Edexcel A Level Business

Revision Notes

UNIT 4 GLOBALISATION
4.1.1 Growing Economies
UK Growth Compared with Emerging Economies
• The growth rate of a country is measured by the annual change in its gross domestic
product (GDP)
• Emerging economies are economies that have increasing growth rates but relatively low income per
head (per capita)
o E.g. India, China and Brazil are considered to be emerging economies
• UK growth tends to be lower than emerging economies
o A key factor why emerging economies are growing at a faster rate than the UK economy is
because of the growth of the manufacturing sector
o The UK economy has seen a decline in the manufacturing sector as businesses choose to
manufacture in emerging economies due to lower labour costs and access to raw
materials
o China is the world’s largest manufacturing economy and exporter of goods

The growth rate of China from 2002 to 2021 peaked at around 14% (Source: Macrotrends)

• A comparison of the two charts above quickly reveals that the growth rate of China is consistently
higher than that of the UK
o The UK growth rate peaks at around 4% in 2000 whereas China peaks at around 14% in 2007

In Paper 1, Extract A-D may include graphs with economic data such as GDP figures which you may
be required to interpret and explain trends over a period of time. Make sure you read the titles and
labels of the axis to be clear about what the information is showing.

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Emerging Economic Power in the Developing World
• Globalisation is the economic integration of different countries through increasing freedoms in the
cross-border movement of people, goods/services, technology & finance
• The past twenty years has been characterised by rapid globalisation and the growing economic
power of less economically developed countries.
• The integration of global economies has impacted national cultures, spread ideas, and speeded
up industrialisation in developing nations
• Emerging economic powers of countries within Asia, Africa and other parts of the world include
o BRICS: Brazil, Russia, India, China and South Africa
o MINT: Mexico, Indonesia, Nigeria and Turkey
• Emerging economies have a growing middle class with increasing incomes which allows their
citizens to spend more on domestic goods and imported goods from abroad
o This increases the profitability of international firms who sell their goods and services in
these emerging economies

The Implications of Economic Growth

• Economic growth helps to generate income in a country and there are numerous implications for
businesses and individuals within it

The Impact of Economic Growth on Businesses and Individuals

Impacts on Businesses Impacts on Individuals

• Potential for increased profits as • Reduced unemployment as there is more
businesses enter new markets and gain demand which requires more labour to
more customers increase output
• Customers are likely to have income
elastic demand leading to increased sales
and revenues/profits
• Reduced costs of production as • Increased average incomes as individuals
businesses can benefit from lower labour now have rising incomes due to employment
costs and cheaper raw materials in which increases the standard of living
emerging economies
• Increased trade opportunities as demand • Access to quality public services as more
for goods and services increases tax revenue is generated. The government
can improve the quantity and quality of public
services
• Increase in investment because as the
economy grows, businesses want to
expand so they are more likely to invest
• There may also be an increase in foreign
direct investment (FDI) as businesses
want to benefit from growing economies

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Indicators of Growth

• There are four key indicators used to assess the economic growth of emerging economies
o Businesses will consider these indicators when deciding which markets to invest in for future
expansion

Indicators of Economic Growth within an economy

Indicator of Growth Explanation

GDP Per Capita • GDP per capita is calculated by taking the total output (GDP) of a country and
dividing it by the number of people in that country
• High GDP per capita is associated with a high standard of living
• It is important to look at the GDP per capita over a period of time to see whether
there has been an improvement
• GDP per capita can also be a useful indicator to compare the growth in two
countries
Health • The health of a countries’ citizens is important to businesses who want to invest
in emerging economies as this will have an impact on the quality of the
workforce
• Key indicators to consider are average life expectancy, infant mortality rate ,
access to healthcare and access to clean water
Literacy • Literacy refers to the percentage of adults within an economy who can read and
write
o According to the OECD’s 2016 International Adult literacy survey, the
differences in average skill levels among OECD countries explain 55% of
the differences in economic growth
o Information about literacy rates is important as this will determine
the quality of the workforce and also the customers they will be selling to
Human Development • Human Development Index (HDI) combines the factors of life expectancy,
Index education and income to determine the quality of development of citizens within a
country
• Specifically, HDI looks at; life expectancy , mean years of schooling and gross
national income per capita (GNI)
• It was created by the United Nations and is measured between 0-1 (1 being the
highest)
• The problem with using HDI as a measure of development is that
o It does not account for inequalities within a country
o There is a lack of reliable data in some countries

In Paper 1, you should be able to assess information given in extract A-D of the indicators of
growth from the perspective of whether a business should consider a country as a potential market
Questions that use the command word ‘assess’ require you to outline the advantages and
disadvantages of the indicators. Make sure your apply it to the context of the business within the
extract

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4.1.2 International Trade & Business Growth

Business Specialisation & Competitive Advantage

Imports and Exports
• Businesses that trade internationally import and export goods/services
o Imports are goods and services bought by people and businesses in one country from
another country
▪ In 2022, the UK’s biggest import was cars valued at approximately £3.25 billion
o Exports are goods and services sold by domestic businesses to people or businesses in
other countries
▪ In 2022, China’s biggest export was smartphone manufacturing valued at
approximately $21.4 billion
• Exports generate extra revenue for businesses selling their goods abroad
• Imports result in money leaving the country which generates extra revenue for foreign businesses
Specialisation and Competitive Advantage
• Specialisation occurs when a country/business decides to focus on producing a particular
good/service
o Businesses specialise when they focus on a specific goods/services e.g. Apple focus on the
production of technological products and services
o Countries can also specialise on a narrow range of goods and services e.g. Ghana
specialises in cocoa and gold
• Specialisation can increase the quantity and quality of goods and services. This has many benefits
including;
o Lower unit costs due to Economies of scale as costs are spread over a large output
o Lower unit costs allow the business to lower prices for consumers leading to more sales
o If businesses do not lower their selling price, then due to the lower costs they are able to
to increase their profit margins
o Any excess output can be sold abroad as exports
• When businesses specialise, it can also help them to gain a competitive advantage
o If they can increase the value added on their goods/services, this can help to gain an edge
over their competitors
o An example of a competitive advantage includes having access to local markets, resources
and materials that competitors do not have access to
FDI & Business Growth
• Foreign Direct Investment (FDI) is investment by foreign firms which results in more than 10%
share of ownership of domestic firms
• Businesses typically grow through FDI as mergers, takeovers, partnerships or joint ventures are
created with a foreign business in order to enter new markets
o E.g. EE was formed in 2012 as a joint venture between the French company Orange and the
German company T-Mobile, allowing greater share of the UK market
• Countries benefit from FDI as this can lead to

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o Increased economic growth as there is an inflow of money into the country
o Increased job opportunities as businesses expand operations
o Access to knowledge and expertise from foreign investors
• Inward FDI occurs when a foreign business invests in the local economy
o E.g. In 2017, Kenya opened the Kenya Standard Gauge Railway line built by Chinese
investors
• Outward FDI occurs when a domestic business expands its operations to a foreign country
o E.g. Dyson has moved its manufacturing from the UK to Malaysia, China and the Philippines

4.1.3 Factors Contributing to Increased Globalisation

Trade Liberalisation
• Globalisation is the economic integration of different countries through increasing freedoms in
the cross-border movement of people, goods/services, technology & finance
• There are many reasons why the speed of globalisation has increased, including increasing levels
of trade liberalisation
• Trade liberalisation is the removal or reduction of barriers to trade between different countries

