Irish Businesses & International Trade (Leaving Cert Business): Revision Notes

Irish Businesses & International Trade

Why Irish businesses engage in global trade

Irish businesses participate in international trade for several important reasons that relate to Ireland's unique economic position and resource limitations.

Resource and climate limitations

Ireland faces significant natural resource constraints that make international trade essential. The country must import many raw materials and finished goods that are not available domestically, such as essential materials for manufacturing and consumer products like cars.

The Irish climate is not suitable for growing certain products that consumers demand, such as citrus fruits and coffee. This creates a natural need to import these goods from countries with more favourable growing conditions.

Market size constraints

Ireland's standard of living has improved dramatically over recent decades, but this creates increased demand for imported goods as consumers seek wider choice and better quality products. The domestic market alone cannot satisfy this enhanced consumer demand.

The home market in Ireland is relatively small compared to other countries. Irish businesses need access to larger international markets to achieve growth potential and increase sales volumes beyond what is possible domestically.

Economic advantages through scale

Economies of scale become achievable when Irish firms can export to larger markets. Higher production volumes help reduce the cost per unit of production, making Irish businesses more competitive and profitable.

Irish businesses can achieve greater profitability by selling to international markets rather than limiting themselves to the domestic market. Access to millions of customers globally provides much greater revenue potential than serving only the Irish population.

Benefits of international trade for Irish businesses

International trade offers numerous advantages to Irish businesses across different areas of operation.

Market access advantages

Irish businesses gain access to the vast European market as EU members. Ireland has free access to over 400 million consumers, creating enormous opportunities for growth that would be impossible by serving only the Irish population.

The euro currency makes trading easier within the eurozone as it provides stability and removes exchange rate risks that businesses would face with multiple currencies.

Competitive and educational benefits

Irish education levels are among the highest globally, and Ireland maintains a highly educated and skilled workforce. This makes Ireland an attractive location for international companies and helps Irish businesses compete globally.

Language and culture provide unique advantages, as English is an international language and Irish culture and heritage create distinctive selling points in global markets.

Business environment advantages

Low corporation tax rates help attract foreign companies to Ireland and make Irish businesses more competitive internationally.

Government assistance is available through bodies like Enterprise Ireland, which provides grants, training and advice to reduce risks and costs for businesses expanding internationally.

Challenges facing Irish businesses in international trade

Despite the benefits, Irish businesses face several significant challenges when trading internationally.

Cost and efficiency challenges

High costs represent a major barrier, as transport costs are higher for Irish businesses due to the island location. Other associated costs can also slow down the distribution of goods, making Irish businesses less competitive.

Lack of economies of scale affects many Irish businesses, as it can be difficult to compete against larger international firms that can produce in massive quantities. This particularly impacts sectors like cars, soft drinks, and medicines where scale advantages are crucial.

Competition pressures

Globalisation creates intense competitive pressure as Irish firms must compete with large international corporations, including those from non-EU countries. For example, the Open Skies agreement allows international airlines to operate in Ireland, creating competition for Aer Lingus.

Irish businesses often need to focus on niche markets to succeed, as competing directly with global giants in mass markets can be extremely difficult.

Geographic and cultural barriers

Location disadvantages affect Ireland significantly, as the island location makes transport by air and sea expensive and can slow down distribution compared to businesses in continental Europe.

Foreign languages create barriers when Irish businesses try to expand into new markets. Knowledge of local languages is essential for effective communication with customers and understanding local business cultures.

Cultural differences require Irish businesses to adapt their marketing, product design and business standards to suit local customer preferences and cultural expectations.

Understanding international trade flows

International trade flows are categorised into four main types based on the direction of trade and whether they involve physical goods or services.

Visible trade

Visible imports refer to physical goods purchased from abroad. These are tangible products you can see and touch, such as cars and computers from China, books from France, or machinery imports. When these products arrive in Ireland, money leaves the Irish economy to pay foreign suppliers.

Visible exports involve physical goods sold to people abroad. Examples include Irish food products sold to France, pharmaceutical goods exported to the UK, and machinery sold to other countries. These exports bring money into the Irish economy when overseas customers pay for Irish goods.

Invisible trade

Invisible imports refer to services purchased from abroad by Irish individuals or businesses. Examples include banking services, insurance policies, or tourism spending by Irish people abroad. For instance, when Irish people holiday in Spain and spend money there, this represents invisible imports as money flows from Ireland to Spain.

Invisible exports are services sold by Irish businesses to customers abroad. Examples include Spanish tourists spending money in Irish hotels, restaurants and attractions, or Irish banks providing financial services to foreign clients. These service exports bring foreign currency into Ireland.

Calculating the value of international trade

Understanding how to measure and calculate international trade values is essential for analysing a country's economic performance.

Key calculation concepts

Balance of trade measures the difference between all visible exports and visible imports in a country. This focuses only on physical goods and excludes services.

Balance of invisible trade calculates the difference between invisible exports and invisible imports, focusing specifically on the services sector.

Balance of payments provides the most comprehensive measure by calculating the difference between total imports and total exports, including both goods and services.

Understanding surplus and deficit

A surplus occurs when a country earns more than it spends internationally. This is a positive situation indicating the country is earning more foreign currency than it is spending abroad.

A deficit represents a negative situation where the country is paying out more money internationally than it is earning from foreign customers.

Calculation methods

There are two main methods for calculating balance of payments:

Method 2 uses total figures:

• Calculate total exports (visible exports plus invisible exports)
• Calculate total imports (visible imports plus invisible imports)
• Subtract total imports from total exports for the balance of payments

Implications of trade balances

When a country has a deficit in its balance of payments:

• More money is leaving the country than coming in
• The government may need to increase taxes or VAT to raise income
• Higher unemployment may result as businesses need fewer employees
• Overall economic performance may decline

When a country achieves a surplus:

• More money flows into the country than leaves it
• The government might reduce taxes due to improved finances
• Higher employment levels typically result
• People generally have more disposable income and improved living standards