Economics and Business Studies
A level quiz, 2010
Unit 3 International Business
more resources on this course from geraldwood.com
How to revise
1.
2.
3.
4.
5.
Use your own notes as your basis for revision.
I have used a number of examples in this quiz that
you would not be expected to know about. The
specification does not require that you learn any
specific examples.
Use this revision quiz if you want a change from your
own notes. It will test your knowledge of the basic
ideas. However, many of the questions contained
here have more than one correct answer
If you don’t understand any of the questions, use your
own notes, or textbooks, or teachers, or friends to
improve your understanding.
Don’t forget – knowledge of the concepts is only part
of what you are tested on. Application, Analysis and
Evaluation are all equally important. The comments
given provide some examples of how basic content
3.3.1 Why does a business seek
international markets?
This section of Unit 3 looks at why some
companies wish to sell overseas, looking
at the product or market conditions which
may encourage a business to trade
internationally
3.3.1(1) International trade as a
means of meeting growth objectives
Q1: What is the simplest way of describing
the aims of most large businesses?
A: Profit maximisation
Comment: Most large firms are public
limited companies whose shares may be
bought by anyone. Unless such firms
pursue the path of maximising the profit
made on its assets, it is vulnerable to
being taken over by companies which are
more profit-orientated
3.3.1(1) International trade as a
means of meeting growth objectives
Q2: Why does the aim of maximising profits
lead most large companies to trade
internationally?
A: The UK with a population of 60 million
has just 1% of the world’s population.
Very few large firms can afford to ignore
the other 99%
Comment: The skills which large
companies acquire are in many respects
transferable across the globe. It makes no
3.3.1(1) International trade as a
means of meeting growth objectives
Q3: Why is growth essential if profits are to
be maximised?
A: There is a limit to the amount of profit that
can be squeezed out of static revenue –
the only long-term way to grow profits is to
grow revenue
Comment: And ultimately this means
selling overseas
3.3.1(1) International trade as a
means of meeting growth objectives
Q4: If a company manages to double its
sales levels together with sales revenue
what will normally happen to profits?
A: They will more than double. Any business
has fixed costs, so doubling output does
not normally double costs – there are
‘economies of scale’ (size)
Comment: Selling overseas is often the
fastest path to doubling sales
3.3.1(1) International trade as a
means of meeting growth objectives
Q5: Why might selling overseas enable a
company to extend its product life cycle?
A: While there is always a market in rich
countries for the latest products at
relatively high prices, in ELDCs
(Economically Less Developed Countries)
demand for older products persists
Comment: For example, in the 1990s
Trevor Bayliss reinvented the windup
radio, which sold to people without access
3.3.1(1) International trade as a
means of meeting growth objectives
Q6: Why might selling overseas enable a
company to launch an innovative new
product?
A: Most people who buy the latest products
(the ‘first adopters’) do not live in the UK.
Innovative new products may have a
greater chance of success if launched first
in the larger markets of Japan or the USA
rather than the UK
Comment: Or they may be launched close
3.3.1(1) International trade as a
means of meeting growth objectives
Q7: Why might selling overseas be a
sensible response to increased domestic
competition?
A: Any static business model is always in
danger from potential competitors,
whether based in the UK or overseas. ‘The
best form of defence is attack.’
Comment: However, expansion should not
be seen as a solution to any company
suffering from underlying problems which
3.3.1(1) International trade as a
means of meeting growth objectives
Q8: Why might buying in supplies from
overseas be a means of growing a
business?
A: By confining itself to UK suppliers, a
company rules out the vast majority of
potential partners, many of whom may
offer better (or cheaper) products
Comment: Nonetheless, domestic suppliers
will normally be able to deliver more
quickly (with a shorter ‘lead time’), and
3.3.1(1) International trade as a
means of meeting growth objectives
Q9: What is the long-term trend with respect
to the transport and communication costs
of doing business internationally?
A: These costs are falling, with telephone
and email costs essentially the same
internationally as nationally
Comment: These technological advances
remove one of the traditional costs
associated with international trade
3.3.1(2) The laws governing
international trade
Q 10: What is meant by ‘trade
liberalisation’?
A: The process by which international trade
is made easier through a relaxation of the
rules which govern it
Comment: To ‘liberalise’ anything is to
reduce the legal constraints on the activity.
While this is not always a good thing, there
are powerful economic arguments in
favour of liberalised international trade
3.3.1(2) The laws governing
international trade
Q11. What are trade barriers?
A: Any arrangements that make international
trade more difficult, such as taxes on
imports (known as ‘tariffs’) or restrictions
on the amount of imports (known as
‘quotas’) – see 3.3.4
Comment: The process of trade
liberalisation does, therefore, consist in the
removal of trade barriers
3.3.1(2) The laws governing
international trade
Q12: What is the work of the World Trade
Organisation (WTO)?
A: To encourage trade liberalisation by
operating a system of trade rules and by
providing a forum for the negotiation of
trade disputes
Comment: While every country stands to
benefit from free trade taken as a whole,
every country also faces situations where
they would like an exception to be made –
3.3.1(2) The laws governing
international trade
Q13: What is a trade bloc?
A: A group of countries which have agreed
to operate by the same rules with respect
to international trade
Comment: Depending on how closely the
members wish to integrate their
economies they may form different types
of trade bloc – such as free trade areas,
customs unions, common markets and full
economic and monetary union
3.3.1(2) The laws governing
international trade
Q14: What is a free trade area?
A: A group of countries, which have agreed
not to impose any trade barriers between
themselves
Comment: There are many such regional
blocs around the world, including the North
American Free Trade Association
(NAFTA), consisting of Mexico, Canada
and the USA. The European Economic
Area (EEA) consisting of non-EU states is
3.3.1(2) The laws governing
international trade
Q15: What is a Customs Union?
A: A free trade area where all the members
impose the same import taxes on all other
countries – the level of import taxes being
known as the Common External Tariff
(CET)
Comment: The benefit of a CET is that once
goods have been imported into one of the
countries in the Customs Union they may
then be moved freely within it without the
3.3.1(2) The laws governing
international trade
Q16: What is a Common Market?
A: A customs union where the members
also have the same rules on product
regulation, and seek to implement free
movement of capital and labour between
member states
Comment: The Eurasian Economic
Community, whose members consist of
many former states within the Soviet
Union such as Russia, Belarus, and
3.3.1(2) The laws governing
international trade
Q17: What is Economic and Monetary Union
(EMU)?
A: A common market where the members
also use the same currency
Comment: Many examples of EMU consist
of one major state with satellite states e.g.
EMU between South Africa and
Swaziland, Lesotho & Namibia
3.3.1(2) The laws governing
international trade
Q18: Do trade blocs always fit neatly into
one of the above categories?
A: No. Trade blocs tend to be very fluid.
They form, break down, gain members
and lose them – and often evolve from one
type of trade bloc into another over time
Comment: Nonetheless there appears to
be a global trend towards more, and more
tightly knit, trade blocs – and this is in turn
one of the factors driving the increase in
3.3.1(2) The laws governing
international trade
Q19: What type of trade bloc is the
European Union (EU)?
A: The EU is an example of Economic and
Monetary Union. Although only 16 out of
the current 27 member countries have
adopted the Euro, all except the UK and
Denmark are committed to adopting it in
due course
Comment: The other 9 (mainly recent
members) are expected to join when their
3.3.1(2) The laws governing
international trade
Q20: Is the EU essentially a trading bloc?
A: The EU has a strong political dimension:
it is not merely an economic arrangement.
The original aim of the 1957 Treaty of
Rome was ‘ever closer union’. This is
interpreted by many to mean a single state
should be the aim
Comment: Indeed for many the economic
arrangements within the EU are secondary
to the political project
3.3.1(2) The laws governing
international trade
Q21: What are the benefits of trading within
the EU?
