THE TRIAD AND

INTERNATIONALBUSINESS

By Aziz Ahmed Chaudhry

TRIADO The three major trading and

investment blocs in the international arena:

O the United States, O the EU,O and Japan.

INTRODUCTIONO Over the last decade international

business activity has increased dramatically, especially among the triad nations.

O Foreign direct investment and trade are at an all-time high.

O However, the most active economies of the EU, specially Germany, France, the UK, and Italy.

INTRODUCTIONO A growing number of other countries

will become increasingly prominent on the international business stage.

O China is moving quickly to establish itself as a major player.

INTRODUCTIONO Yet despite the increase of

international activity by these countries and others in emerging economies, MNEs from the triad will continue to account for most of the world’s foreign direct investment and trade.

O We begin by examining some of the main reasons for foreign direct investment in a triad context.

REASONS FOR FOREIGN DIRECT INVESTMENT

O Foreign direct investment (FDI) is the ownership and control of foreign assets.

O In practice, FDI usually involves the ownership, whole or partial, of a company in a foreign country. This is called a foreign subsidiary.

O Equity investment can take a variety of forms. One is through the purchase of an ongoing company.

REASONS FOR FOREIGN DIRECT INVESTMENT

O Another common example of FDI is to set up a new overseas operation as either a joint venture or a totally owned enterprise.

O It is important to remember that FDI is different from portfolio investment, which entails the purchase of financial securities (especially bonds) in other firms for the purpose of realizing a financial gain when these marketable assets are sold.

REASONS FOR FOREIGN DIRECT INVESTMENT

O The objective of FDI is to provide the investing company with the opportunity to actively manage and control a foreign firm’s activities.

O While the objective of portfolio investment is to achieve growth in the value of its financial holdings.

REASONS FOR FOREIGN DIRECT INVESTMENT

O There are a number of reasons that businesses are interested in taking an ownership position or gain control of foreign assets.

O The following examines some of the most important of these.

INCREASE SALES AND PROFIT:

O Some of the largest and best-known multinationals earn millions of dollars each year through overseas sales.

O Companies in smaller economies need to look outside of their home borders.

O Nearly 90 percent of Nestle’s assets are outside Switzerland.

INCREASE SALES AND PROFIT

O Over 50 percent of Royal Dutch/Shell’s sales originate outside its home markets.

O There are also thousands of smaller firms worldwide that earn the bulk of their revenue from international customers.

INCREASE SALES AND PROFIT

O SMEs also find that with the growth of large multinationals there is often a need for local suppliers and, if they do well, there is a good chance that the MNE will extend the contract and allow them to supply other worldwide locations.

O In addition, global markets often offer more lucrative opportunities than do domestic markets.

INCREASE SALES AND PROFIT

O This helps to explain why Coca-Cola and IBM now earn more sales revenue and profits overseas than they do in the US, and why PepsiCo has become Mexico’s largest consumer products company.

O In Japan, it helps to explain why 83 percent of Nippon Mitsubishi Oil’s and over 50 percent of Toyota’s revenues come from overseas sales.

ENTER RAPIDLY GROWING MARKETS

O Some international markets are growing much faster than others, and FDI provides MNEs with the chance to take advantage of these opportunities.

O A good example is China. Over the past few years the Chinese economy has grown at an annual rate of around 7-8 percent.

O These date also point to the fact that, if the country continues to move toward a market-driven economy, MNEs are likely to find a huge demand for goods and services that cannot be satisfied by local firms alone.

REDUCE COSTS:O An MNE can sometimes achieve

substantially lower costs by going abroad than by producing at home.

O If labor expenses are high and represent a significant portion of overall costs, an MNE may be well advised to look to other geographic areas where the goods can be produced at a much lower labor price.

REDUCE COSTS:

O A second important cost factor is materials. If materials are in short supply or must be conveyed a long distance, it may be less expensive to move production close to the source of supply than to import the materials.

O A third critical cost factor is energy. If the domestic cost of energy for making the product is high, the company may be forced to set up operations overseas near sources of cheaper energy.

REDUCE COSTS:

O A fourth important factor is transportation costs. In the recent past Chinese textile firms had gained a major share of the US market.

O Production costs were so low that, even after adding in transportation expenses, they were able to beat out most competitors.

O This is no longer true, however.

REDUCE COSTS:

O Mexican firms, armed with the latest technology, can now produce high quality, low cost textiles that can be quickly shipped to US customers.

O The US now buys more textile products from Mexico than from China.

GAIN A FOOTHOLD IN ECONOMIC BLOCS

O There are three major international economics blocs.

O MNEs that acquire a company in one of these blocs or that enter into an alliance to do business in one of these economic strongholds can obtain a number of benefits including the right to sell their output without having to be burdened by import duties or other restrictions.

O The final result will be three extended triads and any company that wants to do business worldwide will have to have a presence in all three blocs.

PROTECT DOMESTIC MARKETS:

O Another reason for FDI is to protect one’s domestic market.

O Many MNEs are now entering an international market in order to attack potential competitors and thus prevent them from expanding their operations overseas.

O These multinationals reason that a competitor is less likely to enter a foreign market when it is busy defending its home market position.

PROTECT DOMESTIC MARKETS:

O Similarly, sometimes an MNE will enter a foreign market in order to bring pressure on a company that has already challenged its own home market.

O For example, 10 days after Fuji began building its first manufacturing facility in the US, Kodak announced its decision to open a manufacturing plant in Japan.

PROTECT FOREIGN MARKETS:

O Sometimes MNEs will use FDI in order to protect their foreign markets.

O British Petroleum (BP) merged with Amoco, thus assuring itself of a solid market share and, in the process, protecting its investment in this foreign market.

O Had it not done this, local competitors would inevitably have eroded the firm’s position.

TRAID ECONOMIESO The triad nations dominate the world

trade and investment, and a great deal of this activity takes place both among and within triad nations.

O For example, the US and Japan do approximately $210 billion of trade annually, the US and EU account for over $380 billion of trade, and the EU and Japan do $120 billion of business annually.

TRAID ECONOMIESO One of the major area of triad trade

is automobiles, which provide an excellent example of the economic interrelationships that exits between triad members.