3.2.1 Conditions that prompt trade

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    Push factors – Factors that push businesses out of domestic markets as they are not                                favourable, as a result are led towards international trade.

     

    • Saturated markets make it difficult to establish a business and remain competitive. A market becomes saturated when it is not possible to further expand sales volume.
    • Excessive competition also makes it difficult as firms can be pushed out of the market. Firms must watch other firms to ensure they remain competitive and may try to differentiate to improve the product or innovation.

     

    Pull factors – Factors that pull businesses towards international trade e.g. potential for                           greater sales and profits.

    One of the advantages of emerging markets is that the markets are relatively unsaturated, so there is a large potential to increase sales and profits.

    • Since international expansion leads to business growth, they can take advantage of economies of scale. Firms have the potential to earn higher profits through lower production costs. This can be passed onto the consumer in lower prices, making them more competitive.
    • Risk spreading occurs as when firm enters other markets, it diversifies so if one market fails, they have others to fall back on. Business becomes more secure and stable.
    • Increased trade liberalisation has meant that a wider market is available to firms, which is potential for greater sales and profits in foreign markets more easily.

     

    Offshoring – process of having some of a firm’s processes or services abroad (often to take                   advantage of lower costs)

     

    This can be to take advantage of lower labour or manufacturing costs abroad, such as relocating call centres from the UK to India. It can also be to take advantage of trading blocs through entering new markets more easily, use resources not otherwise available or overcome regulations in the domestic market which limit their business.

     

    However, this can lead to longer waiting times, additional transport costs and is affected by exchange rates if abroad.

     

    Outsourcing – when a business pays a third party to provide goods and services, rather than                    doing the work in-house.

     

    Extending product life cycle by selling in multiple markets

    Firms can extend also extend their product life cycle by selling in multiple markets. This is used to prolong the maturity phase and halt decline. New markets can improve profitability of a firm and provide potential for increased sales. In developing countries, tobacco is in the decline phase of the product life cycle due to awareness of health risks. In comparison, tobacco is still in the growth stage. This is because old products can start the life cycle again in new markets overseas.

     

    Raising spare capacity

    If a firm has spare capacity, they can use this to increase their production volume. This extra

    production could be sold on the domestic market if there is sufficient demand, or on the

    overseas market (if domestic demand is not present). As a result, average costs of production fall and the firm becomes more competitive.

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