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4.1.2 : International trade - Coggle Diagram
4.1.2 : International trade
Businesses that trade internationally usually import and export products..
Imports
Products bought from overseas.
When someone buys an imported product, the money goes back to the country of origin. This causes money to flow out of an economy.
The availability of imports increases the variety of goods and services available to firms and consumers.
Imported products can often be cheaper than domestically produced ones, e.g. clothes.
Exports
Exports are products that are sold overseas in another country.
When a business sells an exported product, they recieve money from the person or business they sold it to overseas. This leads to money flowing into an economy.
Exporting can be a way for businesses to expand: from benefitting from a larger, international market.
This is often the simplest and least risky way to access overseas markets.
Specialisation may help a firm to trade internationally
A competitive advantage: something that allows a business to generate more sales or become more profitable than a rival business.
Example: producing higher quality products, having lower costs, or specialist staff.
Having a competitive advantage is often more important for firms in an international market, as they often face more competition than firms in a domestic market.
A competitive advantage can be gained through specialisation.
Specialisation is when a business focuses on producing one singular or a narrow range of products.
Occasionally, an entire country can specialise in producing a product: such as norway specialising in oil production.
Benefits and drawbacks of specialisation
Benefits:
Workers become highly skilled in producing one particular or a range of products, meaning they are likely to produce them quicker at the same/or a better quality.
This is likely to lead to an increase in efficiency:
Workers can produce more of the same product which could lead to an increase in potential for sales.
Drawbacks:
A business's risk isnt spread. If the demand for the one product they produce decreases they are likely to be heavily affected
Can increase the cost of training staff. If new staff are not experts, it may take time and money in order to train them sufficiently and meet the high standards and gain the right skills.
Foreign direct investment is one form of expanding overseas for businesses.
As well as exporting, FDI is another way businesses can take advantage of overseas markets.
FDI: when a firm in one country invests in a business in another country.
For example: taking over or merging with an existing foreign business, starting a new branch overseas, or starting up a new enterprise in another country.
To class something as FDI, the investing business has to have some sort of managerial control over the foreign business. It doesn't count if a business buys shares in a foreign country.
Horizontal or vertical
Most FDI is horizontal, where a firm invests in a foreign business that is at the same stage as the production process as the business in their home country (such as toyota building a manufacturing plant in the UK)
FDI can also be vertical (where a firm invests in a business that is in a different stage in the production process). This could be a business investing in an overseas firm that supplies it with raw materials for example.
FDI can help a business to grow and increase sales.
It gives a business access to a new market, which could mean more sales as there are more people to sell to.
It may reduce costs as labour or raw materials in a foreign country may be cheaper.
Could give the business the ability to take advantage of skilled local labour, which can increase productivity
FDI may be more useful than exporting from their country of operation. This gives them first hand knowledge on the countrys legal system, consumer tastes and markets.
Investing in a foreign business can also help the business overcome international trade barriers, like tariffs or quotas, which can prevent access to a market.
FDI can have a significant impact on the country's economy.
FDI can improve local standards of living and cause economic growth.