Business and the international economy | IGCSE Class 10 Business Studies Notes

This note covers the globalisation of business and why it has grown, the opportunities and threats that globalisation brings for firms, why governments impose import tariffs and import quotas, the reasons multinational companies (MNCs) grow and the benefits this brings to the business and its stakeholders, the potential benefits and drawbacks for a country where an MNC locates, and how changes in the exchange rate (depreciation and appreciation) affect businesses as exporters and importers.

What is globalisation and why has it grown?

Globalisation is the process by which national economies, businesses and consumers become increasingly linked to one another through trade, investment, technology and the movement of people, so that markets once separated by national borders now operate as a single, interconnected world market.

Definition: Globalisation. The growing interdependence of countries' economies, through increased cross-border trade, investment and the movement of goods, services, capital and people, so that national economies become borderless and integrated into one world economy.

National economies that once pursued self-reliance are now increasingly dependent on one another for the goods and services they produce and consume. Countries are no longer isolated: cross-border trade and investment have grown sharply.

The development of communication, technology and transport infrastructure has brought nations closer together, and newer, faster and more efficient means of transport have cut the obstacles to moving goods and people across borders.

The World Trade Organisation (WTO) and reforms carried out by the governments of different countries have also been major contributory factors to this growth in interaction and business between nations.

The result is a world often described as a "global village", where business is no longer restricted to the boundaries of the home country.

Countries that were once cut off from one another by geographical distance and socio-economic differences now interact far more, and the obstacles to the cross-border movement of goods and people have come down substantially.

Why do countries trade with one another?

The fundamental reason why countries trade, and why globalisation has taken hold, is that countries cannot produce equally well or cheaply everything that they need.

Natural resources are unequally distributed between countries, and labour productivity and production costs also differ because of socio-economic, geographical and political differences.

A country therefore finds it advantageous to specialise in producing the goods and services it can make most effectively and efficiently, and to obtain the rest through trade with other countries that are better placed to produce them.

Most labour-abundant developing countries, for instance, specialise in producing and exporting garments, while importing textile machinery from developed nations that can produce it more efficiently.

What opportunities does globalisation bring to businesses?

Businesses that grow into international markets can enjoy several opportunities. International business can be more profitable than domestic business: when domestic prices are low, a firm can earn higher profits by selling in countries where prices are higher.

Higher profits, spare capacity and economies of scale

Many firms build production capacity that exceeds domestic demand. By winning orders from overseas customers, they can make fuller use of that spare capacity, and larger-scale production often brings economies of scale, lowering unit costs and improving profit margins.

Growth beyond a saturated or crowded home market

Globalisation also offers growth when the domestic market becomes saturated. Firms whose home demand has stopped growing can expand by entering markets where demand is still rising, which has been a major reason why many multinationals from developed countries have moved into developing-country markets.

Where domestic competition is very intense, going international can be the only way for a firm to achieve significant growth, acting almost as a safety valve against a crowded home market.

A small manufacturer of automobile components, employing about 55 workers, illustrates this situation: facing recession in the domestic market, the manufacturer began exploring the possibility of going international, since competitors were already exporting and a substantial market for automobile components and accessories existed in South-East Asia and the Middle East. This shows why a saturated or recession-hit home market pushes even a small firm to look at overseas opportunities, even though doing so brings the added complexity of operating under market conditions different from those at home.

Specialisation as a source of opportunity

Because countries differ in the natural resources, labour and capital available to them, some are better placed than others to produce particular goods and services efficiently. A firm can take advantage of this by importing inputs more cheaply from countries that produce them best, and by exporting to markets where its own product has an advantage, rather than relying only on what the home market can supply or absorb.

Strategic growth and improved business vision

Finally, the vision to grow internationally is often part of a firm's strategic plan, driven by the need to diversify, to become more competitive and to gain the strategic advantages that come with operating in more than one country.

What threats does globalisation bring to businesses?

