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Some products have stood the long test of time such as Cadbury’s Dairy Milk, Kelogg’s Cornflakes
and Nestle’s Kit-Kat to name a few.
Global sourcing
Global sourcing essentially means acquiring goods or services from the international market, in an
effort to exploit global efficiency, in the making of a product or service – for example taking
advantage of cheap labour in China, or take advantage of skilled but cheap labour in Malaysia.
Manufacturing costs vary internationally due to currency conversion and the cost of living in
different countries. The costs of labour and materials are lower in developing nations than in North
America. This difference translates into significant savings in salary and benefit costs for the firm.
That is why most technology companies manufacture in China because of the cheap labour costs.
Telephone call centres have grown exponentially in India and other countries where English is the
primary language. The staff, equipment and construction costs for these facilities are significantly
less than in North America or Europe. The fact that there is significant unemployment and low wages
in these developing nations adds to the long list of benefits leading to a large pool of potential
employees who are interested in this type of employment opportunities.
Global sourcing has both benefits and risks. The benefits of sourcing for the employer include lower
labour costs, low cost raw material, less government oversight, a larger pool of potential employees
and customers and other economic factors like tax breaks and low trade tariffs. For the employees,
the benefits include a higher wage, improved working conditions and learning transferable skills. The
risks of global sourcing include higher costs due to cultural and language related issues.
Diversifying business operations across different countries increases business travel and local
management issues. Most companies prefer to transfer knowledgeable staff to global locations for
senior management positions. In addition, they limit local management hiring to the supervisory
levels.
In simple terms it makes production cheaper and more efficient for the business; allowing the
business to make more profit from selling its products.
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Firms might want to export to markets overseas which they believe are quite weak and where they
could become more price competitive e.g. China and Vietnam exporting clothing to the EU.
Advantages
• Gains from countries specialising in the production of goods/services where they have a
comparative advantage. This means total output will increase, along with living standards and
employment. For example, Germany specialises in the production and export of motor vehicles -
it then imports other things such as clothing and footwear from China.
• Increased number of markets and potential customers for firms which engage in international
trade - it could lead to more revenue, growth and profits. This should be seen as a benefit
rather than a cost.
• Increased competition which means domestic firms have to increase efficiency to survive - it is a
benefit to consumers.
• Increased consumer choice of products - especially if a country like the UK cannot grow exotic
fruits or produce aluminium for not having bauxite ore deposits.
• Economies of scale in production since firms could have more customers across different
markets to sell to; fall in average costs.
Disadvantages
• Structural unemployment in industries which are not competitive e.g. motor manufacturing
firms in the UK such as Ford and Vauxhall are in decline.
• Possible unfavourable terms of trade for countries when they export - so do not get a decent
price; barriers such as trade quotas and tariffs.
• Danger of over-dependency on the export of goods -- and then these markets might dry up
because of a global recession.
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For example, Russia recently used health standards to limit imports of frozen chicken from the
United States, and the United States has frequently charged Japan with using legal restrictions and
allowing exclusive trade agreements among Japanese companies. These exclusive agreements make
it very difficult for U.S. banks and other firms to operate or sell products in Japan.
Often governments will prevent dumping by foreign businesses. Dumping occurs when products are
made available as imports at prices lower than the prices in which they are sold in the exporting
country.
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• FRIENDLY RIVALRY
o Businesses in domestic nations may become more competitive as there is competition from
their neighbouring countries, this healthy competing may make domestic businesses
stronger.
• CUSTOMS POLICIES
o Customs policies have a disadvantage too. Being a part of the EU means that you will have to
have tariffs on goods and services produced outside the EU. For example, if France imported
flour from America, it would now have to pay more for the flour, as there are new tariffs as
according to the customs policy. This means that importing flour from America would now
be more expensive for the French firms.
o External competition, may have aided the development of domestic businesses. This is
because being sheltered from external competition may result in less incentive for a firm to
become efficient. In the long run it may lead to the deterioration of the firm’s performance.
• FREE ACCESS TO MARKETS
o Competition from within the trade bloc, may damage domestic businesses by reducing their
current market share.
• MARKET ADAPTATION
o The marketing strategy of the business may need to be changed in order to suit the needs of
the customers in different countries, with the trading bloc. This means that there will be
additional costs to product development.