Global Environment (AQA A-Level Business): Revision Notes

The Global Economy

Understanding globalisation

The world has become increasingly connected, creating what some call a "global village" where businesses and people interact across borders more than ever before.

Globalisation refers to the growing interconnection between countries and economies worldwide. It's the process by which the world has become more linked together through trade, communication, and cultural exchange.

This interconnection has transformed how businesses operate:

• Location flexibility: Companies can now establish their operations in multiple countries around the world, choosing locations based on strategic advantages
• Global trade: Firms can source materials from any country and sell their products to customers anywhere in the world
• Strategic choices: Businesses make important decisions about where to obtain raw materials (the basic resources needed for production) and where to manufacture products (make goods), often selecting countries with lower labour costs
• Market access: Access to a worldwide market enables businesses to benefit from economies of scale (cost advantages from producing larger quantities), making them more competitive (better able to succeed against rivals)

Reasons for increased globalisation

Globalisation has accelerated dramatically in recent decades. Several technological, economic and political factors have driven this rapid change:

Technology and communication

The internet has revolutionised global business operations. Companies can now communicate between countries quickly and cheaply, which has opened up new possibilities:

• Businesses can outsource work (contract it out to external providers) across the world
• The development of online staffing markets means firms can find skilled workers in other countries where labour costs are lower

Financial systems

There has been a shift from separate national finance markets towards a global finance market. This integration means money can now move securely and easily around the world, enabling international investment and transactions.

Transport improvements

Physical movement of goods and people has become cheaper and faster:

• Giant cargo ships have made transporting goods around the world much more affordable
• Cheap, fast air travel allows both goods and people to move internationally with ease, facilitating business meetings and work across borders

Political changes

Several political developments have reduced barriers to international trade:

• EU citizenship: Citizens of European Union countries can work in any other EU country without restrictions, creating a mobile workforce
• Increased free trade: Reduced tariffs (taxes on imports) have made international trade easier, often promoted by the WTO (World Trade Organisation)
• Trade blocs: Regional groups like the EU (European Union) and APEC (Asia-Pacific Economic Cooperation) have emerged, where member countries have few or no trade barriers between them

The rise of global brands

Huge multinational brands like McDonald's and Coca-Cola® can now be found almost anywhere in the world. Several factors explain this increase in global brand presence:

International broadcasting

International broadcasting enables people to watch television programmes from different countries, which creates international demand for products:

• When consumers see products advertised on popular international TV channels, they develop interest in those products
• This exposure builds brand awareness and desire across borders

Internet marketing

The internet allows companies to market and sell their products internationally without the expense of establishing a physical presence abroad:

• Businesses can sell products internationally whilst avoiding the expense of setting up operations in foreign countries
• Companies can advertise through foreign websites and offer overseas shipping to customers
• This approach allows firms to create a global brand whilst avoiding the risks associated with establishing physical businesses in other countries

Opportunities in emerging economies

Emerging economies are developing countries experiencing fast growth, though they haven't yet reached the development level of fully developed economies. China, India, Brazil and Russia represent four of the most significant emerging economies.

Why emerging economies attract businesses

These markets offer several compelling opportunities:

Good returns from rapid growth:

• Emerging economies present good opportunities for businesses because they offer good returns (profits on investment)
• Their rapid growth means expanding markets and increasing consumer spending

Lower labour costs:

• Labour is usually cheaper in emerging economies compared to developed countries
• This cost advantage allows businesses to reduce production expenses significantly

Growing middle class:

• As jobs are created in these economies, people move out of poverty and a new middle class forms
• This emerging middle class becomes eager to spend money on luxuries (non-essential products) they couldn't previously afford
• This creates substantial economic activity (buying and selling) and new market opportunities

China and India's significance for UK businesses

These two countries offer particularly important opportunities for UK firms:

Market access improvements:

• China removed its protectionist barriers (restrictions on international trade) and became a member of the WTO in 2001, providing UK businesses with more opportunities to export products to China
• As India's income has increased, its imports have also increased, creating opportunities for UK businesses

Large consumer markets:

• Both China and India have very large populations, creating huge markets that can be extremely profitable for UK businesses with strong demand for their products

Wealth creation:

• Recent economic growth has produced many millionaires and even billionaires in China and India
• This wealth creates significant potential for UK companies selling luxury products

Cost reduction opportunities:

• UK businesses can reduce costs by outsourcing manufacturing to emerging economies
• They can also establish call centres in these countries

Challenges of trading with emerging economies

Despite the opportunities, businesses face significant challenges when operating in emerging economies:

Poverty and limited demand

Many people in these countries remain very poor, which limits market potential:

• Despite recent economic growth, many people in China remain very poor
• China has one of the world's largest economies measured by total GDP, but its GDP per person is below average
• In India, around 25% of people are below the poverty line
• This widespread poverty means the number of potential customers for many products is reduced, particularly for non-essential or premium goods

Government restrictions

The Indian government has imposed restrictions on foreign businesses investing in Indian companies. This trade barrier makes it more difficult for UK businesses to enter the Indian market and establish operations there.

Language and cultural barriers

Language and cultural barriers can prevent UK businesses from trading successfully with India and China:

• These barriers prove particularly difficult to overcome in China
• In India, more people speak English, and the culture is more similar to UK culture because India is a former British colony, making trade somewhat easier
• However, significant differences still exist that businesses must navigate

Currency vulnerabilities

Emerging economies use different currencies to the UK, creating financial risks:

• UK businesses are vulnerable to changes in currency values
• A strong pound makes British exports more expensive abroad
• Higher prices would reduce demand for products from UK companies operating in India and China
• This currency risk adds uncertainty to profit forecasts and business planning

Investment risks

Emerging economies represent risky investments because they are less stable than developed economies:

• There might be sudden political changes that affect business operations
• Currency fluctuations (rapid changes in currency values) create financial uncertainty
• Infrastructure problems (inadequate roads, power supply, communications networks) can disrupt business operations
• These factors make it harder to predict returns and plan long-term investments

Remember!