A: As a free trade area, there are no import
duties, and as a common market what is
sold in one country may be sold in another.
With monetary union there are fewer costs
involved in changing currencies, and it is
easier to compare prices
Comment: Almost all multinational
companies including those based in the UK
3.3.1(2) The laws governing
international trade
Q22: What are the constraints on trading
within the EU?
A: The UK is not part of the Euro zone, so
we still face the exchange rate risk and
transactions costs of dealing in another
currency. Different languages and cultures
also form trade barriers
Comment: Additionally, while the EU is a
vast market of 500 million mainly wealthy
people, rapidly growing markets in Asia
3.3.2 Key players in the world
economy
This section of Unit 3 looks at how firms and
businesses may be affected by the
growing economic power of India and
China and how a national business may
seek to trade with them.
3.3.2(1) What will be the likely impact of the growing
economic power of India and China?
TABLE 3.1
Top ten
countries by
GDP/head
TABLE 3.2
1. Liechtenstein 118,000
2. Qatar
Top ten
countries
by GDP
GDP/ Ranking by
head in GDP (out of
US $
228)
165
1. USA
GDP in
US $
trillion
Ranking by
GDP /head
(out of 228)
14.4
10
111,000
69
2. China
8.0
133
3. Luxembourg
81,200
97
3. Japan
4.3
37
4. Bermuda
69,900
162
4. India
3.3
167
5. Norway
59,500
41
5. Germany
2.9
33
6. Kuwait
57,500
58
6. Russia
2.3
73
7. Jersey
57,000
159
7. UK
2.2
32
8. Singapore
51,600
47
8. France
2.1
39
9. Brunei
51,300
123
9. Brazil
2.0
102
10. USA
44,600
1
10. Italy
1.8
41
Source: CIA Factbook 2009. Figures are for 2008, or the latest available estimates.
Figures converted into US dollars using Purchasing Power Parity exchange rates
3.3.2(1) What will be the likely impact of the growing
economic power of India and China?
Q23: Does GDP or GDP/head give a better
guide to economic power (see previous
tables)?
A: GDP gives the better guide
Comment: A country is economically
powerful if it produces more goods than
others. This is measured by GDP. By
contrast, GDP/head is a guide to the
standard of living as it measures output per
person. Because of wildly different
3.3.2(1) What will be the likely impact of the growing
economic power of India and China?
TABLE 3.3
Top ten countries by
GDP, using market
exchange rates
GDP in 2008
as % of
world GDP
TABLE 3.4
Top ten countries by GDP,
using Purchasing Power Parity
exchange rates
GDP in
2008 as %
of world
GDP
1. USA
25.5
1. USA
20.6
2. Japan
10.3
2. China
11.4
3. China
6.4
3. Japan
6.2
4. Germany
6.3
4. India
4.7
5.France
4.6
5. Germany
4.2
6. UK
4.2
6. Russia
3.2
7. Italy
3.8
7. UK
3.2
8. India
2.7
8. France
3.0
9. Canada
2.5
9. Brazil
2.8
10. Spain
2.4
10. Italy
2.6
Note: World GDP in 2008 was US$70.1 trillion (PPP exchange rates)
Sources: CIA Factbook 2009 and UNData websites
3.3.2(1) What will be the likely impact of the growing
economic power of India and China?
Q24: What is the difference between market
exchange rates and Purchasing Power
Parity (PPP) exchange rates?
A: Market rates are the rates at which
currencies may be traded in the open
market. PPP rates are the rates at which
you could buy the same typical basket of
goods in different countries
Comment: If all products could be freely
traded the two rates would be very similar.
3.3.2(1) What will be the likely impact of the growing
economic power of India and China?
Q25: Why does it matter which rate we use?
A: PPP exchange rates give a much better
indication of purchasing power, and so of
economic power
Comment: If you compare China and Japan
in the previous set of tables Japan
appears to produce almost double the
GDP (10.3/6.4) using the market
exchange rate whereas in reality it is
producing roughly half the GDP (6.2/11.4)
3.3.2(1) What will be the likely impact of the growing
economic power of India and China?
Q26: Why does using PPP exchange rates
show countries with low standards of living
narrowing the gap with rich countries?
A: Because poor countries have low wages
which are reflected in low prices for labourintensive services. Market exchange rates
do not reflect this because most services
cannot be traded internationally
Comment: For example, a porter in India
cannot sell his services at the going rate in
3.3.2(1) What will be the likely impact of the growing
economic power of India and China?
Q27: How can we summarise the relative
economic strength of the major economies
in 2008?
A: Using PPP exchange rates, the USA on
21% of world GDP is well ahead of China
(11%), Japan (6%), India (5%) and
Germany (4%)
Comment: Another way of looking at it is to
say that the USA on 21% is roughly
matched by all 27 EU countries (also on
3.3.2(1) What will be the likely impact of the growing
economic power of India and China?
Note: While PPP exchange rates give a
better guide to current economic power,
economic growth rates are normally
expressed using GDP based on market
exchange rates. For this reason, the
subsequent slides are based on
comparisons using market exchange
rates. As China and India catch up with the
developed world, so the difference
between their PPP and market exchange
3.3.2(1) What will be the likely impact of the growing
economic power of India and China?
TABLE 3.5
Rank order by
GDP in 2008
GDP in 2008 mkt exchange
rates: US $ bn
Annual real GDP in 2015
growth: ‘97 at 1997to 2008
2008 growth
rate
GDP in 2020
at 19972008 growth
rate
GDP in 2030
at 19972008 growth
rate
14440
2.6%
17229
19546
25155
2. Japan
5838
1.4%
6438
6904
7939
3. China
3617
9.7%
6936
11043
27994
4. Germany
3546
1.5%
3932
4233
4906
5.France
2635
2.1%
3037
3361
4118
6. UK
2382
2.6%
2853
3246
4200
7. Italy
2170
1.2%
2361
2507
2828
8. India
1527
8.0%
2615
3841
8282
9. Canada
1428
2.9%
1750
2023
2705
10. Spain
1340
3.5%
1703
2021
2845
1. USA
Source: UNData website
3.3.2(1) What will be the likely impact of the growing
economic power of India and China?
Q28: The ‘rule of 70’ states that a variable
growing at x% pa will double in
approximately 70/x years. Using this rule
and the data from Table 3.5, how long will
it take for a) China b) India and c)
Britain/USA to double their GDP?
A: China – 70/9.7 = 7.2 years India – 70/8.0
= 8.8 years USA/Britain = 70/2.6 = 26.9
years
Comment: The ‘rule of 70’ is pretty
3.3.2(1) What will be the likely impact of the growing
economic power of India and China?
Q29: What does a country need to
challenge for the top spots in world
economic power?
A: A level of GDP that is already high, and a
future long-term annual rate of growth of
GDP that will be higher than the existing
leaders
Comment: From Table 3.5, both India and
China are likely to meet these criteria with
growth rates over the past decade far in
3.3.2(1) What will be the likely impact of the growing
economic power of India and China?
Q30: From Table 3.5, how does the forecast
relationship between China’s and the
USA’s GDP change between 2008 and
2030?
A: In 2008, the USA’s GDP is almost exactly
four times that of China’s. By 2030, China
will have just pulled ahead – on this
forecast
Comment: We might guess that by 2030,
the USA and China will have roughly the
3.3.2(1) What will be the likely impact of the growing
economic power of India and China?
TABLE 3.6
Rank order by
GDP in 2008
GDP in 2008 mkt exchange
rates: US $ bn
Annual real Population
growth of
in millions
GDP: ’97(2008/09)
’08
GDP / head
(US $ mkt
exch rate)
14440
2.6%
307
47,000
2. Japan
5838
1.4%
127
46,000
3. China
3617
9.7%
1339
2,700
4. Germany
3546
1.5%
82
43,200
5.France
2635
2.1%
64
41,200
6. UK
2382
2.6%
61
39,000
7. Italy
2170
1.2%
58
37,400
8. India
1527
8.0%
1166
1,300
9. Canada
1428
2.9%
33
43,300
10. Spain
1340
3.5%
41
32,700
1. USA
Source: UNData website, and CIA Factbook
3.3.2(1) What will be the likely impact of the growing
economic power of India and China?
