Trade Strategies, Diversification & Social Enterprise (DP IB Economics)

Strategy

Explanation

 Advantages

Disadvantages 

Import substitution

• Aims to increase domestic production and output by moving consumers away from imports by using tariffs or quotas to increase import prices. This encourages them to buy locally

• Less dependence on imports

• May increase employment in the country

• Supports local firms

• Higher prices and less choice for consumers

• Possibility of retaliation from other countries

• Distorts the efficient allocation of resources as more inefficient domestic firms increase production

• May raises costs for manufacturers who depend on imported components

Export promotion

• Aims to increase the level of exports through subsidies or facilitating international trade fairs at which local firms can connect with international buyers

• Greater output generates higher economies of scale

• Greater output creates more employment

• National specialisation increases

• International competition leads to innovation and increased efficiency

• Some firms may be unable to compete internationally and fail

• There is an opportunity cost to the government for supporting firms through export promotion

Economic integration

• A process in which countries become more interdependent as they form an agreement which decreases barriers to trade (tariffs, quotas etc.) and increasing common fiscal and/or monetary policies

• Decreases prices and increases choice

• Access to a wider range of technology

• More political cooperation between countries

• Expands markets for domestic firms

• Generates higher efficiency in the global allocation of resources

• Some loss of national sovereignty may occur

• Some integration requires common barriers (e.g. tariffs) to be erected to third part nations which may limit other opportunities for increasing trade

Increasing diversification

• Occurs when a country is able to increase the number of products that it offers for export and this reduces risk - if one product fails others may well still be successful

• Reduces the problems associated with over specialisation such as price volatility (e.g. in 2019, 71% of Zambia's exports were copper and it's GDP is significantly influenced by the price of copper)

• Creates new employment opportunities

• Reduces risk of failure during recessions or periods of economic slowdown

• Firms may fail to compete as global competitors may be well established

• It takes time and money to create new industries

Social Enterprise

• A social enterprise focuses
  on meeting specific social
  objectives such as worker welfare, or profit sharing with workers, or providing equal ownership of the business to employees e.g Bouwland Wines in Stellenbosch, South Africa gave equal ownership shares to its 60 employees

• Raises motivation, productivity and output

• Can create new employment opportunities

• Raises income within the communities

• These ventures tend to be small and very localised

• It can be difficult for them to generate economies of scale or to compete internationally