International Business

Globalisation is the process by which the world becomes more interconnected, through increased trade and the sharing of culture and ideas. Trade in goods and services has grown and far more businesses now operate across national borders, so you can buy from, sell to and compete with firms almost anywhere in the world.

Why globalisation has grown

Globalisation has been driven by five linked changes:

• Seeking new markets — selling abroad opens up far more potential customers than a home market alone can offer.
• Better transport — container ships, lorries and air freight make it quick and cheap to move stock between continents.
• Better communication — the internet lets a small firm take an order from a customer on the other side of the world and answer questions instantly.
• Lower production costs overseas — wages, land and raw materials can be cheaper in other countries, so unit costs fall.
• Greater freedom of trade — governments have removed many restrictions on goods crossing borders, so trade involves less tax and paperwork.

For example, a two-person pottery that sells mugs through its own website and posts them to cafés in Iceland and New Zealand reaches customers it could never have reached before.

Benefits and drawbacks

Globalisation brings clear gains, but they are not shared evenly.

Standardisation of products and markets means customers in many countries buy identical versions of the same item, so a firm can sell one design everywhere, but local varieties struggle to survive.

Imports are goods or services that a business buys from abroad - the opposite of exports. A business might import physical goods, such as parts, or services, such as IT support.

Why businesses import

Importing can give a business access to raw materials or products that are not available domestically. For example, a UK bicycle manufacturer imports natural rubber for its tyres because the UK climate cannot produce it. Without imports, it could not make its tyres at all.

Imports can also be cheaper than making the same goods domestically. An overseas supplier may have lower labour costs, cheaper materials or large-scale production, so its price can be lower even after transport. A UK furniture retailer that imports woven rattan chairs from Indonesia may pay less per chair than a UK manufacturer charges, allowing it to set competitive prices or keep a larger profit margin. This can improve its competitiveness against rival businesses.

Drawbacks of importing

Importing can involve complicated and expensive logistics. Goods may travel long distances by ship, lorry and plane, and the business may need to arrange shipping, insurance, customs paperwork and storage. Delays at ports or damaged deliveries can disrupt production or leave a business without stock.

Imports also create competition for domestic firms. Cheap imported products can take sales away from businesses that make similar goods in the home country. If customers choose the lower-priced imports, domestic firms may sell less, earn lower revenue and, in serious cases, be forced to close.

Exports are goods or services produced in one country and sold abroad. The business making them stays at home, but the customer is based in another country. It is the opposite of importing.

Why businesses export

Selling abroad opens up markets far bigger than the business's home country. A firm with a small domestic market may find far more potential customers overseas, so exporting can increase both sales volume and revenue. Each new country is another set of customers who would never have bought from the business otherwise.

Exporting also helps to spread the brand name. Customers abroad get to know the business and its products, which can make it easier to win more orders in those countries later and to build a reputation beyond its home market.

For example, a small Bristol firm making rechargeable bike lights might sell mainly to UK cycle shops. Exporting to bike shops in Norway and Canada reaches customers who cycle in very different conditions, sells many more units and gets the firm's name known among cyclists abroad.

What exporting can cost a business

Exporting is rarely as simple as posting a parcel. Higher costs are common: transport and shipping over long distances, customs paperwork, insurance and sometimes paying an overseas agent to sell on the business's behalf all add to the price of each sale.

Language barriers can cause problems too. Instructions, packaging and contracts may need translating, and misunderstandings with overseas customers or agents can lead to mistakes and lost orders.

There can also be legal restrictions. Different countries set their own rules on product safety, labelling and ingredients, and a business must meet them before it can sell there. A product that is legal to sell at home may need changing, or may not be allowed at all.

Weighing these up matters: exporting can grow sales and revenue, but only if the extra income covers the extra costs and the business can meet each country's rules.

Businesses change location abroad in two main ways. Some move their production facilities to a country where costs are lower, then ship the finished products back home to sell. Bringing these goods into the home country means they are imports. Others relocate to be nearer to new customers, so their products are close to the people buying them. A UK firm making backpacks could move its factory abroad to cut costs, then bring the bags back to Britain to sell.

Lower costs mean a bigger profit margin (the profit on each item as a share of its selling price), or a lower price for customers. Wage rates can be much lower abroad, land and rent can be cheaper, and raw materials may be nearby. If a UK firm pays £4 in labour per backpack but labour abroad costs £1.50, moving production cuts that cost straight away. The business can keep its selling price the same and keep the difference as profit, or drop the price to win sales.

Relocating abroad to be near customers can shorten delivery times and reduce transport costs. A company selling skateboards mainly in one overseas country could build a workshop there, cutting delivery from three weeks to two days and making it easier to react when a new design sells well. Being close also helps the business understand local tastes.

