Chapter 71- Conditions that Promote Trade Flashcards
Factors which affect international trade
There are many conditions that promote trade. On one level, there are economic factors such as the impact of being a member of the European Union, but there are also the creative and entrepreneurial drives to seek new markets that dominate the push for trade.
These are facilitated by a skilled workforce that contributes by providing high-quality goods and services that are in demand.
Although the politics and economics of free trade will never be straightforward, trade has continued to expand and many consider that we have a global consumer culture stretching around the planet.
Push factors
These tend to be adverse on negative factors which encourage businesses to seek trading opportunities overseas.
This could result from weaknesses in the domestic market, such as a saturated market (so many goods cannot expand market share – over supplied) or very high competition from other businesses which drives down costs.
Other factors may include regulation, excessively high taxation e.g. VAT, change in tastes or fashion which would prompt push businesses to look into overseas market, change in demographic, changing economic conditions (recession).
Pull factors
These are generally positive reasons for firms to enter overseas markets and may include some of the following reasons
• Newer or bigger markets
• Technological expertise
• Reduced transportation costs
• Managerial expertise
• Financial expertise
• Economies of Scale allows businesses to expand overseas
because of the benefits in lower average cost of
production. E.g. technological economies of scale, bulk
buying etc. (Definition: occur where increasing the scale of
production leads to a lower cost per unit of output. Put
simply, increasing size or speed increases efficiency and
lowers costs)
• Spreading risk, if companies sell overseas then they of
course will reduce the risk of failure because some
markets will grow more quickly than others. Firms in this
situation may be able to cross subsidise more poorly
performing firms or subsidiaries in other countries.
Off-shoring
Is when businesses move from one country to another, so that all production and ancillary services are undertaken in another country. The reason for this could be to reduce costs or to avoid trade barriers or to take advantage of new and emerging markets.
Offshoring disadvantages
• Transport problem
• Local regulations may make it less attractive
• Exploitation of cheap labour + PR impact of that
• Management may not want to move overseas
• Lack of understating of culture, language etc.
• Corruption
• Stealing of intellectual copy rights
• Quality issues with goods produced overseas
Outsourcing
Is when a particular function is transferred to another supplier or firm e.g. production, IT or pay role. Involves moving an entire business function or project to an external provider.
• Reduction in costs
• Access to local markets
• Workers may be specialised
Labour productivity
Labour productivity should not be confused with cheaper labour costs because labour productivity refers to the amount produced per person in a given time period and not to the cost of labour itself. The important principle is that each employee will cost less per unit of output.
Extending the product life cycle by selling in multiple markets:
Development: The product is researched and designed, and a decision made about whether to launch the product
Introduction: From the development of an original idea to the launch of the product on the market
Growth: when the product takes off and sales increase
Maturity: When sales are near their highest but are slowing down
Decline: When sales begin to fall – when a product has reached the decline stage, with falling sales, market saturation and a decline in profits, a firm has to decide whether to get out of the market for that product altogether, or to attempt to extend the product life cycle in some way.