Benefits of Trade Liberalisation Drawbacks of Trade Liberalisation

• Increased international trade allows • Domestic firms, in particular, Infant
businesses to increase their market size industries may not be able to compete against
o This leads to increased output and international firms
countries can benefit from economies • Some industries may be subject to dumping as
of scale businesses abroad may sell excess products at
• Freer trade helps businesses to reduce costs unfairly low prices
as imported raw materials and
components can be sourced more cheaply

Influences on Globalisation
• There are many reasons for the increasing levels of globalisation
• The context of an individual country determines which of these reasons has had the greatest
impact on their economy
o E.g. The USA has lost numerous manufacturing sectors as production has moved to lower
cost countries such as India or China

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An Explanation of the Factors Contributing to Increased Globalisation

Factor Explanation
Political change • Changes in the government of a country can influence the
country's attitude to trade
o E.g. China joined the World Trade organisation in 2001
which led to a significant increase in exports
Reduced cost of transport and • Economies of scale due to innovation in containerisation on
communication large ships has reduced business costs
• Technological advancements due to the internet/mobile
technology have improved made it easier for buyers and
sellers to connect with one another
Increased significance • A transnational company is a business that operates in more
of transnational companies than one country
• They will have their headquarters in one country but have other
branches in other countries
o E.g. Nike has its headquarters in Oregon, United
States. As of 2022, they have 1046 retail stores
throughout the world
• With increasing numbers of transnational
companies operating globally, there is an increased pressure
by countries to engage in free trade
Increased investment flows (FDI) • FDI is important for job and wealth creation within an
economy
• It allows businesses to establish themselves in countries where
they may face trade barriers
Migration (within and between • Migration is the movement of people from one location to
economies) another
• Migration has led to increased globalisation as better
transportation and deregulation have allowed workers to have
more flexibility when looking for work
o E.g. In 2022, the United Arab Emirates had the highest
proportion of immigrants at 88%
Growth of the global labour force • The global labour force has grown significantly especially
due to the growth of emerging economies such as India and
China
• This has increased globalisation due to the following reasons
o More people in work means more income to spend on
goods and services boosting global demand
o An increased supply of labour leads
to falling wages which is beneficial
in reducing business costs
o More people working generates increased levels
of entrepreneurship
Structural change • This occurs when a country, industry or market changes which
sector of industry they operate in
o E.g. the UK has shifted from the manufacturing sector
to the tertiary sector over the last 50 years
o Offshoring is common practice and speeds up the
process of globalisation

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4.1.4 Protectionism
Protectionism - Tariffs
• Protectionism is when a government seeks to protect domestic industries from foreign
competition
• A tariff is a tax placed on imported goods from other countries
o For example, tennis rackets imported into the UK from China have a tariff of 4.7%
• A tariff increases the price of imported goods which helps to shift demand for that product/service
from foreign businesses to domestic businesses

When the USA places a tariff on imported cheese from Britain, the price of British cheese in the USA
rises

• American customers are more likely now to purchase American cheese as the tariff has
now made British cheese more expensive
• The benefits of tariffs include
o They protect infant industries so they can eventually become more competitive
globally
o An increase in government tax revenue
o Reduces dumping by foreign businesses as they cannot sell below the market price
• The disadvantages of tariffs include
o Increases the cost of imported raw materials which may affect businesses who use
these goods for production, leading to higher prices for consumers
o Reduces competition for domestic firms who may become more inefficient and
produce poor quality products for their customers
o Reduces consumer choice as imports are now more expensive and some
customers will be unable to afford them

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Students are often confused about who pays the tariff. It is not the foreign company, but the domestic
company who pays the tariff. In our cheese example above, any retailers in the USA who import
cheese from Britain have to pay the tariff (import tax) when it crosses the border into the USA. This
policy may help cheese manufacturers in the USA but it harms any other business that imports and
sells foreign cheese as it raises their costs of production.

Import Quotas

• An import quota is a government imposed limit on the amount of a particular product allowed into
the country
o E.g. China has set an import quota on Cambodian rice of approximately 5.32 million tonnes
per year

The quota on rice imports from Cambodia to China helps to protect rice farmers in China

• Restricting the physical amount of imports means that domestic businesses face less
competition and benefit from a higher market share
o More of the domestic demand is now met by domestic producers
• The benefits of import quotas include
o To meet extra the demand, domestic businesses may need to hire more workers which
reduces unemployment and benefits the wider economy
o The higher prices for the product may encourage new businesses to start up in the industry
o Countries are able to easily change import quota as market conditions change
o Foreign countries view a quota as less confrontational to their business interests than tariffs
▪ Their exporters can still sell their goods at the higher price in domestic markets (but a
limited amount)
• The disadvantages of import quotas include
o Quotas limit the supply of a product and whenever supply is limited, the price of the product
rises
o They may generate tension in the relationship with trading partners
o Domestic firms may become more inefficient over time as the use of quotas reduces the
level of competition

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Other Trade Barriers
• Aside from tariffs and quotas, governments also choose to use legislation and subsidies to protect
domestic businesses

The use of Government Legislation & Domestic Subsidies to Protect Domestic Industries

Government Legislation Domestic Subsidies

How does it work? • Governments can impose • Payments are given to domestic
laws to restrict certain businesses to help lower costs of
imports production
to protect customers and
businesses
• Imports may need to meet
strict regulations in order to
be allowed into the country
Example • There is a UK ban on • Post Brexit, the UK Government is
imported chicken from the providing subsidies to its farmers in
USA due to the practice order to decrease their costs of
there of using chlorine to production
wash chicken carcasses
Benefits • Allows domestic firms to • Reduced costs can lead to lower
grow as they have limited prices making domestic firms more
competition from businesses competitive in international markets as
abroad their exports may be cheaper
• Businesses remain competitive and
this helps to protect jobs in the industry
Drawbacks • Can lead to retaliation from • Businesses may become inefficient as
countries facing the they know as they know their costs are
legislation being subsidised

In Paper 1, you need to be able to evaluate the effects of protectionism on a business. You should
also be able to assess the short term and long term effects of protectionism on foreign and domestic
businesses. Depending on the nature of the business, the effect of protectionism can be immediately
felt. It may take some time for other firms to feel the effects. Read the case study carefully to
determine the context.

4.1.5 Trading Blocs

Expansion of Trading Blocs

• A trading bloc is a group of countries that form an agreement to reduce or eliminate protectionist
measures between each other
• Joining a trading bloc is a key method of increasing trade liberalisation and leads to trade creation
o Trade creation means that businesses are able to enter new markets which can lead to an
increase in sales volume and sales revenue

• Three of the largest trading blocs include The European Union (EU), The Association of
Southeast Asian Nations (ASEAN), and The North American Free Trade Agreement (NAFTA)

