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In a global economy, international procurement is a term used to describe the process of allowing firms around the world to bid on contracts for goods and services. The concept has gained popularity as shipping and transportation costs have decreased due to an influx of cheap, readily available fuel. The globalization of large corporations has allowed them to reap the benefits of lower labor and materials costs while still selling the same quality and quantity of products.
There are three primary benefits to international procurement: lower costs, stimulation of a global economy, and increased consumer base. The lower costs that can be achieved through purchasing services or goods from other counties are derived from currency valuation and the effects of product specialization. Both of which are core concepts in economics.
In international procurement, industrialized nations purchase goods from countries with a lower dollar, gaining in the currency exchange. This rate varies over time, but the multiplying factor remains fairly static. The ability to purchase more with a dollar in another nation is one of the primary driving factors behind the appeal of this type of procurement.
Product specialization is the basic concept that some items have a lower cost of production, based on the natural or human resources available in different locations. Specializing in this area allows a particular national economy to offer that product or service at a lower cost that other economies, resulting in increased customers and more economic opportunities. Typical examples of this include produce that is native in one country or region, but is more expensive to produce in another.
In order to build a global economy, each nation must have some contribution or basket of goods that they can offer to potential customers. If a country is limited to just the goods that it can produce internally, then it either needs to invest significant government spending to meet every need or leave those needs unfilled. A country with no natural oil can build an oil drilling mechanism, but would be unable to use it. Ideally, market forces attract customers to the lower prices and higher quality of the products provided by the different nations.
The hidden benefit of international procurement is the increased customer base. As more goods and services are purchased from other countries, the wealth of those economies increases. This creates the capacity for increased spending, allowing customers and businesses to purchase goods and services. Effectively increasing the customer base then encourages more spending and growth, fueling the economic cycle.
@speechie - There would be a few factors that I would think about but I could not tell you if it would be too volatile for your small business because how much risk someone would take is truly a personal thing, even when it comes to risk and business.
I think it can be a great thing to be conservative. In the context of gas prices and its volatility I would imagine that with larger corporations it might be easier to handle the volatility in that you might be placing such a big order that the amount of money that you save or the amount of money that you make (depending if you are procuring the goods or selling the
goods) might be such an amount where it would take extreme volatility in the gas prices to make up for a substantial loss.
So I would think during typical volatility you and your business would still be able to conservatively go after international procurements, but it is important to keep track of gas prices not just in the United States but also in the global economy.
With international procurement seemingly gaining revenue or being a good choice for business secondary to lower fuel costs, is there a drastic change in international procurement when gas prices are volatile?
I am interested in international procurement but because I am part of a small business I tend to try to play it safer than maybe a larger corporation might.