chapter

1. International Trade and Foreign Investment two Concept Preview After reading this chapter, you should be able to: 1. appreciate the magnitude of international trade and how it has grown 2. identify the direction of trade, or who trades with whom. 3. recognize the value of analyzing trade statistic 4. explain the size, growth, and direction of U.S. foreign direct investment 5. identify who invests and how much is invested in the U.S 6. understand the reasons for entering foreign markets chapter

2. International Trade and Foreign Investment two Concept Preview continued After reading this chapter, you should be able to: 7. recognize the weakness in using GNP per capita as a basis for comparing economies 8. understand the international market entry methods 9. explain the many forms of strategic alliances 10. comprehend the globalization of an international firm occurs over at least seven dimensions and a company can be partially global in some dimensions and completely global in others chapter

3. International Trade and Foreign Investment 2-3 • International trade • volume of trade • direction of trade • major trading partners • foreign investment • Why enter foreign markets? • How to enter foreign markets • Paths to multinationals

4. Exports and Foreign Sales of Top U.S. Exporters ($Billions) 2-4 Table 2.1-I Foreign Export Exports + Exports Sales Foreign U.S. Rank in Foreign Rank in Total Rank in Total Total Foreign Company Exports Fortune 50 Sales Forbes 100 Sales Fortune 500 Sales Sales Sales General Motors $16.13 1 $44.04 2 154.90 1 10.4% 28.4% 38.8% Ford 11.89 2 38.08 5 128.44 2 9.3 29.6 38.9 Chrysler 9.40 4 6.57 27 52.22 11 18.0 12.6 30.6 General Electric 8.11 5 11.87 13 64.69 6 12.5 18.3 30.8 Motorola 7.37 6 9.77 17 22.25 28 33.1 43.9 77.0 IBM 6.34 7 39.93 4 64.05 7 9.9 62.3 72.2 Phillip Morris 4.94 8 16.33 9 53.78 10 9.2 30.4 39.6 Archer Daniels Midl. 4.68 9 3.01 68 11.37 92 41.2 26.5 67.7 Hewlett-Packard 4.65 10 13.52 12 24.99 22 18.6 54.1 72.7 Intel 4.56 11 5.70 30 11.52 90 39.6 49.5 89.1 Caterpillar 4.51 12 3.24 63 14.33 61 31.5 22.6 54.1 DuPont 3.63 14 14.32 11 34.97 14 10.4 40.9 51.3 United Technologies 3.11 15 8.30 19 21.20 31 14.7 9.2 53.9 Eastman Kodak 2.60 16 7.12 26 16.86 43 15.4 42.2 57.6 Compaq Computer 2.02 18 5.39 32 10.87 100 18.6 49.6 68.2 Digital Equipment 1.83 20 8.27 20 13.45 65 13.6 61.5 75.1 Allied Signal 1.82 21 3.08 65 12.82 72 14.2 24.0 38.2 3M 1.76 22 7.57 24 15.08 58 11.7 50.2 61.9 Dow Chemical 1.58 24 10.07 16 20.02 33 7.9 50.3 58.2 Merck 1.57 25 4.41 42 14.97 59 10.5 29.5 40.0 International Paper 1.42 29 3.25 62 14.97 60 9.5 21.7 31.2 Xerox 1.29 30 9.68 18 17.84 41 7.2 54.3 61.5