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The European Union (EU)
• The European Union is an economic union, originally formed in 1993
• Countries in Europe can apply to join the union and as of February 2023, there are 28 countries in the
union
• Being a member of the EU includes free movement of goods and people
o Countries within the union have no trade restrictions between themselves
o Countries within the union have common external barriers (e.g. tariffs) to countries outside of
the union
• The UK voted to leave the EU in 2016, and officially left in 2020
Association of Southeast Asian Nations (ASEAN)
• ASEAN was originally formed in 1967
• In February 2023, ten countries were part of this free trade area
• The ASEAN free trade area is less integrated than the European Union as it does not allow for the
free movement of people between the countries, whereas the European Union does
o A free trade area aims to achieve free flow of goods in the region (eliminating trade barriers)
o Free trade areas lower business costs, increase market size and help businesses to generate
economies of scale
North America Free Trade Agreement (NAFTA)
• NAFTA was established in 1994 between Canada, Mexico and the USA. The aim was to promote
free trade between these countries
• In 2018, the terms of the agreement were renegotiated and it was renamed USMCA
(United States, Mexico, Canada)
• Many USA businesses relocated their manufacturing to Mexico as goods could be produced there
much more cost effectively due to the lower wages paid to Mexican workers
o The products could then be imported back into the USA without and tariffs being incurred
• Mexico benefitted from this agreement as it helped to create many new industries and jobs within the
country
o However, most of the benefits occurred in the north of the country close to the USA border

The Impact of Trading Blocs on Businesses

• The impact on a business of trading blocs is dependent on whether the business trades in or out of
the trading bloc
• Businesses outside the trading bloc will face higher costs from protectionist measures such as
tariffs and trying to meet legal requirements inside the trading bloc
o This will make them less competitive when trying to sell goods to member countries within
the bloc
o Being outside the bloc is likely to decrease their sales volume to countries within the bloc

The Benefits for Businesses Inside the Bloc

The benefits for businesses of belonging to a trading bloc

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1. Access to more markets
• Businesses are able to sell to more customers due to free movement of goods
2. External tariff walls
• An external tariff wall is a tax applied to imported goods by a group of countries that have
formed a trade agreement
• This protects businesses within the trading bloc from competition from businesses outside of the
trading bloc
3. Infrastructure support
• Businesses may gain additional support from the government to enable them to maintain their
competitiveness against businesses in countries inside the trading bloc
4. Free movement of labour
• Trading blocs may also have free movement of labour allowing businesses to source workers
from a wider pool
• A higher supply of labour may push wages lower, leading to reduced costs for business
• E.g. Citizens of EU countries have the right to work in any Member State and to be treated
equally as citizens of that State

The Drawbacks for Businesses Inside the Bloc

The drawbacks to businesses of belonging to a trading bloc

1. Increased competition
• There is increased competition for businesses within the trade bloc which may be more of an
issue for small businesses as they have less resources available with which to compete
• Businesses with [popover id="gFvRUFnfn0kKPnY2" label="monopoly power "] can increase
their monopoly by eliminating competitors in other countries within the bloc
• E.g. the UK supermarket industry faced increased competition from the German
supermarkets Aldi and Lidl when the UK was part of the EU
2. Common rules and regulations
• In order to operate as one market, new rules and regulations may be put in place that all
businesses must adhere to
• E.g. The EU working time directive states that employees can only work a maximum of 48
hours per week
3. Retaliation
• External tariffs set against countries outside of the trading bloc may lead to retaliation from
these countries
4. Inefficiency
• Although there is increased competition between countries within the bloc, there is less
competition from businesses in countries outside of the bloc
• This may reduce the incentive of businesses to be more efficient
• Trading blocs also lead to trade diversion which means trade is taken away from efficient
producers who operate outside of the trade bloc and replaced by trade within the bloc

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4.2.1 Conditions that Prompt Trade
Push Factors
• Push factors are factors that push a business to expand outside of their domestic country
• When faced with saturated markets or intense competition, businesses may consider engaging in
international trade as a way to access new markets, diversify their customer base, and gain a
competitive advantage
• There may be adverse conditions within a domestic market which may cause a business to look at
opportunities in countries abroad
o E.g. Due to the UK leaving the European Union, some businesses have decided to move their
operations outside the country
▪ Sony has moved their headquarters from the UK to the Netherlands
▪ Honda closed a production plant in Wales in 2021
▪ HSBC chose to move their London base to France
1. Saturated Markets
• Saturated markets occur when the demand for goods and services has reached a peak and it
becomes challenging for businesses to grow and expand within the local market
• This often prompts businesses to explore opportunities in other global markets which can help to
sustain their growth and profitability
2. Intense Competition
• In a competitive market, businesses need to find ways to differentiate themselves and gain a
competitive advantage
• One way to achieve this is by exploring new markets and expanding their customer base
• By exporting goods and services to new markets, businesses can reduce their reliance on a single
market and diversify their revenue streams, thereby reducing their exposure to market volatility
and competition

Pull Factors

• Pull factors encourage businesses to operate within markets abroad which present significant
growth opportunities
• Two pull factors that can prompt trade are economies of scale and risk spreading

1. Benefiting from economies of scale

• Economies of scale usually occur when a business expands its production in new markets abroad
• Businesses may also be able to purchase raw materials and labour at lower prices than within their
domestic markets
o E.g. Ikea expanded into China as there was opportunity for growth as families
were demanding more furniture due to the removal of the one-child policy
o Producing furniture in China helped to reduce transportation and distribution costs
2. Spreading risk
• By accessing multiple markets, businesses can diversify their customer base and reduce their
exposure to risks associated with operating in a single market
• This can include economic risks, political risks, and other types of risks that could impact their
operations and profitability
o E.g. Aston Martin produces motor cars in the UK, however it exports them to multiple markets
to reduce exposure to risks associated with operating in a single market
▪ There may be a recession in the UK but not in the USA

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Offshoring & Outsourcing

• Businesses use offshoring and outsourcing to develop their international trade

Offshoring

• Offshoring is when a company moves part of the production process, or all of it, to another country

• Reasons for offshoring include

o Lower labour costs
o Access raw materials
o Access skilled labour

The Advantages and Disadvantages of Offshoring

Advantages of offshoring Disadvantages of offshoring

• Lower labour costs may be available in • Public relations and employer/employee
other countries which help businesses to relations may suffer due to relocation as
keep costs down and increase profitability domestic workers lose jobs
• Access to specialised suppliers in • Increased costs in short term such as
countries abroad who provide better relocation costs, acquiring new premises
quality service, raw materials or and training new staff
components
• Economies of scale as businesses sell to • Possibly poor customer service due to
a larger international market language and cultural differences between
the domestic consumers and foreign
workers
• E.g. In 2011, Santander moved their call
centre back to the UK from India after
customers expressed dissatisfaction with
the quality of service they were receiving

Outsourcing
• Outsourcing occurs when a business hires an external organisation to complete certain tasks or
business functions
o E.g. Apple outsources the production of the iPhone to Foxconn in China
• The key reasons for a business choosing to outsource include
o Reduced costs
o Allows business to focus on core competencies
o Easier to comply with rules and regulations in other countries as they are often less
demanding
• The main difference between offshoring and outsourcing is that offshoring is still carried out under
the same business whereas outsourcing is done by a completely different business

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The Advantages and Disadvantages of Outsourcing

Advantages of Outsourcing Disadvantages of Outsourcing

• Businesses can take advantage • Damage to brand image as the values of the
of specialist skills that another business two businesses may not be in alignment
has or that can complete a particular task o E.g. Foxconn workers producing Apple
more efficiently products were committing suicide due
to the low pay and poor working
conditions
• Cost effectiveness as businesses avoid • Poor communication between the
having to spend money investing in new businesses can cause issues which can lead
facilities abroad to increased costs and disruption for the
business choosing to outsource
• Businesses can benefit from higher labour
productivity in other countries
o Labour productivity is the volume of
output obtained from each worker
per hour
o This can lead to lower costs for the
business overall if workers are more
productive

