Conditions that Prompt Trade (Edexcel A Level Business): Revision Note

Push factors

• Push factors are factors that push a business to expand outside of its own country

• When faced with saturated markets or intense competition, businesses may consider international trade as a way to access new markets, diversify their customer base and gain a competitive advantage

• Adverse conditions within a domestic market can cause a business to look at opportunities in countries abroad

Example

Due to the UK leaving the European Union, some businesses have decided to move their operations outside the country

• Sony has moved its headquarters from the UK to the Netherlands

• Honda closed a production plant in Wales in 2021

• HSBC moved around 1,000 trading staff from London to Paris following Brexit, keeping its global headquarters in London

Saturated markets

• Saturated markets occur when the demand for goods and services has reached a peak

• It becomes challenging for businesses to grow and expand within the local market

• This often prompts businesses to explore opportunities in global markets, which can help sustain their growth and profitability

Intense competition

• In a competitive market, businesses need to find ways to differentiate themselves and gain a competitive advantage

  • They may do this 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 that present significant growth opportunities

  • Two pull factors that can prompt trade are economies of scale (opens in a new tab) and risk spreading

Benefiting from economies of scale

• Economies of scale can occur when a business expands its production into new markets abroad

• Businesses may also be able to purchase raw materials and labour at lower prices than within their domestic markets

Example

Ikea expanded into China as there was opportunity for growth with families demanding more furniture due to the removal of the one-child policy

Producing furniture in China helped to reduce transportation and distribution costs

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, political and other types of risks that could impact their operations and profitability

Example

Aston Martin produces motor cars in the UK, but 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

Offshoring and 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:

  • Lower labour costs 

  • Access to raw materials

  • Access to skilled labour

Advantages and disadvantages of offshoring

Outsourcing

• Outsourcing occurs when a business hires an external organisation to complete certain tasks or business functions

Example

Apple outsources the production of the iPhone to Foxconn in China 

• The key reasons for a business choosing to outsource include:

  • Reduced costs 

  • Allows businesses to focus on core competencies

  • Easier to comply with rules and regulations in other countries, as they are often less demanding for a local business

• 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

Advantages and disadvantages of outsourcing

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

A typical product life cycle 

• An extension strategy is a method used by a business to lengthen the maturity stage of the product life cycle

  • A business could sell its product in new international markets

    • A product could reach maturity in one market but could then be introduced into another market

    • This allows the business to generate more revenue

Example

LEGO's core products have long been well-established in markets such as the UK and USA.

To extend the product life cycle, LEGO has focused on rapid expansion into China, growing from just 60 stores in 18 cities in 2018 to over 380 stores in 105 cities by 2022, alongside a major factory expansion in Jiaxing to support long-term growth across the wider Asian market