5. Exports and Foreign Sales of Top U.S. Exporters ($Billions) 2-5 Table 2.1 -II Foreign Export Exports + Exports Sales Foreign U.S. Rank in Foreign Rank in Total Rank in Total Total Foreign Company Exports Fortune 50 Sales Forbes 100 Sales Fortune 500 Sales Sales Sales Rockwell International 1.28 31 2.75 77 11.20 94 11.4% 24.6% 36.0% Abbott Laboratories 1.23 32 3.40 57 9.16 124 13.4 37.1 50.5 Deere 1.14 35 2.45 88 9.03 127 12.6 27.1 39.7 Sun Microsystems 1.12 36 2.21 96 4.69 244 23.9 47.1 71.0 Unisys 1.08 37 3.77 51 7.40 158 14.6 50.9 65.5 Dresser Industries 0.94 41 2.55 86 5.33 219 17.6 47.8 65.4 Monsanto 0.90 42 2.90 73 8.27 145 10.9 35.1 46.0 Bristol-Meyers Squibb 0.87 43 5.01 36 11.98 86 7.3 41.8 49.1 Exxon 0.83 45 77.13 1 101.46 3 0.8 76.0 76.8 Honeywell 0.78 47 2.23 95 6.06 195 12.9 36.8 49.7 Note: Because of rounding, values in the last column do not always equal the sum of the values of the next two columns to the left. Forbes defines foreign sales as sales from foreign production and excludes exports and intercompany sales. Sources: “The 100 Largest Multinationals,” Forbes, July 17, 1995, pp. 274-276; “The Top U.S. Exporters,” Fortune, November 13, 1995, pp. 74-76; and “The Fortune 500 Largest Corporations,” Fortune, May 15, 1995, pp. F-1 through F-22.

6. World Trade in Merchandise Exports (FOB Values in Billions of Current U.S. Dollars) 2-6 Table 2.2 Average Annual Percentage 1970 1980 1990 1996 Increase Total world exports $314 $2,001 $3,436 $5,441 11.6% Developed countries 225 1,269 2,449 3,721 11.4 Germanya 35 193 423 521 10.9 United States 43 217 394 625 10.8 Japan 19 130 288 411 12.3 France 18 111 210 289 11.2 UK 19 110 185 260 10.6 Italy 13 78 170 256 12.1 Developing countriesb 56 587 806 1,523 13.5 EU 88 c 690 d 1,477 e 2,073 12.9 EFTA 51 f 112 99 g 132 3.7 LAIA 13 80 113 219 11.4 Notes: EU = European Union. EFTA = European Free Trade Association. LAIA = Latin American Integration Association (formerly LAFTA). aIncludes exports to East Germany before reunification. bDefined by the World Bank as low- and middle-level-income nations as indicated by GNP/capita. cOriginal six members only (Belgium, Luxembourg, France, West Germany, Italy, and the Netherlands). dIncludes original six plus Denmark, Ireland, and United Kingdom. eInlcudes Greece, Spain, and Portugal and excludes Austria, Finland, and Sweden. fIncludes Finland as associate member with the original seven states — Austria, Denmark, Norway, Portugal, Sweden, United Kingdom, and Switzerland. gIncludes Iceland, Austria, Finland, and Sweden before 1995 and excludes the United Kingdom and Denmark. Sources: Monthly Bulletin of Statistics (New York: United Nations, June 1997), pp. 92-103 and 266-71.

7. 1996/1970 Export Ratios Based on Current Dollars and Quantum Indexes 2-7 Figure 2.1 Areas

8. Major Trading Partners 2-8 • Business climate in importing nation is relatively favorable • Export and import regulation are not insurmountable • There should be no strong cultural objections to buying that nation’s goods • Satisfactory transportation facilities have already been established • Import channel members (merchants, banks, and customs brokers) are experienced in handling import shipments from the exporter’s area • Foreign exchange to pay for goods is available • 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