Product Life Cycle Extension

• The product life cycle represents the value of sales from the time a product is introduced into the
market until it is no longer sold

The four stages of the Product Life Cycle show the value of sales over a period of time

• The stages of the product life cycle include Introduction , growth , maturity and decline
• An extension strategy is a method used by a business to extend the life cycle of a product or
service
• One extension strategy that can be used by a business is to sell the product in new international
markets to extend the life of the product
o A product could reach maturity in one market but could then be introduced into another market
o This allows the business to generate more revenue

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4.2.2 Assessing a Country as a Market
Factors to Consider Before Entering New Countries
• When businesses are considering new markets, they have to consider the attractiveness of the
market
• This will involve businesses carrying out extensive market research, and using models such as
the Boston Matrix and PESTLE

Factors to consider before entering new countries

Infrastructure
• Infrastructure considers factors such as roads, transportation and communication (mobile
coverage/internet)
o Good infrastructure improves the production process and delivery of goods/services to the
customer which reduces costs and increase sales
Ease of doing business
• Rules and regulations involved in establishing a business in a particular market may be relatively
simple or extraordinarily hard
o Issues to consider include accessing credit, registering properties and enforcing contracts
o If businesses face significant challenges setting up a business, this may lead to delays in
operations and the business generating sales
• The World Economic Forum (WEF) has established a ranking of countries by the ease of doing
business

A scoring system that rates how easy it is to conduct business activities in different countries (Source: World
Economic Forum)

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Levels of growth and disposable income
• Disposable income is the income individuals have left after paying direct taxes (e.g. income tax) and
other deductions (e.g. pension contributions)
o Selling products in a country with higher disposable income is likely to lead to more sales
o Selling in a country with lower disposable income is likely to lead to slower sales growth
• Businesses should look at trends in income levels over time to see if there is potential growth in
sales in the future
Exchange rates
• An exchange rate is the price of one currency in terms of another e.g. £1 = $1.10
• Exchange rates can be subject to extreme fluctuations due to external factors
o Businesses should look at the historical trends of the currency of the country
• Businesses moving to countries with stronger currencies can import raw materials and components
for production at a lower price
• Exports from this country will be more expensive to customers abroad
Political Stability
• Businesses may be at risk of not gaining a return on their investment in a country with political
instability
o A country with political instability will be subject to corruption, lack of law enforcement and
higher levels of crime
o It is more likely to have disruption to trading
• An economy with a stable economy and government is seen as a less risky investment for a
business
In Paper 1, you may be given an extract A-D will contain information regarding a particular
market/country. You will be expected to assess if the business should expand and make a
judgement regarding whether a business should expand their operations in this market. It is
important you use evidence from the extract and your own knowledge to support your arguments
and consider in your conclusion what the most important factors are for the business

4.2.3 Assessing a Country as a Production Location

Factors to Consider Before Setting Up Production Locations in Other Countries

• Businesses may choose to set up production facilities in other countries
• This is a different process from choosing a country as a potential market for customers
• In this sense, production includes both manufacturing and any services associated with the
business e.g. call centres

Factors to assess when deciding considering setting up production facilities in another country

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• When setting up production facilities in another country, several factors need to be
assessed to ensure a successful outcome
• These include the costs of production, skills and availability of labour force, infrastructure,
location in trade bloc, government incentives, the ease of doing business, political stability,
natural resources available, and the likely return on investment

Factors when assessing production location

Factor Why is this factor important?

Costs of production • Businesses want to keep costs of production low as this can help
them increase their profit margin or allow them to sell at a lower
price to gain a competitive advantage
Skills and availability of labour • The quality of the workforce is important as this will directly impact
force the quality of the goods and services produced in an economy
o Businesses will need to consider factors such as literacy
rates and whether the workforce has the right skills needed
for the business
• Businesses may choose to locate production in a market where
the labour costs are lower
Infrastructure • Businesses need to consider the infrastructure needed such as
roads as this will affect the production process.
o E.g the transportation of raw materials for the production
process
Location in a trading bloc • A business located in a market within a trade bloc will be able to
access many advantages such as reduced protectionist
measures
o E.g. Japanese companies Nissan and Toyota have invested
in manufacturing facilities in the UK (prior to Brexit) to gain
access to the EU market
Return on investments • Assessing the return on investment in different markets will reduce
the risk of the initial investment not being paid for
• Investment appraisal techniques (payback method, average rate
of return and discounted cash flow) can be used to tell a
business what their potential return on investment could be
Natural Resources • It is often important that a business has easy access to their raw
materials as this can help to reduce transportation costs and help to
reduce any potential delays to the production process
Political Stability • Businesses may be at risk of not gaining a return on their
investment in a country with political instability
o A country with political instability will be subject to
corruption, lack of law enforcement and higher levels of
crime
o It is more likely to have disruption to production
• An economy with a stable economy and government is seen as
a less risky investment for a business
Ease of doing business • A business will want to locate in an area where there is
limited bureaucracy, so the process of establishing production
facilities is not delayed or does not incur high costs
Government Incentives
• Businesses may be offered incentives (e.g. grants, business loans
and tax breaks) by the government

IAL/BUSINESS/REVISION NOTES/UNIT 4 17
In Paper 3 you may have a question with different location options and you need to evaluate the
financial and non-financial factors to determine which location would be the best option for a
particular business. This may also involve performing calculations for an investment appraisal or
quantitative sales forecasting (Theme 3)

Remember, there is a difference between whether a business is choosing a location as a potential

4.2.4 Reasons for Global Mergers & Joint Ventures
market or for production facilities!

Factors Driving Global Mergers & Joint Ventures

• A global merger is an agreement between two businesses from two different countries to join
together
• A joint venture is when two businesses join together to share their knowledge, resources and skills
to form a separate business entity
o E.g. The mobile network EE is a joint venture formed by the French mobile network, Orange
and the German mobile network, T-Mobile
• Businesses may choose these methods of reaching a new market as they may be more cost effective
than exporting, licensing and franchising

Key reasons for global mergers and joint ventures

Spreading Risk
• Businesses operating in different markets spreads the risks associated with fluctuating economic
conditions
o If there is an economic downturn in one market, they may still gain sales in another market
that is less affected
Entering new markets/trading blocs
• Entering a market using a merger/joint venture is a quicker method than using organic growth
• In emerging economies, many governments inisist that foreign businesses can only operate as a
joint venture as this can benefit domestic businesses
• Forming a joint venture with a local company allows the joining business to gain knowledge and
business of the local markets
Acquiring national/international brand names/patents
• A patent is the legal right given by the government to an individual or business to make, use or sell
an invention and exclude others from doing so
• The process of developing intellectual property can be a long and expensive process

IAL/BUSINESS/REVISION NOTES/UNIT 4 18
o Using a merger/acquisition is a method businesses can use to get access to intellectual
property or a business with a strong reputation
Securing resources/supplies
• Businesses can strategically merge or create a joint ventures with another business which has
access to resources e.g land and raw materials
o This allows business to quickly gain access to resources which helps to speed up the
production process
• Businesses have to be aware of any ethical issues concerning the resources as this can damage
the reputation of the business e.g. perhaps being unaware that the company they are joining with
uses child labour
Maintaining/increasing global competitiveness
• Businesses can increase their global dominance by merging or joining with another business
• By expanding, a business can benefit from economies of scale which leads to lower costs
o Businesses can reduce prices which can increase sales, leading to a higher market share

