International bussiness the challenge of global competition 11e chapter 02

Large International Firms Invest Overseas, and They Also Export • Supplying overseas markets – Exporting to and production in those markets • In order to establish and expand overseas

International Trade and Foreign Direct Investment

McGraw-Hill/Irwin

chapter two

Learning Objectives

 Appreciate the magnitude of international trade

 Identify the direction of trade, or who trades with whom

 Explain the size, growth, and direction of U.S foreign

direct investment, worldwide and in the U.S.

 Identify who invests and how much is invested in U.S.

 Understand the reasons for entering foreign markets

 Comprehend that globalization of international firm

occurs over seven dimensions and that a company

can be partially global in some dimensions and

completely global in others

Large International Firms Invest

Overseas, and They Also Export

• Large American international firms responding to such factors as:

1 Global competition

2 Liberalization by host governments in

regard to foreign investment

3 Advances in technology

Large International Firms Invest

Overseas, and They Also Export

Note: Foreign sales refers to sales outside the home country of the company All figures are based on 2005 fiscal year, as reported in 2006,

except for Wal-Mart Stores, whose fiscal year ended January 31, 2006 This list excludes BP, which was ranked the 4th largest, because the company’s annual report did not provide information on either foreign sales or net income from foreign operations.

— information not provided in company annual report.

Large International Firms Invest

Overseas, and They Also Export

• Supplying overseas markets

– Exporting to and production in those

markets

• In order to establish and expand overseas operations

– International Trade - Including exports and

imports

– Foreign Direct Investment

– Foreign Sourcing

International Trade

• Increase in volume of trade

Source: Monthly Bulletin of Statistics (New York: United Nations, June 1997), pp 92–102 and 266–71; Monthly Bulletin of Statistics (New York: United Nations, August

2000), pp 92–111 and 122; “World Merchandise Exports by Region and Selected Economy, 1980, 1985, 1990, 1995 and 1999–2001,” World Trade Organization, Statistics

Division, www.wto.org/english/res_e/statis_e/statis_e.htm (June 30, 2002); “World Exports of Commercial Services by Selected Region and Economy, 1980–2001,” World

Trade Organization, Statistics Division, www.wto.org/english/res_e/statis_e/statis_e.htm (June 5, 2002); “World Service Exports by Region and Selected Economy, 1992–

02,” International Trade Statistics 2003 (Geneva: World Trade Organization, 2003), pp 171–74, 179–81; and “Growth in the Value of World Merchandise Trade by Region,

International Trade

Location of Worldwide Manufacturing Value-Added for Selected Regions (percentage of value added at current prices)

n.a data not available * 1980 data are actually for 1981, but listed at constant 1980 prices Source: “Foreign Direct Investment: Foreign

Direct Investment Flows,” United Nations Conference on Trade and Development, http://globstat.unctad.org/html/index.html (July 14, 2006).

International Trade

Note: Rankings are based on trade data for 2004.

Source: World Trade Organization, International Trade Statistics 2005 (Geneva: World Trade Organization, 2005), pp 21, 23.

Source: Monthly Bulletin of Statistics (New York: United Nations), July

2001, pp 266–71, July 2000, pp 258–61, June 1997, pp 255–62, June

1993, pp 266–71; Statistical Yearbook (New York: United Nations, 1969),

pp 376–83; and “International Trade—World Exports by Provenance and

Destination,” http://unstats.un.org/unsd/mbs/ July05-online.pdf (July 14,

2006).

Major Trading Partners: Their

Relevance for Managers

• Why Focus on Major Trading Partners?

– The business climate in the importing

nation is relatively favorable

– Export and import regulations are not

insurmountable

– There should be no strong cultural

objections to buying that nation’s goods

– Satisfactory transportation facilities have

already been established

Major Trading Partners: Their

Relevance for Managers

– 5 Import channel members (merchants,

banks, and customs brokers) are

experienced in handling import shipments

from the exporter’s area

– 6 Foreign exchange to pay for the exports

is available

– 7 The government of a trading partner may

be applying pressure on importers to buy

from countries that are good customers for

that nation’s exports

Major Trading Partners of the United

States (Table 2.4)

Major Trading Partners of the United

States (Table 2.4 cont’d)