Q31: Why is it possible for a country to
achieve long-term rapid economic growth
when its GDP per head is much lower than
that of developed countries?
A: All the country has to do is ‘catch up’ by
using technology and economic
management techniques which already exist
Comment: From the previous table, we see
that India and China both have low
GDP/head, so their rapid growth may
3.3.2(1) What will be the likely impact of the growing
economic power of India and China?
Q32: What degree of convergence does the
Table 3.6 show between the GDP per
head of the major economies (excluding
India and China)?
A: A remarkable degree: except for Spain
they all have a GDP/head in the region of
$37-47,000
Comment: If India and China can sustain
their remarkable growth rates and achieve
a similar GDP/head, then their GDPs will
3.3.2(1) What will be the likely impact of the growing
economic power of India and China?
Q33: For mathematicians only [not needed
for exam]. Assuming China and the USA
maintain their existing rate of GDP growth,
in how many years from 2008 will the
GDP/head in the two countries be equal?
(assume zero pop’n growth)
A: 43 years i.e. 2051 (see next slide for
calculation)
Comment: Both countries would have a
GDP/head 3.0 times greater than the
3.3.2(1) What will be the likely impact of the growing
economic power of India and China?
Working for optional Q33:
When will China (GDP/head 2700, growth rate 9.7% pa)
catch up with the US (GDP/head 47000, growth rate 2.6
%pa)?
We want to find the number of years, n, such that the following equation
is solved:
2700 x 1.097ⁿ= 47000 x 1.026ⁿ
1.097ⁿ= 470/27 x 1.026ⁿ
Convert all 3 expressions into logs as follows:
nlog1.097 = log420/27+nlog1.026
nlog1.097 - nlog1.026 = log420/27
n(log1.097 - log1.026) = log420/27
n= (log420/27)/(log1.097-log1.026)
n = 42.7 – the years from 2008 it will take China to catch up i.e. 2051
3.3.2(1) What will be the likely impact of the growing
economic power of India and China?
Q34: Why should we view all such
forecasts with extreme caution?
A: There are too many unknowns. The
further we look ahead, the more inaccurate
we will be
Comment: However, China has already
maintained astonishing growth rates for
the past three decades (see Table 3.7
below).
it can1978-88
repeat1988-98
the trick
1970-78
1998-08
TABLE 3.7: Perhaps
Decade:
over the next four
Av. annual growth rate:
Source: UNData website
5.9%
10.1%
9.6%
9.7%
3.3.2(1) What will be the likely impact of the growing
economic power of India and China?
GDP in 2008 - mkt
exchange rates: US $
bn
Exports
as a % of
GDP
Imports
as a % of
GDP
1. USA
14440
16
21
2. Japan
5838
20
14
3. China
3617
46
36
4. Germany
3546
57
50
5.France
2635
36
39
6. UK
2382
35
42
7. Italy
2170
29
27
8. India
1527
22
36
9. Canada
1428
36
40
10. Spain
1340
33
44
TABLE 3.8
Rank order by
GDP in 2008
Source: UNData website
3.3.2(1) What will be the likely impact of the growing
economic power of India and China?
Q35: Which two countries in Table 3.8 rely
least on Exports?
A: The USA and Japan
Comment: It is normally the case that very
large economies export a smaller
percentage of their output, as they are big
enough to achieve many of the gains from
specialisation within their own borders. By
contrast, the smallest economies often
export up to 80 or 90% of their GDP
3.3.2(1) What will be the likely impact of the growing
economic power of India and China?
Q36: To what extent does China rely on
Exports?
A: Both China and Germany are unusual in
being very large economies with around
50% of their GDP being exported (46% in
the case of China)
Comment: You can also see from Table 3.8
that they run large current account
surpluses (i.e. the excess of Exports over
Imports)
3.3.2(1) What will be the likely impact of the growing
economic power of India and China?
2,500
TABLE 3.9
China GDP in 1990$ bn
2,000
India GDP in 1990$ bn
UK GDP in 1990$ bn
1,500
1,000
500
0
1969
1979
1989
1999
2009
3.3.2(1) What will be the likely impact of the growing
economic power of India and China?
160%
TABLE 3.10
140%
India's GDP as % of China's
120%
100%
80%
60%
40%
20%
0%
1969
1974
1979
1984
1989
1994
1999
2004
2009
3.3.2(1) What will be the likely impact of the growing
economic power of India and China?
Q37: Using Tables 3.9 and 3.10, how did the
relative size of India’s and China’s
economy change between 1969 and 2009?
A: India’s economy went from being oneand-a-half times the size of China’s to
under half the size
Comment: India is on any count a rapidly
growing economy, whose GDP may well
overtake the UK in 20 years or so – but it
has not been able to equal the
3.3.2(1) What will be the likely impact of the growing
economic power of India and China?
Q38: How do political arrangements differ
between India and China?
A: India is the world’s largest democracy;
China is a one-party state run by the
Communist party
Comment: China has largely embraced a
capitalist, free-market economic model.
However, many large companies are still
state-owned and there is less freedom of
expression than in India or in a Western
3.3.2(1) What will be the likely impact of the growing
economic power of India and China?
TABLE 3.11
UK Exports as % of total
TABLE 3.12
UK Imports as % of total
(China includes Hong-Kong)
(China includes Hong-Kong)
18
16
US
16
14
Benelux
12
Germany
14
12
Benelux
10
10
Germany
8
China/HK
6
4
India
2
0
2000
2002
2004
2006
2008
Source: ONS website
US
8
6
China/HK
4
2
0
2000
India
2002
2004
2006
2008
3.3.2(1) What will be the likely impact of the growing
economic power of India and China?
Q39: How have UK import patterns
changed over the last decade (see Table
3.12)?
A: Germany and Benelux (Belgium, the
Netherlands and Luxembourg) continue to
be major sources of supply. The USA has
fallen from first to fourth place, having
been overtaken by China (including HongKong)
Comment: In 2008, only 1.3% of UK
3.3.2(1) What will be the likely impact of the growing
economic power of India and China?
Q40: What opportunities exist within China
for UK firms to outsource manufacturing?
A: Most low-technology manufacturing that
used to be done in Britain has shifted to
South-East Asia (and China in particular)
where wages are much lower and quality
is of a similar standard
Comment: This is reflected in the growth of
Chinese imports to the UK from 5% to 9%
of all imports over the last decade (see
3.3.2(1) What will be the likely impact of the growing
economic power of India and China?
Q41: What opportunities exist in China for
UK firms to market their products (see
Table3.11)?
A: Table 3.11 shows that Chinese success
in penetrating the British market has not
been matched by anything like an
equivalent penetration of the Chinese
market by Britain
Comment: Nonetheless, UK exports to
China are up from 2.2% to 3.5% of all UK
3.3.2(1) What will be the likely impact of the growing
economic power of India and China?
Q42: Apart from the legal barriers
[discussed later in 3.3.4], what barriers to
market entry exist for UK firms attempting
to sell into China?
A: For example, China restricts the import
of creative content (books, CDs and
videos). In the case of film to just 20 a
year. Yet it makes little attempt to enforce
copyright, so effectively China pirates
creative content and gets it for free
3.3.3 How does a company decide
which countries to target?
This section of Unit 3 looks at how
companies seeking to expand overseas go
about choosing which of the 200-plus
countries they should consider investing
in.
It also introduces the theory of comparative
advantage, the traditional explanation of
why countries as a whole gain from
specialisation followed by international
trade.