The Benefits and Drawbacks of Global Mergers & Joint Ventures

Benefits Drawbacks
• Economies of scale gained from costs • The initial costs of merging can be
spread over larger output can lead to significantly high
increased profit margins • There is no guarantee a business will gain a
return on their initial investment if it is not
successful
• Diversifying risk due to having products in • Diseconomies of scale can occur due to
several markets so if there is a fall in sales communication issues and a lack of control as
of certain products, the business can still the business expands
generate revenue from other products
• Opportunity to enter new markets which • A culture clash between the two businesses
otherwise may be closed to the business can affect the quality of the business, leading
to poor sales
• When two businesses join
together, redundancies can occur
o This is likely to affect the morale of the
remaining workers

In Paper 1, you may have to evaluate the strengths and weaknesses of a potential
merger/takeover and joint venture. You can use extract A-D for application but words ‘such as’ in
the question means you can base the application on a similar business

The examiner recommends that students read quality newspapers, financial publications and
reputable websites to become familiar with various business contexts that can be referred to their
4.2.5 Global Competitiveness
exam answers

Exchange Rate Fluctuations

• Global competitiveness is the ability of a business to perform better than its rivals across markets in
different countries
• Fluctuations in exchange rates can influence the competitiveness of business
o An exchange rate is the value of one currency in terms of another currency

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• Currency appreciation and depreciation have different impacts on a business

Currency appreciation
• An appreciation of the exchange rate means the value of a currency increases against another
currency
o E.g. if £1= $1.60 and then increases to £1 = $1.80, the value of the £ has appreciated against
the US$

The Impact of Currency Appreciation on Global Competitiveness

Advantages of an Appreciation Disadvantages of an Appreciation

• If businesses import raw materials and • If businesses exports goods/services
components from abroad, they will now to foreign consumers, the goods will be
be cheaper more expensive for international customers
o This will help the business to reduce o This may lead to a fall in sales as
their costs and possibly increase consumers now shift demand to
their profit margin domestic businesses

Currency depreciation
• A depreciation of the exchange rate means the value of the currency decreases against another
currency
o E.g. If £1 = $1.60 and then falls to £1 = $1.20 the value of the £ has depreciated against the
US$

The Impact of a Currency Depreciation on Global Competitiveness

Advantages of a Depreciation Disadvantages of a Depreciation

• If businesses export goods/services abroad • If a business imports raw materials or

they become more competitive because their components from abroad, they are now
products are cheaper to purchase more expensive
• In the domestic market there may be less o This leads to an increase in the costs
competition from foreign firms as imports are for a business, which could then be
now more expensive for domestic passed onto consumers in the form of
consumers to purchase higher prices

Paper 1 and Paper 3 frequently question you on the impact of exchange rate changes on a
business. The information may be presented as a) a written extract or b) a table or graph showing
the fluctuations in the exchange rate. It is important to be able to explain whether an appreciation or
depreciation has occurred

Acronyms to help explain the impact of exchange rate changes include:

S.P.I.C.E.D - Strong Pound Imports Cheaper Exports Dearer (dearer means more expensive)

W.P.I.D.E.C - Weak Pound Imports Dearer Exports Cheaper

You can use the ‘pound’ interchangeably with any other currency used in the exam

IAL/BUSINESS/REVISION NOTES/UNIT 4 20
Competitive Advantage

• Global competitiveness increases when a firm has a competitive advantage

o Two factors that provide competitive advantage include cost leadership and differentiation

Cost Leadership and Differentiation

Cost Leadership Differentiation

• Cost leadership is when a business • Differentiation occurs when the business
becomes the lowest cost producer in their makes the characteristics of their
industry products/services different to those of their
• Cost leadership can be achieved using competitors
strategies such as: • Methods of differentiation include developing a
o Increasing the productivity of their strong brand, better design, better quality and
workforce customer service
o Using machinery and technology
efficiently
o Outsourcing
o Offshoring
• Businesses can utilise this position as a cost
leader to reduce their prices or keep their
prices the same which results in an increase
in profit margins

The Impact of Skills Shortages

• If a business is unable to find the labour with the required skills it will affect their ability to gain a
competitive advantage
• Cost leadership could be difficult to achieve if the workers lack skills as they may not be
as productive
o This could increase unit costs due to factors such as waste
• Product differentiation is less likely to occur where workers lack the skills and expertise to produce
highly differentiated products
• In order to overcome these issues, a business can use outsourcing and offshoring to access the skills
needed for their business

4.3 Global Marketing

4.3.1 Marketing

Glocalisation
• Global marketing strategy is the process of planning, producing, placing and promoting a
business’s product or service to the global market
• Glocalisation is a strategy where businesses aim to reach customers globally and also take into
consideration the needs of the local market
o The term ‘think global, act local’ is used to describe the strategy of glocalisation

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Different Marketing Approaches
• There are several marketing approaches that a business can take when it comes to expanding its
operations to other countries or regions
• The three main approaches are:
o Domestic/ethnocentric
o Mixed/geocentric
o International/polycentric

1. The Domestic/Ethnocentric Approach

• Businesses see the domestic market and foreign markets as very similar
• This approach is based on the belief that the company's home country culture and marketing
practices are superior to those of other countries
• There will be no changes to the products for overseas customers and marketing of the product will be
the same
o E.g. Apple sells standardised products across their global markets e.g. iPhone, iPad which
helps them to reduce costs as they can benefit from economies of scale

The Advantages & Disadvantages of the Ethnocentric Approach

Advantages Disadvantages
• Businesses can benefit from economies of • The business could potentially lose sales
scale as the product is standardised and as the product is not tailored to the needs
produced on a large scale and wants of markets overseas
• Costs are also lower as there is no • This approach can lead to cultural
investment into product development to insensitivity and may not resonate with
adapt products for different markets local customers in other countries

2. Polycentric/International approach
• Businesses adapt their marketing strategy by tailoring their products to the local market
• The company treats each country as a unique market and develops a customised marketing
mix for each market
o E.g. KitKat (Nestle) has developed different adaptations of the chocolate to reach different
consumers in the international market
▪ The packaging for KitKat in japan was changed to include cherry blossoms, a symbol
of good luck
▪ Additional flavours such as purple sweet potato and matcha powder were included to
appeal to the tastes of the local market

The Advantages & Disadvantages of the Polycentric Approach

Advantages Disadvantages

• Sales are likely to increase as the • Product development to adapt the product
product is tailored to meet the needs may increase average unit costs
of customers • There will also be additional costs in market
• This helps to develop brand loyalty research to find out about the market
in overseas markets

IAL/BUSINESS/REVISION NOTES/UNIT 4 22
3. The Geocentric/Mixed Approach
• This strategy is a mix of the polycentric and ethnocentric approach
• This approach utilises the benefits of standardised products but also tailors products to meet the
needs of local markets overseas while maintaining a consistent brand image across markets
o E.g. McDonald's has a geocentric approach by adapting their menu to meet the tastes and
culture of different overseas markets
o McDonald's do not offer beef or pork in India due to religious reasons. However in the majority
of western countries, McDonald's has standardised products such as the Big Mac

The Advantages & Disadvantages of the Geocentric Approach

Advantages Disadvantages

• Sales are likely to increase as the product is • There will be costs associated with the
tailored to meet the needs of customers product development and menu
• This helps to develop brand loyalty in changes required to meet the needs of the
overseas markets local market

The question can ask you to recommend which type of approach a business should take when
expanding abroad. You should take into account the best approach for the type of business that is
being considered in the extracts

