AQA A-Level Business (7132)

## Learning Outcomes

- Understand what **internationalisation** means and why businesses expand beyond domestic markets
- Identify the main methods of entering overseas markets, including export, licensing, alliances and direct investment
- Explain the factors that make an international market more or less attractive
- Analyse why businesses may produce or source resources abroad
- Distinguish clearly between **offshoring**, **outsourcing** and **reshoring**
- Evaluate which international strategy may be most suitable in a given business context
- Apply internationalisation to Paper 3 case-study questions using chains of analysis and judgement

## AQA A-Level Business (7132) Syllabus

For the AQA A-Level Business (7132), you are expected to understand internationalisation as a strategic method, with a focus on the following syllabus points:

- Know that **internationalisation** means expanding business activity into overseas markets by selling, sourcing, producing or operating abroad
- Identify reasons for greater internationalisation, including lower transport costs, improved communications and reduced trade barriers
- Explain why businesses target, operate in and trade with international markets, such as growth, profit, diversification and access to resources
- Understand the main methods of entering international markets: **export**, **licensing**, **alliances** and **direct investment**
- Analyse the factors influencing the attractiveness of international markets, including market size, growth, competition, exchange rates and political stability
- Understand reasons for producing more and sourcing more resources abroad
- Explain overseas production decisions, including **offshoring** and **reshoring**
- Assess international decisions in context, balancing cost reduction, control, risk and local market needs

## Test Your Knowledge

_Attempt these questions before reading this article. If you find some difficult or cannot remember the answers, look more closely at that area during your revision._

1. What is the difference between **internationalisation** and **globalisation**?
2. Why might a business choose exporting rather than direct investment?
3. What makes one overseas market more attractive than another?
4. How does a change in exchange rates affect the profitability of selling abroad?
5. Why might a business re-shore production after previously offshoring it?

## Introduction

Internationalisation is a major strategic method because many firms cannot rely only on their home market for future growth. Domestic markets may become saturated, competition may intensify, or costs may be too high. Expanding abroad can open access to new customers, cheaper inputs and fresh profit opportunities.

For AQA Business, this topic is not just about definitions. It is about making a judgement. A business must decide whether going abroad is worth the extra risk, cost and complexity. In Paper 3, strong answers compare methods, use the case context and reach a clear final view.

> **Key Term: internationalisation**
> Expanding business activity beyond the domestic market by selling, sourcing, producing or operating in overseas markets.

### Why internationalisation has increased

Internationalisation has grown because doing business across borders is now easier, faster and often cheaper than in the past. Better transport networks reduce delivery times and shipping costs. Improvements in communication technology make it easier to manage suppliers, staff and customers in different countries. Digital platforms also allow firms to market and sell internationally without building a large physical presence first.

Lower trade barriers have also helped. In some cases, trade agreements reduce tariffs and quotas, making cross-border trade more attractive. Firms can also access better market data, compare labour costs internationally and identify demand in emerging economies more easily than before.

Another cause is pressure from competition. If rivals are sourcing more cheaply abroad or selling to high-growth overseas markets, staying only in the UK may leave a business at a disadvantage. Investors may also expect faster growth than the domestic market can provide.

> **Key Term: globalisation**
> The increasing integration of economies and markets around the world.

A useful distinction is that **globalisation** describes the wider worldwide process, while **internationalisation** describes what an individual business does in response.

Businesses internationalise for several main reasons:

- to increase sales revenue by reaching new customers
- to achieve growth when the home market is mature or saturated
- to spread risk across more than one country
- to access cheaper labour, materials or components
- to get closer to customers and reduce delivery times
- to avoid trade barriers by producing inside the target market
- to gain access to specialist skills, technology or resources

For example, a UK manufacturer facing weak domestic demand may export to faster-growing economies. A retailer may open overseas stores because the UK market is crowded. A business with high labour costs may shift some production abroad to improve profit margins.

> **Test Tip:** In 9-mark and 16-mark answers, do not stop at “bigger market means more sales”. Extend the chain: bigger market → higher potential demand → greater revenue → better capacity utilisation or profit potential → stronger long-term growth.

### Methods of entering international markets

The main methods sit on a spectrum from lower commitment and lower control to higher commitment and higher control. No method is always best.

