International trade and investment patterns
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International trade and investment patterns
Generally speaking, international business refers to all the commercial transactions that occur between two or more countries (Fengxiang 2006). These transactions include both private and governmental. International business is carried out for the purpose of satisfaction of needs of the individuals or enterprises. It has been seen that private businesses are mostly engaged in international business with the aim of making profit; the case is not true for government. International business entails the exchange of goods, services, labor and technology, imports and exports, across border exchanges in intellectual property like patents and copyrights, supplying and buying products in other countries, investing across the border and the development of warehouses and distribution systems abroad (Fengxiang 2006). Therefore, international business is a conglomeration of exchanges done in sales, investments and logistics (Fengxiang 2006). The prime difference between international trade and international business is that international trade can be considered a subset of international business (Fengxiang 2006). International business is concerned with the satisfaction of demands of the people or organizations, whereas international trade encompasses the buying and selling of goods and includes export-import trade (Fengxiang 2006). The paper highlights the arguments that are surrounding world trade and investment patterns. It also discusses in detail the benefits and drawbacks of companies in the UK outsourcing to the EU. In the later part of the paper, the role and impact of membership to WTO, IMF and the World Bank on the UK economy have been considered, along with the currency risks facing UK companies with respect to global change rates.
Paulo and Bento (2009) observe that the impact that foreign investment has on international trade is subject to a lot of debate. Over past few years, foreign direct investment (FDI) has been given a lot of attention. The reason can be attributed to the immense increase in the annual global flow, particularly between 1985 to 1995. During this period of time, the annual global flow increased from $60 billion to approximately $315 billion. In fact, the greater interest in the FDI is a component of the greater interest being in the elements that are leading to the integration of the world economy, also known as globalization (WTO 1996). The advantage of FDI is that such investments increment the efficiency with which resources are used. Moreover, FDI are a good source of exchanging new technology and marketing networks and organizational skills (WTO 1996). FDI confers another advantage by increasing the competition and providing companies the drive needed for innovation, savings and production of capital. FDI and international trade are considered to be complimentary to each other, as both are provide services to the international market.
However, arguments against FDI have surfaced as well. It has been seen that at the institutional level, the growing importance of FDI, along with the lack of effective multilateral rules on national policies regarding FDI, has caused the growth of globalization to become slow. Furthermore, opponents of FDI are of the view that the adverse impact of FDI is detrimental to the economy. It is argued that FDI exports jobs and therefore pulls the wages down in the home countries, which are the sites where capital develops. In countries which receive the FDI, concerns have been raised on the possible monopolization of the market, and the influence FDI would have on the Balance of Payments (WTO 1996).
Outsourcing is closely related to the integration of economy. In fact, it is considered as the secondary product of globalization (Seaton 2010). The result of globalization was that countries started to depend on each other more, the effects coming into notice in the 1990s. The process of globalization was further aided by advances in technology, making communication quick and easy. Seaton (2010) observes that the modern outsourcing phenomenon is the direct product of a combination of both globalization and communication. Outsourcing is defined as getting services from an outside supplier, possibly at a lesser rate than is available in the country (Seaton 2010). There are a number of benefits of outsourcing, and it is argued that the world can benefit immensely from outsourcing. From the perspective of companies in UK, planning of outsourcing to the EU, outsourcing can offer a range of advantages. One prime advantage is the opportunity for offshore expansion. Companies in UK can start expansion by outsourcing initially, and then establishing themselves offshore as the company gets used to the policies and regulations there (Positive effects of outsourcing 2010). Outsourcing can also significantly bring down the service costs by 50-60% (The Future of Outsourcing 2010). In a research conducted by Schank () about shipyards in the UK who outsourced, the major reason identified for outsourcing was for the minimization of costs. Also, UK shipyards were involved in outsourcing for filling the need for the required expertise and skills.
However there is an obvious disadvantage of outsourcing. The current drawback of outsourcing is that the “policies of the first world nations like UK and US for outsourcing are nothing but sloppy” (Negative effects of Outsourcing 2010). The policies do not provide a level playing ground for companies to operate. Companies that are functioning well without outsourcing are pushed very quickly behind in the competition when another rival starts outsourcing and decreases its costs significantly. Consumers would prefer services that are offered at a lower cost compared to quality services offered by companies which are not outsourcing. Outsoursing also has future negative impacts. The very same supplier starts to gain greater knowledge about the business, and can start its own business; thus giving rise to much intense competition. Moreover, policies in the UK and EU state that employees who refuse to comply with outsourcing and do not transfer will be denied job security rights (Leighton, Hecker, Syrett & Holland 2007). This atmosphere of increased insecurity also results in decreased motivation (Negative effects of Outsourcing 2010). Furthermore the sacked employee can join rivals and leak the secrets of the company (Negative effects of Outsourcing 2010). In the UK, government is regards outsourcing in the same line as manufacturing. A factory is closed one year, and can be reopened after a couple of years; the UK government is of the view that the reemployment of staff is not a problem (Kolawa 2003). However, it is difficult to recruit the same level of skills (Kolawa 2003). Millado (2010) is of the view that outsourcing is causing loss of a large number of jobs in the UK, where the bulk of the contracting companies are based.