Adapting & Applying the Marketing Mix to Global Markets

• The marketing mix is the set of controllable marketing tools that a company uses to promote its
brand or product in a market
o It consists of the four Ps - product , price , place , and promotion
• Businesses have to adapt the marketing mix to a new overseas market ensure the success of the
product/service
• By adapting the marketing mix to meet local needs, companies can effectively penetrate global
markets and build a strong global brand
Adapting the Marketing Mix to Global Markets
Place Product
• Businesses have to identify the best channel of • Businesses need to consider how much
distribution to get the product/service to the they should modify or adapt their
customer in a particular market products to meet new markets overseas
• They also need to consider the available • They need to consider if they will take an
technology as many transactions take place via ethnocentric, polycentric or geocentric
e-commerce approach
Price Promotion
• When making pricing decisions, businesses • Promotion needs to be adapted to meet
must consider customer incomes, costs of language and cultural differences
production and taxes • Businesses must aim to choose
• They must also consider the stage of the most effective method of
the product life cycle the product is at within promotion to promote products in that
that market market
• The state of the economy (recession or o E.g social media may be an
boom) will also impact the pricing strategy effective marketing tool in some
o E.g. In 2022, Coke in Finland was markets but less effective in
$2.42, whereas in Egypt is was $0.18 others

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Adapting & Applying Ansoff's Matrix to Global Markets
• Ansoff's Matrix is a strategic planning tool that helps businesses identify potential growth
opportunities by analysing their product and market strategies
o The matrix consists of four growth strategies - market penetration, market development,
product development, and diversification
• Expanding outside of domestic markets generates risks for the business, so they need to ensure
that they adopt the right strategy
o By doing so, businesses can effectively penetrate global markets and achieve long-term
success

Ansoff’s Matrix

EXISTING PRODUCTS NEW PRODUCTS

EXISTING GLOBAL MARKETS Market Penetration Product development
NEW GLOBAL MARKETS Market development Diversification

Market Penetration
• This strategy focuses on selling existing products into existing markets
o Carries the least risk - if a business already operates in a market and launches another
product, customers are already familiar with the business
Market Development
• This strategy focuses on selling existing products to new markets
o Businesses may have to adapt the product to meet the needs of customers in global markets
who have different preferences
o This strategy carries more risk as customers may not understand the product
▪ E.g. Tesco opened stores in China and later had to withdraw from the market as they
lacked understanding of Chinese consumer habits
Diversification
• This strategy involves businesses developing new products for new markets
• A high risk strategy as the business may have limited knowledge about the market
• This strategy requires a deep understanding of local market conditions and consumer behaviour to
ensure that the new product and market are a good fit for the business
Product Development
• A growth strategy where a business aims to introduce new products into existing markets
• This requires market research to identify the target market's needs and preferences, developing
products that meet those needs, and adapting the marketing mix to ensure that the products
resonate with local consumers

In Paper 1 you are often required o make links between Theme 1 and Theme 4. When you have
questions on marketing, refer to the marketing strategies and concepts from other sections of the
course to explain the different approaches a business may undertake when expanding into an
international market

IAL/BUSINESS/REVISION NOTES/UNIT 4 24
4.3.2 Niche Markets

Cultural Diversity
• Cultural diversity recognises the ideas, customs and social behaviour of a particular people or
society in different global markets
• Businesses need to take into account the different cultural behaviours and customs when
operating in overseas markets
o E.g. In India, beef and pork are not consumed for religious reasons. Fast food outlets have
adapted their menu to take this into consideration
o E.g. In the United Arab Emirates there are rules around the consumption of alcohol that
businesses need to adhere to

Features of Global Niche Markets

• Global niche markets are small segments of the global market that are characterised by unique
and specific needs and preferences
• Groups of customers within these markets are sometimes referred to as subcultures
• These groups may be very small within an individual country, however when combined across the
world the number of customers may be significant
o E.g. Halal products are produced and prepared according to Islamic laws and regulations
o They are in high demand in Muslim-majority countries and businesses that offer them can tap
into this market and cater to the specific needs of Muslim consumers

Features of global niche markets

• Excellent Customer Service

As customers are usually paying higher prices for the product/service they expect exceptional
customer service
• Innovation
Innovation ensures that products are highly differentiated and maintain a unique selling point (USP)
that meets the needs of the target market
• Prioritising profit over market share
Niche markets are lucrative and businesses focus on increasing profits that they can re-invest into
improving their products/services

IAL/BUSINESS/REVISION NOTES/UNIT 4 25
• Expertise in product area
Having employees that are highly skilled and keeping up to date with the latest developments within
the niche market helps to build value for the customers
• Emphasis on quality
Businesses need to ensure the quality of the product is exceptional as they are targeting wealthier
customers who pay for high value products
• Clear understanding of the wants and needs of customers
The business may have relatively few customers so needs to ensure that the needs/wants of these
customers is fully understood

Adapting the Marketing Mix to suit Global Niches

• Adapting the marketing mix to suit global niches involves tailoring the 4Ps of marketing (product, price,
place, and promotion) to meet the specific needs and preferences of a particular niche market
• Product
One way to adapt the product to suit a global niche market is to modify the features of the product to meet
the specific needs of the target audience. E.g. A business that produces luxury watches can offer a line
of vegan watches for consumers who are looking for high-quality and exclusive products that are also
cruelty-free
• Price
Adapting the price to suit a global niche market involves offering a pricing strategy that is attractive to the
target audience. E.g. A business that produces organic products can offer competitive prices similar to
mainstream products to attract consumers who are looking for healthy and sustainable options.
Alternatively, a business that produces sustainable fashion can offer a premium price that reflects the
exclusive and high-quality nature of the product
• Promotion
Adapting the promotion to suit a global niche market involves using marketing communication
strategies that resonate with the target audience E.g. A business that produces luxury products can
use influencer marketing to communicate the exclusivity of the product to wealthy customers
• Place
Adapting the place to suit a global niche market involves choosing a distribution strategy that is
convenient for the target audience E.g. A business that produces gluten-free products can distribute them
through local specialty stores and online platforms to reach customers

4.3.3 Cultural & Social Factors

Factors to Consider in Global Marketing

• Global businesses must consider various cultural and social factors to effectively market their
products/services in different countries and regions

Cultural and social factors to consider in global markets

IAL/BUSINESS/REVISION NOTES/UNIT 4 26
• By understanding cultural differences, adapting to local tastes, using accurate translations, and
avoiding inappropriate branding and promotion, businesses can build strong relationships with their
global customers and achieve long-term success
An Explanation of the Cultural and Social Factors

Factor Explanation

Cultural differences • Businesses must be aware of how businesses and customers

interact in new global markets
• Businesses need to understand cultural differences in areas such
as values, beliefs, customs, and traditions, and adapt their
marketing strategies accordingly

Different tastes • Tastes and preferences vary greatly between cultures and regions
• Businesses must ensure that their products/services are adapted to
meet local preferences

Language • Businesses must ensure that their marketing messages

are translated accurately and appropriately
• This involves understanding language nuances and idioms
o E.g. When KFC entered the Chinese market, it translated its
slogan "Finger-Lickin' Good" into Chinese as "Eat Your
Fingers Off", which had negative connotations in the
Chinese culture

Unintended meanings • Unintended meanings can arise when businesses use images,
symbols, or language that have different connotations in different
cultures
o E.g. The colour white symbolises purity and innocence in
Western cultures, but it represents death and mourning in
some Asian cultures