3.3.3(1) Assessment of country markets
Q43: What is any commercial company
looking for when it invests in a foreign
country?
A: A profit, normally measured in terms of
the annual ‘percentage return on capital
employed’ (ROC)
Comment: This is measured by the annual
operating profit expressed as a
percentage of the original investment (i.e.
‘capital employed’) made
3.3.3(1) Assessment of country markets
Q44: How, therefore, might a company rank
a number of different investment projects
across a range of countries?
A: In the order of the likely ROC on each
project
Comment: Other broad considerations will
be the size of potential projects (large
firms are likely to favour large
investments); the degree of risk entailed
and the firm’s attitude to risk; and wider
3.3.3(1) Assessment of country markets
Q45: Why do companies that go overseas to
buy raw materials (or manufacture goods),
and those that go to market their products
both need to invest?
A: Companies looking for raw materials or
manufacturing facilities may wish to buy
up local assets e.g. the right to prospect
for oil (or build an oil refinery). Those
intent on marketing their products will
invest in office and retail space,
3.3.3(1) Assessment of country markets
Q46: For which type of company will the
availability of natural resources be a key
factor?
A: Primary (extractive) industries such as
agriculture, mining and oil companies
Comment: One notable feature of China’s
expansion over the past decade has been
its rush to invest in Africa to secure the
raw materials it needs for its growing
manufacturing sector
3.3.3(1) Assessment of country markets
Q47: What will be the impact of commodity
prices within the primary sector on a firm’s
decision to invest?
A: New investments in mining and
agriculture are far more likely to come
when prices look set to remain high – the
returns on the investment will be that
much greater
Comment: Recent Chinese economic
expansion has fuelled an upward trend in
3.3.3(1) Assessment of country markets
Q48: For which type of company will the
size and wage level of the potential labour
force be of particular interest?
A: Labour-intensive industries such as lowtechnology manufacturing and lowtechnology services such as call centres
Comment: The availability of large
numbers of well-disciplined and cheap
workers is a necessary condition behind
China’s and India’s rapid economic growth
3.3.3(1) Assessment of country markets
Q49: For which type of company will the
level of technology be of particular
interest?
A: For high-technology companies involved
in design and research & development
and advanced manufacturing
Comment: These activities are typically
located in developed countries where
there are lots of workers with the required
skill base and practical experience – not
3.3.3(1) Assessment of country markets
Q50: What does the HDI (Human
Development Index) measure?
A: A combination of three things: life
expectancy, education & literacy and GDP
per head (using PPP exchange rates) – on
a scale of 0 to 1
Comment: The practical effect of using HDI
rather than GDP per head to compare
countries is that HDI favours countries
where income is redistributed extensively
3.3.3(1) Assessment of country markets
TABLE 3.13
Country (top
10 by HDI &
selected
others)
Norway
Australia
Iceland
Canada
Ireland
Netherlands
Sweden
France
Switzerland
Japan
USA
UK
Germany
China
Sources: Wikipedia for HDI, CIA Factbook for GDP
HDI score
(range of
0 to 1)
0.97
0.97
0.97
0.97
0.97
0.96
0.96
0.96
0.96
0.96
0.96
0.95
0.95
0.77
HDI
rank
order
1
2
3
4
5
6
7
8
9
10
13
21
22
92
GDP/head
(PPP) rank
order
GDP (PPP)
rank order
5
24
17
22
11
20
25
39
18
37
10
32
33
133
41
19
139
15
56
21
33
8
39
3
1
7
5
2
3.3.3(1) Assessment of country markets
Q51: What is the fundamental difference
between GDP and HDI as a measure of a
country’s development?
A: HDI is a ‘per capita’ measure whereas
simple GDP is not
Comment: From Table 3.13 you will see that
there is a rough correspondence between
HDI and GDP per head, but hardly any
correspondence between HDI and simple
GDP
3.3.3(1) Assessment of country markets
The map below shows countries shaded
by their HDI scores, with dark green the
highest down to dark-red/black the lowest
(grey = data not available)
TABLE 3.14
Source: Wikipedia, List of countries by HDI
3.3.3(1) Assessment of country markets
Q52: What does Table 3.14 show about the
geographical distribution of Economically
Less Developed Countries (ELDCs)?
A: Sub-Saharan Africa contains most of the
world’s very poor nations
Comment: Asia and South America contain
mostly ‘middle-income’ countries and show
every sign of following Japan, South Korea
and Singapore into the ranks of the
developed world
3.3.3(1) Assessment of country markets
Q53: For which type of company will
economic development (as measured by
GDP per head or HDI) be of particular
interest?
A: Companies seeking to sell their products
overseas will seek markets able to afford
them
Comment: Simple GDP will also be of
interest. For example, China scores low on
GDP/head (and HDI) but nonetheless is so
3.3.3(1) Assessment of country markets
Q54: Why is growth in GDP (and GDP per
head) of particular interest to companies
looking to enter an overseas market?
A: It is always easier for a company to enter
a market if it doesn’t have to take market
share away from others to do so. An
expanding market offers this type of
opportunity
Comment: As with any investment, the
ideal is to ‘get in at the bottom’ i.e. to
3.3.3(1) Assessment of country markets
Q55: Why is geographical proximity a much
less important factor than it once was?
A: The container revolution of the past 30
years has dramatically reduced both
transport costs, and door-to-door transport
times (and so both lead times and inventory
costs)
Comment: The whole globalisation
phenomenon (including cheaper air travel
and communications) is another way of
3.3.3(1) Assessment of country markets
Q56: For which companies will geographical
proximity nonetheless remain an important
consideration?
A: For perishable goods (such as
newspapers and flowers) and for low-value
high-bulk goods (such as coal) – though all
these goods are in fact commonly traded
between continents
Comment: Membership of a trade bloc is
normally connected to geographical
3.3.3(1) Assessment of country markets
Q57: What impact do exchange rate
movements have on a firm’s willingness to
invest in a country?
A: It is easy to hedge (i.e. insure) against
unfavourable exchange rate movements –
though this adds to the cost of doing
business
Comment: The more volatile a currency,
the more it will cost to insure against
unfavourable movements. Volatile
3.3.3(1) Assessment of country markets
Q58: What bearing does the legal system of
a country have on multinationals’
willingness to invest?
A: Businesses want to know that their
assets (including intellectual property) are
effectively protected by the police and
legal system and that contracts are
enforceable quickly and cheaply
Comment: A country where large amounts
have to be spent on private security raises
3.3.3(1) Assessment of country markets
Q59: How does the political system affect a
company’s willingness to invest?
A: Firms want political stability. This is best
provided by mature democracies, though
enlightened dictatorships as in Singapore
may also provide stability and rapid
economic growth
Comment: Political transitions are
dangerous for business. Political
instability e.g. in much of the Middle East
3.3.3(1) Assessment of country markets
Q60: How may government policies affect
the willingness of a company to invest?
A: This part of the specification covers a
wide range of policies. It includes a
favourable tax regime, an ability to get
money out of the country easily, the
minimum of onerous regulation in the
areas of Health & Safety, employment and
the environment
Comment: There may be a direct conflict
3.3.3(1) Assessment of country markets
TABLE 3.15
Country
Number of procedures needed
by an investor seeking a
business license from the
government
Average number of
days taken to
complete these
procedures
South
Korea
10
17
USA
19
40
Angola
12
119
Cameroon 15
426
Source: World Bank’s annual Doing Business survey, quoted in ‘Dead Aid’ by
Dambisa
100)
ChinaMoyo (p.37
336
3.3.3(1) Assessment of country markets
Q61: How may gov’t administrative
efficiency affect the willingness of a firm to
invest?