Source: “U.S Aggregate Foreign Trade Data, 1999 and Prior Years,” U.S Foreign Trade Highlights, tables 10 and 11, U.S Department of Commerce International Trade

Administration, http://www.ita.doc.gov/td/industry/otea/usfth/ “ Table 11: Top 50 Suppliers of U.S Imports in 2004,” U.S Department of Commerce International

Trade Administration, www.ita.doc.gov/td/industry/otea/usfth/tabcon.html (July 14, 2006); “Table 10: Top 50 Purchasers of U.S Exports in 2004,” U.S Department of

Commerce International Trade Administration, www.ita.doc.gov/td/industry/otea/usfth/tabcon.html (July 14, 2006).

Major Trading Partners of the United

States

• International trade exists because firms export

Foreign Investment

• Divided into two parts

– Portfolio investment

• The purchase of stocks and bonds to

obtain a return on the funds invested

– Direct investment

• The purchase of sufficient stock in a firm

to obtain significant management control

Foreign Investment

• FDI

– Volume

• Outstanding Stock of FDI

– The book value of all foreign direct

investment

• Annual Outflows of FDI

– The amount invested each year into other

nations

Figure 2.3 Stocks of Outward Foreign Direct Investment, Selected Countries

Source: Various “Country Fact Sheets,” World Investment Report 2001, United Nations Conference on Trade and Development, Geneva,

October 2001, and World Investment Report 2005, United Nations Conference on Trade and Development, Geneva, September 2005.

Foreign Investment

• Annual inflows of FDI

– Where countries are investments being made

and where do investments come from (Table

2.5)

Table 2.5 Direction of Foreign Direct Investment

(Annual Flows) for Selected Regions and

Countries, 1985-2004 ($ billions)

Table 2.5 Direction of Foreign Direct Investment

(Annual Flows) for Selected Regions and

Countries, 1985-2004 ($ billions)

Note: Because of rounding, values may not equal 100%.

Foreign Investment

– Level and Direction of FDI

• Can only get an idea of the rate and

amounts of such investments and of the

places in which they are being made

– Trade Leads to FDI

• Foreign trade is typically less costly and

less risky than making a direct investment into foreign markets

Foreign Investment

• U.S Foreign Direct Investment Abroad (figure 2.4a)

• Foreign Direct Investment in the United States (figure 2.4b)

– Acquire Going Companies or Build Ones?

(figure 2.5)

Figure 2.4

Figure 2.5 International Investment

Position of the United States, 1976-2005

(billions of dollars)

Note: Figures are based on current cost 2002 figures are preliminary.

Why Enter Foreign Markets?

• Increase Profits and Sales

– Enter New Markets

• New Market Creation

• Preferential Trading Arrangements

– an agreement by a small group of nations to

establish free trade among themselves while maintaining trade restrictions with all other nations

Why Enter Foreign Markets?

• Improved Communications

– Electronic mail, wireless and wired

telephones, and video conferencing

– Obtain Greater Profits

• Greater Revenue

• Lower Cost of Goods Sold

• Higher Overseas Profits as an Investment

Motive

Why Enter Foreign Markets?

– Test Market

• Opportunity to make changes to market

mix (product, promotion, price, channels

of distribution)

• Drop entire venture if needed

Protect Markets, Profits, and Sales

• Protect Domestic Market

• Attack in Competitor’s Home Market

– Using Foreign Production to Lower Costs

• Export processing zones – a

government-designated zone in which workers are permitted to import parts and materials without paying import duties, as long as imported items are then exported once they have been processed or assembled

Protect Markets, Profits, and Sales

• In-Bond Plants (Maquiladora) –

Production facilities in Mexico that temporarily import raw materials, components, or parts duty-free to be manufactured, processed, or assembled with less expensive local labor, after

which the finished or semi finished product is exported

Protect Markets, Profits, and Sales

– Protect Foreign Markets

• Lack of Foreign Exchange

• Local Production of Competitors

• Downstream Markets

• Protectionism– Guarantee Supply of Raw Materials

– Acquire Technology and Management

Know-How

Seven Global Dimensions

• Use of non-home-country personnel

• Extent of global ownership in the firm