on imported goods.
Import quota	Restriction on the quantity of a product imported.
Multinational business	Business with production or service operations in more than one country.
Exchange rate	Price of one currency in terms of another.
Currency appreciation	Increase in the value of a currency.
Currency depreciation	Fall in the value of a currency.
Repatriation of profits	Profits earned abroad being sent back to the multinational's home country.

What students must know for the examination

Define globalisation.
Explain the main reasons globalisation has increased.
Explain important opportunities and threats of globalisation.
Define and explain free trade.
Define tariffs, quotas and protectionism.
Explain why governments may protect domestic industries.
Define a multinational business.
Explain why businesses become multinationals.
Explain benefits and drawbacks of MNCs to a host country.
Explain how different stakeholders may be affected by multinational expansion.
Define an exchange rate.
Distinguish between appreciation and depreciation.
Explain the effect of exchange-rate movements on import prices, export prices, competitiveness, business costs, sales and profitability.
Apply exchange-rate changes correctly to importing and exporting businesses.

Exam technique: always apply the effect to the business in the case study. An exporter and an importer may be affected in opposite ways by the same exchange-rate movement.