A: Basic levels of efficiency are as important
as the overall regulatory burden
Comment: Looking at Table 3.15, the
attractions of doing business in South
Korea or the USA are obvious. Mediumto-large companies may be prepared for a
10-month wait to get into China – but is
3.3.3(1) Assessment of country markets
The map below shows Transparency International’s
‘Corruption Perception Index’, with the darker the shade
indicating the greater perception of corruption in that
country
TABLE 3.16
s
Source: Transparency International
3.3.3(1) Assessment of country markets
Q62: What connection do you see in Table
3.16 between the perceived level of
corruption in a country and its GDP per
head?
A: There is a clear inverse relationship with
developed countries having low levels of
perceived corruption and the poorest
nations in Africa and the Middle East
having the highest
Comment: High standards of living, low
3.3.3(1) Assessment of country markets
Q63: Why should a high level of corruption
make a business less willing to invest in a
country?
A: First, it increases the cost of doing
business through the need to offer bribes.
Second, it increases uncertainty – how do
you know who to bribe, and how much?
Comment: We might guess that India and
China will have to clean up their act if they
wish to catch up with Japan, Germany and
3.3.3(2) Comparative advantage and the role of
specialisation by countries
Q64: What is the definition of Comparative
Advantage?
A: Country A is said to have the comparative
advantage over country B in the
production of Good X if country B is
relatively more efficient in the production
of Good X compared with other products
Comment: It is not necessary for country A
to have the ‘absolute advantage’ in the
production of X i.e. to use fewer resources
3.3.3(2) Comparative advantage and the role of
specialisation by countries
Q65: If person A can deliver newspapers twice
as fast as person B, and person A can flip
hamburgers four times as fast as B then who
has the comparative advantage in i)
delivering newspapers and ii) flipping
hamburgers?
A: Person A – flipping hamburgers. Person B –
newspaper delivery
Comment: Although B is slower than A at
delivering newspapers, yet B is relatively
3.3.3(2) Comparative advantage and the role of
specialisation by countries
Q66: What conclusion does the theory of
comparative advantage lead to?
A: That all countries will stand to gain if they
specialise (in part or in full) in those
products in which they have a comparative
advantage, and then trade with each other
Comment: This explains why teenagers
dominate newspaper delivery. They may
be slower at the job than adults– but not
nearly as much slower than they would be
3.3.3(2) Comparative advantage and the role of
specialisation by countries
Q67: Why is the theory of comparative
advantage good news for poor countries (&
poor people)?
A: You can still make a living even if there are
other countries (people) that could do what
you do more quickly. You simply need to find
the products (or job) at which you are least
bad – or most good
Comment: Because of the way comparative
advantage is defined, every country (&
3.3.3(2) Comparative advantage and the role of
specialisation by countries
Q68: The ‘gains from trade’ generated from
specialisation followed by international
trade will not be realised unless they are
great enough to overcome what additional
costs?
A: The management and transport costs
associated with international trade, and
the risks associated with relying on
overseas markets and supplies
Comment: As previously discussed these
3.3.3(2) Comparative advantage and the role of
specialisation by countries
Q69: What determines which countries
have the comparatives advantage in which
goods and services?
A: The key phrase is ‘relative factor
endowment’ e.g. countries with a relatively
large amount of the factor of production
land will have the comparative advantage
in ‘land-intensive industries’ – primarily
farming
Comment: This works with (for example)
3.3.3(2) Comparative advantage and the role of
specialisation by countries
Q70: Use the theory of comparative
advantage to explain why at present the
USA dominates industries reliant on
science research, and China dominates
low-technology manufacturing
A: The USA is relatively well-endowed with
the factors of production needed in this
area – capital and skilled labour. China is
relatively well-endowed with the unskilled
yet disciplined labour needed for low-tech
3.3.3(2) Comparative advantage and the role of
specialisation by countries
Q71: Is a country’s relative factor
endowment (and so comparative
advantage) fixed over time?
A: Not at all. Those countries whose GDP
per head is growing faster than average
will have the opportunity to invest the extra
resources into capital equipment and also
into labour skills (sometimes known as
‘human capital’)
Comment: There is a well-trodden
3.3.3(2) Comparative advantage and the role of
specialisation by countries
Q72: Which economic agents receive the
gains from international trade?
A: Initially the business sector, which is
driven by the profit motive to seek these
gains. However, competitive pressures will
force prices down and spread these gains
among consumers – and also the state
sector through additional tax revenue
Comment: Within each country there will be
industries which lose out, but every
3.3.3(2) Comparative advantage and the role of
specialisation by countries
Q73: What other gains from international
trade exist apart from those generated by
comparative advantage?
A: International trade leads to more
competitive market structures in every
industry it touches. This is particularly
beneficial in industries where cost structures
lead to monopoly-like markets within
individual countries, such as steel or vehicle
manufacturing
3.3.3(2) Comparative advantage – cont’d
TABLE 3.17 UK physical goods (‘visible trade’), X and M, 2008
UK Exports 2008, Top 12 £ bn
physical goods, by value
Source: ONS
1. Oil
31.9
UK Imports 2008, Top
12 physical goods, by
value
£ bn
2. Road vehicles
22.5
1. Oil
37.8
3. Pharmaceuticals
17.2
2. Road vehicles
33.9
4. Power generating
equip.
15.1
3. Misc. manufactures
18.1
4. Telecoms equip.
16.3
5. Misc. manufactures
14.2
5. Office machines
15.3
6. Gen. industrial
machinery
10.4
6. Electrical machinery
14.6
7. Clothing
13.2
7. Electrical machinery
9.9
12.1
8. Other transport equip.
9.2
8. Gen. industrial
machinery
9. Organic chemicals
8.4
11.8
10. Specialised machinery
7.7
9. Power generating
equip.
11. Office machines
7.1
10. Meat, fruit & veg
11.7
12. Non-ferrous metals
6.9
11. Pharmaceuticals
11.0
3.3.3(2) Comparative advantage and the role of
specialisation by countries
Q74: In table 3.17, the UK’s top 8 ‘visible’
export categories also feature in the list of
our top imports. Why is this?
A: The costs of doing business
internationally are now such a small
proportion of total costs that it makes
commercial sense to export and import
many items which are very similar
Comment: For example, the UK exports
‘light crude’ oil from the North Sea while
3.3.4 Other considerations before
trading internationally
This section looks at three particular areas:
1.A firm’s responsibilities to its stakeholders,
and potential conflicts between ethics and
profit.
2.The social and cultural differences in doing
business in other countries
3.The constraints on international business
imposed by tariffs, import quotas and legal
restrictions
3.3.4(1) Responsibility to stakeholders
Q75: Who are a firm’s stakeholders?
A: All those who have an interest in the
company: its owners/shareholders,
management, suppliers, employees,
customers – and wider society
Comment: The proposition that a firm has
responsibilities to all its stakeholders
contrasts with the narrower view that the
firm only has responsibilities to its owners;
and that caring for other stakeholders
3.3.4(1) Responsibility to stakeholders
Q76: What is the danger for a company
operating in a competitive environment in
pursuing any objective other than profit?
A: It risks being undercut and/or taken over
by its single-minded profit-seeking
competitors
Comment: An example in 2010 is the
hostile bid for Cadbury plc by Kraft.
Cadbury has a proud history of looking
after its employees whereas Kraft is a food
3.3.4(1) Responsibility to stakeholders
Q77: How might ‘caring for employees’ in
terms of pay, working conditions and job
security be compatible with the aim of
profit maximisation?
A: There is likely to be some sort of financial
payback generated from increased
employee loyalty. Additionally, bad
publicity about ‘sweatshop labour’ is likely
to be avoided
Comment: Campaigning groups like
3.3.4(1) Responsibility to stakeholders
Q78: What ethical argument can be made
for shifting manufacturing production to the
country with the lowest-paid labour force?
