OCR A Level Economics: Globalisation and multinational firms (H460)

This guide follows the OCR A Level Economics (H460) specification, Version 3.0 (June 2026), for first assessment in 2021. It covers the topic Globalisation, in the area of study The global context, within Component 2, Macroeconomics. The specification labels no content as AS or extension: all of it is A Level. Every country, firm and figure below is invented and illustrative.

Trade theory, the balance of payments, exchange rates, protectionism and trading blocs are separate topics and are not repeated here. Use the OCR Economics hub, the printable checklist and the free diagnostics to plan revision. This guide pairs with the revision notes and the practice questions. For growth and development see economic growth, GDP and recession.

What this unit covers

Outcome	You must be able to
Meaning	Explain what is meant by globalisation
Characteristics	Explain the characteristics of globalisation
Causes	Explain the causes of globalisation
Impact on economies	Evaluate the impact on developed, emerging and developing economies
Multinational firms	Evaluate the impact of multinational firms on the world economy
Emerging economies	Evaluate the impact of emerging-economy performance on other economies

The first three are “explain” outcomes: define, then develop with a chain of reasoning. The last three are “evaluate”: weigh gains against costs and reach a supported judgement.

1. What globalisation means

Globalisation is the ongoing integration of national economies, so that each depends more on the others, through cross-border movements of goods, services, capital, people, technology and ideas. It is a process, not a state. Events in one economy are increasingly felt in others.

It is not the same as free trade. Trade is one channel; capital, people and ideas are others.

2. Characteristics

• Faster growth of trade than of output. Trade intensity rises.
• Rising cross-border investment. Foreign direct investment (FDI) is lasting ownership of productive assets abroad, such as a factory.
• Multinational firms operating in many countries, often linking suppliers in a global supply chain.
• Integrated financial markets where savings move quickly between countries.
• Migration and mobility of labour, including remittances.
• Technology and information flows that spread ideas and standards.
• Emerging economies taking a larger share of world output and trade.

Worked example 1: measuring the process. In an illustrative world, between Year 1 and Year 25 a world trade index rises from 100 to 310 and a world output index from 100 to 180. The cost of a three-minute international call falls from 9.00 to 0.60 currency units. Emerging economies’ share of world exports rises from 18% to 34%.

Trade relative to output: 310 / 180 = 1.722, so trade intensity is up 72.2%
Call cost: (9.00 - 0.60) / 9.00 = 93.3% fall
Export share: 34 - 18 = 16 percentage points; 34/18 - 1 = 88.9% relative rise

Trade grew faster than output, communication became far cheaper and the pattern of world trade shifted. Quote percentage points when comparing shares, and say which you mean.

3. Causes

1. Cheaper, faster transport. Larger ships and containers cut the cost per unit shipped.
2. Information and communication technology. Firms can coordinate suppliers and customers across time zones.
3. Trade liberalisation. Lower barriers widen markets (the detail belongs to the protectionism topic).
4. Capital liberalisation. Fewer controls on money moving across borders encourage FDI and portfolio investment.
5. Multinational firms. Their search for lower costs and new markets is both a cause and a result.
6. Policy shifts in emerging economies. Opening up to trade and investment brought large labour forces into world markets.
7. Rising incomes and falling real costs of travel create demand for foreign goods and services.

Worked example 2: why a firm goes abroad. A coat maker produces 200,000 coats a year at home. Home unit cost is 46 (labour 22, materials 18, overheads 6). In Country E, labour is 9, materials 18, overheads 6 and shipping and handling 5. Setting up costs 6.4 million.

Overseas unit cost = 9 + 18 + 6 + 5 = 38
Saving per coat = 46 - 38 = 8; annual saving = 8 x 200,000 = 1.6 million
Payback = 6.4 / 1.6 = 4.0 years
Wages in Country E rise 25%: labour = 11.25, unit cost = 40.25
Saving = 5.75; annual saving = 1.15 million; payback = 6.4 / 1.15 = 5.6 years

The move pays for itself, but rising wages abroad lengthen the payback. Comparative cost advantages are not permanent, and the firm also weighs risk, skills, infrastructure and market access.

4. Impact on developed, emerging and developing economies

Judge each group on gains, costs and who bears them.

Developed economies

• Gains: cheaper imports raise real incomes; larger markets give scale economies; competition and technology raise productivity; inflows of FDI and skilled migrants.
• Costs: structural unemployment where industries shrink; pressure on low-skilled wages; wider inequality; reliance on foreign supply chains.

Worked example 3: who gains within a developed economy. Skilled workers earn 30 an hour and unskilled workers 15. After a period of offshoring, money wages rise 12% for skilled and 3% for unskilled workers while prices rise 5%.

New wages: 30 x 1.12 = 33.60 and 15 x 1.03 = 15.45
Wage ratio: 30/15 = 2.00 before; 33.60/15.45 = 2.17 after
Real change: skilled 1.12/1.05 - 1 = +6.7%; unskilled 1.03/1.05 - 1 = -1.9%

The average hides a split: one group gains and the other loses in real terms. Whether the economy as a whole gains depends on whether the winners could compensate the losers, and whether they actually do.