9. Major Trading Partners of the U.S. ($ Billions in Current Dollars) 2-9 Table 2.4 1965 1996 1965 1996 Imports from Amount Imports from Amount Exports to Amount Exports to Amount 1. Canada $4.83 1. Canada $158.64 1. Canada $5.64 1. Canada $134.61 2. Japan 2.41 2. Japan 115.17 2. Japan 2.08 2. Japan 65.95 3. U.K. 1.41 3. Mexico 75.11 3. W. Germany 1.65 3. Mexico 56.74 4. W. Germany 1.34 4. China 51.51 4. U.K. 1.62 4. U.K. 30.25 5. Venezuela 1.02 5. Germany 38.83 5. Mexico 1.11 5. S. Korea 25.66 6. Mexico 0.64 6. Taiwan 29.90 6. Netherlands 1.09 6. Germany 22.97 7. Italy 0.62 7. U.K. 28.83 7. France 0.97 7. Taiwan 17.54 8. France 0.62 8. S. Korea 22.61 8. India 0.93 8. Netherlands 16.50 9. Brazil 0.51 9. Singapore 20.34 9. Italy 0.89 9. Singapore 16.25 10. Bel. & Lux. 0.49 10. France 18.63 10. Australia 0.80 10. France 14.45 11. Philippines 0.37 11. Italy 18.29 11. Bel. & Lux. 0.65 11. Hong Kong 13.87 12. India 0.35 12. Malaysia 17.82 12. Venezuela 0.63 12. Bel. & Lux. 12.69 13. Hong Kong 0.34 13. Venezuela 13.17 13. Spain 0.47 13. Brazil 12.34 14. Neth. Ant. 0.32 14. Thailand 11.33 14. S. Africa 0.44 14. China 11.94 15. Australia 0.31 15. Hong Kong 9.85 15. Switzerland 0.37 15. Australia 11.71 Notes: Exports are stated on an f.a.s. (free alongside ship) value basis. Services not included. Imports are stated on a CIF (Cost, Insurance, Freight) value basis. Services not included. U.K. = United Kingdom. Bel. & Lux. = Belgium and Luxembourg. Their export and import statistics are reported jointly. Neth. Ant. = Netherlands Antilles Source: Department of Commerce, Survey of Current Business, June 1997, pp. 74-77.

10. Foreign Investment 2-10 • Portfolio investment • the purchase of stocks and bonds to obtain a return on the funds invested • Foreign direct investment • the purchase of sufficient stock to obtain significant management control

11. Direct Overseas Investment, 1996 and 1980 ($ Billions in Current Dollars) 2-11 Table 2.5 1995 1980 Country Amount Share Amount Share United States $794.1 25.0% $220.2 43.5% United Kingdom 356.3 11.2 16.6 3.3 Japan 330.2 10.4 80.7 15.9 Germany 288.4 9.1 43.1 8.5 France 206.4 6.5 23.6 4.7 Netherlands 184.7 5.8 42.1 8.3 Canada 111.3 3.5 22.6 4.5 Other 906.8 28.5 57.7 11.4 World total $3,178.2 100.0% $506.6 100.0% Source: UNCTAD, World Investment Report 1997 (New York: United Nations, 1997), p. 319.

12. Direction of Foreign Direct Investment (Annual Flows) for Selected Regions and Countries ($ Billions in Current Dollars) 2-12 Table 2.6 -I Where funds originate 1985-1990 1993 1996* (net investment) (annual average) World $156.6 $239.1 $346.8 Developed countries 145.0 204.8 294.7 United States 21.6 74.8 84.9 United Kingdom 25.2 25.5 53.5 Japan 27.8 13.8 23.4 Germany 12.9 15.3 28.7 France 14.3 20.6 25.2 Netherlands 8.8 12.3 20.0 Canada 4.8 5.8 7.5 Belgium and Luxembourg 3.6 4.9 9.0 Italy 3.4 9.3 5.9 Switzerland 5.0 8.8 10.5 Source: UNCTAD, World Investment Report 1997 (New York: United Nations, 1997), pp 303-12.

13. Direction of Foreign Direct Investment (Annual Flows) for Selected Regions and Countries ($ Billions in Current Dollars) 2-13 Table 2.6 -I Where funds originate 1985-1990 1993 1996* (net investment) (annual average) Developing countries 10.6 34.1 51.5 Africa 1.1 0.8 0.8 Asia 8.1 31.0 46.8 China 0.7 4.4 2.2 Hong Kong 2.1 17.7 27.0 Korea, Rep. Of 0.8 1.4 4.2 Malaysia 0.3 1.3 1.9 Singapore 0.6 2.0 4.8 Taiwan 2.9 2.5 3.1 Latin America and the Caribbean 1.4 2.3 3.9 Brazil 0.3 0.5 1.0 Chile † 0.4 1.0 Mexico 0.2 * 0.6 Venezuela 0.2 0.9 0.6 Notes: *Estimates. †Less than $0.1 billion. Source: UNCTAD, World Investment Report 1997 (New York: United Nations, 1997), pp 303-12.