Globalisation also exposes businesses to greater risk than operating only at home. Firms entering foreign markets deal with buyers, suppliers, employees and shareholders of different nationalities, who differ in language, customs and business practice, which makes transactions harder to agree and manage than in a single home market.

Customers in different countries also differ considerably in their tastes, incomes and preferences, so a product that succeeds at home may need to be adapted, at extra cost, before it suits customers abroad.

A business trading or investing internationally also faces risks from differing political systems and the degree of political risk in each country, as well as from business regulations, taxation, tariffs and quotas that vary from country to country and can discriminate against foreign products.

The use of different currencies in international transactions adds a further risk, because exchange rates fluctuate and this can make it harder for a firm to fix prices and to protect itself against foreign-exchange losses.

A further threat is simply increased competition at home: globalisation that lets a firm sell abroad also lets foreign and multinational competitors sell into its own domestic market, which can erode its market share and force down prices and margins.

Why might governments introduce import tariffs and import quotas?

Definition: Import tariff. A tax charged by a government on goods imported into the country, which raises the price of the imported good to the buyer.

Definition: Import quota. A physical limit set by a government on the quantity of a particular good that may be imported into the country during a given period.

Each country sets its own tariff and taxation policies, import quota systems, subsidies and other controls, and these are often designed to discriminate in favour of domestic products and against foreign products.

Reasons governments use tariffs and quotas

Governments have several reasons for using tariffs and quotas. They may wish to protect domestic industries, especially new or "infant" industries that cannot yet compete on price or quality with established foreign producers.

They may want to protect jobs in industries that would otherwise lose sales, and so employment, to cheaper imports. A tariff also raises government revenue, since it is a tax collected on imports.

Governments may use tariffs or quotas to try to correct a trade deficit by reducing the volume of imports relative to exports, or to retaliate against another country that has itself imposed unfair trade barriers on their exports.

A quota works by capping the quantity of a good that may enter the country, so that domestic producers face less foreign competition and can keep a larger share of the market. Because the supply of the imported good is restricted, its price in the home market usually rises, which again helps domestic producers and can reduce spending on imports.

Unlike a tariff, a quota raises no tax revenue for the government, and it gives importers who hold the limited import licences a valuable advantage, since they can sell the restricted quantity at the higher price.

Worked example: the effect of a tariff

Worked example 1. A government imposes a 20% import tariff on bicycles to protect its domestic bicycle manufacturers. An overseas exporter had been selling bicycles into this market at $100 each, and the exporter ships 500 bicycles a month to this market.

Answer: The tariff adds 20% of $100 = $20 to the landed cost of each imported bicycle, taking it to $100 + $20 = $120. If local manufacturers can still sell a comparable bicycle for less than $120, the overseas exporter will lose competitiveness in this market. The exporter should either absorb part of the tariff by cutting its own price, improve quality to justify the higher price, or redirect sales effort towards markets without the tariff.

Worked example: the effect of a quota

Worked example 2. A government allows only 10,000 tonnes of imported sugar to enter the country each year, although domestic buyers would import 15,000 tonnes at the current world price if there were no limit. Domestic sugar producers can supply the shortfall.

Answer: The quota holds imports at 10,000 tonnes, so domestic producers can sell up to 5,000 tonnes more than they would if imports were unrestricted. Because buyers cannot obtain all the imported sugar they want, the home price of sugar is likely to rise, which raises domestic producers' revenue and protects their jobs. The government, however, collects no tax revenue from the quota, unlike a tariff. The government should keep the quota only if the gain to domestic producers and jobs outweighs the higher price paid by consumers and food manufacturers.

Why do businesses grow into multinational companies?

Definition: Multinational company (MNC). A business that owns, controls or carries out production of goods or services in more than one country, beyond its original home country.

Firms become multinational for much the same reasons that make international business attractive generally. Prospects for higher profits are an incentive, since a firm can sell where prices and demand are stronger.

