Transcript Chapter 2: International Trade and Foreign Direct Investment

International Trade and Direct
Foreign Investment
Chapter 2
International Trade

Volume of Trade




1990= $4 trillion
2003= $9 trillion
Where has it grown?
Top 10 countries produce:


56% of exports
63% of imports
International Trade

Where is trade going?


Developed countries  developed countries (75%)
Japan

Developing countries


U.S.

Developing countries


Lack of resources
Captive market
Australia and New Zealand

Shifting focus
International Trade

Changing Direction of Trade

Trade agreements
NAFTA’s effects
 World trade between agreement partners




1980= 37.3%
1990= 59.9%
1999= 70.7%
Why Focus on Major Trading
Partners?

Demonstrates








Business climate
Regulations
No strong cultural objections
Transportation
Intermediaries
Foreign exchange
Government
Asian imports
Foreign Investment

Two components

Portfolio investment
Less than 10%
 $2.86 trillion invested in U.S. stocks and bonds
from overseas


Direct investment

More than 10%
Foreign Investment

Volume

U.S.= $1.5 billion (largest in world)


Annual Outflows



Declining proportion (35.5% tp 21.9%)
US & EU= 80%
Developed countries
Annual Inflows


Developed countries Developed countries
Trends
Foreign Investment

Level and Direction


Trade Leads to FDI?


What does it tell you?
Exporting leads to investment
FDI Leads to Trade

Lower barriers, increased competition, new
production and communication technology
U.S. Foreign Investment


Investment Abroad

Increasing areas

Decreasing areas
Investment in the U.S.


Where is it coming from?
More invested in U.S. than U.S. is investing abroad
U.S. Foreign Investment

What is being purchased in U.S.?

Existing companies
Assets are for sale
 Fast access to technology
 Known brand
 Competitive pressures

Why Enter Foreign Markets?

Increased Profits and Sales

Enter new markets

New market creation


Preferential Trading Arrangements


Larger markets
Faster-Growing Markets



GDP per capita
Consumer support
Government support
Improved Communications


Easier to oversee
Supplement work done domestically
Why Enter Foreign Markets?

Obtain greater profits
Greater revenue
 Reduced costs





Spread out fixed costs
Economies of scale
Higher profits
Test markets
Why Enter Foreign Markets?

Protect Markets, Profits, and Sales

Protect domestic market

Follow customers overseas


Follow main accounts
Attack competitors’ home markets

Using foreign production to lower costs




In-bond industry (maquiladora)
 Impact
Caribbean Basin Initiative
Growth Triangles
Export Processing Zones
Why Enter Foreign Markets?

Protect Foreign Markets








Lack of foreign exchange
Local production by competitors
Downstream markets
Protectionism
Guarantee supply of raw materials
Acquire technology and management experience
Geographic diversification
Satisfy management’s desire
Multidomestic or Global?



Usual flow for exporting and investment
Why more standardization?
Seven dimensions







Product
Market
Promotion
Where value added
Competitive strategy
Use of non-home country personnel
Extent of global ownership