A: If enough multinationals move to the
poorest countries, the price of labour (i.e.
wages) will increase – thereby reducing
global inequality
Comment: China and other Asian countries
have used their comparative advantage in
labour-intensive industries to set
3.3.4(1) Responsibility to stakeholders
Q79: Is there any limit to the view that by
going where labour is cheapest a firm is
acting ethically?
A: Yes: if the labour in question is not a free
agent. This covers some child labour,
indentured labour trapped by
moneylenders, prisoners in so-called
‘labour camps’, and illegal migrant labour
unable to access legal protection
Comment: Multinationals may seek to
3.3.4(1) Responsibility to stakeholders
Q80: Is it more ethical for UK consumers to
‘buy British’ and for UK firms to
manufacture here?
A: It depends on the extent to which you
consider yourself a global citizen or a
national one
Comment: Of course if all countries pursed
a ‘buy domestic’ policy, then every country
would forfeit the gains from trade.
Furthermore, a common slogan of those
3.3.4(1) Responsibility to stakeholders
Q81: Is it unethical to replace labour with
capital in pursuit of minimum costs &
maximum profit?
A: Not if it works. As any economy grows
there will be a shift to more capitalintensive methods. The alternative may
well be the failure of the firm
Comment: The process of managing the
switch needs both business acumen and
compassion. For both ethical and business
3.3.4(1) Responsibility to stakeholders
Q82: Why is environmental damage such as
that caused by CO2 emissions or dumping
waste an example of a failure of the free
market to generate the best outcome for
society?
A: The costs caused by this approach
(known as ‘external costs’) do not fall
primarily on the firms doing the damage
Comment: From a purely profit-seeking
perspective, fly-tipping and unregulated
3.3.4(1) Responsibility to stakeholders
Q83: What mechanisms exist for
incentivising firms to limit the
environmental damage they cause?
A: Limits imposed by legislation (e.g.
abolition of 100W domestic light bulbs);
taxation (e.g. lower taxes for loweremitting cars) and public opinion
Comment: Pressure groups, along with
government campaigning, have been
crucial in putting companies in the UK in a
3.3.4(1) Responsibility to stakeholders
Q84: Why is a private limited company
(Ltd), sole trader or partnership more at
liberty to pursue aims other than
maximising profit – in contrast to a
conventional public limited company (plc)?
A: They cannot be taken over against the
wishes of their existing owners
Comment: John Lewis, a famous employee
partnership, has as its stated aim “the
happiness of all our members through
3.3.4(2) Social/cultural differences in doing business
Q85: Why might a multinational be well
advised to employ a local advertising
agency a country where it hoped to market
its products?
A: Otherwise, there would be a significant
risk of cross-cultural misunderstanding
Comment: It is difficult enough for
companies to run successful advertising
campaigns in their own country: trying to
communicate effectively across cultures
3.3.4(2) Social/cultural differences in doing business
Q86: What marketing benefit do large
companies in developed economies have
in selling on a global scale?
A: Their brands are likely to have had some
exposure – and to be well-known and
trusted – across much of the globe already
Comment: Creating an international brand
from a strong domestic brand is a good
example of an economy of scale: the value
of the brand can be multiplied up at
3.3.4(2) Social/cultural differences in doing business
TABLE 3.18 MARKETING OVERSEAS
Channel to
market
Explanation
Degree of direct
involvement by
MNC
Direct sales
MNC buys offices in target country and
Greatest
markets product itself, probably employing
local staff
Franchise
MNC sets up franchise operation with
local business people acting as
franchisees
Agents
MNC employs local business to sell on
their behalf
Joint
ventures
MNC sets up a new company with a local
company: both parties have an equity
stake
Distributor /
wholesaler
MNC sells product to local
distributor/wholesaler, who then sells on
3.3.4(2) Social/cultural differences in doing business
Q87: What factors would an MNC bear in
mind when deciding which of these
channels of distribution to use in an
overseas market?
A: They might consider what level of
involvement was possible, given their
existing management capacity and other
calls on their managers’ time
Comment: Some countries will insist that
MNCs set up joint ventures as a condition
3.3.4(2) Social/cultural differences in doing business
Q88: In India Tesco plans (in 2010) to set up
a wholesale business after the Indian
government objected to its plans for retail
expansion. What might this objection be
based on?
A: Food retailing in India is highly fragmented
with millions relying on ‘mom-and-pop’
convenience stores for their livelihood. The
impact on unemployment was considered
to be too serious
3.3.4(2) Social/cultural differences in doing business
Q89: What are the particular benefits of a
joint venture for a MNC with an established
local company?
A: In return for sharing the profits, the MNC
has a credible partner who has a direct
financial stake in making the project work.
The MNC should be able to become
embedded in local culture and in the
business community
Comment: The local company gains the
3.3.4(2) Social/cultural differences in doing business
Q90: What is price discrimination?
A: The practice of charging different prices
to different groups of customers where the
differences in price to not reflect
differences in cost
Comment: For example, charging double
for a first class seat in a railway is price
discrimination. The service may cost
more, but nowhere near twice as much.
3.3.4(2) Social/cultural differences in doing business
Q91: Why is an MNC very likely to practise
price discrimination between national
markets?
A: The price which is considered reasonable
is likely to be wildly different in different
countries, and there is little danger of
people who are charged more shopping
internationally to access the lower price
Comment: However, the growth of internet
sales is pushing companies in the
3.3.4(2) Social/cultural differences in doing business
Q92: Are poor countries normally charged
less?
A: Not necessarily. Incomes are lower
suggesting a lower price is needed. But
competition may also be lower enabling a
higher price to be charged. The MNC may
adopt a policy of ‘skimming’ – charging a
high price to the few rich people able to
afford a luxury import.
Comment: The product may also occupy a
3.3.4(3) The purpose of tariffs, import quotas and
other legal restrictions on trade
Q93: What is an import tariff?
A: A tax on imported goods. It may be
expressed as a percentage of the goods’
value, or as so much per unit measured by
weight or volume
Comment: Every Customs Union (the EU
included) has what is known as a
Common External Tariff, which all the
member countries of the union charge
non-members on their imports. Tariff
3.3.4(3) The purpose of tariffs, import quotas and
other legal restrictions on trade
Q94: What is the purpose of an import tariff?
A: It is a convenient way of raising tax
revenue. It also affords some measure of
protection to domestic industry from
outside competition – though at the cost of
raising prices for consumers and reducing
the gains from trade
Comment: Import tariffs increase the cost of
doing business overseas. For UK firms, an
incentive is thereby given to exporting
3.3.4(3) The purpose of tariffs, import quotas and
other legal restrictions on trade
Q95: What is an import quota?
A: A set limit on the amount of a product
which may be imported into a country
Comment: In the case of the EU, there are
many ‘reduced tariff’ quotas i.e. specific
amounts of a product are allowed in at a
reduced rate of tax but after the quota is
exhausted the full import tariff is imposed
on subsequent amounts
3.3.4(3) The purpose of tariffs, import quotas and
other legal restrictions on trade
Q96: What is the purpose of an import
quota?
A: Import quotas, like import tariffs, are
normally imposed to protect domestic
industry from foreign competition
Comment: They are an even more
damaging form of protection than import
tariffs, because they set an arbitrary limit
on imports of the good in question
regardless of market demand. In practice,
3.3.4(3) The purpose of tariffs, import quotas and
other legal restrictions on trade
Q97: Why might a nation impose legal
restrictions on imports other than tariffs and
quotas?
A: If they thought the good in question would
do some harm, perhaps through not meeting
health and safety concerns
Comment: e.g. China will only allow foreign
media (music, films and books) to be
imported through state-owned companies in
order to give it a measure of control over the
3.3.4(3) The purpose of tariffs, import quotas and
other legal restrictions on trade
Q98: Are tariffs, quotas and other legal
restrictions a significant barrier to firms
doing business internationally?
