Globalisation 14.2

Today…. Reasons for international expansion 1.Increasing sales and finding new markets 2.Acquiring resources and technology 3.Diversification 4.Minimisation of competitive risk 5.Exploiting economies of scale 6.Cushioning economic cycles 7.Responding to regulatory differences 8.Tax minimisation

In summary: The globalisation of business basically stems from a desire by multinationals and coun- tries to gain a competitive advantage, lift efficiency, cut costs, and lift profits and incomes.

1. Increasing sales and finding new markets Domestic market may: Become saturated e.g. Vegemite Slow or negative population growth e.g. Europe Be dominated by a competitor e.g. Coke vs. Pepsi Be experiencing an economic downturn Be flooded by foreign-made products

2. Acquiring Resources and Technology Insufficient domestic inputs Cheaper inputs from overseas

Effeciency To help minimise shipping and other transport costs and maximise profits of corporations, some multinationals will set up subsidiary plants in the centre of populated markets, wherever these may be located.

3. Diversification A process of spreading the risks encountered by a business. This strategy is based on the principle of ‘not putting all your eggs in one basket’.

Three kinds of diversification: Geographic diversification Product diversification Supplier diversification (details on next slides …)

Geographic Diversification: Operating in many locations This is useful in case one market suffers a decrease in sales

Product Diversification: Increasing the range of products sold This is useful in case sales drop for one product - the others can still create profit

Supplier Diversification: Having a number of suppliers of raw materials This is a good idea because being reliant on one supplier is risky

4. Minimisation of Competitive Risk Competition does not only come from other domestic producers Overseas businesses may be able to sell their products at a cheaper price Selling overseas can minimise competitive pressures by providing a new market and another source of revenue

5. Exploiting Economies of Scale Reducing per unit cost by spreading fixed (overhead) costs across more units

How does Economies of Scale work? For some firms, large-scale production is cheaper than small production runs. This is because fixed production costs (i.e. costs that do not rise much as output increases including research, advertising, product development, some aspects of management and, up to a point, equipment) can be spread more thinly over a greater volume of sales.

6. Cushioning Economic Cycles Economic activity in a country fluctuates between a boom and a recession However, this is becoming less important. As the world markets become increasingly integrated, booms and recessions tend to be worldwide

7. Responding to Regulatory Differences Regulations are restrictions placed by governments on the activities of individuals or businesses Over the last two decades, regulations have increased Examples include environmental protections, work and health standards and product labelling Conforming to such regulations may add to the cost of production

Employment Differences In some labour-intensive industries (e.g. clothing, aspects of car manufacture, rubber production, toy making), wages represent the largest input cost for businesses. Given that in some countries, labour is relatively dear while in others it is cheap, some firms go hunting around the world in search of good supplies of cheap workers.

Question: What ethical issues could arise from avoiding regulations?

8. Tax Minimisation Tax rates vary from country to country Industrialised countries tend to have higher rates of company tax than developing countries Some developing countries offer taxation incentives to businesses if they invest in their country

Taxation Incentives: Tax holiday: A scheme in which no company or personal tax is paid for a certain period of time Tax haven: A country that has low or no taxes on business income.

Quiz Question Time! Write yourself three quiz questions on today’s topic!

Today we covered…. Reasons for international expansion: 1.Increasing sales and finding new markets 2.Acquiring resources and technology 3.Diversification 4.Minimisation of competitive risk 5.Exploiting economies of scale 6.Cushioning economic cycles 7.Responding to regulatory differences 8.Tax minimisation