Factors contributing to increased globalisation — Edexcel A-Level Business
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Factors contributing to increased globalisation explained
Tariffs are taxes on goods entering a country, quotas cap the quantity allowed in, and non tariff obstacles use standards, licensing and paperwork to do the same job more quietly.
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Stripping them away, through World Trade Organization agreements, free trade areas and customs unions, cuts the landed cost of components, opens a far larger addressable market and makes offshore production worthwhile. The same change exposes a domestic producer to importers who were previously priced out, compressing margins and forcing a choice between competing on cost and differentiating. The direction is not one way: United States tariff rounds, and the customs checks and rules of origin that followed the United Kingdom leaving the European Union, raised obstacles again, so treat openness as reversible before recommending an investment that depends on it.
b) Political change
A shift in who governs and what they permit covers elections, trade policy, sanctions, nationalisation, tax and regulation, and it reaches a business by three routes: the cost of trading across a border, the security of assets already committed abroad, and the certainty a board needs before committing more. The collapse of trade with Russia after the invasion of Ukraine forced firms such as BP and McDonald’s to write off businesses they had spent decades building, while China opening from the late nineteen seventies created the supply chains most retailers still rely on. The awkward point for evaluation is that risk and return usually move together, so the question is rarely whether risk exists but whether the firm is paid enough to carry it, and whether it could enter by licensing instead.
c) Reduced cost of transport and communication
Containerisation, bulk shipping, cheap air freight and near free digital communication have pushed the cost of moving a product and of coordinating people across borders towards a rounding error, which is why a firm can design in Britain, make in Vietnam and answer the phone in India. In a decision this matters because it changes where production is viable: if freight is a tiny share of unit cost then the wage gap decides the location, while a heavy, low value product such as ready mixed concrete is still made near its market. The trade-off is a longer, thinner supply chain, so lead times stretch, inventory and working capital rise, and one blocked canal or one port strike halts the line. It also lowers barriers to entry in Porter's five forces, because a small online seller can now reach a world market.
d) Increased significance of global (transnational) companies
A firm that owns and controls value adding activity in more than one country plans its value chain as one system rather than as a set of national businesses, so Apple designs in California, has chips fabricated in Taiwan and assembly carried out in China, and a large slice of world trade is now movement between parts of the same company. In a decision this matters to host governments, which weigh the jobs, tax revenue and technology transfer a plant brings against transfer pricing, profit repatriation and the buying power the firm holds over local suppliers. It matters to the company too, because running one brand across many cultures forces a choice between standardisation and adaptation, and Hofstede's dimensions warn that a management style built for a low power distance country can fail where deference to authority is expected.
e) Increased investment flows (FDI)
Putting capital into productive assets abroad and keeping lasting control of them, either by building a plant from scratch or by buying a local firm outright, is how a business turns exporting into presence. In a decision it sits on a ladder of entry modes alongside exporting, licensing, franchising and joint ventures, and it buys the most control at the highest cost and the slowest payback. Firms commit capital to leap over tariffs and quotas, to sit inside a trade bloc, to reach cheaper inputs or to follow a major customer, which is why Nissan built at Sunderland and why Tata bought Jaguar Land Rover. Appraise it like any project, with payback measured in years, average rate of return as average annual profit divided by initial cost expressed as a percentage, and net present value discounted at a rate that reflects political risk.
f) Migration (within and between economies)
Workers moving from countryside to city inside one country, and workers moving from one country to another, change the price and the availability of labour, which is a cost line on every business plan. China's internal shift of hundreds of millions of people to coastal cities is what made low cost manufacturing there possible; in the UK the arrival of workers after European Union enlargement filled roles in agriculture, food processing and care, and the end of free movement tightened those same labour markets. For a firm it decides whether vacancies can be filled at the wage on offer, and it creates markets too, because incoming communities buy familiar products. The sending economy gains remittances but can lose its trained nurses and engineers, which is the brain drain argument.