A: Yes, particularly in high-tax areas such as
food
Comment: At the start of Unit 3 we saw that
the WTO is dedicated to reducing all these
barriers to trade but that its powers are
weak. Although free trade benefits every
country, those domestic firms who stand to
3.3.5 Globalisation
This section continues from 3.3.1 in looking
at reasons why companies trade globally
3.3.5(1) Global industries
Q99: “The leader in global localisation
translated [the Xbox 360 game] Brutal
Legend into English, French, German,
Spanish & Japanese.” What does ‘global
localisation’ mean?
A: The adaptation of a product so that it can
be marketed across a range of global
markets
Comment: Definition from Sony’s CEO, “a
new way of life for Sony, whereby we meet
3.3.5(1) Global industries
Q100: What is the fundamental business
idea behind global localisation?
A: Economies of scale can only be
maximised from a truly global operation,
and that it is possible to achieve these
while still adapting products to the separate
requirements of different markets
Comment: Furthermore, it is often politically
advisable for an MNC to have production
facilities in each of the regions where it
3.3.5(1) Global industries
Q101: Why might it be politically advisable
for an MNC wish to balance its
investments across the regions in which it
sells?
A: In hard times (such as the recent 200809 recession), countries will often defend
their own industry by adopting protectionist
measures. It is much easier for an MNC
to persuade local politicians not to act
against it if the goods it sells are
3.3.5(1) Global industries
Q102: Why are takeovers and mergers a
common method of achieving a global
presence?
A: Inorganic growth of this sort is so much
quicker in building up a presence in a new
country than organic growth. Often,
competing MNCs are engaged in a race to
build up market share in their sector of an
emerging economy
Comment: Setting up a joint venture is
3.3.5(1) Global industries
Q103: Why is the takeover of one large firm
by another often easier to achieve if the two
firms are in different countries?
A: It is much less likely that competition
issues will be raised, as market shares in
both countries will not be affected
Comment: This is one of the key reasons
behind the drive of many large companies
to seek overseas markets. It may be the
only legal way to achieve the rapid growth
3.3.5(1) Global industries
Q104: What benefit does any company gain
by being able to source its inputs from any
country?
A: The benefit of minimising costs. If a
company is able and willing to search on a
global level for its inputs it will be charged
an internationally competitive price –
which will probably be less than a purely
national price
Comment: The issues of the quality of the
3.3.5(1) Global industries
TABLE 3.19 Global Commodity Price Index:
2005=100
Source: www.indexmundi.com
250
200
150
100
50
0
May-90
Jan-93
Oct-95
Jul-98
Apr-01
Jan-04
Oct-06
Jul-09
Apr-12
3.3.5(1) Global industries
Q105: What has led to the global boom in
commodity prices over 2001-2008 shown
by Table 3.19?
A: Rapid growth in the global economy and
particularly from China
Comment: The impact of the sharp global
recession in 2008-09 is evident in the
halving of commodity prices over 6
months, followed by their rapid recovery
as China used the opportunity to stock up
3.3.5(1) Global industries
Q106: Which continent has benefited
particularly from China’s increased
demand for raw materials over the past
decade?
A: Africa. The boom in commodity prices
has increased GDP in the world’s poorest
continent
Comment: It has also given Africa a new
superpower prepared to invest in the
continent’s infrastructure, and represents
3.3.5(2) Global marketing
Q107: Why is advertising in major-city
airports very similar around the world?
A: They are aimed at the single global elite
of international business people and other
frequent flyers
Comment: An emerging world culture is
also exemplified by shipping entrepôts, i.e.
trading hubs such as Rotterdam,
Shanghai, Singapore, Los Angles, HongKong and Dubai
3.3.5(2) Global marketing
Q108: What benefit does an emerging world
culture bring to the marketing plans of
MNCs?
A: A reduction in the average (unit) costs of
marketing, as the same marketing
messages can be replicated across global
regions
Comment: As globalisation gathers pace, we
may expect to see yet more convergence in
customers’ aspirations and tastes reflected
3.3.5(2) Global marketing
Q109: Why is it still the case that MNCs are
likely to use local advertising agencies?
A: The process of globalisation still has a
long way to go. Different languages,
religions and cultures still mean that
national populations will respond best to
different marketing approaches
Comment: History is full of movements that
appeared to have been inevitable at the
time but which subsequently went into
3.3.5(2) Global marketing
Q110: What features of many ELDCs lead
to the need for different marketing and
distribution methods on the part of MNCs?
A: a) reduced creditworthiness of many
consumers, hence scarcity of credit cards
for Internet sales b) limited (though
growing) middle class able to buy bigticket items such as cars c) a different
attitude to intellectual property with more
companies prepared to copy illegally
3.3.5(2) Global marketing
Q111: Why might pre-paid mobile phone
cards have been essential to the growth of
mobile phones in ELDCs?
A: In ELDCs consumer credit is often not
widely understood, and repayment difficult
to enforce. A mechanism for securing
payment upfront is essential if new
technologies are to take off
Comment: Mobile phones also have an
advantage over land lines in ELDCs in that
3.3.5(3) Global market niches
Q112: Why are luxury brands among the
biggest winners of globalisation?
A: Luxury brands face the problem of not
being able to widen their market without
damaging their exclusivity. A global market
provides many times the opportunity of any
one national market to sell more while still
being available to only a tiny proportion of
the most wealthy people
Comment: Hotel chains, jewellery, perfume,
3.3.5(3) Global market niches
Q113: Why do non-luxury products
appealing to a relatively small proportion of
the population also stand to gain from
globalisation?
A: Again, provided the interest is widespread
across the world, a global market provides
an enormous increase in size over a
national one
Comment: Many sports businesses benefit
from their global reach - for example,
3.3.5(3) Global market niches
Q114: Some enterprises exist solely on
account of their international flavour. Give
some examples.
A: The Olympics, London Fashion Week,
Frankfurt International Book Fair, Cannes
Film Festival, Esperanto, international
arms fairs, the Nobel peace prize, Formula
1, the Red Cross
Comment: Many industries have room for
one or more global showcases – whether
3.3.5(3) Global market niches
Q115: What characteristics would you
associate with the international subculture
based around the motorbike?
A: Youth, economy, masculinity, adventure,
mobility, speed, excitement
Comment: Any motorbike manufacturer will
be able to tap into a global understanding
of what riding a motorbike is all about
3.3.5(3) Global market niches
Q116: Why do satellite launches form a
global niche market?
A: The fixed costs are very large, and the
demand for the service relatively small, so
there is only room for a handful of
companies worldwide
Comment: As technology advances and the
fixed and variable costs come down so the
industry is becoming more conventional in
its market structure
3.3.6 Are multinationals a force for
good or should they be controlled?
The short answer is – yes, they are a force
for good; and yes, they should be
controlled
This topic looks at the benefits and
disbenefits associated with multinational
operations and how they can be controlled
3.3.6(1) Benefits that multinationals bring to
overseas countries
Q117: What is a multinational [transnational]
corporation [MNC/TNC]?
A: A large corporation or company with
offices and/or factories in several countries.
Comment: The common features of a range
of definitions is that the company is large
and that it has significant investments in at
least two countries. Whether a given
company is an MNC must be subjective as
there is no agreement as to how large the
3.3.6(1) Benefits that multinationals bring to
overseas countries
Q118: Why does international trade benefit
every country that takes part in it?
A: The theory of comparative advantage
(see 3.3.3) shows that every country
stands to gain from free trade in total
Comment: The phrase ‘diffuse benefits,
concentrated costs’ explains why free
trade is often opposed by politicians. The
gains are spread over the whole
population while the costs are focussed on
3.3.6(1) Benefits that multinationals bring to
overseas countries
Q119: What benefits to market structure
does international trade bring?