Inappropriate/Inaccurate • Inappropriate or inaccurate translations can lead to serious

translations consequences for businesses, including loss of credibility, legal
implications, and damage to brand reputation
• Businesses must use professional translation services and
consult with local experts to ensure that their messages are
accurately translated and culturally appropriate

Inappropriate • Inappropriate branding and promotion can occur when businesses

branding/promotion use images, symbols, or language that are offensive or
inappropriate in different cultures
o E.g. In 2018, A Dolce & Gabbana advert showed a Chinese
model attempting and failing to eat various Italian dishes
with chopsticks. People were outraged over the depiction of
Chinese people as lacking refinement and an understanding
of culture

IAL/BUSINESS/REVISION NOTES/UNIT 4 27
4.4 Global Industries and Multinational Corporations
4.4.1 The Impact of MNCs

Impact of MNCs on the Local Economy

• A multinational company (MNC) is a business that is registered in one country but has
manufacturing operations/outlets in different countries
o E.g. Starbucks headquarters are in Washington, USA but they have 32,000 stores in 80
countries
• Factors such as globalisation and deregulation have contributed to the growth of MNC’s
• MNC’s will choose locations based on factors such as cost advantages and access to markets
o Nike originates from the USA but 50% of their manufacturing takes place in China, Vietnam
and Indonesia due to the lower production costs in these countries
• MNCs offer both advantages and disadvantages with regard to:
o Employment, wages and working conditions
o The impact on local businesses
o The impact on the local community and environment

Advantages and Disadvantages of MNCs on Employment, Wages and Working Conditions

Advantages Disadvantages
• MNCs lead to job creation for the local • MNCs may exploit local workers if
community employment regulation is weak or not
• MNCs may offer more competitive enforced
wages than local businesses • MNCs tend to establish production
• MNCs may offer better working conditions than facilities in regions where labour costs are
local businesses lower and pay relatively low wages
• MNCs may not create jobs for local
workers as they may relocate workers
from their own country to work abroad
(Chinese companies are notorious for
this)

Advantages and Disadvantages of MNCs for Local Businesses

Advantages Disadvantages
• MNCs can help to boost the local • MNCs reduce the supply of
economy creating opportunities for local workers available to local businesses
businesses if they offer better pay and working
o If the population is benefiting from higher conditions
wages, they may spend more on local • If MNCs are able to produce at a lower
business products cost and compete with local
o MNCs may utilise the services of local businesses, they may lose local
businesses customers
• There may be potential opportunities for joint o If local businesses lose
ventures and partnerships with MNCs who seek to customers, this may also cause
gain knowledge of the local market unemployment for workers of
o Local firms may learn new skills and production local businesses
methods that allow them to become more
efficient

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Advantages and Disadvantages of MNCs to Local Communities and Environment

Advantages Disadvantages
• Local residents may benefit from job • MNCs may cause damage to local
opportunities and growth in the local habitats/environment during production process
economy o E.g. Shell has a track record of oil
• MNCs often invest to pollution in vulnerable communities in
improve infrastructure Nigeria
o Better roads, transportation and • MNC's may leave unsightly production
access to water and electricity facilities behind once they have extracted all of
would help the local community in the resources and left the country
addition to helping the MNC operate
more efficiently
• MNCs may have to pay taxes
and business rates to local councils/
authorities
o These funds may be reinvested
back into the local community
• MNCs can establish charitable
initiatives that have a positive effect on the
local community

Impact of MNCs on the National Economy

• Many governments are in favour of MNCs establishing in their country as there are benefits to the
wider economy

MNCs impact several metrics in the national economy

Foreign Direct Investment (FDI) Flows

• There will be an inflow of money into a country if a MNC decides to invest into a country
through foreign direct investment

IAL/BUSINESS/REVISION NOTES/UNIT 4 29
Advantages and Disadvantages of FDI Flows from MNCs

Advantages Disadvantages
• There is an initial lump sum of money that • Assets from the home country are
enters the country to pay for the investment now owned (or partly owned) by foreign
o This money enriches local firms or businesses
citizens who now have more money • The local firms or individuals who have sold
available to spend in the economy the asset, may not reinvest the money into
o If this money is reinvested back into the local economy but may move it
the local economy, it may help to abroad/offshore
generate new jobs and boost economic
growth

Balance of Payments
• The Balance of payments is a statement showing all of the financial transactions between a
country and the rest of the world
• MNCs can help to improve the balance of payment of a country as the FDI flows into the country will
help improve their balance of payments
o Any goods and services exported for sale by the MNC will generate further inflows to the
country’s balance of payments
o This is especially beneficial to a country when the MNC is exporting a rare and valuable raw
material e.g cobalt
• MNCs can also have a negative impact on the balance of payments
o If the MNC buys raw materials or equipment abroad (imports), there is a flow of money out of
the country
o If the MNC send profits back to their home country, it will also represent a flow of money out
of the country

Technology and skills transfer

• MNCs can bring new technologies and skills to local businesses

o This will help to improve efficiency and productivity, helping domestic businesses to
become more competitive in the national and international market
Consumers
• Customers in countries which host MNCs benefit from:
o A wider choice of goods and services
o Lower prices if MNCs pass their cost advantages on in the form of lower prices
o Better quality of goods and services
o Improved living standards as people may have higher incomes due to the job creation and
the resulting reduction in unemployment
• However in the long run, MNCs can push domestic businesses out of the market leaving
customers with less choice
o This may lead to MNCs exploiting customers with higher prices and low quality products as
they have limited choice

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Business Culture
Advantages and Disadvantages of MNCs on Business Culture

Advantages Disadvantages
• Domestic businesses may be influenced by • MNCs may demonstrate unethical
the business culture of MNCs behaviour and have a company culture of
o E.g. In the 1990s, UK businesses exploitation
adopted the working practices of o E.g. Bangladesh is used by many
Japanese businesses such as clothing brands to produce cheap
Nissan clothes and many turn a blind eye to
o Workplaces became more open and poor working conditions
employers started to copy ideas o This encourages local firms to also
such as Kaizen and continuous ignore the working conditions
improvement
• MNCs may also encourage a culture
of entrepreneurship
o This can help to boost
overall Economic Growth

Tax Revenue and Transfer Pricing

• There is the potential for the host country to gain significant tax revenue
• Governments can use tax revenue paid by MNCs to invest in improving public services and
infrastructure
• However, MNCs seek to maximise profits and will try to reduce their tax liabilities
o Transfer pricing is a method used by MNCs to shift profits from where they are generated to
countries with lower tax rates
o This is a method of tax avoidance and means that the businesses will pay less tax in the host
country

In Paper 1 and 3, when assessing the impact of multinational companies on the local and
national economy, consider the scale of the multinational in comparison to the country they are
looking to establish in. For example, if the MNC makes more profit than the GDP of the country
in a year, then it is likely to have a stronger influence on the country

4.4.2 Ethics

An Introduction to Ethics
• Business ethics refers to the principles and norms that govern business behaviour
• The ethics of a business will determine how they operate and their decision making process
• Unethical actions can damage the brand and result in a loss of profitability
o Unethical actions are usually pursued as they result in higher levels of profit for the business
(or its owners)
o Customers around the world are putting more and more pressure on brands to behave
ethically
• Businesses are being judged more on how they handle the following issues

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The range of ethical considerations businesses need to consider

