Theme 4 - 4.2.1 - Conditions That Prompt Trade

Question 1

What are 2 push factors ?

Answer 1

There are some push factors which may force a business to consider selling abroad :

• High levels of domestic competition - if there is high levels of competition in the market that your are operating in then you might want to expand to different markets where there are less competition so that you can gain more sales
• Saturated markets with only low growth opportunities - if you are in a saturated market meaning that all the products are already sold to the people that would buy the products, then while the business is doing R&D in order to make a new product and try to differentiate etc to get more sales - the business needs to continue trading but if they stay in the saturated market then the sales wouldn’t change much so you have to look abroad for new markets where you can gather sales to get the profit you need to pump into R&D

Question 2

What are the PULL factors ?

Answer 2

There are some pull factors that might force. Business to consider selling abroad:

• Significant opportunities to sell overseas to markets - exporting is one way to increase sales and an export opportunity may arise because of demand for you product in different countries - and a business selling abroad will be able to grow faster as more profit which can lead to expansion of the business
• Ability to spread risk - A key benefit of exporting your product to other countries is that it allows you to spread the business risk out because if you sell in other countries then your aren’t just stuck to one countries laws and regulations so for example if you only sell in uk then you are committed to the uk market and this is risky because if the interest rates go up then this could cause the business a problem as loans will be more expensive and consumers might be at an incentive to save more money than to spend ( because savings accounts give more money back at high interest ) - so if that goes wrong you might be in trouble it if yous sell to multiple countries with different laws then this might have a smaller impact on you because you also have a foothold in another market that doing very well - especially in the uk when less people now have disposable income because of the costs of living crisis. Or also different countries might have different rates that the marketing your operating in is growing therefore if you are not operating in the market in a different country that’s growing a lot then you have a big opporutnity cost as you chose to put your eggs all in one market( basket)
• Ability to gain EOS - exporting is an excellent way to drive production to a level that delivers EOS - if you expand into a new country and new market where you can sell your product to a lot more people this means that you could get a lot more sales which means more profit and this means that you could increase production with more profit pumped into it which could lead to EOS as for example buying in bulk so lower unit cost. OR even you might start producing in that country and that country might have lower rent costs, labour costs etc so this all means lower unit cost which means more profit or other things etc etc

Question 3

What is offshoring ?

Answer 3

Offshoring is when a business relocates some of its production process to another country

This may be to cut costs in term of labour pay rates - as other countries may have lower labour costs so you benefit from EOS etc

OR also the country that you are offshoring to may have a good pool of educated people that could help your business to grow because they may think differently and give you alternatives to your business venture options which could be more profitable

Question 4

What is Outsourcing ?

Answer 4

This is where a business function such as customer service or taxes is passed onto a third party business —> this doesn’t mean out of the country like offshoring but just out of the business and to another business

This could also be like market research