A: Markets which are opened to free trade
tend to become more competitive to the
benefit of consumers, who may now
access the cheapest global price
Comment: There is, on the other hand, the
possibility that an MNC will wipe out local
producers and establish a monopoly
3.3.6(1) Benefits that multinationals bring to
overseas countries
Q120: What is the connection between
international trade and MNCs?
A: The vast majority of int’l trade is carried
out by MNCs – so the ‘gains from trade’ as
explained by comparative advantage and
the gains from having more competitive
market structures are gains brought about
in the main by MNCs
Comment: MNCs get a separate section in
the specification – but they cannot easily
3.3.6(1) Benefits that multinationals bring to
overseas countries
Q121: What has been the main source of
demand that has fuelled China’s
extraordinary growth rates?
A: Exports. We saw in Table 3.8 that these
consist of 46% of its GDP.
Comment: With this growth has come a
rapid increase in employment and in
China’s GDP per head. MNCs have been
crucial to this process.
3.3.6(1) Benefits that multinationals bring to
overseas countries
Q122: Does the involvement of MNCs in the
Fair Trade movement benefit overseas
countries?
A: Yes: Fair Trade guarantees a minimum
price for commodities such as coffee,
giving its few selected growers security of
income
Comment: While Fair Trade is a growing
movement, it will always be a very small
proportion of ELDC exports. By far the
3.3.6(1) Benefits that multinationals bring to
overseas countries
Q123: Early in 2010, Google threatened to
withdraw from China unless its search
engines were allowed to operate without
filtering sensitive subjects such as human
rights in China. Is this pressure from
Google a benefit to China?
A: Yes, if you believe that human rights are
a universal value
Comment: The argument is often put that
MNCs exert undue influence over host
3.3.6(2) Potential negative impact of multinationals
on overseas countries
Q124: Under what circumstances might an
MNC be able to bully an ELDC in trade
disputes?
A: If an ELDC is effectively a client state of a
superpower. One way the superpower
may take advantage of this is by the trade
negotiations of its MNCs
Comment: Bullying by MNCs is normally
only possible if it reflects an underlying
geopolitical situation, where two countries
3.3.6(2) Potential negative impact of multinationals
on overseas countries
Q125: Why is the MNC Gazprom, provider of
83% of Russia’s energy, able to bully
Ukraine?
A: Ukraine relies on its Gazprom for all its
gas i.e. Gazprom is a monopsonist (sole
supplier)
Comment: In both January 2006 and
January 2009, Russia cut off Ukraine’s gas
supply. Ukraine also has some leverage:
gas for EU customers from Russia goes
3.3.6(2) Potential negative impact of multinationals
on overseas countries
Q126: In the nineteenth century, Britain went
to war with China in 1839-42 and 1856-60 to
force China to allow British traders to sell
opium in its territory. Opium is a highly
addictive drug with a current Class A rating.
Does this illustrate the potential negative
impact of MNCs?
A: Up to a point, yes – the unrestricted sale
of opium was an economic and social
disaster for China. But the real problem was
3.3.6(2) Potential negative impact of multinationals
on overseas countries
Q127: MNCs typically pay much less to staff
in ELDCs than they would in their home
country – indeed that is the main reason
why so much manufacturing has been
relocated to SE Asia. Does this amount to
exploitation of local labour?
A: It is difficult to argue that this is immoral
when local labour is far better off than it
would have been without the MNCs.
Comment: Indeed, this process is the
3.3.6(2) Potential negative impact of multinationals
on overseas countries
Q128: Working conditions may also be very
much worse in ELDCs than in MNC’s home
countries with longer hours of work, limited
rights to organise and primitive health &
safety measures. Is this a ‘negative impact’
from the MNC?
A: Again, the real issue is what the impact on
local working conditions really is. In all
probability, the working conditions provided
by MNCs will be superior to those provided
3.3.6(2) Potential negative impact of multinationals
on overseas countries
Q129: Since 1977(!) Nestlé has been subject
to a boycott from many on the basis that its
promotion of milk formula in ELDCs
discourages breast feeding, thereby
harming the health of the baby. Is this a
‘negative impact’ of an MNC?
A: Potentially, yes. The same point could be
made of the tobacco, gambling and alcohol
industries in both an international and a
domestic context
3.3.6(2) Potential negative impact of multinationals
on overseas countries
Q130: MNCs are at the forefront of using up
non-renewables such as oil & coal, and the
exploitation of renewables such as timber at
unsustainable rates. Does this create a
negative impact?
A: It may well do so, though this has to be
balanced against the benefits that such
activity brings
Comment: MNCs may well behave more
responsibly in terms of environmental
3.3.6(2) Potential negative impact of multinationals
on overseas countries
Q131: In 1984 in Bhopal, India a leak of a
deadly chemical from a plant that was 51%
owned by the American company, Union
Carbide, lead to an immediate death toll in
the region of 4,000 to 15,000. Can we blame
MNC ownership for this?
A: Probably not. Industrial disasters like the
explosion of the Chernobyl nuclear reactor in
1986 in the former Soviet Union occur
without MNCs.
3.3.6(3) Can multinational firms be controlled?
Q132: Do MNCs or their host countries
generally have the negotiating advantage?
A: Unless the host state is in a position of
substantial dependence relative to the
MNC’s home country, then the host country
should have the upper hand
Comment: We have already looked at some
of the exceptions: Ukraine versus Russia at
present, and China versus Britain in the
nineteenth century
3.3.6(3) Can multinational firms be controlled?
Q133: “The assumption has always been that
the China market is too big to walk away
from. Foreign firms accept the difficult
commercial conditions, the tough
competition, government interference or
censorship because the prize is worth it.”
[BBC news, 13/1/2010] Does this suggest
that China cannot control MNCs?
A: No: MNCs go into China very much on
China’s terms. The WTO is not powerful
3.3.6(3) Can multinational firms be controlled?
Q134: In 2004, the EU Competition
Commission fined Microsoft €497m for
uncompetitive practices followed by a
further fine of €899m in 2008 for being
slow in implementing the remedies
imposed at the earlier hearing – total EU
fines on Microsoft are now $2.5 billion.
Does this suggest Microsoft can be
controlled?
A: In the case of the EU, yes.
3.3.6(3) Can multinational firms be controlled?
Q135: What pressure can be brought to bear
on MNCs with regard to working conditions
in ELDCs if the host government does not
see it as an issue?
A: Pressure groups have had some success
through adverse publicity and boycotts in
shaming MNCs into improving working
conditions
Comment: The problem is most acute with
low-end MNCs like Primark whose business
3.3.6(3) Can multinational firms be controlled?
Q136: How might an MNC seek to evade
responsibility for the working conditions of
those who make its products?
A: Subcontract the manufacturing process
to local firms, which will not attract the
attention of Western pressure groups like
MNCs do
Comment: It is now common practice for
MNCs to accept some responsibility for
the working conditions of their
3.3.6(3) Can multinational firms be controlled?
Q137: How do the boycotts and street
protests organised by student-centred
groups such as People & Planet exercise
influence on MNCs?
A: By raising the subject of working
conditions in ELDCs in the public
perception, they help to create a climate in
which MNCs feel compelled to address the
issue
Comment: While it is difficult to point to
3.3.6(3) Can multinational firms be controlled?
Q138: Many High Street retailers have
joined the ETI (Ethical Trading Initiative),
“a ground-breaking alliance of companies,
trade unions and voluntary organisations.
We work in partnership to improve the
lives of workers across the globe”. Why
might they have joined?
A: Either out of conviction, or a feeling that it
pays to be seen to be addressing public
concerns
3.3.6(3) Can multinational firms be controlled?
Q139: Can multinational firms be controlled?
A: In large measure, yes. MNCs are in a
more competitive situation than ever before,
with American, Japanese and European
MNCs joined by ones from China and India
– among others. The days when a small
country could be dictated to by a US
multinational are fast disappearing
THE END
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