g) Growth of the global labour force
When China, India and the former Soviet bloc joined the world trading system, the number of workers available to firms selling into world markets roughly doubled, and rising female participation and longer schooling added to the pool. For a business this is why offshoring became attractive, since a wide supply of workers at low wages holds down the cost of labour intensive assembly, garment sewing and data processing. The judgement to make is that a low wage is not automatically a low cost, because labour productivity, measured as output per period divided by the number of employees, determines unit labour cost, and a well paid German engineer can be cheaper per unit than a poorly paid one elsewhere. Those same workers then become customers as incomes rise, which is why Unilever and Samsung chase Asian and African demand.
h) Structural change
Economies shift the balance of their output between farming and extraction, manufacturing, and services, and the past fifty years moved the UK decisively towards services while China moved towards manufacturing. For a business that is both a threat and an opening: a British engineering firm meets cheaper overseas rivals and may become a designer, assembler and service provider rather than a mass producer, while a UK law, insurance or software firm gains a growing export market. The cost falls unevenly, because a worker made redundant in steel cannot simply step into financial services, and that mismatch is structural unemployment, the reason governments fund retraining. In workforce planning it changes the skill mix a firm recruits for and the wage bill it has to carry.
Your focus
- a) Reduction of international trade barriers/trade liberalisation
- b) Political change
- c) Reduced cost of transport and communication
Show all 8 objectives
- d) Increased significance of global (transnational) companies
- e) Increased investment flows (FDI)
- f) Migration (within and between economies)
- g) Growth of the global labour force
- h) Structural change
Factors contributing to increased globalisation exam tips
Marking Points
- Defining a tariff as a tax on imports and a quota as a physical limit, then showing which one touches this firm’s costs or sales.
- Tracing a chain from cheaper imported inputs to either a lower price or a wider margin, and saying which the firm should take.
- Recognising the threat side, with cheaper imports raising rivalry and the threat of new entrants in Porter’s five forces.
- Using a figure from the extract, such as the percentage tariff removed, to estimate the change in unit cost or selling price.
- Judging how permanent the change is before committing capital that only pays back under open trade.
- Naming the specific change in the extract and the route by which it reaches this firm, whether cost, demand, regulation or security of assets.
- Placing it inside a structured scan of the external environment and then weighting it against the other factors present.
- Explaining the effect on a decision, for example delaying capital investment, holding more inventory or choosing a lower commitment entry method.
- Recognising that such change creates opportunities as well as threats, including deregulation, subsidies or a rival being forced to withdraw.
- Judging the likelihood and the timescale rather than assuming the worst outcome will occur.
- Naming the specific driver and applying it, for example arguing that a standard steel container and cheap bunker fuel make it profitable for a UK retailer to source own label goods from Asia, rather than only saying that transport is cheaper.
- Quantifying wherever the case study allows it, using freight as a percentage of unit cost or the saving from a wage differential, so the answer shows why production moved instead of asserting that it did.
- Separating goods from services and explaining that cheap broadband, cloud software and video calling made services such as software development, accounting and customer support tradeable for the first time.
- Evaluating with the counterweight, that longer supply chains raise lead times, inventory and disruption risk, so the judgement depends on how time sensitive and how valuable per kilogram the product is.
- Defining the term in a clause, as a business that owns or controls production in more than one country, and then spending the answer on what that lets the named firm do.
- Explaining intra-firm trade and the global value chain, that components cross borders several times inside one company before a finished product reaches a customer.
- Balancing host country gains against costs, setting employment, skills and tax receipts against transfer pricing into low tax jurisdictions, profit leaving the country and downward pressure on local pay and standards.
- Using a named model where it earns credit, such as Hofstede on managing across cultures or Porter's generic strategies on whether the firm competes globally on cost leadership or on differentiation.
- Separating this from portfolio investment, since the defining feature is a lasting controlling stake in real assets rather than the buying of shares or bonds for a financial return.
- Explaining greenfield against acquisition and saying which suits the named firm, because building creates exactly the plant wanted while buying delivers a brand, a customer base and a distribution network at once.