14. Direction of Foreign Direct Investment (Annual Flows) for Selected Regions and Countries ($ Billions in Current Dollars) 2-14 Table 2.6 -III Where funds go 1985-1990 1993 1996* (net investment) (annual average) Developed countries 116.7 138.8 208.2 United States 48.6 43.5 84.6 United Kingdom 19.0 15.5 30.1 Japan 0.4 0.2 0.2 Germany 2.3 1.8 3.9 France 7.2 20.8 20.8 Netherlands 5.6 8.8 6.3 Canada 5.2 5.0 6.7 Belgium and Luxembourg 4.1 10.8 13.9 Italy 3.4 4.4 3.7 Spain 6.6 13.3 6.4 Source: UNCTAD, World Investment Report 1997 (New York: United Nations, 1997), pp 303-12.

15. Direction of Foreign Direct Investment (Annual Flows) for Selected Regions and Countries ($ Billions in Current Dollars) 2-15 Table 2.6 -IV Where funds originate 1985-1990 1993 1996* (net investment) (annual average) Developing countries 24.7 73.0 128.7 Africa 2.9 3.7 4.9 Asia 13.5 50.9 84.3 China 2.7 27.5 42.3 Hong Kong 1.6 1.7 2.5 Korea, Rep. Of 0.7 0.6 2.3 Malaysia 1.1 5.0 5.3 Singapore 3.0 4.7 9.4 Taiwan 0.9 0.9 1.4 Latin America and the Caribbean 8.1 18.1 38.6 Brazil 1.3 1.3 9.5 Chile 0.7 0.8 3.1 Mexico 2.6 4.4 7.5 Venezuela 0.1 0.4 1.3 Source: UNCTAD, World Investment Report 1997 (New York: United Nations, 1997), pp 303-12.

16. Foreign Direct Investment in the U.S. 2-16 • Rapid increase • Acquire going companies or build new ones? • corporate restructuring in this country caused management to put on the market units that either did not meet management’s profit standards or were considered to be unrelated to the company’s main business • foreign companies desired to gain rapid access in this country to advanced technology (especially in computers and communications) • management's of foreign firms felt that entrance into the large and prosperous American market could be more successful if they acquired brand names vs. money to promote unknown ones

17. Why Enter Foreign Markets? 2-17 • 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 other nations • European Union • North American Free Trade Agreement (NAFTA) • faster-growing foreign markets • Protect markets, profits and sales • Protect foreign markets

18. Faster-growing Foreign Markets 2-18 Table 2.10 -I Top and Bottom Countries for GNP/Capita (1995) and Average Growth Rates of GNP/Capita and Population (1985—1995) 1995 Annual Growth Rates (percentage) GNP/Capita Population Ranking Country* (current US$) (millions) GNP/Capita† Population 1 Luxembourg $41,210 0.4 1.0% 1.1% 2 Switzerland 40,630 7.0 0.2 0.8 3 Japan 39,640 125.2 2.9 0.4 4 Norway 21,940 4.4 1.6 0.5 5 Denmark 29,890 5.2 1.5 0.2 6 Germany 27,510 81.9 n.a. 0.5 7 United States 26,980 263.1 1.4 0.9 8 Austria 26,890 8.1 1.9 0.6 9 Singapore 26,730 3.0 6.2 1.8 10 France 24,990 58.1 1.5 0.5 11 Iceland 24,950 0.3 0.3 1.1 12 Belgium 24,710 10.1 2.2 0.3 13 Netherlands 24,000 15.5 1.8 0.6 14 Sweden 23,750 8.8 -0.1 0.6 15 Hong Kong 22,990 6.2 4.8 1.3 16 Finland 20,580 5.1 -0.2 0.4 17 Canada 19,380 29.6 0.4 1.3 18 Italy 19,020 57.2 1.7 0.1 19 Australia 18,720 18.1 1.4 1.4 20 United Kingdom 18,700 58.5 1.4 0.3 21 United Arab Emirates 17,400 2.5 -3.5 5.8 22 Kuwait 17,390 1.7 0.9 -0.3 23 Israel 15,920 5.5 2.5 2.7 24 Ireland 14,710 3.6 5.2 0.1 25 New Zealand 14,340 3.6 0.6 1.0

