Business Theme 4

• Free trade areas


  Areas such as the EU, ASEAN or NAFTA that have reduced barriers to trade between member countries, e.g. eliminated tariffs or quotas
• WTO (World Trade Organization)


  Has looked to reduce barriers to trade as one of their key goals
• Transport improvements


  • Containerization and efficient sea shipping have led to lower average cost per unit, making trade cheaper
• Capital barriers


  Easier for firms to access finance as capital flows between countries have become more possible, leading to more economically interconnected global equity and debt markets
• Reasons for globalization


  • Development of free trade areas
  • Transport improvements
  • Less capital barriers
• Importance of globalization


  • Growth and rise of multinational corporations (MNCs)
  • Interconnection of business cycles
  • Growth and rise of brands
• More interconnected markets


  More opportunity for MNCs
• Higher output for MNCs


  Economies of scale, lower cost per unit, lower prices, MNCs become more dominant
• More interconnection between economies


  Business cycles become more aligned, making it harder to diversify and spread risk
• Growth and rise of MNCs


  Growth and rise of brands, more focus on brands and marketing budgets to pursue brand names in various economies
• Brands have become more important than quality for MNCs to ensure consumers in the economies they enter are aware of their existence
• Growing economies


  Emerging economies such as China, India, Brazil, Russia, South africa
• UK GDP growth rates have been slowing over time


  Much slower than emerging economies for over a decade
• Opportunities and risks


  • For UK businesses exporting to or offshoring production to emerging economies
• GDP per capita


  Total GDP divided by population, estimates average economic output per person
• GDP per capita


  • Good indicator of standard of living, but doesn't account for pollution, inequality, etc.
• GDP per capita


  Indicator of market size and purchasing power for businesses
• Literacy rates


  Percentage of population that can read/write or have certain education levels
• Literacy rates


  • Indicator of developmental progress, useful for businesses offshoring due to more skilled workforce
• Health indicators


  Life expectancy, infant mortality, percentage of doctors
• Health indicators


  • Judge workforce productivity and potential market for businesses
• Human Development Index (HDI)


  Index developed by UN to examine economic development, scored 0-1 (0 = low, 1 = high)
• HDI factors


  • Health (life expectancy), Education (expected years of schooling), Standard of living (GNI per capita)
• Exporting


  Selling goods and services or products into a foreign market
• Importing


  Buying goods and services from a foreign market for sale or for use in the importer's domestic or home market
• International trade


  Exporting and importing
• Specialization


  Countries or businesses focus on producing and exporting goods and services that they have a comparative advantage in, while importing goods and services that other countries or other businesses can produce more efficiently
• Comparative advantage


  When a country or business can produce a good or service at a lower opportunity cost than another country or business
• Competitive advantage


  When a country or business can produce a good or service more efficiently than its rivals, leading to lower average costs and potentially lower prices
• Competitive advantage


  • Allows for lower average cost per unit
  • Can lead to lower prices
  • Increases quality of products
  • Improves innovation
• Foreign direct investment (FDI)


  Investment made by a company in one country into another country, usually by setting up operations in that other country
• Reasons for FDI


  • Accessing new markets and customers
  • Accessing new resources (labor, raw materials, etc.)
  • Accessing new partners (e.g. joint ventures)
• GDP (Gross Domestic Product)


  A measurement of economic growth, the value of all final goods and services produced in an economy in a year
• GDP increases


  Incomes are going to increase
• GDP falls


  Incomes are going to fall
• Business/Economic Cycle


  1. Boom

  2. Recession

  3. Depression

  4. Recovery
• The long-run trend of GDP growth is increasing
• The business cycle exists because of external shocks to the economy
• During recession/depression phases


  Businesses are unlikely to invest and likely to destock
• During recovery/boom phases


  Businesses are likely to invest more in capital and restock