- Giving a motive tied to the case, such as jumping a trade barrier, securing raw materials, lowering unit labour cost or getting close to a fast growing market.
- Appraising the commitment numerically with payback, average rate of return or net present value, and saying what a long payback means when the host country is politically unstable.
- Treating the issue as labour supply, so more workers available at a given wage hold unit labour costs down while fewer workers push wages, recruitment spend and investment in automation up.
- Distinguishing movement inside an economy from movement between economies and showing why both matter, for example urbanisation creating a factory workforce and a consumer market in the same city.
- Using the people metrics to evidence the pressure, with labour turnover as the number of staff leaving divided by the average number employed and multiplied by one hundred, alongside vacancy rates.
- Balancing sending and receiving effects, naming remittances and the loss of skilled workers on one side against pressure on housing and public services on the other.
- Explaining the mechanism rather than asserting it, so a larger pool of workers at a given wage makes labour intensive production abroad viable and holds down pay for comparable work in developed economies.
- Using unit labour cost properly, with labour productivity as output per period divided by the number of employees, and showing that a low hourly rate paired with low output per worker can cost more per unit.
- Noting the demand side, that the growing workforce becomes a middle class market, which is often the stronger reason a Western firm invests there at all.
- Evaluating with the limits, since skills, literacy, infrastructure and component quality mean available workers are not interchangeable across every task.
- Describing the shift between primary, secondary and tertiary activity in a named economy with a direction and a rough scale, rather than offering the word deindustrialisation on its own.
- Linking the change to a business decision, such as moving up the value chain into design, branding, servicing and after sales support once low cost manufacture has gone abroad.
- Explaining structural unemployment as a mismatch of skills and location rather than a simple shortage of jobs, and naming retraining, relocation support and regional policy as responses.
- Judging the net effect with evidence, weighing lost manufacturing employment against growth in service exports and in higher value roles.
Examiner Tips
- 💡Duty changes lend themselves to a short calculation, so practise adding a percentage charge to a landed cost and finding the new selling price.
- 💡Argue both directions in evaluation, since the same removal helps the exporter and hurts the domestic producer in the same extract.
- 💡Use Porter’s five forces to frame the threat of new entrants when protection falls, because naming the model organises the argument.
- 💡This is nearly always an assess or evaluate question on the external environment, so prioritise: say which factor dominates for this firm and why.
- 💡Tie the argument to a decision already in the case, such as a planned overseas plant, rather than discussing politics in the abstract.
- 💡Close with a conditional judgement, stating what would have to be true about the outcome for your recommendation to change.
- 💡This is rarely asked on its own. It appears as one factor inside a longer question on why a named business has globalised, so tie it to that firm's product and cost structure in the opening sentence.
- 💡Four mark and six mark items want two developed reasons rather than a list of five, so pick the driver the case study actually evidences and build a chain of reasoning from it to profit.
- 💡Save evaluation material for supply chain risk and for the point that transport cost falls less quickly once fuel prices and carbon charges are rising.
- 💡Questions here name a firm and a host country, so write about that pairing; generic paragraphs about multinationals sit in the lowest level for application.
- 💡Assess and evaluate questions want a conclusion with a condition attached, for instance that the gains are real where a government can enforce labour and tax rules and thin where it cannot.
- 💡Keep one checkable example ready, such as Unilever selling in around one hundred and ninety countries, and deploy it in a clause rather than a paragraph.
- 💡Numerical items on this topic give a table of cash flows and ask for payback or net present value, so practise reading the cumulative cash flow line and interpolating within the year.
- 💡In written items the marks come from comparing entry modes, so always weigh direct investment against the cheaper alternatives the firm chose not to use.
- 💡Recommend questions want a decision supported by a justification and a condition, not a tidy summary of both sides.
- 💡This normally appears inside a question on why a business globalised or on where it should locate, so bring it in as a labour market factor rather than as a topic in its own right.
