GCSE / Level 2 Revision Notes

External Environment: Business and Globalisation

Globalisation is arguably the most important factor currently shaping the world economy.  Although it is not a new phenomenon (waves of globalisation can be traced back to the 1800s) the changes it is bringing about now occur far more rapidly, spread more widely and have a much greater business, economic and social impact than ever before.
Globalisation is best thought of as a process that results in some significant changes for markets and businesses to address: for example

• An expansion of trade in goods and services between countries (an opportunity for many businesses; a threat for others)
• An increase in transfers of financial capital across national boundaries including  foreign direct investment (FDI) by multi-national companies and the investments by sovereign wealth funds (e.g. Middle Eastern governments buying assets in the UK)
• The internationalisation of products and services and the development of global brands such as Starbucks, Nike, Sony and Google
• Shifts in production and consumption – e.g. the expansion of outsourcing and offshoring of production and support services, which has traditionally benefitted countries with lower labour costs & skilled labour markets such as India, at the expense of jobs in developed economies like the UK
• Increased levels of labour migration – which has the effect of lowering wage costs in many industries, but for others is a problem (e.g. a loss of skilled workers leaving an economy)
• The emergence of countries playing a bigger role in the global trading system including China, Brazil, India and Russia

A key result of globalisation is the increasing inter-dependence of economies. For example:

• Most of the world’s countries are dependent on each other for their macroeconomic health
• Many of the newly industrialising countries are winning a growing share of world trade and their economies are growing faster than in richer developed nations
• All countries have been affected by the credit crunch and decline in world trade, but many emerging market countries have slowed down rather than fall into a full-blown recession

There are several alternative approaches for a business looking to expand globally – many choose to follow one or more of the following:

• Establish production sites overseas
• Licence technology & other intellectual property
• Joint ventures
• Franchising
• Offshoring / outsourcing
• Selling directly to overseas markets – either with sales agents, distribution agreements or online

The motivations for successful businesses to operate globally are strong, and growing.  For example:

• Higher profits and a stronger position and market access in global markets
• Reduced technological barriers to movement of goods, services and factors of production
• Cost considerations – a desire to shift production to countries with lower unit labour costs
• Forward vertical integration (e.g. establishing production platforms in low cost countries where intermediate products can be made into finished products at lower cost)
• Avoidance of transportation costs and avoidance of tariff and non-tariff barriers
• Extending product life-cycles by producing and marketing products in new countries