Winning orders from foreign customers also brings increased capacity utilisation, as a firm puts spare production capacity to use, while setting up production overseas brings it closer to foreign customers, serving them more effectively and at lower cost.

A saturated home market gives firms a strong incentive to seek growth abroad, and intense domestic competition can push firms to look overseas as a way out of a crowded home market.

The urge to grow, to diversify and to gain strategic advantage is, for many large companies, now part of their core business strategy, which is why becoming an MNC is so often the next stage after simply exporting.

Advantages of becoming a multinational company, and the impact on stakeholders

Becoming multinational brings advantages to the business itself and affects its various stakeholders. The business gains higher potential profits, fuller use of its production capacity, and new routes to growth once its home market is saturated or too competitive.

Shareholders generally benefit from the extra profit and growth this brings. Employees in the firm's home country can benefit from the business's continued expansion and job security, while new jobs are also created for employees in the countries where the MNC sets up production.

Customers in the new markets gain access to products and services that were not previously available to them, widening consumer choice. Governments of both the home and host countries can gain from the tax revenue a successful MNC generates.

What benefits can a country gain from an MNC locating there?

A host country can gain substantially when a multinational company sets up operations within its borders.

Jobs, exports, choice and investment

International business helps a country earn foreign exchange, which it can use to pay for imports of capital goods, technology, petroleum, pharmaceutical and other products that might otherwise be unavailable domestically.

It can lead to a more efficient use of resources, as the country produces what it can produce more efficiently and trades for the rest, which, if the gains are shared fairly, benefits all the trading countries involved.

Producing only for domestic consumption severely restricts a country's growth and employment prospects, and many developing countries found their domestic market too small to absorb larger-scale production.

Countries such as Singapore, South Korea and China, by contrast, embarked on an "export and flourish" strategy, seeing markets for their products abroad, and became star performers on the world economic map, improving both their growth prospects and employment opportunities.

Over time, this kind of international trade and investment can also raise a country's standard of living, as people are able to consume goods and services that would not have been available without it.

An MNC locating in a country typically brings new jobs, extra exports, increased choice for local consumers and new investment in the economy.

Worked example 3. A car manufacturer is deciding whether to build a factory in Country Y. Country Y's government offers tax incentives, and the factory would employ 2,000 local workers and export most of its output, worth an estimated $50 million a year, while the country's annual imports of car parts the factory still needs cost $8 million.

Answer: For Country Y, the factory brings new jobs for 2,000 workers, extra exports worth an estimated $50 million a year, which earn far more foreign exchange than the $8 million spent on imported car parts, wider consumer choice if cars are also sold locally, and new capital investment. For the manufacturer, the move offers lower costs and access to a new market. The government should approve the project, provided it is satisfied the benefits outweigh any loss of sales suffered by its own domestic car producers.

What drawbacks can a country face from an MNC locating there?

Hosting a multinational company is not without cost to the host country. Local businesses competing in the same market can see their sales fall, as they struggle to match the prices, marketing power or economies of scale of a large international entrant.

Local firms producing under contract manufacturing for a multinational also lose some control over their own production process, since goods must be made strictly to the terms and specifications set by the foreign company, and they are not free to sell the contracted output on the open market even if prices there are higher.

Limitations for the host country: repatriation of profits and political risk

A further concern for the host economy is repatriation of profits: profits earned by the MNC's local operation are often sent back to the parent company in the home country rather than reinvested in the host economy, meaning the wider economy does not retain the full benefit of the business activity taking place within its borders.

Political risk is also a limitation, since governments can be wary of multinational control over domestic industries, which can lead to tighter regulation or restrictions on wholly owned foreign subsidiaries.

Worked example 4. A government is reviewing whether to continue allowing a large multinational supermarket chain to expand in its country. Small local shopkeepers report falling sales, while the government notes that the chain earned $4 million in profit locally last year and reinvested only $1 million of it in the country.

