2 This chapter covers:

•International trade
and growth
•Direction of trade
•Size, growth and
International Trade and direction of FDI
•Investments in U.S.
Foreign Direct Investment •Reasons for entering
foreign markets
•Dimensions of
globalization

International Business
by Ball, McCulloch, Frantz,
Geringer, and Minor
McGraw-Hill/Irwin Copyright
Copyright © 2006
© 2006 TheThe McGraw-HillCompanies,
McGraw-Hill Companies,Inc.
Inc. All
All rights
rights reserved
reserved.
 Chapter Objectives
 Appreciate the magnitude of international trade.
 Identify the direction of trade.
 Explain the size, growth, and direction of U.S. foreign direct
investment.
 Identify who invests and how much is invested in the U.S.
 Understand the reasons for entering foreign markets.
 Comprehend that globalization of an international firms
occurs over seven dimensions and that a company can be
partially global in some dimensions and completely global in
others.

2-2

Copyright © 2006 The McGraw-Hill Companies, Inc. All rights reserved

 International Firms
 Responding to
 Global competition
 Liberalization by host governments
 Advances in technology

 Outward FDI reached $119.7 billion in 2002

 American exports increased to $1,007 billion in 2003
 Factories in every market not feasible
 Many markets too small
 Must be served by exports

 Both FDI and exporting essential

2-3
Copyright © 2006 The McGraw-Hill Companies, Inc. All rights reserved
 Small and Medium-Sized Enterprises

 United Nations defines as parent companies whose

affiliates had assets, sales and net income under $3
million; fewer than 500 employees
 SMEs accounted for 96.5% of U.S. exports in 1997
 Very small companies (less than 20 employees)
accounted for 65% of all U.S. exporting firms in 1997
 Almost 40% of SME exports went to Canada, Japan
and Mexico
 Majority of SMEs exporting were wholesalers or other
nonmanufacturing companies

2-4

Copyright © 2006 The McGraw-Hill Companies, Inc. All rights reserved

 Introduction
 International Business Activities
 International Trade
 includes exports and imports.
 Foreign Direct Investment (FDI)
 International companies must make FDI to establish and
expand their overseas operations.
 Foreign Sourcing
 is the overseas procurement of raw materials,
components, and products.

2-5

Copyright © 2006 The McGraw-Hill Companies, Inc. All rights reserved

 Volume of Trade
 In 1990,
 volume of international
trade in goods and
services surpassed $4
trillion.

 In 2003,
 international trade in
goods and services
exceeded $9 trillion.
 One-fourth of everything
grown or produced in the
world is now exported.

2-6 Copyright © 2006 The McGraw-Hill Companies, Inc. All rights reserved
 Volume of Trade
 Increases in exports to developing countries,
especially
 Latin America
 Central and Eastern Europe
 Middle East
 Asia

 Quadrupling of world exports in less than 31 years

demonstrates that the opportunity to increase sales
by exporting is a viable growth strategy

2-7

Copyright © 2006 The McGraw-Hill Companies, Inc. All rights reserved

 Direction of Trade
 Largest exporters and importers of merchandise
are generally developed countries
 Among largest 25 exporters emerging
economies of
 China, Mexico, Malaysia, Thailand, Brazil
 Among largest merchandise importers
 China, Mexico, Malaysia, Thailand, India,
Turkey
2-8
Copyright © 2006 The McGraw-Hill Companies, Inc. All rights reserved
 Direction of Trade -
The Exceptions
 Reasons Japan exports more to developing nations
 Japan established extensive distribution in
developing nations since early 1900s.
 Uses “sogo shosha” to import raw materials and
components necessary for the Japanese industry, due
to lack of local sources for raw materials.
 Other industrialized nations have imposed import
restrictions on Japanese exports to protect their home
industries.

2-9
Copyright © 2006 The McGraw-Hill Companies, Inc. All rights reserved
 Direction of Trade -
The Exceptions
 Reasons the United
States exports more to
developing nations
 The U.S. has significantly
more subsidiaries in
developing countries
than Japanese companies
 Some customers prefer to
buy from American firms

2-10

Copyright © 2006 The McGraw-Hill Companies, Inc. All rights reserved

Focus on Major Trading Partners
 Favorable business
climate
 Regulations not
insurmountable
 No strong cultural
objections
 Transportation facilities
already established
 Channel members
experienced in
handling imports
 Foreign exchange is
available
 Government pressure
to buy from countries
that are good customers
for exports

2-11

Copyright © 2006 The McGraw-Hill Companies, Inc. All rights reserved

 Major Trading Partners
 Major U.S. Trading Partners
 Mexico and Canada
 Share common border with the U.S.
 Freight charges lower
 Delivery times shorter
 Contacts easier and less expensive

 Nations from East and Southeast Asia have become

important trading partners.
 China, South Korea, Taiwan, Malaysia and Singapore
supply U.S. with huge quantities of electronic
components and manufactured goods
2-12

Copyright © 2006 The McGraw-Hill Companies, Inc. All rights reserved

 Asian Importers

 Rising standard of
living
 Further industrial
expansion
 Import of raw materials
to be assembled
 Government pressure
to lower trade surpluses

2-13
Copyright © 2006 The McGraw-Hill Companies, Inc. All rights reserved
 Foreign Investment
 Two components of foreign investment
 Portfolio investment
 Purchase of stocks and bonds solely for the purpose of
obtaining a return on the funds invested.
 Direct investment
 Investors participate in the management of the firm in
addition to receiving a return on their money.
 Applies when investors equity participation ratio is 10
percent or more.