19. 2-19 Table 2.10 -II Top and Bottom Countries for GNP/Capita (1995) and Average Growth Rates of GNP/Capita and Population (1985—1995) 1995 Annual Growth Rates (percentage) GNP/Capita Population Ranking Country* (current US$) (millions) GNP/Capita† Population 144 Nigeria 260 111.3 1.2 2.9 145 Yemen, Rep. 260 15.3 n.a. 4.2 146 Mali 250 9.8 0.6 2.8 147 Haiti 250 7.2 -5.2 2.0 148 Guinea-Bissau 250 1.1 1.8 1.9 149 Bangladesh 240 119.8 2.1 2.0 150 Uganda 240 19.2 2.8 3.0 151 Vietnam 240 73.5 4.2 2.2 152 Burkina Faso 230 10.4 -0.1 2.8 153 Madagascar 230 13.7 -2.0 3.1 154 Niger 220 9.0 -2.1 3.2 155 Nepal 200 21.5 2.4 2.5 156 Chad 180 6.4 0.5 2.5 157 Sierra Leone 180 4.2 -3.4 1.6 158 Rwanda 180 6.4 -5.0 0.6 159 Malawi 170 9.8 -0.7 3.1 160 Burundi 160 6.3 -1.3 2.8 161 Zaire 120 43.8 -8.5 3.2 162 Tanzania 120 29.6 0.9 3.1 163 Ethiopia 100 56.4 -0.5 2.6 164 Mozambique 80 16.2 3.6 1.8 Notes: n.a. = not available. *Only 164 countries for which data were reported to the World Bank are listed. †GNP/capita growth rates are real. Source: World Development Report, 1997 (Washington D.C.: World Bank, 1997). Pp. 6-7, 34-36.

20. Why Enter Foreign Markets? 2-20 • Improved communications • Greater revenue • Lower cost of goods sold • Higher overseas profits as an investment motive • Test market • Protect markets, profits and sales • protect domestic market • follow domestic accounts overseas • attack competitor’s markets • use foreign production to lower costs • in-bond plant concept (maquiladoras)

21. Why Enter Foreign Markets? 2-21 • Protect markets, profits and sales • protect foreign markets • growth triangles • lack of foreign exchange • local production by competitors • downstream markets • protectionism • guarantee supply of raw materials • acquire technology and management know-how • geographic diversification • satisfy management’s desire for expansion

22. How to Enter Foreign Markets 2-22 • Export • indirect • export goods and services through various types of home-based exporters • direct • export goods and services by the firm that produces them • Foreign manufacture • wholly owned subsidiary • start from the ground by building a new plant • acquire a going concern • purchase its distributor • joint venture • licensing • franchising • contract manufacturing • management contract

23. Investment Outlays and Number of Investments, 1985-1996 2-23 Figure 2.6 Investment Outlays ($ millions) Number of Investments Source: Survey of Current Business, June 1997, p. 45.

24. How to Enter Foreign Markets 2-24 • Joint venture • a corporate entity formed by an international company and local owners • corporate entity formed by two international companies for the purpose of doing business in a third market • corporate entity formed by a government agency and an international firm • a cooperative undertaking between tow or more firms of a limited-duration project • influence of strong nationalism • acquire expertise, tax, and other benefits

25. How to Enter Foreign Markets 2-25 • Licensing • grant the licensee the right to use any kind of expertise • licensee pays a fixed sum upon signing and then pays 2-5% of sales • Franchising • permits the franchisee to sell products or services under a highly publicized brand name • well-proven set of procedures and carefully marketing strategy • Alliances can be mergers and acquisition • Future of alliances

26. Multidomestic or Global Strategy 2-26 • World environment is changing • governments generally have liberalized the flows of capital, technology, people, and goods • improvements in information technology enable mangers to direct company activities in diverse areas over long distances • global competition has increased • forces companies to strive for better quality and lower-cost products • drives management to open new markets

27. Seven Global Dimensions 2-27 • 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