Emerging economies (a working definition: fast-growing, industrialising economies integrating into world markets)

• Gains: export-led growth, FDI, technology transfer, jobs moving from low-productivity farming to higher-productivity work, falling poverty.
• Costs: dependence on foreign demand, environmental damage, inequality between regions, exposure to sudden capital outflows.

Worked example 4: growth versus living standards. Country E’s real GDP grows 7% a year with population growth of 1.2%. Developing Country D grows 2.5% with population growth of 2.4%.

Country E per head: 1.07 / 1.012 - 1 = 5.7% a year
Time for output per head to double: ln 2 / ln 1.0573 = 12.4 years
Country D per head: 1.025 / 1.024 - 1 = 0.1% a year

Globalisation raised output in both, but only Country E sees a rapid rise in output per head. Even that figure says nothing about how it is shared.

Developing economies

• Gains: access to markets, aid and investment, cheaper capital goods, technology.
• Costs: dependence on a few primary exports with volatile prices; weak bargaining position; limited infrastructure and skills, so FDI may not arrive; imports can undercut infant industries.

Worked example 5: commodity dependence. Country D exports 400 a year, of which 280 is one crop (70%). The world price falls 20% and the volume sold is unchanged.

Crop earnings fall by 0.20 x 280 = 56
Total export earnings fall from 400 to 344, a 14% fall

A single price movement removes 14% of all export earnings. Diversification reduces this risk, but takes investment and time.

Evaluation. Outcomes depend on the starting point (skills, institutions, infrastructure), the policy response (education, retraining, taxes and transfers), the time period (adjustment costs come first), and the distribution of gains. Globalisation is not the only cause of change: technology also displaces workers.

5. Multinational firms and the world economy

A multinational firm runs production or other operations in two or more countries, usually directed from a home base.

Benefits for host economies

• Capital inflows, jobs and higher wages than local alternatives.
• Technology, management skills and training that spill over to local firms.
• Tax revenue and export earnings; lower prices and wider choice for consumers.

Costs for host economies

• Profit repatriation, so national income grows by less than output.
• Transfer pricing and tax planning that reduce tax paid locally.
• Market power that crowds out local firms; footloose behaviour if costs elsewhere fall.
• Environmental and labour standards that may be weaker where regulation is weak.

For the home country, outward FDI may reduce domestic jobs but bring returns and lower-cost inputs. For the world economy, multinationals help to allocate capital and technology to where they are most productive, but they can concentrate power and shift risk.

Worked example 6: what the host keeps. A foreign-owned plant in Country D has value added of 120 million a year: wages 50, taxes 10 and profit 60 (all in millions). All profit belongs to the foreign owners, and 45 of it is sent abroad. The plant employs 1,500 workers, and the average local wage is 24,000.

Income to residents = wages + taxes = 50 + 10 = 60 (the 15 of retained profit is still foreign-owned)
Share of value added = 60 / 120 = 50%
Wage per worker = 50 million / 1,500 = 33,333; premium = 33,333/24,000 - 1 = 38.9%
Cumulative profits sent abroad: 45, 90, 135, 180 ... after four years

If the initial investment was 150 million, the cumulative outflow overtakes it in Year 4. This does not make the investment a loss: it also paid wages, taxes and perhaps taught new skills.

Evaluation. The net effect depends on linkages with local suppliers, whether technology really spreads, the tax regime, the host’s bargaining power and the alternatives available.

6. Emerging economies and other economies

Emerging economies are now large enough for their performance to affect others through:

• Demand for exports. Faster growth raises imports of machinery, components, services and raw materials.
• Commodity prices. Strong demand raises prices, helping exporters and hurting importers.
• Cheaper goods. Low-cost output restrains prices in importing countries but can displace their producers.
• Competition for investment, and resource pressure. FDI may be diverted; demand for energy raises costs.
• Financial channels. Capital flows, and shocks that spread through confidence and exchange rates.

Worked example 7: a slowdown abroad. Country A’s exports are 30% of its GDP, and 15% of its exports go to Country E. Country E’s growth falls from 7% to 4%. Take the income elasticity of demand for imports as 1.8.

Import growth: 1.8 x 7 = 12.6%, falls to 1.8 x 4 = 7.2%: a 5.4 percentage point slowdown
Effect on Country A's GDP growth: 0.30 x 0.15 x 5.4 = 0.24 percentage points

The effect is modest for Country A, but would be much larger for an economy that sends half its exports to Country E. Evaluation: consider the size of the trade links, the commodity involved, whether other markets can replace the lost demand, and the exchange rate response.

Common errors

• Treating globalisation as only trade, or only multinational firms.
• Listing gains and costs without saying who bears them.
• Treating GDP growth in an emerging economy as the same as higher living standards.
• Assuming multinational firms always repatriate all profit, or never do.
• Mixing up percentage and percentage-point changes.
• Ending an evaluation with “it depends” and no judgement.

Official syllabus

OCR, A Level in Economics (H460) specification, Version 3.0 (June 2026), for first assessment in 2021, Component 2 content, area of study The global context, topic Globalisation.