BUS 460
INTERNATIONAL TRADE AND
FOREIGN DIRECT INVESTMENT
Introduction:
 International business is concerned with the purchase
and sale of goods and services across national
boundaries.
 As such, the volume and direction of business
transactions impacts directly upon world statistics for
international trade and foreign direct investment
(FDI).
 The pattern of international trade and investment is
constantly changing and evolving.
 One noticeable change has been the growth of
regionalism.
International Trade: The Theory
Mercantilism:
 Mercantilism:
 Mercantilists saw trade as a zero sum game – a game
such as beggar-my-neighbor.
 Where one players gains are another’s losses.
 A mercantilist nation was one that strove to maximize
its exports and minimize its imports.
International Trade: The Theory
Mercantilism:
 Mercantilism:
 The margin between the two – what would now be
termed as a surplus on the current account of balance
of payments – would be matched by the inflows of
gold and foreign currency it received for its net exports
and added to its reserves.
 The larger these reserves , the stronger the nation
would feel in its dealings with the rest of the world.
International Trade: The Practice
Trade Barriers and Protectionism
 Trade Barriers and Protectionism:
 The most commonly cited reasons for protectionism:
 1- The need to protect a country’s infant industries:
 A third world country seeking to reduce its
dependence on primary produce by a nurturing a
manufacturing sector may feel a compelling need to
protect its manufacturers from foreign competition
while they are establishing themselves.
 But: once provided, it notoriously difficult to withdraw.
Trade Barriers and Protectionism
 2- To protect domestic industries from unfair foreign
competition:
 One common form of unfair competition is dumping.
 The practice of selling goods on export markets at less
than on home markets.
 It is understandable if firms facing dumping by their
overseas competitors react by calling for tariffs to be
imposed to eliminate the prices differential.
Trade Barriers and Protectionism
 3- Health/social reasons:
 For health reasons you cannot normally import fresh
fruit into the USA or live animal from the UK.
 Firearms and drugs are also typically subject to strict
import controls for reasons which have little or
nothing to do with economics.
 But nonetheless reflect a form of protectionism.
Trade Barriers and Protectionism
 4- Protection of local culture or national identity:
 The call for agricultural protection widely heard
within western Europe since the establishment of the
Common Agricultural Policy.
 Based on members’ desires to protect local culture.
 France sees trade barriers as a legitimate means of
helping them to preserve their rural traditions.
Trade Barriers and Protectionism
 5- Politics:
 Political reasons for not wishing to trade with
particular countries include compliance with
international sanctions.
 And a desire not to be reliant to overseas suppliers for
strategically important goods such as defense
equipment.
 Equally, countries may wish to grant preferential
trading terms to a former colony/political ally.
Trade Barriers and Protectionism
 6- Protection from cheap foreign labor:
 The argument has been used by labor unions in the
USA,
 Who are concerned at the replacement of US-based
plants with Mexico-based ones,
 In the aftermath of the formation of NAFTA.
Forms of Protectionism:
 1- Tariffs: Taxes or duties typically levied on imports as
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they enter the country.
2- Import quotas: restrictions on the quantity of a
good which may be imported, perhaps from specific
countries.
3- Embargoes.
4- Export subsidies.
5- Foreign exchange controls.
6- Non-tariff barriers: such as laws and regulations e.g.
product specifications or professional qualifications.
GATT and the World Trade
Organization (WTO):
 The General Agreement for Tariff and Trade (GATT)
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was established in 1947, with 23 founder members.
Then extended to include 100 countries.
GATT’s aim was to promote trade and
reduce/eliminate tariffs.
GATT three major rounds:
1- The Kennedy Round in the mid-1960s.
2- The Tokyo Round in the mid-1970s.
Both 1 & 2 achieved tariff reduction of about 1/3.
GATT and the World Trade
Organization (WTO):
 3- The Uruguay Round in 1993: which concluded seven
years of difficult negotiation.
 Initiated further cuts in import duties and other tariffs
world-wide.
 It created a new framework for international trade
under the aegis of the WTO.
 Also, Uruguay Round saw 125 countries agreed to an
average of 1/3 reductions in tariffs (36% in the
developed world and 24% in the LDC’s.
Key Trading Principles under GATT
and WTO
 1- Restrictions on the use of quotas.
 2- Allowing of retaliation against ‘unfair’ trading
practices.
 3- A requirement to grant ‘most favored nation’
concessions to all member countries.
 4- Members not allowed to treat imported goods less
favorably than domestic production (except GATS).
International Trade:
The statistics Post World War Two
 The volume and value of world trade has increased
dramatically over the half century since the
establishment of GATT.
