Chapter 1 - Trade and investment in a global economy. The main goals of this chapter are to: Introduce the student to the contemporary issues in international trade and investment, define international business and its main components and illustrate the importance of technology in driving the globalisation of products and markets, identify the entities involved in international trade and investment and explore the changing nature of firms that do business outside their national borders.
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Chapter 1 Trade and investment in a
global economy
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Lecture plan
• Scope of international business
– exports of goods and services – international contracting
– foreign direct investment
• What is globalisation? Main indicators
• The drivers of globalisation
• Arguments pro and against globalisation
• International business versus domestic business
• Why study international business?
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National GDP and exports as % of world
GDP and exports of goods and services
% of world GDP % of world exports of
goods & services
Source: adapted from UNCTAD, World Investment Report (http://www.unctad.org/wir)
and GATT/WTO data
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Scope of international business
• Exports (goods and services)
• Contracting
• Joint ventures
• Wholly owned direct investment
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Exports of goods
• Primary products
• Manufactures
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• Subcontracting (e.g the car sector)
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Foreign investment
• Foreign Direct Investment (FDI)
– joint venture and wholly-owned investment
– effective control; managerial participation
• Portfolio investment
– investment income; capital gains
• Dividing line: 10% of the company shares
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FDI concepts
• FDI (flow): measures movement of FDI in a given
period, usually a year
• FDI (stock): book value of accumulated investment
flows over the years
• Foreign production: value of goods and services
produced abroad by multinationals.
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The world's top 500 global
SE Asia 2 Thailand (1), Malaysia (1) Sth Asia 3 India (3)
Australasia 10 Australia (9), NZ (1) Latin America 6 Mexico (2)
Africa 5 S Africa (4), Zambia (1)
Source:adapted from Fortune, 22 July 1992, 13 August 1998
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The world’s top 500 global
corporations by region (2003)
Region/
Country
No of Corp’s
Main countries
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Global integration
‘ The process by which markets and
production in different countries are becoming increasingly interdependent due
to the dynamics of trade in goods and services and the flows of capital and technology.’
OECD
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Drivers of globalisation
Two key factors seem to underlie the trend towards the increasing globalisation of
markets and production:
1 decline of barriers to trade and
investment
2 technological change
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Indicators of globalisation
• Increasing trade/GDP ratio
• FDI as % of GDP
• Growth of intra-industry trade
• Declining concentration of international
business flows
• Aggregate international business as
% of GDP
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Ratio of world exports of goods and services to GDP and ratio of global FDI flows to world fixed investment (GFCF)*, %, 1983–2003
0 5 10 15 20 25 30
Source: adapted from GATT International Trade 1993, WTO International Trade 2004 and UNCTAD,
World Investment Report (http://www.unctad.org/wir)
GFCF = Gross Fixed Capital Formation Global FDI Flows = Global FDI Outflows + Global FDI Inflows/2
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Share of exports of goods and
services in GDP
0 5 10 15 20 25 30 35
Low& Middle Income
High Income countries
World
1980 2001
Source: adapted from World Bank, 2003 World Economic Indicators
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Why FDI is growing more rapidly than world trade or world output
• Can circumvent future trade barriers
• World political and economic change
• Democratisation of markets
• Globalisation of world markets
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Answers to critics of globalisation
• Decisions in WTO and other international organisations are made by consensus of governments
• Globalisation is more effective with strong governments and sound institutions
• Globalisation benefits both large and
small/medium companies
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Anti-globalisation arguments
• Destroys manufacturing jobs in wealthy, advanced countries
• Wage rates of unskilled workers in
advanced countries decline
• Companies move to countries with fewer labour and environment regulations
(‘export of jobs’)
• Loss of sovereignty
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Globalisation - arguments pro
• Lower prices for goods and services
• Economic growth stimulation
• Increase in consumer income
• Job creation
– countries specialise in production of goods and services that are produced most efficiently
• Unprecedented advances in living
standards
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International business vs domestic business
• International risk
– financial (exchange, interest, inflation) – political (nationalisation, expropriation) – regulatory (legal systems, policies)
practices)
• Multinational conflicts
– Multinational strategies vs national interest
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International business training
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