Global Market Influences (HSC SSCE Business Studies): Revision Notes
Global Market Influences
Global markets present both opportunities and challenges for businesses. While operating internationally carries greater financial risk than domestic operations, businesses must engage with global markets to implement effective growth strategies and remain competitive.
Three major global market influences shape financial management decisions: economic outlook, availability of funds, and interest rates. These factors are largely uncontrollable because they exist within the external business environment. Businesses cannot significantly control these influences, but they can implement appropriate financial management strategies to minimise negative effects.
Globalisation has fundamentally changed how businesses operate financially. Over the past two decades, increased interdependence between world economies has meant that businesses increasingly rely on international trade for expansion and profit growth. Financial markets across countries are now closely connected, meaning events in one region can quickly impact businesses worldwide.
Global economic outlook
The global economic outlook refers to projected changes in economic growth levels across the world. This outlook directly influences business financial decisions.
Positive economic outlook
When the global economic outlook is positive (meaning world economic growth is expected to increase), businesses face several financial implications:
Increased demand for products and services becomes the primary driver of financial decisions. For Australian businesses, this means needing to scale up production to meet growing international demand. This expansion requires significant funding for:
- Purchasing new equipment and machinery
- Employing additional staff or providing training to existing workers
- Expanding physical business premises or production facilities
Interest rate changes typically accompany positive outlooks. International borrowing costs may decrease because lenders perceive lower repayment risk. As business sales increase, profits rise, making repayment more certain. However, businesses must note that increased demand for funds can actually push interest rates upward, creating a counterintuitive effect.
Negative economic outlook
A poor economic outlook reverses these effects. Businesses face:
- Decreased international demand for their products
- Reduced need for expansion capital
- Potentially higher borrowing costs due to increased perceived risk
- Lower sales and reduced profitability
Case study: COVID-19 pandemic impact
The COVID-19 pandemic dramatically illustrated how global economic outlook affects business finances. Australia experienced its deepest economic contraction since the Great Depression of the 1930s. In September 2020, the Australian Bureau of Statistics confirmed the nation's first recession since 1990–91, with the economy shrinking by over 12 months.
Key economic indicators showed severe decline:
- Household consumption fell in the June 2020 quarter
- Discretionary spending dropped
- Services spending fell
Australia's economic performance, while severe, compared favourably to other developed nations:
- United States: contraction
- Britain: contraction
- Canada: contraction
- Germany: contraction
The pandemic was projected to cost the Australian economy at least $170 billion. Globally, the financial impact was estimated between $25 trillion (if contained) and $51.8 trillion (if uncontrolled). Investment, employment and consumer spending were all expected to require over one year to recover.
Availability of funds
Availability of funds describes how easily a business can access borrowing from international financial markets. These markets comprise institutions, companies and governments willing to lend money to businesses, individuals or governments seeking capital.
International financial markets
International financial markets operate on three primary factors:
Risk assessment determines how likely lenders believe they are to receive repayment. Higher perceived risk means stricter lending conditions or complete denial of funding.
Demand and supply dynamics affect fund availability. When many businesses seek funding simultaneously, available capital becomes scarcer. Conversely, when few businesses seek loans, funds are more readily accessible.
Domestic economic conditions influence international lenders' willingness to provide capital. Strong domestic economies signal lower risk, while struggling economies suggest higher default probability.
Financial deregulation and integration
Australia's financial system underwent deregulation during the 1970s and 1980s. Removing barriers to cross-border financial flows integrated the Australian economy with global financial systems. This deregulation produced significant benefits:
Benefits of Financial Deregulation:
- Australian businesses can now borrow from overseas sources
- Australian investors can purchase international financial assets
- Foreign entities can invest in Australian markets
- Overall availability of funds has increased for Australian businesses
Recent challenges
Since the global financial crisis of 2008–09, accessing credit has become a major challenge for businesses. Banks became significantly more cautious about lending, particularly to smaller businesses. This hesitancy stems from:
- High rates of business failure during economic downturns
- Many businesses struggling to meet existing repayment obligations
- Banks seeking to protect their own financial stability
The COVID-19 pandemic worsened these challenges. Banks became even more reluctant to extend credit, creating particular difficulties for small and medium enterprises (SMEs) that lack the financial reserves and established relationships that larger businesses possess.
