International trade and business growth — Edexcel A-Level Business
Test yourself on International trade and business growth with PEARSON EDEXCEL A-Level practice questions.
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International trade and business growth explained
One is revenue earned from a customer abroad and the other is a purchase from a supplier abroad, and the exam value lies in what each does to the numbers.
Read the full explanation
Selling overseas spreads risk across markets, extends a product’s life once the home market has matured, and raises capacity utilisation, which is actual output divided by maximum possible output expressed as a percentage, so fixed costs are spread over more units and unit cost falls. Buying overseas cuts input prices but lengthens lead times and forces larger inventory. Both carry currency exposure, and the rule to quote is that a strong pound makes imports cheap and exports dear. The gap between the two flows is the balance of trade, and for a single firm the useful version is how much of its revenue and its cost base sits in another currency.
b) The link between business specialisation and competitive advantage
Concentrating resources on the activity a firm or a country performs relatively better than others is what the term means, and the marks run through cost. Doing one thing repeatedly buys economies of scale, a steeper learning curve and deeper technical knowledge, which either lowers unit cost enough to support Porter’s cost leadership or builds expertise strong enough to support differentiation. Bangladesh in garments and Germany in machine tools show the logic at national level, and ARM shows it in one firm that designs processors and manufactures none of them. The trade-off is dependence: a narrow business is exposed to one demand shift, one new technology or one hostile customer, which is why Ansoff put diversification on the matrix. Porter is blind to how fast a technology change can destroy a position that took years to build.
c) Foreign direct investment (FDI) and link to business growth
This means buying or building productive assets in another country, such as Nissan’s Sunderland plant or Tata’s purchase of Jaguar Land Rover, rather than merely holding shares there. It buys control, a local cost base, protection from tariffs and a shorter supply chain, which is why it sits at the top of the entry ladder above exporting, licensing and joint ventures. The price is capital at risk in a jurisdiction the board does not know well, so appraisal matters: payback measures the years until the outlay is recovered, average rate of return divides average annual profit by the initial cost and states it as a percentage, and net present value discounts future cash flows to today. Evaluation weighs the control gained against the flexibility surrendered and the cash locked up.
Your focus
- a) Exports and imports
- b) The link between business specialisation and competitive advantage
- c) Foreign direct investment (FDI) and link to business growth
International trade and business growth exam tips
Marking Points
- Explaining selling overseas as a route to higher capacity utilisation and lower unit cost, not simply as more sales.
- Applying the exchange rate rule correctly, so a weaker pound is shown to raise the sterling value of overseas earnings and the cost of bought in components.
- Comparing the firm’s overseas revenue with its overseas input cost to establish the net currency exposure.
- Naming a specific barrier for this firm, such as tariffs, distribution, regulation or payment risk, and weighing it against the gain.
- Linking overseas sourcing to a stated strategy, for example buying from a lower cost country to defend a cost leadership position.
- Explaining the mechanism, through economies of scale, the learning curve or superior expertise, rather than asserting that focus creates an edge.
- Naming which of Porter’s generic strategies the position supports, cost leadership or differentiation, and why rivals find it hard to copy.
- Applying the idea to the extract by identifying the one activity this firm is genuinely better at than its competitors.
- Setting the gain against the risk of depending on a single product, customer, country or technology.
- Judging durability, given imitation, patent expiry, exchange rate movement and the pace of change in that industry.
- Distinguishing this from exporting and licensing by the level of control and the amount of capital committed.
- Giving a specific motive for this firm, such as producing behind a tariff wall, reaching cheaper labour or securing a raw material.
- Using an appraisal figure from the extract, such as payback in years or average rate of return as a percentage, to support the recommendation.
- Explaining the effect on growth, including new revenue streams, economies of scale and stronger bargaining power with suppliers.
- Balancing the commitment against risks such as expropriation, currency movement, cultural distance and integration failure after an acquisition.
Examiner Tips
- 💡Currency movements are a favourite short calculation, so practise converting a price into the other currency before and after a change in the rate.
- 💡In a longer answer, use overseas sales to raise capacity utilisation and state what that does to unit cost, because that link earns analysis marks.
- 💡Weigh currency risk against the size of the opportunity rather than mentioning it as an afterthought at the end.
- 💡Name Porter and say which generic strategy applies, because naming a model and then applying it is what lifts analysis towards evaluation.
- 💡Keep the example to a sentence and return to the case business; a history of trade theory earns nothing.
- 💡Where the question asks whether the position will last, argue about how easily it can be imitated in this industry.
- 💡Expect a quantitative question first, often payback or average rate of return, then a longer recommend or evaluate question that must use that number.
- 💡Compare at least one alternative entry method, since a recommendation with no alternative considered rarely reaches the top band.
- 💡State the criterion you are judging against, for example whether payback falls inside the period the directors have set.
Common Mistakes
- Getting the exchange rate effect the wrong way round, which destroys the whole chain of analysis that follows.
- Treating overseas sales as pure profit and ignoring freight, tariffs, insurance and the cost of adapting the product.
- Confusing the national trade balance with the individual firm’s position, when the question is about the business.
- Assuming spare capacity can be sold abroad immediately, without distribution, language support or after sales service in place.
- Describing division of labour on a production line when the question is about a firm or country concentrating on one product or activity.
- Claiming a firm has an edge because it is large or well known, without identifying any source of that edge.
- Ignoring that comparative advantage moves, so a low cost location can become an expensive one within a decade.
- Asserting that a firm pursues cost leadership and differentiation at once with no evidence of how it funds both.
- Confusing it with buying shares in a foreign company, which is portfolio investment and brings no operational control.
- Recommending it because the market is expanding, with no reference to the capital required or the payback period.
- Ignoring lower commitment alternatives such as licensing, franchising or a joint venture that achieve entry with far less risk.
- Quoting payback as a rate of return, when payback measures time in years and the average rate of return measures profitability.