Globalization is the economic term for the increasing connectivity of the world’s economies. In previous centuries, most economic decisions that businesses faced required little knowledge of the outside world because the economy was highly localized. For better or worse, things have changed and any business, especially one sourcing materials from abroad or dealing with international buyers or sellers, must have a broad and current knowledge of what is happening around the world to make the best decisions. Here are a few ways that international affairs affect finances at home.
Availability of Goods
Supply and demand, of course, is a cornerstone law of the economic universe. Because supply chains around the world are now spread across many countries, what happens in one area of the world where a company does business will affect its entire operation. For example, Apple produces its iPhones in China but sources its materials from around the world, including precious minerals from many African countries, and sells its phones around the world. With a supply chain so spread out, new vulnerabilities emerge. Another important aspect of availability of goods is the imposition of sanctions and/or tariffs – the banning of certain materials from certain countries or newly imposed taxes that could place a heavy burden on companies importing materials from these countries.
Impact on Credit
As part of a healthy business model, companies should implement credit loss predictions – the money that a company could potentially lose because of credit risk. Collecting outstanding debts from international borrowers is substantially more time-consuming and complicated than domestic collection. Many nations simply do not have the infrastructure to protect a company’s interests in the event of a borrower’s failure to repay or systemic financial collapse. Global scale events are among a variety of factors that can impact credit loss calculations.
Stock Market Fluctuations
The stock market is notoriously sensitive to international developments. Perhaps one of the best examples of this is the skyrocketing cost of oil that occurs every time the Middle East erupts into chaos or war. Unfortunately, things like that happen quite frequently in that region. The reason for this is the expectation of a slowing energy supply which affects nearly every aspect of the economy. Energy is the most important aspect of global business, so anything that slows the flow of energy, especially oil, is going to impact business substantially. Understanding the risks associated with the increasingly globalized economy can help protect your business from losses and ensure healthy growth.