Interest rates
Interest rates represent the cost of borrowing money. They function as the price lenders charge for providing capital, compensating them for risk and the opportunity cost of lending.
Risk and interest rates
Fundamental Principle: The fundamental principle governing interest rates is simple: higher lending risk means higher interest rates. Lenders charge more when they believe repayment is uncertain.
Businesses with:
- Strong financial track records pay lower rates
- Weak financial positions pay higher rates
- No credit history face difficulty accessing funds at any rate
International borrowing considerations
Australian businesses seeking to expand internationally or increase export production typically require external financing. Australian interest rates have traditionally exceeded those in countries like the United States and Japan, creating an apparent opportunity for cost savings through overseas borrowing.
However, overseas borrowing carries significant exchange rate risk. Consider this scenario:
Worked Example: Exchange Rate Risk
An Australian business borrows $1,000,000 from a Japanese lender at a lower interest rate than available domestically.
The Risk: If the Australian dollar weakens against the Japanese yen, the actual cost of repayment increases. The initial interest rate advantage can be completely eliminated, or reversed, by adverse currency movements.
The Outcome: What appeared to be "cheap" overseas financing may ultimately cost substantially more than domestic borrowing.
Current global interest rate environment
Following the global financial crisis of 2008–09, central banks worldwide implemented emergency measures:
- Slashed interest rates to historic lows
- Purchased bonds and mortgages to inject liquidity
- Maintained these "temporary" measures for over a decade
The COVID-19 pandemic drove rates even lower. As nations implemented lockdowns, central banks flooded global economies with cheap credit and deferred repayments. Current conditions include:
Current Global Conditions:
- Japan and Europe maintaining negative interest rates
- United States rates at historic lows
- Ultra-low borrowing costs globally
- Deferred interest and repayment arrangements
These conditions create both opportunities (cheap borrowing) and challenges (economic uncertainty) for business financial management.
Government and global market influence on financial management
Both government policy and global market conditions significantly shape business financial management strategies. Understanding these influences is essential for effective financial planning.
Government influence mechanisms
Governments affect business finances through multiple channels:
Legislation directly influences financial decisions and cash flow. New laws may require businesses to change operations, invest in compliance systems, or modify financial reporting practices. Each legislative change carries potential costs that impact financial planning.
Legal structure requirements vary by business type. Governments impose different obligations on sole traders, partnerships, companies and trusts. These varying requirements affect:
- Taxation obligations
- Financial reporting standards
- Liability exposure
- Compliance costs
Regulatory compliance carries financial consequences. Businesses failing to meet government regulations face penalties including fines, legal costs, and reputational damage. These penalties directly impact profitability and can affect ability to access future funding.
Taxation regulations fundamentally shape financial decisions. Tax rates, deductions, incentives and obligations all influence:
- Investment timing
- Asset purchase decisions
- Business structure choices
- Profit distribution methods
Financial assistance programs vary with government policy. New policies can increase or decrease support available to businesses, affecting their access to grants, subsidies, and other financial aid.
Government COVID-19 response measures
During the COVID-19 pandemic, the Australian government implemented extensive measures that directly impacted business financial management:
JobKeeper Payment provided wage subsidies to businesses affected by COVID-19, enabling them to continue paying employees despite reduced revenue. This measure directly supported cash flow and helped businesses retain skilled workers.
Commercial tenant relief included temporary eviction holds and a mandatory code of conduct for commercial tenancies. These measures helped businesses reduce rental costs during economic difficulty, preserving cash for other essential expenses.
Boosting cash flow for employers delivered tax-free cash flow support to SMEs employing staff. The Australian Taxation Office provided eligible businesses with payments between $20,000 and $100,000 through the business activity statement system. This direct injection of funds helped businesses maintain operations.
