International Trade and Direct Foreign Investment Chapter 2

International Trade Volume of Trade Volume of Trade 1990= $4 trillion 1990= $4 trillion 2003= $9 trillion 2003= $9 trillion Where has it grown? Where has it grown? Top 10 countries produce: Top 10 countries produce: 56% of exports 56% of exports 63% of imports 63% of imports

International Trade Where is trade going? Where is trade going? Developed countries  developed countries (75%) Developed countries  developed countries (75%) Japan Japan Developing countries Developing countries Lack of resources Lack of resources U.S. U.S. Developing countries Developing countries Captive market Captive market Australia and New Zealand Australia and New Zealand Shifting focus Shifting focus

International Trade Changing Direction of Trade Changing Direction of Trade Trade agreements Trade agreements NAFTA’s effects NAFTA’s effects World trade between agreement partners World trade between agreement partners 1980= 37.3% 1980= 37.3% 1990= 59.9% 1990= 59.9% 1999= 70.7% 1999= 70.7%

Why Focus on Major Trading Partners? Demonstrates Demonstrates Business climate Business climate Regulations Regulations No strong cultural objections No strong cultural objections Transportation Transportation Intermediaries Intermediaries Foreign exchange Foreign exchange Government Government Asian imports Asian imports

Foreign Investment Two components Two components Portfolio investment Portfolio investment Less than 10% Less than 10% $2.86 trillion invested in U.S. stocks and bonds from overseas $2.86 trillion invested in U.S. stocks and bonds from overseas Direct investment Direct investment More than 10% More than 10%

Foreign Investment Volume Volume U.S.= $1.5 billion (largest in world) U.S.= $1.5 billion (largest in world) Declining proportion (35.5% tp 21.9%) Declining proportion (35.5% tp 21.9%) Annual Outflows Annual Outflows US & EU= 80% US & EU= 80% Developed countries Developed countries Annual Inflows Annual Inflows Developed countries  Developed countries Developed countries  Developed countries Trends Trends

Foreign Investment Level and Direction Level and Direction What does it tell you? What does it tell you? Trade Leads to FDI? Trade Leads to FDI? Exporting leads to investment Exporting leads to investment FDI Leads to Trade FDI Leads to Trade Lower barriers, increased competition, new production and communication technology Lower barriers, increased competition, new production and communication technology

U.S. Foreign Investment Investment Abroad Investment Abroad Increasing areas Increasing areas Decreasing areas Decreasing areas Investment in the U.S. Investment in the U.S. Where is it coming from? Where is it coming from? More invested in U.S. than U.S. is investing abroad More invested in U.S. than U.S. is investing abroad

U.S. Foreign Investment What is being purchased in U.S.? What is being purchased in U.S.? Existing companies Existing companies Assets are for sale Assets are for sale Fast access to technology Fast access to technology Known brand Known brand Competitive pressures Competitive pressures

Why Enter Foreign Markets? Increased Profits and Sales Increased Profits and Sales Enter new markets Enter new markets New market creation New market creation GDP per capita GDP per capita Preferential Trading Arrangements Preferential Trading Arrangements Larger markets Larger markets Faster-Growing Markets Faster-Growing Markets Consumer support Consumer support Government support Government support Improved Communications Improved Communications Easier to oversee Easier to oversee Supplement work done domestically Supplement work done domestically

Why Enter Foreign Markets? Obtain greater profits Obtain greater profits Greater revenue Greater revenue Reduced costs Reduced costs Spread out fixed costs Spread out fixed costs Economies of scale Economies of scale Higher profits Higher profits Test markets Test markets

Why Enter Foreign Markets? Protect Markets, Profits, and Sales Protect Markets, Profits, and Sales Protect domestic market Protect domestic market Follow customers overseas Follow customers overseas Follow main accounts Follow main accounts Attack competitors’ home markets Attack competitors’ home markets Using foreign production to lower costs Using foreign production to lower costs In-bond industry (maquiladora) In-bond industry (maquiladora) Impact Impact Caribbean Basin Initiative Caribbean Basin Initiative Growth Triangles Growth Triangles Export Processing Zones Export Processing Zones

Why Enter Foreign Markets? Protect Foreign Markets Protect Foreign Markets Lack of foreign exchange Lack of foreign exchange Local production by competitors Local production by competitors Downstream markets Downstream markets Protectionism Protectionism Guarantee supply of raw materials Guarantee supply of raw materials Acquire technology and management experience Acquire technology and management experience Geographic diversification Geographic diversification Satisfy management’s desire Satisfy management’s desire

Multidomestic or Global? Usual flow for exporting and investment Usual flow for exporting and investment Why more standardization? Why more standardization? Seven dimensions Seven dimensions Product Product Market Market Promotion Promotion Where value added Where value added Competitive strategy Competitive strategy Use of non-home country personnel Use of non-home country personnel Extent of global ownership Extent of global ownership