 For 50 years trade has been rising faster than the value
of world output.
 Thereby, confirming the growing internationalization
of business.
 The decision to export and import is made not by
nations but by individual producers and consumers.
How Trade Affects Nation’s Economy
There are 3 Main Issues:
 1- Comparative advantages change over time, and may
move for or against any individual nation.
 2- Individual business will respond at differing rates to
changes in market demand,
 and so the gains from trade which accrue to particular
nations will reflect this speed of response.
 3- The value added by trade in goods and services is
unequal. Exporting commodities will generate lower
returns than the exports of, say, consumer electronics,
because the terms of trade are relatively poor.
Foreign Direct Investment (FDI)
Introduction:
 International trade and foreign direct investment
(FDI) are closely interlinked.
 The common factor in both instances is the
international / transnational corporation (TNC),
because exporting / importing or investing overseas
are:
 Simply alternative ways of internationalizing business.
Foreign Direct Investment (FDI)
Definition:
 The transnational corporation is defined as:
 Comprising parent enterprises and their foreign
affiliates.
 A parent enterprise controls assets of another entity on
other country usually via ownership of an equity stake.
 United Nations Commission for Trade And
Development (UNCTAD) assumes a minimum equity
stake of 10% as the threshold for control.
Foreign Direct Investment (FDI)
Statistics:
 Investing in foreign affiliates requires large amounts of
capital, and so FDI tends to be concentrated in the
hands of the largest companies.
 UNCTAD estimates that there are around 60,000
TNC’s across the glob, but
 The 100 largest concerns account for US$ 4 trillions of
sales, equivalent to 36% of total world sales by foreign
affiliates.
Foreign Direct Investment (FDI)
Statistics:
 The total assets of these 100 companies are worth US$4
trillions, they have over 6 million foreign employees.
 And, only two of the ‘top 100’ are from developing
countries.
The World’s 20 Largest NonFinancial TNC’s (1997)
 Table 2.4 (p.42) shows that:
 1- The vast majority of corporations in the top 100
TNCs have parent enterprises in the Triad nations.
 2- The average size of TNCs from developing countries
is only $1.4 billion compared with $13.3 billion for the
top 100 TNCs.
 3- Four industries dominate the list – electronics and
electrical components, petroleum, chemicals and
pharmaceuticals, and the automotive business.
The World’s 20 Largest NonFinancial TNC’s (1997)
 Table 2.4 (p.42) shows that: (continued)
 4- The corporations ranked most highly in terms of the
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trans-nationality figures predominantly have parent
enterprises in smaller industrialized countries.
Such as:
Netherlands and Switzerland (Nestle & Unilever).
5- Central European TNCs are still relatively small.
6- A large proportion of FDI flows are devoted to
cross-boarder mergers and acquisition.
Reasons for FDI:
 1- Increased profit.
 2- New markets.
 3- Protectionism.
 4- Extending the product life cycle.
Reasons for FDI:
 1- Increased profit:
 Commercial companies are always on the look-out for
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opportunities to raise profits.
Either via cost reductions, higher sales volume or
higher prices.
2- New markets:
From an operational management prospective, it does
not make sense to ship cars over huge distances, so
Penetration of foreign markets requires the
establishment of regional production facility.
Reasons for FDI:
 3- Protectionism:
 Import restrictions may make it difficult for a company
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to gain a foothold in a foreign marketplace, and
The only solution is to produce locally.
4- Extending product life cycle:
If a company finds that a product is reaching
technological maturity or the ends of its lifecycle in
the traditional markets,
FDI may provide means of extending the cycle by
moving into new markets.
Characteristics of the Source
Nations:
 Relatively old figures (1998):
 The bulk of FDI flows originate from Europe, USA and
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Japan.
FDI outflows from the EU reached a massive US$386
billion in 1998, a rise of over 50% from 1997.
The USA FDI outflows for 1998 equaled US$133 billion.
Those of Japan fell by 7% to US$24 billion.
Across the OECD countries, the value of FDI outflows
rose from US$ 321 billion in 1996 to over US$ 566
billion in 1998.
Characteristics of Host Nations:
 Relatively old figures (1998):
 The inflows of investment to the developed world
amounted to 68% of the world total in 1998.
 The total drawn in by the OECD countries equaled
US$ 465 billion in 1998.
 The EU is the largest recipient of the money. Inflows
to the EU rose from US$ 130 billion in 1997 to US$ 230
billion in 1998.
 The inflows of investment to the USA was very large
amounted US$ 193 billion in 1998. Was US$ 111 billion
in 1997.
The US-EU Banana War
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‫‪THE END‬‬
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