#### Exporting

Exporting means producing in the home country and selling abroad. This is often the simplest route into a foreign market. It requires less financial commitment than building overseas facilities, so it is useful when a business wants to test demand first.

> **Key Term: export**
> Selling goods or services produced in one country to customers in another country.

Advantages of exporting:

- lower initial cost than setting up overseas operations
- lower risk than direct investment
- useful for testing demand
- can improve capacity utilisation if domestic factories have spare capacity

Disadvantages of exporting:

- transport costs may be high
- tariffs may raise the final price
- exchange-rate movements can reduce profit
- less local market presence and less control over distribution

A simple chain of analysis could be:
exporting to a new market → higher total sales volume → fixed costs spread over more units → lower average cost → improved competitiveness or profit margin.

But the opposite can also happen:
tariffs and shipping costs rise → overseas selling price increases → demand falls → revenue and profit fall.

#### Licensing

Licensing involves giving a foreign business the right to produce or sell a product, brand or technology in return for a fee or royalty.

> **Key Term: licensing**
> Permitting a foreign business to produce or sell a product, brand or technology in return for a fee or royalty.

Advantages:

- low financial commitment
- quick access to the market
- local firm provides knowledge of customers and regulations
- lower risk for the original business

Disadvantages:

- less control over quality and brand image
- lower profit retention than owning the operation directly
- risk of imitation or loss of intellectual property
- success depends on the licensee’s competence

Licensing is often suitable when a business has a valuable brand, patent or product design but lacks the finance or confidence for direct investment.

#### Alliances and joint ventures

An alliance is a cooperative arrangement between businesses. A joint venture is a more formal shared operation, with ownership, risk and decision-making split between partners.

> **Key Term: alliance**
> Cooperation between businesses to enter or operate in a market while remaining separate firms.

A local partner may provide market knowledge, contacts, staff and understanding of regulations. The foreign business may contribute finance, training, technology or brand strength.

Advantages:

- shared risk and shared cost
- better understanding of local culture and buying habits
- easier market entry where foreign firms face barriers
- can improve speed of expansion

Disadvantages:

- profits must be shared
- disagreements may delay decisions
- objectives may differ between partners
- loss of full control

This method is especially useful when local responsiveness matters. For example, in food, fashion or retail, local tastes can differ sharply, so local knowledge has high value.

#### Direct investment

Direct investment means investing directly in overseas operations, such as shops, offices, factories or a subsidiary business abroad.

> **Key Term: direct investment**
> Investment by a business in productive capacity or operations in another country.

When a business owns operations in more than one country, it may become a multinational.

> **Key Term: multinational**
> A business with operations in more than one country.

Advantages:

- high level of control
- stronger local presence
- may avoid tariffs on imports
- can reduce transport costs by producing close to customers
- easier to adapt products and service to local needs

Disadvantages:

- expensive
- high political and economic risk
- slower to establish
- difficult to exit if the market performs badly

This route may suit a large business with strong finance, long-term objectives and a need for close control over quality, production or branding.

A useful comparison is below:

- **Exporting**: low cost, low commitment, lower control
- **Licensing**: low cost, fast entry, very limited control
- **Alliance/joint venture**: shared cost and risk, shared control
- **Direct investment**: highest cost and risk, highest control
  > **Test Tip:** If the case study says the firm has limited finance, little overseas experience or wants to test demand, exporting or licensing is often easier to justify than direct investment.

### Assessing market attractiveness and overseas production decisions

A business should not enter an overseas market just because it is large. It needs to judge whether likely profits are high enough after costs and risks are considered.

> **Key Term: market attractiveness**
> The likely profit potential of entering a market, based on demand, costs, competition and risk.

Key factors affecting attractiveness include:

- **market size**: a large population may mean more potential customers
- **market growth**: rising incomes and GDP can increase demand
- **competition**: heavy rivalry may reduce prices and profit margins
- **trade barriers**: tariffs, quotas and regulations raise costs
- **exchange rates**: currency changes affect export prices and imported input costs
- **political stability**: unstable governments raise risk
- **legal environment**: strict regulations may increase operating costs
- **culture and consumer tastes**: products may need costly adaptation
- **infrastructure**: weak roads, power or telecommunications increase costs and delays
  > **Key Term: exchange rate**
  > The value of one currency against another currency.

