2
This chapter covers:
•International trade
and growth
•Direction of trade
International Trade and
Foreign Direct Investment
•Size, growth and
direction of FDI
•Investments in U.S.
•Reasons for entering
foreign markets
•Dimensions of
globalization
International Business
by Ball, McCulloch, Frantz,
Geringer, and Minor
McGraw-Hill/Irwin
Copyright
© 2006
McGraw-HillCompanies,
Companies,Inc.
Inc. All
All rights
Copyright
© 2006
TheThe
McGraw-Hill
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
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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
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Introduction
International Business Activities
International Trade
Foreign Direct Investment (FDI)
includes exports and imports.
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
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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
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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
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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
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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
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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
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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
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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
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Asian Importers
Rising standard of
living
Further industrial
expansion
Import of raw materials
to be assembled
Government pressure
to lower trade surpluses
2-13
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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
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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
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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
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FDI in United States
Nearly 82% of stock
owned by firms from
United Kingdom
France
Netherlands
Japan
Germany
Switzerland
Canada
2-17
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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
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New Markets
New Markets Factors
Saturated home market
Find markets with
Rising GDP per capita
Need reliable data
Must compare
purchasing power
Evenly distributed
income preferable
Other Considerations
Population growth
Preferential Trading
Agreements
Fast growing economy
Improved
communications
2-19
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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
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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
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Why Enter Foreign Markets?
To protect foreign market
Lack of foreign exchange
Local production by competitors
Downstream markets
Protectionism
Follow suit or risk losing the market
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
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Changing Environment
Changes
affect trade and FDI
Governments
liberalized flows of goods,
people, technology, capital
Improvements in information technology
Increased global competition
2-23
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Global Dimensions
Product
Markets
Promotion
Where value is added to
product
Competitive strategy
Use of non-homecountry personnel
Extent of global
ownership of firm
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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
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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
Investments
(USD millions):
Polish-American
Enterprise Fund 505.0
IPC 440.0
Philip Morris 372.0
PepsiCo 283.0
Citibank 235.2
Epstein 200.0
Procter and Gamble 190.0
Mars Incorporated 163.0
Enron Int'l 132.0
Systems Holding Inc. 114.4
Goodyear 112.0
Mc Donald's 107.0
D.Chase Enterprises 100.0
Curtis 100.0
J.P.Morgan 100.0
Central European Media 85.0
Schooner Capital Corp/
White Eagle Industries 80.0
Sheraton Warsaw 80.0
Texaco Inc. 68.6
F & P Holding Co. Inc. 66.8
Source: www.mac.doc.gov
Copyright © 2006 The McGraw-Hill Companies, Inc. All rights reserved
