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A LevelBusinessAQARevision Notes9. Strategic Methods: How to Pursue Strategies (A Level)9.3 Globalisation and InternationalisationThe Value of Globalisation

The Value of Globalisation (AQA A Level Business): Revision Note

Exam code: 7132

Lisa Eades

Written by: Lisa Eades

Reviewed by: Steve Vorster

Updated on

Reasons for globalisation

  • Globalisation is the economic integration of different countries through increasing freedoms in the cross-border movement of people, goods, services, technology and finance

  • Characteristics of globalisation include

    • Increasing foreign ownership of companies

    • Increasing movement of labour and technology across borders

    • Free trade in goods and services

    • Easy flows of capital across borders

  • In 2000, the value of global trade was approximately $6.45 trillion; by 2020, this figure was $19 trillion

  • Numerous factors have contributed to the rapid increase in the pace of globalisation

Reasons for increased globalisation

Flowchart illustrating reasons for increased globalisation, including trade liberalisation, political change, investment flows, and global company importance.
Reasons for increased globalisation include reduced trade barriers, reduced transport costs and migration

Factor

Explanation

Political change

  • Changes in the government of a country can influence the country's attitude to trade

    • E.g. China joined the World Trade Organisation (WTO) in 2001, which led to a significant increase in exports

Reduced cost of transport and communication

  • Economies of scale due to innovation in containerisation on large ships has reduced business costs

  • Technological advancements due to the internet and mobile technology have improved made it easier for buyers and sellers to connect with one another 

Increased significance of transnational companies

  • Transnational companies have their headquarters in one country but have other branches in other countries

    • 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 economies) 

  • Migration is the movement of people from one location to another

  • Migration has led to increased globalisation as better transportation and deregulation have allowed workers to have more flexibility when looking for work

    • 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:

    • More people in work means more income to spend on goods and services, boosting global demand

    • An increased supply of labour leads to falling wages, which reduces costs

    • 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

    • E.g. the UK has shifted from the manufacturing sector to the tertiary sector over the last 50 years

    • Offshoring speeds up the process of globalisation

The importance of globalisation

  • Globalisation offers businesses huge chances to grow and cut costs, but it also brings greater competition, more complex operations and risk

  • Companies that plan well, perhaps by adapting products, securing reliable global supply chains and understanding local cultures, can turn global reach into long-term success

Why globalisation matters to business

Flowchart titled "Why globalisation matters" with arrows pointing to benefits: cheaper inputs, risk spreading, larger markets, finance access, knowledge transfer.
Globalisation is important to business as it provides access to larger markets and cheaper/better inputs

  1. Larger markets

    • More customers

      • Selling in several countries multiplies the potential customer base well beyond the limits of the home market

    • Economies of scale

      • A bigger output allows fixed costs, such as R&D, marketing and equipment, to be spread over more units, lowering average costs and helping prices stay competitive

  2. Cheaper or better inputs

    • Global sourcing

      • Firms can shop around the world for raw materials, components or services at the best balance of price and quality

    • Specialist skills

      • Access to clusters such as India’s IT sector or Germany’s precision engineering brings in expertise that may be scarce at home

  3. Risk spreading

    • Diversified revenue

      • Weak demand in one region can be balanced by strength in another, making overall sales less volatile

  4. Knowledge and technology transfer

    • Learning from partners

      • Joint ventures, licensing and worldwide supply chains expose firms to new ideas, production techniques and management practices

    • Innovation stimulus

      • Competing on a global stage pushes businesses to improve products and processes faster

  5. Access to finance

    • Broader funding sources

      • Listing on foreign stock exchanges or issuing global bonds widens the pool of investors and can lower the cost of capital

The importance of emerging economies

  • In the past twenty years, the economic power of less economically developed countries has increased

  • Emerging economic powers of countries within Asia, Africa and other parts of the world include

    • BRICS: Brazil, Russia, India, China and South Africa

    • 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

    • This increases opportunities for international firms who sell their goods and services in these emerging economies

    • It also means British firms can benefit from low production costs if they move facilities such as factories to these countries

    • However, their lower cost base, including their lower labour costs, means they are becoming a competitive threat for British firms

Evaluating the impact of emerging economies on UK businesses

Opportunities for UK businesses

Threats for UK businesses

  • New customers

    • Brazil, India, Indonesia, Turkey and others have fast-growing middle classes that want higher-quality food, fashion, leisure and financial services

    • Many British businesses specialise in these goods and services

  • Cheaper production bases

    • Setting up factories or outsourcing tasks in countries such as Vietnam or Mexico can cut labour and overhead costs

  • Access to natural resources

    • Emerging economies often control key raw materials (e.g. lithium in Chile, iron ore in Brazil)

    • Forming supply contracts can secure these valuable inputs at favourable prices

  • Joint-venture partners

    • Teaming up with local firms helps UK brands navigate regulations and distribution, gaining a first-mover advantage over slower rivals

  • Market diversification

    • Earning revenue in several regions spreads risk if sales slow in the UK or EU

  • Stronger competition

    • Growing firms from China, India or Turkey may enter the UK and European markets with lower prices or new digital ideas

  • Political and currency volatility

    • Sudden policy shifts, trade barriers or exchange rate volatility can increase costs and disrupt sales forecasts

  • Intellectual property risks

    • Weaker patent or copyright enforcement in some countries makes copying easier and can erode a brand's value

  • Supply chain uncertainty

    • Poor infrastructure, port congestion or extreme weather may delay shipments and raise logistics costs

  • Cultural and regulatory hurdles

    • Unfamiliar legal systems, different product standards and business customs can add time, cost and compliance risk to any expansion plan

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    Author
    Reviewer
    Lisa Eades

    Author: Lisa Eades

    Expertise: Business Content Creator

    Lisa has taught A Level, GCSE, BTEC and IBDP Business for over 20 years and is a senior Examiner for Edexcel. Lisa has been a successful Head of Department in Kent and has offered private Business tuition to students across the UK. Lisa loves to create imaginative and accessible resources which engage learners and build their passion for the subject.

    Steve Vorster

    Reviewer: Steve Vorster

    Expertise: Economics & Business Subject Lead

    Steve has taught A Level, GCSE, IGCSE Business and Economics - as well as IBDP Economics and Business Management. He is an IBDP Examiner and IGCSE textbook author. His students regularly achieve 90-100% in their final exams. Steve has been the Assistant Head of Sixth Form for a school in Devon, and Head of Economics at the world's largest International school in Singapore. He loves to create resources which speed up student learning and are easily accessible by all.