Section 1.3.1Unit 1: Markets in Action
Unit 1: Markets in Action
Introductory Concepts
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Globalisation is driven by technology, trade liberalisation, and deregulation — together they shrink the effective distance between markets and allow firms to source, produce, and sell worldwide.
Globalisation is the increasing integration and interdependence of the world's economies through the free flow of goods, services, capital, and labour across borders. For businesses, it means both wider opportunities and fiercer competition.
Three forces drive it. Technology — the internet, containerised shipping, and digital payments make it cheap to coordinate supply chains across continents. Trade liberalisation — the WTO and bilateral agreements reduce tariffs and quotas, lowering the cost of cross-border trade. Deregulation — governments opening financial markets and relaxing FDI restrictions invite foreign capital and competition.
For businesses the impact is double-edged. Globalisation opens larger markets and access to cheaper inputs (labour, raw materials, components), but it also brings increased competition from foreign firms and exposure to foreign exchange risk as revenues and costs span multiple currencies.
Real Example: Zara's parent company Inditex operates a global supply chain spanning 12 countries, using advanced logistics technology to move garments from design to store in under two weeks. Cheap shipping and liberalised trade allow Zara to source fabric in Turkey, cut in Morocco, and sell in 96 markets worldwide.
Exam Matters: Examiners expect you to distinguish between the drivers (technology, liberalisation, deregulation) and the impacts on business (larger markets, cheaper inputs, competition, FX risk). A strong answer links a specific driver to a specific business outcome with a named example.
Globalisation forces firms to rethink every strategic decision — from where they produce, to how they price, to how they manage currency exposure across borders.
Globalisation reshapes business strategy in fundamental ways. Firms can offshore production to low-cost countries, outsource non-core functions to specialists abroad, and access a global talent pool. These choices lower costs but create supply chain dependencies and reputational risks.
Pricing becomes more complex because firms must account for exchange rate fluctuations, transfer pricing across subsidiaries, and different price elasticities in different markets. A strong pound makes UK exports expensive abroad; a weak pound makes imported inputs costly.
Risk management becomes critical. Firms use hedging (forward contracts to lock in exchange rates), diversification across markets, and local sourcing to reduce exposure. The most successful global firms balance efficiency (centralised production) with resilience (diversified supply chains).
Real Example: Walmart's entry into India required adapting to local regulations that restricted FDI in multi-brand retail. Walmart initially used a joint venture with Bharti Enterprises to navigate rules, then shifted to wholesale cash-and-carry operations — showing how globalisation demands strategic flexibility, not just cost-cutting.
Exam Matters: A top-mark answer evaluates whether the benefits of globalisation (lower costs, larger markets) outweigh the risks (FX exposure, supply chain fragility, reputational risk) for a specific firm in a specific context. Always consider: 'It depends on the firm's size, industry, and risk appetite.'
Trade blocs range from free trade areas to full single markets — each deeper level of integration removes more barriers but demands more policy surrender from member states.
A free trade area (FTA) eliminates tariffs between members but each country keeps its own external tariffs on non-members. NAFTA (now USMCA) is a classic example — Mexico, the US, and Canada trade freely among themselves but set independent tariffs on imports from China.
A customs union goes further: members adopt a common external tariff (CET) against non-members, which simplifies trade rules but removes individual tariff policy. The EU began as a customs union — all members charge the same tariff on, say, Vietnamese textiles.
A single market adds the free movement of capital and labour alongside goods and services. The EU single market allows a Polish engineer to work in Germany without a visa and a French bank to operate in Spain without separate authorisation. For businesses inside, it creates a seamless domestic-style market of 450 million consumers.
Real Example: BMW benefits hugely from the EU single market. It sources components from 15+ EU countries tariff-free, moves skilled engineers between plants in Germany, Austria, and the UK (pre-Brexit), and sells finished cars across 27 member states without customs paperwork or regulatory duplication.
Exam Matters: Examiners test your ability to rank the levels of integration and explain the trade-offs. A strong answer explains why deeper integration benefits businesses (larger barrier-free market) but constrains governments (cannot set independent trade policy).
Trade blocs create trade among members by removing barriers, but they divert trade away from efficient non-members who face the CET — so not all trade effects are positive for global efficiency.
Trade creation occurs when bloc membership replaces expensive domestic production with cheaper imports from a partner country. A Spanish wine producer gains tariff-free access to Germany, undercutting less efficient German vineyards — consumers benefit from lower prices.
Trade diversion occurs when the CET forces firms to switch from a cheaper non-member supplier to a more expensive bloc member. If the EU's CET makes Brazilian orange juice costlier than Spanish juice, UK buyers switch to Spain even though Brazil produces more cheaply — a net efficiency loss.
For businesses inside the bloc, the impact is overwhelmingly positive: barrier-free access to a huge market, simplified regulation, and larger customer bases. For businesses outside, the CET creates a competitive disadvantage that may force them to set up production inside the bloc (tariff-jumping FDI) to remain competitive.
Real Example: Post-Brexit, UK fisheries lost tariff-free access to the EU single market. Scottish salmon exporters now face customs checks and paperwork delays that add cost and reduce freshness — a real-world example of trade diversion as EU buyers increasingly switch to Norwegian salmon (Norway has an EEA arrangement).
Exam Matters: A common exam question asks you to evaluate whether joining a trade bloc benefits a country's businesses. Structure your answer: trade creation benefits (lower costs, bigger markets) vs trade diversion costs (losing efficient non-member suppliers) — then conclude with 'it depends on the relative size of creation vs diversion'.
Globalisation is driven by technology, trade liberalisation, and deregulation — together they shrink the effective distance between markets and allow firms to source, produce, and sell worldwide.
Globalisation forces firms to rethink every strategic decision — from where they produce, to how they price, to how they manage currency exposure across borders.