Increased Instant Asset Write-Off allowed businesses to immediately deduct purchases of eligible assets costing less than $150,000. This provided significant cash flow benefits by reducing tax liability in the year of purchase rather than requiring depreciation over multiple years.
Additional Support Measures:
Apprentice and trainee support offered businesses employing apprentices or trainees a wage subsidy of of wages. This reduced labour costs for businesses while supporting workforce development.
Coronavirus SME Guarantee Scheme provided government guarantees of on new unsecured loans to eligible SMEs. By reducing lender risk, this scheme enhanced banks' willingness to provide credit, enabling businesses to access additional working capital.
Temporary relief for financially distressed businesses increased thresholds for statutory demands and bankruptcy proceedings. This gave struggling businesses more time and space to address financial difficulties without facing immediate legal action.
Global market influence mechanisms
Global market conditions affect Australian business finances through several pathways:
Economic outlook effects on exports: The global economic outlook directly determines demand for Australian products. A positive international outlook increases export demand, requiring businesses to invest in expanded production capacity. A negative outlook reduces demand, forcing businesses to scale back operations and manage reduced revenue.
International fund availability: Since Australia's financial deregulation, businesses can access international funding sources. The ease of this access varies with global economic conditions. During prosperous times, international lenders readily provide capital. During crises, international funding becomes scarce or prohibitively expensive.
Overseas interest rates and exchange rate interactions: Businesses borrowing offshore face dual risks. Interest rate changes affect borrowing costs directly. Exchange rate movements affect the real cost of repayments. These factors can interact to either enhance or eliminate apparent cost advantages. A business might secure low interest rates overseas, only to face increased costs due to currency depreciation.
Global recession impacts: Economic downturns reduce household consumption and discretionary spending worldwide. Australian businesses serving international markets face reduced sales and profitability. This requires implementing various financial management strategies including:
- Cost reduction measures
- Cash flow preservation
- Debt restructuring
- Diversification of revenue sources
- Efficiency improvements
Exam guidance
Critical Exam Approach:
When analysing global market influences in exam questions:
For "analyse" questions: Examine cause-and-effect relationships. Explain how changes in economic outlook, fund availability or interest rates lead to specific business financial decisions. Use phrases like "this leads to," "consequently," and "as a result."
For "evaluate" questions: Make judgements about the significance of different influences. Consider which factors matter most in different business contexts. Assess both positive and negative impacts. Conclude with a balanced judgement about overall effects.
For case study questions: Apply theoretical knowledge to specific business examples. Identify which global market influences are most relevant to the business described. Explain how these influences would affect that particular business's financial management decisions.
Key command word approaches:
- Identify: Simply name the influence (e.g., "interest rates")
- Outline: Briefly describe the influence and one effect
- Explain: Describe the influence and clearly show cause-and-effect relationships
- Analyse: Break down the influence into components and examine relationships between them
- Evaluate: Make judgements about significance and importance, considering multiple perspectives
Remember!
Key Points to Remember:
- Global market influences (economic outlook, availability of funds, interest rates) are largely uncontrollable but manageable through appropriate strategies
- Positive global economic outlook increases demand and may reduce interest rates, requiring expansion funding
- Availability of funds depends on risk, supply and demand, and domestic economic conditions
- Overseas borrowing carries exchange rate risk that can eliminate interest rate advantages
- Government influences business finances through legislation, taxation, compliance requirements and financial assistance programs
- COVID-19 demonstrated how quickly global conditions can change and require business adaptation
Key terms:
- Global economic outlook: projected changes to worldwide economic growth levels
- Availability of funds: ease of accessing borrowing from international financial markets
- Interest rates: cost of borrowing money
- Globalisation: increased interdependence between world economies
- Exchange rate risk: potential for currency movements to affect borrowing costs
- Financial deregulation: removal of barriers to cross-border financial flows
Critical Framework:
Remember the three main global market influences framework: Economic outlook → Availability of funds → Interest rates.
These three factors interact and collectively shape business financial management decisions. Changes in one factor typically affect the others, creating complex financial management challenges that require sophisticated strategic responses.