What is 'Foreign Direct Investment' (FDI)?

FDI is an investment made by a firm or individual in one country into business interests located in another country, typically involving a 10% or greater ownership stake.

What is the primary difference between exporting and Foreign Direct Investment (FDI)?

Exporting involves selling domestically produced goods abroad with low resource commitment, while FDI involves establishing a physical presence or ownership in a foreign country, requiring high capital and offering more control.

How does a joint venture differ from a takeover in international expansion?

A joint venture is a collaborative partnership where two firms share risks and rewards for a specific goal, whereas a takeover involves one firm buying a majority stake in another to gain full control.

What is the difference between a tariff and a quota?

A tariff is a tax imposed on imported goods to increase their price and protect domestic industry, while a quota is a physical limit on the volume of goods allowed into a country.

What is a common mistake when assuming the impact of tariffs on domestic businesses?

Students often forget that while tariffs protect domestic manufacturers from competition, they also increase costs for domestic firms that rely on imported raw materials or components.

Why is it incorrect to assume that international trade always leads to lower prices for all consumers?

While trade increases competition, protectionist measures like tariffs or the costs of international logistics and local compliance can actually drive prices up in certain markets.

What error is made when ignoring 'cultural distance' in international growth?

Businesses often fail by assuming a product successful in the home market will work abroad without adaptation, ignoring local preferences, language, and legal regulations.

Define 'Specialisation' in the context of international trade.

Specialisation is the process where a business or country focuses its production on a limited scope of goods or services to gain greater degrees of efficiency and competitive advantage.

What are the 'BRICS' and 'MINT' nations?

These are acronyms for emerging economies with high growth potential: BRICS (Brazil, Russia, India, China, South Africa) and MINT (Mexico, Indonesia, Nigeria, Turkey).

How do economies of scale facilitate business growth through trade?

By selling to a larger global market, firms can increase production volume, which lowers the average cost per unit, making the business more profitable and price-competitive.

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International Trade & Business Growth

Summary

International trade involves the exchange of goods and services across national borders, enabling businesses to achieve growth through market expansion, specialisation, and strategic investment. By leveraging competitive advantages and economies of scale, firms can reduce unit costs and access emerging markets, though they must navigate protectionist barriers like tariffs.

1. Definition & Core Concepts

International Trade is the exchange of capital, goods, and services across international borders or territories. It allows for the expansion of a business's potential customer base beyond its domestic market.
Exports are goods and services produced domestically and sold to buyers in other countries, acting as a primary revenue driver for international growth.
Imports refer to goods and services purchased from foreign sources, which can provide domestic businesses with cheaper raw materials or specialized components.
Specialisation occurs when a business or country focuses its resources on producing a specific range of goods where it has a distinct advantage, leading to higher efficiency and quality.

2. Underlying Principles of Growth

Economies of Scale: As businesses expand into international markets, their total output increases. This allows them to spread fixed costs over a larger number of units, reducing the average unit cost ( $AC = \frac{TC}{Q}$ ).
Competitive Advantage: By focusing on what they do best, firms can create higher value for consumers. This advantage can stem from access to unique resources, superior technology, or lower labor costs in specific regions.
Market Saturation: When a domestic market reaches its limit for growth, international trade provides a 'vent for surplus,' allowing firms to maintain growth trajectories by entering untapped geographic regions.

Graph showing the relationship between resource commitment, risk, and level of control for different international entry modes.

3. Methods of International Expansion

4. Key Distinctions in Trade Policy

5. Exam Strategy & Tips