- 💡Assess questions reward a clear judgement about which group gains, so decide whether you are arguing for the firm, the receiving economy or the sending economy before you write.
- 💡Where the case gives turnover or vacancy figures, quote them, because application marks are awarded for using the data rather than for naming the theme.
- 💡Expect this as a supporting factor in a longer question about why manufacturing shifted to Asia, so give it one developed paragraph and drive it through to cost per unit.
- 💡Bring a calculation whenever figures are supplied, because a labour productivity or unit labour cost comparison turns a generic claim into an evidenced one.
- 💡Evaluate by asking how long the advantage lasts, since Chinese wages have risen sharply and some production has already moved on to Vietnam and Bangladesh.
- 💡This is fertile evaluation material in questions about a UK manufacturer, so use it to argue that the firm's strategy has to change rather than that it should simply cut costs.
- 💡Data response items often give sector employment shares across time, so read the direction of travel and quote a figure from each end rather than describing the table.
- 💡Analyse questions want a chain of reasoning: shift in the economy, effect on the firm's costs or demand, effect on its decision.
Common Mistakes
- Treating free trade as an unambiguous benefit for every business, when producers competing with imports can lose heavily.
- Confusing a tariff with a quota, or describing both as outright bans on trade.
- Forgetting obstacles that are not tariffs, such as product standards and customs paperwork, which can cost more than the duty itself.
- Writing about consumers and the wider economy instead of the effect on the named business.
- Retelling events as news, with no consequence traced to costs, revenue, risk or the value of assets held abroad.
- Assuming every change is negative, when a new government can open public procurement, cut business taxes or relax planning rules.
- Filling in an external environment framework as a list, when the marks come from arguing which factor matters most to this firm.
- Confusing this with legal compliance, so the answer only discusses obeying the regulation that already exists.
- Treating falling transport cost as the whole explanation for offshoring, when the wage gap, tariff levels, tax treatment and the availability of skilled labour usually weigh more heavily in the decision.
- Assuming cheap transport helps every business equally, when a bulky, low value or perishable product such as fresh milk or bagged aggregate is still produced close to the customer.
- Describing better communication as nothing more than easier emailing, and missing that it allows real time control of a supply chain and a genuine global division of labour.
- Confusing such a company with any exporter, when selling abroad is not the same as owning production abroad and that distinction is the whole point of the term.
- Writing a one sided answer in which the firm is only exploitative or only benevolent, when the mark scheme rewards a judgement that depends on the host government's bargaining power and regulation.
- Claiming the firm pays no tax anywhere, instead of explaining transfer pricing as the setting of internal prices so that profit is recorded where tax rates are lowest.
- Calling any overseas purchase of shares direct investment, when a passive holding that carries no control is portfolio investment.
- Assuming inward investment is always welcome, ignoring that profits are repatriated, that plants can be closed quickly and that local competitors may be driven out of the market.
- Discounting cash flows at a rate plucked from nowhere and then quoting net present value to the penny, which reads to an examiner as false precision.
- Drifting into a political essay about immigration instead of answering the business question about labour supply, wage costs and customer markets.
- Forgetting the movement that happens inside an economy, so answers miss urbanisation, which is the larger shift of people in economies such as China and India.
- Assuming any labour shortage is solved by paying more, ignoring that a firm may instead automate the task, offshore it or cut opening hours.
- Equating a bigger workforce with cheaper production and ignoring productivity, training cost, defect rates, management time and freight.
- Writing as though the effect on developed country workers were uniform, when the pressure falls on routine tradeable work while skilled and non tradeable jobs such as plumbing are largely untouched.
- Confusing the size of a population with the size of a labour force, since children, students, retired people and those not seeking work are not part of it.
- Treating deindustrialisation as a collapse in manufacturing output, when UK output has often held up while employment in it fell because productivity rose.
- Listing the three sectors as a definition exercise and never returning to the named business, which caps the answer at the lowest level for application.
- Blaming the shift entirely on cheap imports and ignoring automation, technology and the way consumers spend more on services as incomes rise.