Ethical Considerations Explained

Stakeholder Conflicts
• A stakeholder is an individual or group that has an interest or can be affected by a business
• Different stakeholder have different levels of power and different priorities which inevitably creates
the potential for conflict

Conflict Explanation
Management V Workers • Management may be more focussed on output or reducing costs,
than on worker safety or creating a positive working environment
• Workers want to be safe and have a comfortable environment in
which to work
Management V Owners • The owners (shareholders) want management to maximise the
business profits and, for example, be less interested in the mental
well-being of the employees
• The management work daily with the employees and will
often sacrifice some profit in the interest of looking after their
workers health and mental well-being
Company Profits V • The owners (shareholders) aim to maximise output so as to
Resource Depletion generate increasing levels of profit
• Higher output requires more rapid usage of natural resources and
generates more environmental damage

Pay & Working Conditions

• MNCs often operate in countries which have different employment regulations and working
conditions
o MNCs need to decide if they will comply with the regulations of their base location or the
country abroad

IAL/BUSINESS/REVISION NOTES/UNIT 4 32
• MNCs may demonstrate unethical behaviour by exploiting workers in LEDCs by paying them lower
wages
o MNCs argue that the wages they pay provide a decent standard of living within that country
o In 2015, Apple came under scrutiny as their production facilities in China were found to pay
workers approximately $1.85 an hour, nowhere near enough to cover their living expenses
• Some MNCs also behave unethically by providing poor working conditions in order to cut costs
o Factories and warehouses with poor working conditions are referred to as ‘sweatshops’
▪ Nike were accused of using sweatshops in countries such as China and Vietnam,
paying workers 14 cents a day
• Another issue with MNCs is child labour, where school aged children are working extremely long
hours
o Starbucks were found to have children under 13, working 40 hour weeks in
Guatemala picking beans for as little as £5 a day

Environmental Considerations
• Climate change and global warming have become a priority for governments across the world
• Governments are encouraging businesses to improve the environmental impact of their business
activity
Current Environmental Issues

Potential Issue Explanation

Waste Management • Many developed countries have regulations about how businesses
should dispose of their waste
• LEDCs usually have less regulation and enforcement on waste
management
o There is usually poor waste management infrastructure
• MNCs can also dispose of waste in LEDCs at a cheaper
cost which allows them to maintain their high profits
• Four major MNCs (Coca Cola, Pepsi, Nestle and Unilever) dispose of
half a million tonnes of plastic across six developing countries
(Tearfund, 2020)
Emissions • Emissions are often released from factories or from the products
made by MNCs
o E.g. The Carbon Majors Database report found that 100
companies are responsible for 71% of the global emissions
that cause global warming
• The emissions MNCs produce have a negative impact on local
communities causing health issues such as asthma, cancer and skin
irritations

Supply Chain Considerations

• The supply chain consists of all the suppliers involved in the manufacturing of a product/service
• Many MNCs have suppliers in different countries and increasingly they are held accountable for the
working conditions of these suppliers
• Many MNCs are now taking action to reduce unethical labour practices as part of their Corporate
Social Responsibility (CSR)

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Issues with child labour and exploitation of labour in the supply chain

Child labour Exploitation of labour

• Some MNCs have manufacturing facilities • Exploitation of labour can take the form of low
in countries where child labour is common wages and poor working conditions
o Usually in areas where children o E.g. working long hours and with poor
are are working to generate ventilation
income for the family • MNCs are under increasing pressure from
• MNCs using child labour in their supply governments, customers and institutions such as
chain face backlash which can damage the International Labour Organisation to take
their brand and affect sales action to ensure their product/services do not
o E.g. There were protests outside involve exploited labour
the Primark Oxford Street store
after a documentary revealed child
labour working in their factories in
Bangladesh

Marketing Considerations
• When developing their marketing strategy MNCs must consider the cultural and social differences in
the countries in which they operate

Marketing Considerations for MNCs

Misleading labelling Inappropriate Promotional Activities
• Labelling must comply with the regulation of the • Promotional activities should not be
country offensive or illegal
o The information must be correct and not o E.g. Nivea had to pull their
include any false information aimed at ‘White is purity’ campaign for
generating higher sales their deodorant in the Middle
• Examples of misleading information include false East as the public believed it
information about was promoting white
o Size supremacy
o Content of the product
o Features
o Functionality
• E.g. Volkswagen were found to falsely promote
‘clean diesel’ vehicles and had to pay approximately
$34bn in fines
o This severely damaged their brand

4.4.3 Controlling MNCs

Factors to Consider When Managing MNCs

• Both governments of LEDCs and MEDCs find it difficult to manage MNCs
o MEDCs often benefit from the profits of MNCs and these firms carry significant political
influence on government policy
o LEDCs often have key decision makers (autocratic rulers) who receive payment for access
to the country’s resources
o It is important to control the activities of MNCs so as to enhance the benefits and reduce the
disadvantages of what they offer

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Factors to consider when controlling MNCs

Political Influence
• Political institutions enforce laws and regulations which businesses need to adhere to
• When MNCs establish themselves in a new country, they must work within the institutional
framework of that country
• MNCs in developed countries are often able to exert pressure on national
governments through lobbying to create favourable conditions for their business
o Another common issue occurs when politicians may occupy roles on the board of
directors for an MNC after retiring in return for reducing political control on the MNC whilst
they are in power
• MNCs in developing countries can influence governments as they may establish deals which are
beneficial to politicians
o Bribes may be paid to secure lucrative contracts

Legal Control
• Governments can enforce legislation and regulation to control the operations of MNCs
o The European Union has the Competition Commission which protects producers and
consumers from anti-competitive or unfair practices
▪ Google were fined 2.24bn euros by the EU Competition Commission for abusing their
market dominance in the search engine market
• Governments want to attract MNCs to help boost their economy, so creating legal control in areas
relating to taxes and employment ensures stability for the MNC
o E.g. Prior to Brexit, MNCs were attracted by the stability of the UK economy and it offered
them access to the full EU marketplace

Pressure Groups
• Pressure groups are organisations that operate to influence company and public policy in the
interest of a particular cause
• Pressure groups can operate on a national or international scale
o Save the Arctic campaigned for lego not to sell their products at Shell petrol stations
o Greenpeace campaigned for Kimberley Clark (the manufacturer of products such as Kleenex
and Huggies) to dispose of their products in a sustainable way
• Pressure groups can take action in different forms such as:
o Naming and shaming
o Direct action
▪ E.g. Protests, strikes and boycotting products
o Lobbying by taking issues directly to the government

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• There are also pressure groups that work on behalf of MNCs such as the Confederation of British
Industry (CBI)
o The CBI speak and lobby to the government on behalf of the businesses which are members

Social Media
• Social media involves the interaction of people via electronic devices using social media platforms
• MNCs can use social media to their advantage to spread awareness and promote their business
on a global scale
o However social media also enables stakeholders to freely share information about the
unethical behaviour of MNCs
o MNCs are forced to address the issues raised on social media as there is a high level of
public exposure and information can spread rapidly
• MNC influence on social media may be limited in some countries as they have regulations in place
to manage social media power
o E.g. The Chinese and Russian governments closely monitor social media to regulate
information being spread

In Paper 1, when assessing the best way to control the actions of an MNC, you must consider the
advantages and disadvantages of the different methods. When evaluating you should also consider
the most effective method within the context of the business in the extract. How large is the
business? How well established is it? What is the reputation of the MNC in other countries? etc.

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