Worked example:

A UK business exports a product that costs **£100** to produce and sells it in the US for **$187.50**.

If the exchange rate is **£1 = $1.25**:

Step 1: Convert the dollar revenue into pounds  
$187.50 ÷ 1.25 = **£150**

Step 2: Calculate profit  
Profit = revenue - cost  
Profit = £150 - £100 = **£50**

Now suppose sterling strengthens to **£1 = $1.50**

Step 1: Convert the same dollar revenue into pounds  
$187.50 ÷ 1.50 = **£125**

Step 2: Calculate profit  
Profit = £125 - £100 = **£25**

So a stronger pound cuts profit from **£50** to **£25**, assuming the dollar price stays the same.

This matters because exchange-rate changes can make exporting less attractive even if sales volume is unchanged.

Students often make these errors:

- assuming internationalisation always raises profit
- ignoring exchange-rate risk
- discussing only revenue and forgetting costs, tariffs or compliance
- choosing a method without linking it to the business’s finance, objectives or product

Producing and sourcing abroad may also be attractive. Businesses may offshore to reduce wages, rent, tax or transport costs, or to get closer to customers.

> **Key Term: offshoring**
> Moving production or business functions from the home country to another country.

However, lower wage costs do not always mean lower total costs. Long supply chains can create delays, quality issues and reputational damage. Boeing’s outsourcing and global sourcing problems on the Dreamliner show how quality control can become harder when production is spread widely.

> **Key Term: reshoring**
> Bringing activities previously moved abroad back to the home country.

Reshoring may happen when overseas quality falls, delivery is unreliable, labour-cost differences shrink or shorter lead times become more valuable. Zara benefited from bringing more production closer to home because faster response and lower stock costs offset higher labour costs.

A strong evaluative answer often uses the structure:
**on the one hand** internationalisation may increase growth and reduce costs; **on the other hand** it may create exchange-rate, quality and coordination problems; **it depends on** the business’s finance, product type, brand strength, need for control and the conditions in the target market.

### How to structure an evaluative answer

For a 16-mark or 20-mark response, start with the case context, not theory in isolation. Identify the business’s objective first: growth, lower costs, market access, risk spreading or tariff avoidance.

Then compare at least two realistic options. For example:

- exporting versus direct investment
- offshoring versus keeping production in the UK
- licensing versus an alliance

Use financial and non-financial evidence. Financial points may include expected sales growth, cost savings, tariffs, exchange-rate exposure and likely impact on profit margin. Non-financial points may include quality control, speed of entry, brand protection, local market knowledge and political risk.

Make your judgement conditional, not vague. For example, say direct investment is more suitable **if** the business has strong finance, expects high long-term demand and needs control. Say exporting is more suitable **if** the firm wants to test demand with lower risk.

A high-level judgement explains why one factor matters most in that context. For a small UK business with weak cash flow, the main issue may be finance and risk. For a premium brand, control over quality may matter more than speed of entry. For a firm facing import tariffs, producing within the market may be the key issue.

## Key Point Checklist

_This article has covered the following key knowledge points:_

- Internationalisation means expanding business activity into overseas markets
- Globalisation is the wider process of increasing integration between world economies and markets
- Businesses internationalise for growth, profit, diversification, lower costs and access to resources
- Greater internationalisation has been driven by improved transport, better communications and lower trade barriers
- The main entry methods are export, licensing, alliances and direct investment
- Exporting is lower cost and lower risk, but may be affected by tariffs, shipping costs and exchange rates
- Licensing gives fast market access with low investment, but offers less control
- Alliances and joint ventures provide shared risk and local knowledge, but profits and control are shared
- Direct investment gives the greatest control and local presence, but involves the highest cost and risk
- Market attractiveness depends on demand, growth, competition, trade barriers, exchange rates, infrastructure and political stability
- Offshoring can reduce costs, but may create quality, supply-chain and reputational problems
- Reshoring may improve control, flexibility and reliability, even if domestic costs are higher

## Key Terms and Concepts

- internationalisation
- globalisation
- export
- licensing
- alliance
- direct investment
- multinational
- market attractiveness
- exchange rate
- offshoring
- reshoring


Strategic methods - Internationalisation