International Trade and Direct
Foreign Investment
Chapter 2
International Trade
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Volume of Trade
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1990= $4 trillion
2003= $9 trillion
Where has it grown?
Top 10 countries produce:
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56% of exports
63% of imports
International Trade
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Where is trade going?
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Developed countries  developed countries (75%)
Japan
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Developing countries
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U.S.
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Developing countries
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Lack of resources
Captive market
Australia and New Zealand
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Shifting focus
International Trade
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Changing Direction of Trade
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Trade agreements
NAFTA’s effects
 World trade between agreement partners
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1980= 37.3%
1990= 59.9%
1999= 70.7%
Why Focus on Major Trading
Partners?
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Demonstrates
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Business climate
Regulations
No strong cultural objections
Transportation
Intermediaries
Foreign exchange
Government
Asian imports
Foreign Investment
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Two components
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Portfolio investment
Less than 10%
 $2.86 trillion invested in U.S. stocks and bonds
from overseas
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Direct investment
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More than 10%
Foreign Investment
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Volume
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U.S.= $1.5 billion (largest in world)
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Annual Outflows
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Declining proportion (35.5% tp 21.9%)
US & EU= 80%
Developed countries
Annual Inflows
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Developed countries Developed countries
Trends
Foreign Investment
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Level and Direction
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Trade Leads to FDI?
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What does it tell you?
Exporting leads to investment
FDI Leads to Trade
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Lower barriers, increased competition, new
production and communication technology
U.S. Foreign Investment
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Investment Abroad
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Increasing areas
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Decreasing areas
Investment in the U.S.
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Where is it coming from?
More invested in U.S. than U.S. is investing abroad
U.S. Foreign Investment
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What is being purchased in U.S.?
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Existing companies
Assets are for sale
 Fast access to technology
 Known brand
 Competitive pressures
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Why Enter Foreign Markets?
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Increased Profits and Sales
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Enter new markets
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New market creation
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Preferential Trading Arrangements
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Larger markets
Faster-Growing Markets
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GDP per capita
Consumer support
Government support
Improved Communications
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Easier to oversee
Supplement work done domestically
Why Enter Foreign Markets?
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Obtain greater profits
Greater revenue
 Reduced costs
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Spread out fixed costs
Economies of scale
Higher profits
Test markets
Why Enter Foreign Markets?
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Protect Markets, Profits, and Sales
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Protect domestic market
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Follow customers overseas
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Follow main accounts
Attack competitors’ home markets
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Using foreign production to lower costs
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In-bond industry (maquiladora)
 Impact
Caribbean Basin Initiative
Growth Triangles
Export Processing Zones
Why Enter Foreign Markets?
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Protect Foreign Markets
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Lack of foreign exchange
Local production by competitors
Downstream markets
Protectionism
Guarantee supply of raw materials
Acquire technology and management experience
Geographic diversification
Satisfy management’s desire
Multidomestic or Global?
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Usual flow for exporting and investment
Why more standardization?
Seven dimensions
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Product
Market
Promotion
Where value added
Competitive strategy
Use of non-home country personnel
Extent of global ownership