International Trade and Foreign Direct Investment McGraw-Hill/Irwin International Business, 11/e Copyright © 2008 The McGraw-Hill Companies, Inc. All rights reserved. chapter two

2-3 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

2-4 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

2-5 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, 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. Source: Company annual reports, Fortune magazine’s 2006 Global 500 listing of world’s largest companies, (July 14, 2006).

2-6 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

2-7 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, (June 30, 2002); “World Exports of Commercial Services by Selected Region and Economy, 1980–2001,” World Trade Organization, Statistics Division, (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, 2004,” International Trade Statistics 2005 (Geneva: World Trade Organization, 2005) pp. 20, 23.

2-8 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, (July 14, 2006).

2-9 International Trade Note: Rankings are based on trade data for Source: World Trade Organization, International Trade Statistics 2005 (Geneva: World Trade Organization, 2005), pp. 21, 23.

2-10 Direction of Trade Increasing Regionalization of Trade 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,” July05-online.pdf (July 14, 2006).

2-11 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

2-12 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.

2-13 Major Trading Partners of the United States (Table 2.4)

2-14 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, “ Table 11: Top 50 Suppliers of U.S. Imports in 2004,” U.S. Department of Commerce International Trade Administration, (July 14, 2006); “Table 10: Top 50 Purchasers of U.S. Exports in 2004,” U.S. Department of Commerce International Trade Administration, (July 14, 2006).

2-15 Major Trading Partners of the United States International trade exists because firms export

2-16 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

2-17 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

2-18 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.

2-19 Foreign Investment Annual inflows of FDI –Where countries are investments being made and where do investments come from (Table 2.5)

2-20 Table 2.5 Direction of Foreign Direct Investment (Annual Flows) for Selected Regions and Countries, ($ billions)

2-21 Table 2.5 Direction of Foreign Direct Investment (Annual Flows) for Selected Regions and Countries, ($ billions) Note: Because of rounding, values may not equal 100%. 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.

2-22 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

2-23 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)

2-24 Figure 2.4

2-25 Figure 2.5 International Investment Position of the United States, (billions of dollars) Note: Figures are based on current cost figures are preliminary. Source: Elena L. Nguyen, “The International Investment Position of the United States at Year-End 2002,” Survey of Current Business, July 2003, pp. 20–21;

2-26 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

2-27 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

2-28 Why Enter Foreign Markets? –Test Market Opportunity to make changes to market mix (product, promotion, price, channels of distribution) Drop entire venture if needed

2-29 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.

2-30 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

2-31 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

2-32 Protect Markets, Profits, and Sales –Geographic Diversification –Satisfy management’s Desire for Expansion

2-33 Seven Global Dimensions Product Markets Promotion Where value is added to the product Competitive strategy Use of non-home-country personnel Extent of global ownership in the firm