SQA Advanced Higher Business Management

Globalisation is the growing connection of national economies through trade in goods and services, the movement of capital and people, and the spread of technology, information and culture. For a business it means that suppliers, customers, competitors and sources of finance are no longer confined to the home country, and that events in one market (a change in a tariff, a currency fall, a factory fire) reach firms thousands of miles away within days.

A multinational corporation (MNC) is a business that owns or controls operations in more than one country, usually with its head office in one country (the home country) and production, sales or service sites in others (host countries). Unilever, Toyota, Apple, Shell and Diageo are all multinationals, and so are far smaller businesses that run a single overseas branch.

What drives globalisation

Several changes over the past seventy years have made trading and operating abroad cheaper and less risky.

• Trade liberalisation. Successive rounds of negotiation under the General Agreement on Tariffs and Trade (1947) and then the World Trade Organization (WTO, created in 1995) cut tariffs and reduced quotas. Regional blocs such as the EU and ASEAN went further and removed most barriers between their members.
• Transport. Containerised shipping, larger vessels and cheaper air freight lowered the cost of moving goods, so a product can be made in one continent and sold in another at a competitive price.
• Information and communications technology. The internet, cloud computing, video calls and online payment let a firm manage a supply chain, sell to customers and pay staff in several countries from one place.
• Deregulation of capital markets. Fewer controls on moving money across borders made it easier for firms to raise finance abroad and for investors to buy shares in foreign companies.
• The rise of emerging economies. Growth in China, India, Brazil and South-East Asia created large groups of new consumers and also large pools of workers, which attracted investment.
• Consumer tastes. Global brands, social media, travel and film have narrowed differences in what people want in some product categories, which lets one product be sold in many countries with small changes.

Effects of globalisation on business

Opportunities

Larger markets let a firm sell more and so spread its fixed costs over greater output, which lowers the cost of each unit (economies of scale). Production can be located where labour, materials or energy are cheapest. A firm can raise finance on foreign stock markets and learn new methods from foreign partners and competitors. Selling in several countries also spreads risk, because a downturn in one market can be offset by growth in another.

Threats

Foreign competitors can enter a firm's home market with lower prices, and a small firm may find itself unable to compete with a multinational's buying power and marketing budget. Supply chains that cross many borders are exposed to disruption, as the shortages after the Covid-19 pandemic showed. Exchange rate movements change the price of imports and the value of overseas earnings. Firms also face scrutiny of their conduct abroad: a supplier's use of child labour or unsafe working conditions becomes the buyer's reputational problem.

Effects on Scottish businesses

Scotland has a small home market, so many Scottish firms depend on exports. Scotch whisky, salmon, financial services, energy equipment and software are sold worldwide, which makes these firms sensitive to trade agreements, tariffs and exchange rates. Scottish firms also compete at home with imports and with foreign-owned firms, and the country relies on inward investment for a considerable share of its manufacturing and technology employment.

Why multinationals grow

A firm that has outgrown its home market, or that sees better returns elsewhere, has several reasons to become multinational.

1. Access to larger markets, including fast-growing ones where demand for the product is rising.
2. Lower costs: cheaper labour, land, materials or energy, and economies of scale from producing in bigger volumes.
3. Avoiding trade barriers. A tariff on imported cars makes it cheaper for a manufacturer to build the cars inside the country it wants to sell in.
4. Securing raw materials or components, for example by owning a mine or a plantation.
5. Spreading risk across several economies, currencies and groups of customers.
6. Lower taxation or helpful government incentives, such as grants or tax holidays, in some host countries.
7. Taking advantage of a strong brand or technology that can be used in many markets at little extra cost.
8. Being close to customers. Local production allows quicker delivery, adaptation to local tastes and a local image, which can matter in markets that are suspicious of imports.
9. Following customers or competitors. A supplier to a car maker may open a factory beside the new assembly plant, and a firm may enter a market to stop a rival from taking it unchallenged.

MNCs also grow through takeovers and mergers of foreign firms, which give them an existing customer base, brands and local knowledge at once. Once large, an MNC has bargaining power over suppliers and governments, which encourages further growth.

Limits and criticisms

Globalisation does not benefit everyone evenly. Jobs in manufacturing have moved from higher-wage to lower-wage countries, which has caused unemployment in some regions of the UK. Critics argue that it widens inequality, increases environmental damage and gives large firms influence over governments. Since the financial crisis of 2008, and more strongly since the Covid-19 pandemic and the trade disputes of the late 2010s and 2020s, some governments have moved towards protectionism, using tariffs, subsidies and "buy local" rules, and some firms have brought production closer to their home markets, which is called reshoring (or nearshoring when the new location is a neighbouring country).