Answer: The benefits are jobs in the new stores and wider consumer choice; the drawbacks are reduced sales for local shopkeepers and the $3 million of profit that was not reinvested and may be sent back to the parent company abroad. The government should weigh the net effect on local employment and require a larger share of profits to be reinvested locally before allowing further expansion.

What are depreciation and appreciation of an exchange rate?

Definition: Exchange rate. The price of one country's currency expressed in terms of another country's currency.

Because international business transactions involve different currencies, a firm trading abroad is always exposed to the exchange rate between its home currency and the currencies of the countries it trades with.

Why exchange rates fluctuate

This exchange rate keeps fluctuating, which adds to the difficulty international business firms face in fixing prices and in protecting themselves against foreign-exchange risk. Fluctuations arise because the demand for, and supply of, a currency on foreign-exchange markets are constantly changing as trade, investment and other transactions between countries change.

Definition: Depreciation of an exchange rate. A fall in the value of one currency against another, so that a unit of that currency buys less of the foreign currency than before.

Definition: Appreciation of an exchange rate. A rise in the value of one currency against another, so that a unit of that currency buys more of the foreign currency than before.

Depreciation and appreciation in plain terms

If, for example, a currency depreciates, each unit of it is worth less in foreign currency than before, so a given amount of the home currency now buys fewer units of the foreign currency than it did previously; if it appreciates, each unit is worth more, and buys more of the foreign currency than before.

Understanding the direction of the change, and its effect on businesses, is essential.

How do exchange rate changes affect businesses as exporters and importers?

Effect of depreciation

A change in the exchange rate affects exporters and importers in opposite directions. When a country's currency depreciates, its exporters' goods become cheaper when priced in foreign currency, which can make them more competitive abroad and increase sales and profitability. Alternatively, an exporter can keep its foreign-currency price unchanged and earn more in the weaker home currency on each sale, raising its profit margin.

At the same time, depreciation makes imports more expensive in the home currency, raising costs for a business that imports raw materials or finished goods, which can reduce its profitability unless it passes the higher cost on to customers.

Effect of appreciation

When a country's currency appreciates, the reverse happens. Exporters' goods become more expensive in foreign currency, which can make them less price-competitive abroad and reduce sales and profitability unless demand for the product is not very sensitive to price.

Importers benefit from appreciation, because imported goods and materials become cheaper in the home currency, which can lower costs and improve profitability.

Worked example 5. An exporter sells machine parts priced at $500 per unit to customers abroad. The exporter's home currency then depreciates sharply against the foreign buyer's currency.

Answer: Because the home currency has depreciated, the exporter can keep the $500 foreign-currency price unchanged and still earn more in its own (now weaker) home currency for each sale, or it can cut the foreign price below $500 to win extra sales by becoming more competitive. The exporter should cut the foreign price only if it expects the extra sales volume to more than offset the lower margin per unit; otherwise it should hold the price and take the improved home-currency profit.

Table: potential benefits and drawbacks of an MNC to a host country

The potential benefits and drawbacks described above can be summarised area by area. On the benefit side, a host country typically gains new jobs, extra exports and foreign exchange earnings, wider consumer choice, new investment in plant and infrastructure, and government tax revenue from the MNC's activity.

On the drawback side, local businesses competing with the MNC can lose sales and sometimes jobs, local firms producing under contract may lose control over how goods are made, profits earned locally are often repatriated to the parent company's home country rather than reinvested, and governments can become wary of foreign control over domestic industries, leading to tighter regulation. The table below sets these out side by side, area by area.

Read as a whole, the table shows that an MNC's arrival rarely brings only benefits or only drawbacks: every area, including trade and capital, carries both a gain for the host economy and a cost that its government has to weigh when deciding whether, and on what terms, to welcome foreign investment.

Going beyond the syllabus

These ideas extend the unit and are not needed for the questions on it.

How do firms enter international markets?

Firms can become multinational through several modes of entry. Licensing allows a foreign firm to use a company's patents, trade secrets or technology for a fee called a royalty: this is how Pepsi and Coca-Cola are produced and sold worldwide by local bottlers.