However, long supply chains are harder to manage. Logistics is the organising of moving, storing and delivering goods. Parts may be delayed by customs checks or bad weather, and shipping finished goods back home adds transport costs that can cancel out low wages. Holding more stock as a buffer ties up money. There is also a communication problem: staff may work different hours and speak different languages, so a query can take a day to answer. Weaker understanding can lead to mistakes in orders or quality, and managers may need to travel more.

The decision usually comes down to whether the saving on production costs is larger than the extra cost of moving goods and the loss of easy contact with the factory.

A multinational company is a business that owns or controls production in more than one country. It is not enough to sell abroad or be well known abroad: it must control production, such as a factory or assembly plant, in at least two countries. Most multinationals keep a centralised head office in their home country, where senior managers make the main decisions for all the countries they operate in. This helps keep the brand and overall strategy consistent.

Why become a multinational?

One reason is to sell in many locations. Being in more countries raises brand exposure, so more customers see the business, and this can increase sales volume — the number of products sold. Higher sales volume can raise total revenue.

Another reason is to move manufacturing to a low-cost country. Lower wages and cheaper raw materials can reduce unit costs — the cost of making one item. If unit costs fall while the selling price stays similar, the profit margin on each sale rises. Together, these choices let a multinational take advantage of low labour costs, obtain materials at lower prices and sell where customers can pay more, so profit can rise.

Worked example

Suppose a UK firm, BottleBright, makes reusable sports bottles. It opens a factory in Vietnam where labour is cheaper and buys plastic locally at a lower price. It sells the bottles in Germany and Canada, where customers can pay higher prices. The Vietnam factory lowers unit costs, while selling where customers can pay higher prices raises revenue, so total profit can increase. By controlling production in both the UK and Vietnam, BottleBright is a multinational.

Barriers to trade are government-created restrictions that make it harder for goods and services to flow between countries. A tariff is a tax on imports and is the most common barrier. Governments use tariffs to restrict imports and protect domestic industries from foreign competition.

How a tariff affects an exporter

A tariff makes an exporter's products more expensive in the foreign market, which can reduce demand and the exporter's sales revenue. For example, a firm sells skateboards abroad for £60 each. The importing country adds a 20% tariff, so customers there pay £72. If demand falls, the firm sells fewer skateboards and its sales revenue drops.

To absorb the tariff and keep the customer's price at £60, the firm must cut its price to £50. It then receives £10 less per skateboard, so profit per unit falls. Each sale also adds less contribution (the money left after variable costs to pay off fixed costs), so the break-even point rises: more sales are needed to cover the same fixed costs.

Trade blocs

A trade bloc is a set of countries that work together to encourage trade among members while making imports from non-members harder through trade barriers. Some trade blocs operate as a single market, with goods, services, people and money for investment (capital) able to move freely between member countries.

Membership can give a business free access to a larger market and reduce trade barriers between member countries, making it easier and cheaper to sell abroad. However, it can also mean greater competition from businesses in other member countries and reduced access to markets outside the bloc. Trade with non-members does not stop, but it can become harder or more expensive.

International competition occurs when overseas businesses compete for customers in a domestic market — the market within a country itself. Your local shops and suppliers now compete with rivals based anywhere in the world.

Globalisation — the growing connections between countries through trade, transport and communication — increases this foreign competition. As it becomes easier and cheaper to move products across borders, overseas businesses can enter domestic markets and win customers who once bought from home-grown firms. If domestic businesses lose too many sales, they may be driven out of business.

Why the internet has sped this up

The growth of internet use has accelerated international competition. A customer can compare prices from several countries in a few minutes, and an overseas seller can advertise to them directly. Distance and the cost of setting up shops abroad matter far less than they used to, so foreign rivals appear quickly.

Undercutting means beating a rival by charging a lower price. Foreign firms often have lower costs, so they can undercut domestic firms. For example, a small British firm making garden tools finds an overseas manufacturer selling a similar set online for £20 less. Sales fall, the firm cuts a shift, and two staff are made redundant; if the decline continues, the business may close.

E-commerce opens up global markets

E-commerce is buying and selling online. It lets a business reach potential customers anywhere in the world without renting premises overseas. A workshop in Cornwall selling model railway parts can take an order from a customer in New Zealand at 3am, because the website keeps selling while the owner sleeps — so time differences become much less of a barrier. Automatic translation tools reduce language problems, and clear photos and standard card payments make buying from abroad feel as easy as buying nearby.

E-commerce also benefits customers: they get global variety, choosing from products made all over the world, and often lower prices because sellers from many countries compete for their order. A business that offers both wins orders a single shop never could, raising its sales revenue.