2-14

Copyright © 2006 The McGraw-Hill Companies, Inc. All rights reserved

 Volume of FDI
 End of 2002 worldwide nearly $6.9 trillion
 Largest investors
 United States 1.45 times next largest investor
 United Kingdom followed
 France third largest investor

 Total annual outflow 2002 $647 billion

 Much FDI associated with mergers, acquisitions
and other investments result of increased global
competition

2-15

Copyright © 2006 The McGraw-Hill Companies, Inc. All rights reserved

 Trade Leads to FDI
 Foreign direct investment historically follows trade
 Trade less costly and less risky
 Can expand business in small increments
 Use domestic or foreign agents to export
 Hire sales representatives to live in overseas market
 Establish own sales company

 Today many international firms disperse activities

to locations close to available resources

2-16
Copyright © 2006 The McGraw-Hill Companies, Inc. All rights reserved
 FDI in United States
 Nearly 82% of stock
owned by firms from
 United Kingdom

 France

 Netherlands

 Japan

 Germany

 Switzerland

 Canada
2-17
Copyright © 2006 The McGraw-Hill Companies, Inc. All rights reserved
 Acquire or Build
 Majority of FDI acquisitions because
 Corporate restructuring put many businesses on
market
 Foreign companies want to gain rapid access

 More success with known brand names

 Pursuit of economies of scale has led to

restructuring and consolidation

2-18
Copyright © 2006 The McGraw-Hill Companies, Inc. All rights reserved
 New Markets
 New Markets Factors  Other Considerations
 Saturated home market
 Population growth
 Find markets with
 Preferential Trading
 Rising GDP per capita
Agreements
 Need reliable data

 Must compare
 Fast growing economy
purchasing power  Improved
 Evenly distributed communications
income preferable

2-19

Copyright © 2006 The McGraw-Hill Companies, Inc. All rights reserved

 Why Enter Foreign Markets?
 Obtain Greater Profits
 Less competition, better
price
 Greater sales volume
 Lower costs of goods
sold
 Government
inducements
 Higher profit margins
 Test market

2-20
Copyright © 2006 The McGraw-Hill Companies, Inc. All rights reserved
 Why Enter Foreign Markets?
 To protect domestic market
 Follow customers overseas
 Attack in competitor’s home market
 Use foreign production to lower costs
 Protect from lower-priced foreign imports
 In-bond plants (maquiladoras)
 Caribbean Basin Initiative
 Andean Trade Preference Act
 Growth Triangles
 Export Processing Zones

2-21
Copyright © 2006 The McGraw-Hill Companies, Inc. All rights reserved
 Why Enter Foreign Markets?
 To protect foreign market
 Lack of foreign exchange
 Local production by competitors
 Follow suit or risk losing the market
 Downstream markets
 Protectionism
 Government erects barriers to protect local industry
 Guarantee supply of raw materials
 Acquire technology and management know-how
 Geographic diversification
 Satisfy management desire for expansion
2-22

Copyright © 2006 The McGraw-Hill Companies, Inc. All rights reserved

 Changing Environment
 Changes affect trade and FDI

 Governments liberalized flows of goods,

people, technology, capital
 Improvements in information technology

 Increased global competition

2-23
Copyright © 2006 The McGraw-Hill Companies, Inc. All rights reserved
 Global Dimensions
 Product
 Markets

 Promotion

 Where value is added to

product
 Competitive strategy

 Use of non-home-
country personnel
 Extent of global
ownership of firm
Copyright © 2006 The McGraw-Hill Companies, Inc. All rights reserved
 Exports of Cereals

Source: www. ese.export.gov

Copyright © 2006 The McGraw-Hill Companies, Inc. All rights reserved
 U.S. Exports to Asia

Source: ese.export.gov
Copyright © 2006 The McGraw-Hill Companies, Inc. All rights reserved
 U.S. Trade

Source: www.whitehouse.gov
Copyright © 2006 The McGraw-Hill Companies, Inc. All rights reserved
 Global FDI Structure

Source: UNCTAD
Copyright © 2006 The McGraw-Hill Companies, Inc. All rights reserved
 The Top U.S. Investors in Poland
(December 1998)

 Company Value of Systems Holding Inc. 114.4

Investments Goodyear 112.0
(USD millions): Mc Donald's 107.0
Polish-American D.Chase Enterprises 100.0
Enterprise Fund 505.0 Curtis 100.0
IPC 440.0 J.P.Morgan 100.0
Philip Morris 372.0 Central European Media 85.0
PepsiCo 283.0 Schooner Capital Corp/
Citibank 235.2 White Eagle Industries 80.0
Epstein 200.0 Sheraton Warsaw 80.0
Procter and Gamble 190.0 Texaco Inc. 68.6
Mars Incorporated 163.0 F & P Holding Co. Inc. 66.8
Enron Int'l 132.0

Source: www.mac.doc.gov
Copyright © 2006 The McGraw-Hill Companies, Inc. All rights reserved