the nature of international business part 2 s5

7/29/2019 The Nature of International Business Part 2 S5

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Copyrigh t 2006 The McGraw-Hill Comp anies, Inc. Al l rights reserved

2

International Trade and

Foreign Direct Investment

International Business

by Ball, McCulloch, Frantz,

Geringer and MinorMcGraw-Hill/Irwin Copyright 2006 The McGraw-Hill Companies, Inc. All rights reserved.

This chapter covers:

International trade

and growth

Direction of trade

Size, growth and

direction of FDI

Investments in U.S.

Reasons for enteringforeign markets

Dimensions of

globalization


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Chapter Objectives

Appreciate the magnitude of international trade.

Identify the direction of trade.

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

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 firmsoccurs over seven dimensions and that a company can be

partially global in some dimensions and completely global inothers.

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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 essential2-3


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Small and Medium-Sized Enterprises

United Nations defines as parent companies whoseaffiliates had assets, sales and net income under $3million; 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, Japanand Mexico

Majority of SMEs exporting were wholesalers or othernonmanufacturing companies

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5/29Copyrigh t 2006 The McGraw-Hill Comp anies, Inc. Al l rights reserved

Introduction

International Business Activities International Trade

includes exports and imports.

Foreign Direct Investment (FDI) International companies must make FDI to establish and

expand their overseas operations.

Foreign Sourcing is the overseas procurement of raw materials,

components, and products.

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Volume of Trade

In 1990, volume of international

trade in goods andservices surpassed $4trillion.

In 2003, international trade in

goods and servicesexceeded $9 trillion.

One-fourth of everythinggrown or produced in theworld is now exported.

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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 yearsdemonstrates that the opportunity to increase salesby exporting is a viable growth strategy

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Direction of Trade

Largest exporters and importers of merchandiseare 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

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Direction of Trade -

The Exceptions

Reasons Japan exports more to developing nations

Japan established extensive distribution indeveloping nations since early 1900s.

Uses sogo shosha to import raw materials andcomponents necessary for the Japanese industry, dueto lack of local sources for raw materials.

Other industrialized nations have imposed import

restrictions on Japanese exports to protect their homeindustries.

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Direction of Trade -The Exceptions

Reasons the UnitedStates exports more todeveloping nations

The U.S. has significantlymore subsidiaries indeveloping countriesthan Japanese companies

Some customers prefer tobuy from American firms

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Focus on Major Trading Partners

Favorable businessclimate

Regulations notinsurmountable

No strong culturalobjections

Transportation facilitiesalready established

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Channel membersexperienced inhandling imports

Foreign exchange is

available Government pressure

to buy from countriesthat are good customers

for exports



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 becomeimportant trading partners.

China, South Korea, Taiwan, Malaysia and Singaporesupply U.S. with huge quantities of electroniccomponents and manufactured goods

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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 10percent or more.

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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 globalcompetition

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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 activitiesto locations close to available resources

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FDI in United States

Nearly 82% of stockowned by firms from

United Kingdom

France Netherlands

Japan

Germany

Switzerland

Canada2-17


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Acquire or Build

Majority of FDI acquisitions because

Corporate restructuring put many businesses onmarket

Foreign companies want to gain rapid access More success with known brand names

Pursuit of economies of scale has led torestructuring and consolidation

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New Markets

New Markets Factors Saturated home market

Find markets with

Rising GDP per capita

Need reliable data

Must comparepurchasing power

Evenly distributed

income preferable

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Other Considerations

Population growth

Preferential Trading

Agreements Fast growing economy

Improved

communications


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Why Enter Foreign Markets?

Obtain Greater Profits Less competition, better

price

Greater sales volume

Lower costs of goodssold

Governmentinducements

Higher profit margins

Test market

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To protect domestic market Follow customers overseas

Attack in competitors 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

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To protect foreign market Lack of foreign exchange

Local production by competitors Follow suit or risk losing the market

Downstream markets Protectionism

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

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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

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Global Dimensions

Product

Markets

Promotion

Where value is added toproduct

Competitive strategy

Use of non-home-country personnel

Extent of globalownership of firm


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Exports of Cereals

Source: www. ese.export.gov


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U.S. Exports to Asia

Source: ese.export.gov


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Global FDI Structure

Source: UNCTAD

The Top U.S. Investors in Poland


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p

(December 1998)

Company Value ofInvestments(USD millions):

Polish-AmericanEnterprise Fund 505.0

IPC 440.0Philip Morris 372.0PepsiCo 283.0Citibank 235.2Epstein 200.0

Procter and Gamble 190.0Mars Incorporated 163.0Enron Int'l 132.0

Source: www.mac.doc.gov

Systems Holding Inc. 114.4Goodyear 112.0Mc Donald's 107.0D.Chase Enterprises 100.0Curtis 100.0

J.P.Morgan 100.0Central European Media 85.0Schooner Capital Corp/

White Eagle Industries 80.0Sheraton Warsaw 80.0

Texaco Inc. 68.6F & P Holding Co. Inc. 66.8

the nature of international business part 2 s5

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