Governmental policies and firms’ own decisions are not the only factors that affect international business. International business is also influenced by the main agents that drive it, i.e. the World Bank, World Trade Organization (WTO) and the International Monetary Fund (IMF). The World Bank is an organization that provides loans, advice and a range of customized resources to over 100 developing countries all over the world. The mission of the organization is to alleviate poverty and to assist people and their environment by giving them the required resources (The World Bank Group 2010). The Bank also aims to build strong partnerships in the public and private sectors (World Bank 2003). The organization is based on the principles of providing client-centered quality service. It encompasses two institutions: International Bank for Reconstruction and Development (IBRD) and the International Development Association (IDA). The IRBD is concerned with the reduction of poverty in middle-class countries; on the other hand, the IDA focuses its activities on the development of the poorest of countries. The loans and other resources offered by the organization to developing countries are used for a variety of purposes like agriculture, natural resource development, development of infrastructure and education (The World Bank Group 2010). The Bank was founded in 1944, and has its headquarters in Washington. It boasts of more than ten thousand employees worldwide (The World Bank Group 2010).
The IMF is another organization working for the promotion of global monetary cooperation, secure financial stability and to remove barriers in international trade, along with encouraging sustainable economic growth and decreasing the unemployment rate (IMF 2010). The IMF is also concerned with the reduction of poverty worldwide. The organization works in concert with developing countries to help them become more stable from a macroeconomic perspective. The IMF is responsible for finding out patterns in the ongoing global economic trends, and to warn the countries that are its members if the organization foresees any potential economic instability (IMF 2010). It also helps governments to take advantage of the opportunities that arise with the changing economic atmosphere. One of the biggest benefits that the UK economy could gain from being a member of the IMF is that the organization would help UK gain advantage from globalization and to avoid any economic pitfalls. The global economic crisis is representative of the advice and help given by the IMF to its members and mirrors how interconnected countries are to each other (IMF 2010).
The UK economy has changed significantly to cater to the changing times. With technological advances, services have become easy to exchange. The UK government has taken advantage of these changes and has thus become a major leader of export markets for a number of financial and business services (Department of Business Enterprise & Regulatory Reform 2008). Over the past years, the World Bank and UK has worked in collaboration on the funding of projects for developing countries. Furthermore the role of the World Bank cannot be underestimated. In 1999, there was increasing pressure on the UK government to accept Euro and to switch to a single currency. President Brown was against such a proposition and therefore argued against the introduction of a single currency. In this regard, the role of IMF and the World Bank cannot be ignored. A report made by economists from both organizations, along with the Bank of Spain etc, stated that the Sterling was considerably overvalued compared to the Euro. Therefore the report suggested that it needs to fall by 20% before it could be switched to a single currency. This report thus proved to be in favor of what President Brown was fighting for since the start. He argued that a transition period was required in order to achieve business cycle convergence, and change ATMs, payments etc (Harris 2000).
The World Trade Organization, as the name foretells, is also a major agent in the regulation of international trade. It is the only international organization that is responsible for devising and implementing the rules and regulations of international trade. The core of the organization is the WTO agreements. These agreements are signed unanimously by most of the countries in the world and are ratified by their parliaments (World Trade Organization 2010). The mission of the organization is to enable exchange of goods and services and to support importing and exporting. There is an assortment of advantages that the UK government derives from being a member of the WTO. The organization helps the effective transaction of goods and services. It works to introduce rules and regulations that make trade more smooth and solving disputes. Any disputes that emerge between the UK and other trading countries can be resolved constructively. Another advantage that the organization renders to the UK government is that it frees it from the hassle of making trade agreements with each of its trading partners. Another important advantage rendered is the reduction in the costs of living by making trade freer (World Trade Organization 2010). Since the capital and resources that the UK government spends on necessities and luxuries are directly influenced by trade, free trade can have a positive impact on the UK economy.
Global exchange rates also have an effect on the economy of a country. This can be explained by considering the currency risks that arise with fluctuations in global change rates if UK was either a major importer or exporter. Currency risk is considered as the change in the value of currency that occurs in response to the change in the value of another currency. The reason why the economy of UK is vulnerable to currency risks when trading internationally is because the transactions are being paid for in a foreign currency. If UK was a major importer, a fall in the exchange rate would result in loss for the country; this is because UK’s currency would buy less of the foreign currency. Therefore UK has to pay more for the goods, services etc imported. Similar mechanics apply to the scenario where UK is the major exporter. If UK’s currency depreciates with respect to foreign currency, there is a loss of a major proportion of the profit, depending on the severity of the depreciation. The problems of fluctuations in global exchange rates can be solved through hedging. Hedging is responsible for mitigating the exchange rate risks (Matthews 2010).
Thus, in conclusion, international trade is regulated by a number of factors. More recently, globalization and communication have changed the dynamics of conventional trading. On the other hand, policies of the World Bank, the IMF and the WTO are also determinants of international trade. The changes in international trade patterns, like outsourcing, have received both appreciation and criticism. However in the UK, outsourcing is still not being done on a large scale. Global exchange rates also affect the profits and losses being made in transactions across the border.
Reference List
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