Franchising is similar but applies to services, as with McDonald's, which operates fast-food restaurants worldwide through its franchising system.

A firm may also make a foreign direct investment (FDI), directly investing in plant and machinery abroad to gain a controlling interest, which can take the form of a joint venture with a local partner or a wholly owned subsidiary.

A portfolio investment, by contrast, simply buys shares or makes loans in a foreign company for a financial return, without getting involved in production or marketing.

How is contract manufacturing used by multinationals?

A country can also gain when its own firms produce under contract for multinational companies. Contract manufacturing lets a multinational have goods made to its specifications by local producers abroad, using their existing production facilities and often their lower material and labour costs, without investing in its own plant.

The local producer gains a ready market for spare capacity, but loses some control over the manufacturing process and must sell the contracted output to the international company at predetermined prices, even if open market prices are higher.

How can tariff revenue be calculated?

A tariff is a tax, so the revenue it raises can be worked out from the tariff rate and the value of imports on which it is charged, using Tariff revenue = Tariff rate × Import value. The price a buyer pays once the tariff has been added can be shown as Landed cost = Price × (1 + Tariff rate).

How are net export earnings and repatriated profit measured?

The net gain from trade can be summarised as Net export earnings = Export revenue − Import cost, where export revenue is what a country earns from goods and services sold abroad and import cost is what it pays for goods bought from abroad.

The share of an MNC's profit that leaves the host country can be summarised as Repatriated profit = Total profit − Reinvested profit, where reinvested profit is the share of earnings the MNC chooses to keep and spend inside the host country.

How is an exchange rate expressed as a calculation?

The relationship between two currencies can be summarised as Exchange rate = Value of one currency ÷ value of another: it states how much of one currency is needed to buy a unit of the other. Calculations of this kind are not assessed in this unit.

Glossary

• Globalisation: the growing interdependence of national economies through increased cross-border trade, investment and the movement of goods, services, capital and people.
• Multinational company (MNC): a business that owns, controls or carries out production of goods or services in more than one country.
• Import tariff: a tax charged by a government on goods imported into the country, which raises the price to the buyer.
• Import quota: a physical limit set by a government on the quantity of a good that may be imported in a given period.
• Exchange rate: the price of one country's currency expressed in terms of another country's currency.
• Depreciation (of a currency): a fall in the value of one currency against another.
• Appreciation (of a currency): a rise in the value of one currency against another.
• Repatriation of profits: sending profits earned by a foreign subsidiary back to the parent company's home country.
• Foreign direct investment (FDI): investment by a company directly in property, plant or machinery in a foreign country, giving a controlling interest.
• Portfolio investment: investment in another country made by buying shares or providing loans, without getting directly involved in production.
• Licensing: a contractual arrangement in which one firm grants another firm in a foreign country the right to use its patents or technology for a fee.
• Franchising: an arrangement similar to licensing, applied to services, where a franchisee pays to use a parent company's name, methods and trademark.
• Joint venture: a firm jointly owned by two or more otherwise independent firms, often one foreign and one local.
• Wholly owned subsidiary: a foreign business entity in which the parent company has made a 100% equity investment and holds full control.
• Stakeholders: groups or individuals, such as shareholders, employees, customers and governments, affected by or interested in a business's decisions.

