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Unlock This CourseIn today's connected world, businesses don't just operate in their home country. Many companies buy materials from abroad (importing) or sell their products to other countries (exporting). But the international economy is always changing and these changes can have huge effects on businesses that trade internationally.
Think about it - when you buy a smartphone, it might be designed in America, made in China and sold in the UK. Each step involves international trade and changes in the global economy affect every part of this process.
Key Definitions:
Exchange rates are like the weather for international businesses - they're always changing and can make a huge difference to profits. When the pound is strong against other currencies, UK importers celebrate because foreign goods become cheaper. But UK exporters worry because their products become more expensive for foreign customers.
Exchange rates are probably the biggest factor affecting importers and exporters. Let's look at how they work in practice.
When the pound strengthens against other currencies, it's like getting a discount on everything you buy from abroad. But it also means foreign customers have to pay more for British goods.
Importers win: Raw materials, components and finished goods from abroad cost less in pounds. This can increase profit margins or allow lower selling prices.
Exporters struggle: British goods become more expensive for foreign buyers, potentially reducing demand and sales volume.
Smart businesses use hedging strategies to protect against currency fluctuations, like fixing exchange rates in advance.
When the pound weakened after Brexit, Jaguar Land Rover saw their exports become more competitive globally. However, they also faced higher costs for imported components from Europe. The company had to balance these opposing effects while planning their production and pricing strategies.
Governments sometimes put up barriers to protect their own industries or raise money through taxes on imports. These barriers can dramatically change the game for international businesses.
Trade barriers come in different forms, each affecting businesses differently:
Taxes on imported goods that make them more expensive. For example, if the US puts a 25% tariff on British steel, American buyers will pay 25% more, making British steel less competitive.
Limits on the quantity of goods that can be imported. If the EU limits textile imports to 1 million units per year, exporters must compete fiercely for their share.
Rules about product standards, safety, or environmental requirements that can make it harder and more expensive to export to certain countries.
When the UK left the EU, new trade barriers appeared overnight. British exporters to Europe faced new paperwork, potential tariffs and regulatory checks. Many small businesses found the extra costs and complexity made European trade unviable.
When economies grow, people have more money to spend, which affects international trade patterns. Understanding these cycles helps businesses plan their international strategies.
Economic growth creates a ripple effect across international markets:
When countries like China or India experience rapid growth, their citizens want more consumer goods, creating opportunities for exporters. However, growing economies also compete more effectively in international markets.
During economic downturns, the opposite happens. People buy less, especially expensive imported goods and businesses cut costs by finding cheaper suppliers.
As China's economy grew rapidly in the 2000s and 2010s, German luxury car manufacturers like BMW and Mercedes-Benz saw huge increases in Chinese demand. They invested heavily in Chinese production facilities and marketing. However, recent Chinese economic slowdown and trade tensions have forced these companies to reconsider their strategies.
Smart businesses don't just react to international changes - they prepare for them. Here are the main strategies successful international businesses use:
International businesses face unique risks, but there are proven ways to manage them:
Businesses can lock in exchange rates for future transactions, protecting against sudden currency movements. It's like insurance for international deals.
Instead of relying on one country, businesses spread their exports across multiple markets. If one market struggles, others might still perform well.
Having multiple suppliers in different countries means businesses can switch if one source becomes too expensive or unreliable.
Many businesses avoid some international risks by producing goods in their target markets. This eliminates exchange rate risk and trade barriers, though it requires significant investment and local expertise.
Let's look at how actual businesses have adapted to international economic changes:
These examples show how businesses can turn international challenges into opportunities:
British vacuum cleaner company Dyson moved its manufacturing from the UK to Malaysia and Singapore. This decision was driven by lower costs, access to skilled workers and proximity to growing Asian markets. While controversial, it helped Dyson remain competitive globally and continue investing in UK-based research and development.
The key lesson from successful international businesses is flexibility. They monitor global economic trends, maintain diverse supplier and customer bases and aren't afraid to adapt their strategies when conditions change.
Even small businesses can succeed internationally. Many use online platforms to reach global customers without the traditional costs of international expansion. Others focus on niche products where they can command premium prices despite currency fluctuations.
The international economy continues evolving, with new challenges and opportunities emerging. Climate change policies, digital trade and changing consumer preferences all affect how businesses operate internationally.
Successful businesses stay informed about global trends, maintain flexible strategies and always have backup plans. The international economy will keep changing, but businesses that understand these impacts and prepare accordingly will continue to thrive.