4.2.1 - Conditions that Prompt Trade
International trade is often prompted by a mix of pressure at home and attraction abroad. In this topic, the exam skill is to show not just what each factor is, but how it changes a firm's sales, costs or risk and therefore makes trading internationally more attractive.
Push factors in the home market
A business may start looking overseas because its domestic market has become a harder place to grow. In this topic, push factors are not exciting overseas opportunities. They are problems or limits in the current market that push the firm to search for customers elsewhere.
Push factors
Conditions in the home market that limit growth or profitability and push a business to look for sales or production opportunities abroad.
One important push factor is saturation.
Saturated market
Where most of the customers who would buy a product already have it, or there is limited opportunity for growth.
In a saturated market, most likely buyers already own the product, so sales growth slows. That means a firm may struggle to increase revenue at home even if the product itself is still strong. If spare capacity starts to build, exporting becomes attractive because selling abroad can create demand from customers who have not yet bought the product.
Competition can create the same pressure. If rivals are numerous or aggressive, prices may be forced down or businesses may need to spend more on promotion and product improvement. Because this squeezes profit margins, firms may trade internationally to find less crowded markets, different customer segments or simply extra sales volume.
In an original classroom case, Carvajal Oils sells olive oil in a mature Spanish home market with little sales growth. It considers France and the UK, followed by Sweden, Norway and Finland, to reach additional customer groups. These supplied assumptions illustrate a push factor; they are not claims about the history of a real company.
Pull factors in overseas markets
Some firms are pushed out by pressure at home, but others are pulled in by the advantages of selling internationally. Pull factors matter when overseas markets seem more attractive than relying on one domestic market.
Pull factors
Conditions in overseas markets that make international trade or international production look more attractive than relying only on the home market.
Two pull factors named in this specification are economies of scale and risk spreading. Economies of scale mean that as output rises, average cost per unit falls. If a business can sell into several countries, total sales may rise enough to spread fixed costs such as marketing, design or head-office costs over more units. Because average costs fall, the firm may become more price competitive or keep a higher profit margin.
Risk spreading
Reducing dependence on one market by operating in several countries so weakness in one can be offset by strength in another.
Risk spreading is attractive because demand is not equally strong in every market at the same time. If a business depends on one country only, a downturn, fashion change or stronger local competition in that market can damage the whole business. Selling in several markets reduces that dependence, so weakness in one market may be offset by stability or growth in another.
Zara expanded beyond Spain when growth at home became more limited and entry into other European markets became possible. Selling in multiple countries gave the business access to more customers, helped it raise total output, and reduced reliance on a single national market.
Offshoring and outsourcing as trade prompts
International trade can also be prompted by the possibility that some activities can be carried out more competitively overseas. This usually happens because managers think a different location or provider could lower costs, provide useful skills, or let the business focus on what it does best.
Offshoring
Moving manufacturing or service activities to another country, usually to reduce costs or access suitable labour or skills.
Offshoring is about location. A business may move production or services overseas if labour, premises or other operating costs are lower there. However, the exam point is not simply "cheap labour". A low wage rate only improves competitiveness if overall cost per unit falls after allowing for labour productivity, transport, communication and coordination costs.
Businesses often confuse offshoring with outsourcing, but they are not the same.
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