Common errors and misconceptions

• Misconception: Globalisation and international trade are exactly the same thing. Correct: Globalisation is the broader process of growing interdependence between economies; it includes trade but also investment, production abroad and the movement of people and technology.
• Misconception: An import tariff and an import quota work in the same way. Correct: A tariff is a tax that raises the price of imports and also raises government revenue; a quota limits the physical quantity of imports and raises no tax revenue.
• Misconception: A depreciation of the home currency is always bad for a business. Correct: Depreciation helps exporters by making their goods cheaper abroad, but it makes imports more expensive, so the effect depends on whether the business mainly exports or imports.
• Misconception: Becoming a multinational company only benefits the business itself. Correct: It also affects stakeholders such as employees, customers and governments in both the home and host countries, and can bring both benefits and drawbacks to the host country.
• Misconception: Repatriation of profits means an MNC is breaking the law. Correct: Repatriation is a normal, legal part of foreign investment; the concern for the host country is that it reduces the economic benefit retained locally.
• Misconception: Exchange rate changes only matter to very large businesses. Correct: Any business that exports or imports is affected, because exchange rate movements change the price, competitiveness and profitability of its products.
• Misconception: An import quota protects domestic producers without any cost to anyone else. Correct: A quota restricts supply, so the home price usually rises and consumers pay more, while the government collects no tax revenue from it.

Exam-style questions with model answers

Q1. State what is meant by globalisation. [2 marks]

1. Globalisation is the growing interdependence of national economies, through increased cross-border trade, investment and the movement of goods, services, capital and people.
2. It means that markets once separated by national borders increasingly operate as one interconnected world market.

Q2. A government is worried that cheap imported shoes are causing domestic shoe factories to close. Explain two reasons why it might introduce an import quota on shoes. [4 marks]

1. A quota caps the quantity of shoes that may be imported, so domestic factories face less foreign competition and can keep a larger share of the market.
2. This protects the jobs of workers in domestic shoe factories, which might otherwise close as sales fall.
3. With imports restricted, the home price of shoes usually rises, which raises the revenue of domestic producers.
4. However, the quota raises no tax revenue for the government, unlike a tariff, and consumers pay more for shoes.

Q3. A country's currency depreciates against the currencies of the countries it trades with. Explain two effects this could have on a business in that country that both exports and imports. [4 marks]

1. Its exported goods become cheaper when priced in foreign currency, which can make them more price-competitive abroad and raise sales.
2. If it keeps its foreign-currency price unchanged, each sale earns more in its own now weaker home currency, raising its profit margin.
3. Its imported raw materials become more expensive in the home currency, which raises its production costs.
4. This higher cost can reduce its profitability unless it passes the cost on to customers in higher prices.

Q4. Explain one benefit and one drawback to a country of a large multinational company locating a factory there. [4 marks]

1. Benefit: the factory creates new jobs for local workers, which raises employment and incomes in the host country.
2. Benefit: the factory may export much of its output, earning foreign exchange that the country can use to pay for imports.
3. Drawback: local businesses selling similar products may see their sales fall, as they struggle to match the MNC's prices and scale.
4. Drawback: profits earned by the factory may be repatriated to the parent company's home country rather than reinvested locally.

Q5. State two reasons why a business might want to become a multinational company. [2 marks]

1. It can escape a saturated or highly competitive home market and find new growth opportunities abroad.
2. It can make fuller use of its production capacity and earn higher profits by selling where prices and demand are stronger.

Q6. A government is considering imposing a 25% tariff on imported furniture. A furniture importer currently buys 400 sets a year at $500 each. Explain the effect of the tariff on the importer and on the government, and recommend whether the importer should continue buying from abroad. [8 marks]

1. The tariff adds 25% of $500 = $125 to the price of each imported set, taking the landed cost to $625.
2. On 400 sets a year, the importer now pays 400 × $125 = $50,000 more, so its costs rise sharply.
3. The government collects tariff revenue of $50,000 a year from this importer alone, and domestic furniture makers gain protection from cheaper imports.
4. The importer's higher costs may force it to raise its own selling prices, which could reduce its sales.
5. Alternatively, the importer could look for domestic suppliers or switch to products not covered by the tariff.
6. Domestic suppliers may be less efficient, so switching could raise costs in other ways or reduce the quality and range the importer can offer.
7. Consumers of the importer's furniture face higher prices, which may reduce demand in the market as a whole.
8. The importer should continue importing only if it can pass most of the $125 per set on to customers without losing too many sales; otherwise it should choose a domestic supplier.

Q7. Explain how an appreciation of a country's currency could affect the profitability of a business that exports most of its output. [3 marks]

1. Its goods become more expensive when priced in foreign currency, so they become less price-competitive abroad.
2. Sales in export markets may fall, reducing the business's revenue.
3. Its profitability is likely to fall unless demand for its product is not very sensitive to price.

Q8. A multinational retailer wants to open large stores in a country where many small shops already trade. The government must decide whether to allow the expansion. Justify whether the government should allow it. [10 marks]

1. Allowing the expansion creates new jobs in the retailer's stores and in the firms that supply it, raising employment and incomes.
2. Consumers gain from increased choice and, often, lower prices, which raises their standard of living.
3. The retailer brings new investment into the country, in buildings, equipment and technology.
4. The government gains tax revenue from the retailer's profits and from the wages it pays.
5. The retailer may also export goods or bring in foreign exchange, which helps the country pay for imports.
6. Against this, small local shops may see their sales fall and some may close, so jobs are displaced as well as created.
7. Profits earned by the retailer may be repatriated to its home country, so the host economy keeps less of the benefit than the headline figures suggest.
8. The government may also become wary of foreign control over a large part of domestic retailing, and may need tighter regulation.
9. Local suppliers may become dependent on one large buyer, which weakens their bargaining position.
10. On balance, the government should allow the expansion but attach conditions, such as a requirement to reinvest a share of profits locally, because the gains to consumers and employment are likely to outweigh the losses to small shops.

Key takeaways

• Globalisation is the growing interdependence of national economies through trade, investment, technology and the movement of people, which has grown due to better transport, communication and trade reforms.
• Globalisation offers businesses growth, higher profits, fuller capacity use and economies of scale, but also exposes them to greater competition, currency risk and political risk.
• Governments may use import tariffs to tax imports and raise revenue, and import quotas to limit import quantities, both often to protect domestic industries and jobs.
• A quota caps the quantity imported, usually raising the home price and helping domestic producers, but it raises no tax revenue for the government.
• Firms become multinational to seek higher profits, growth beyond a saturated or overcrowded home market, and fuller use of production capacity.
• Becoming an MNC affects stakeholders, including shareholders, employees, customers and governments in both home and host countries.
• A host country can gain jobs, exports, increased consumer choice and investment from an MNC locating there.
• A host country can also suffer reduced sales for local businesses and the repatriation of the MNC's profits abroad.
• A depreciation of a currency makes exports cheaper and more competitive abroad but makes imports more expensive.
• An appreciation of a currency makes exports more expensive and less competitive abroad but makes imports cheaper.

Test yourself

What is globalisation?

The growing interdependence of national economies through increased cross-border trade, investment and the movement of goods, services, capital and people.

Name two reasons a government might impose an import tariff.

To protect domestic industries and jobs from cheaper foreign competition, and to raise government revenue from the tax collected on imports.

How does an import quota differ from an import tariff?

A quota limits the quantity of a good that may be imported and raises no tax revenue, while a tariff is a tax on imports that also raises government revenue.

Why might a government use an import quota to protect domestic producers?

A quota caps the quantity of imports, so domestic producers face less foreign competition and can sell more, usually at a higher home price.

Give one benefit to a business of becoming a multinational company.

It can escape a saturated or highly competitive home market and find new growth opportunities by selling or producing abroad.

State two benefits a host country can gain from an MNC locating there.

New jobs for local workers and increased exports or foreign exchange earnings from the goods the MNC produces.

What is meant by repatriation of profits?

Sending profits earned by a foreign subsidiary back to the parent company's home country, rather than reinvesting them in the host economy.

If a currency depreciates, what happens to the price of that country's exports abroad?

Its exports become cheaper when priced in foreign currency, which can make them more competitive and increase sales abroad.

If a currency appreciates, what happens to the cost of imports for a business in that country?

Imports become cheaper in the home currency, which can lower costs and improve profitability for importing businesses.