InternationaI Trade and InternationaI Trade and

Foreign Direct Investment Foreign Direct Investment

Chapter Two
McCraw-Hill/Irwin
Copyright 21 by 1he McCraw-Hill Companies, Inc. All rights reserved.
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Learning Objectives Learning Objectives
P Appreciate the magnitude of international trade
P dentify the direction of trade, or who trades with
whom
P Explain the patterns of worldwide foreign direct
investment
P dentify who invests and how much is invested in the
U.S.
P Understand the reasons for entering foreign markets
P Comprehend that an international firm
i. Globalizes along at least seven dimensions
ii. Can be global in some dimensions, partially global
in others
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Large Firms Lead Overseas Large Firms Lead Overseas
Investment, They AIso Export Investment, They AIso Export
P from Large American international firms is at
its highest level ever because of
P global competition
P liberalization by host governments in regard to
foreign investment
P advances in technology
P U.S. doubled from 2003 to 2006 reaching
$217 billion, even so.
P uring the ten years to 2007, U.S. exports
increased 76% to $1,646 billion
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Large Firms Invest Overseas, They AIso Export Large Firms Invest Overseas, They AIso Export
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Proportion of oreign Sales and Profits
of the World's Largest Multinationals
Source: Company annual reports; ortune magazines 2007 Global 500 listing of worldslargest companies,
http://money.cnn.com/magazines/fortune/global500/2007/full_list/ (July 4, 2008).
Rank:
ortune
Global
500
Company
oreign Sales
as Percentage
of Total Sales
ncome from
oreign Operations
as Percentage of
Net ncome
1 Wal-Mart Stores 24 22
2 Exxon Mobil NA 73
3 Royal utch Shell* 58 NA
4 BP 75 84
5 General Motors
#
43 NA
6 Toyota 77 37
7 Chevron 65 68
8 aimler 77 NA
9 Conoco Philips 33 25
10 Total 76 NA

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WorId Exports of Merchandise
(FOB VaIues; in BiIIions of Current U.S. DoIIars)
.
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Merchandise 1980 1990 2000 2007
Total world exports $2,001 $3,436 $6,427 $13,898
North America 294 522 1,058 1,854
Latin America 110 147 361 496
European Union 754 1,509 2,316 5,314
Russian ederation n.a. n.a. 106 355
Africa 121 104 147 422
Middle East 214 134 267 721
Asia 317 739 1,832 4,129
United States 226 394 781 1,163
China 18 62 249 1,218
Japan 130 288 479 713

Source: Monthly Bulletin of Statistics (New York: United Nations, June 1997, August 2000); orld Merchandise Exports by Region and Selected
Economy, 1980, 1985, 1990, 1995 and 19992001, WTO, Statistics ivision, www.wto.org/english/res_e/statis_e/statis_e.htm (June 30, 2002);
orld Exports of Commercial Services by Selected Region and Economy, 19802001, WTO, Statistics ivision,
www.wto.org/english/res_e/statis_e/statis_e.htm (June 5, 2002); and nternational Trade Statistics 2007, (Geneva: WTO, 2008),
http://www.wto.org/english/res_e/statis_e/its2007_e/its07_toc_e.htm (July 6, 2008).
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WorId Exports of CommerciaI Services
(FOB VaIues; in BiIIions of Current U.S. DoIIars)
.
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Source: Monthly Bulletin of Statistics (New York: United Nations, June 1997, August 2000); orld Merchandise Exports by Region and Selected
Economy, 1980, 1985, 1990, 1995 and 19992001, WTO, Statistics ivision, www.wto.org/english/res_e/statis_e/statis_e.htm (June 30, 2002);
orld Exports of Commercial Services by Selected Region and Economy, 19802001, WTO, Statistics ivision, www.wto.org (June 5, 2002); and
nternational Trade Statistics 2007, (Geneva: WTO, 2008), http://www.wto.org/english/res_e/statis_e/its2007_e/its07_toc_e.htm (July 6, 2008).
CommerciaI Services 1980 1990 2000 2007
Total world exports $364 $783 $1,476 $3,257
North America 45 151 316 533
Latin America 18 30 60 91
European Union 191 370 606 1,512
Russian ederation n.a. n.a. 10 38
Africa 12 19 30 84
Middle East 12 13 33 79
Asia 50 132 303 745
U.S. 38 133 277 454
China n.a. 6 30 127
Japan 19 41 68 136

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Distribution of WorId Manufacturing VaIue
Added by IndustriaI Sector (% share)
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ndustrialized
countries
eveloping countries
ndustrial Sector
1995 2000 2006 1995 2000 2006
15 - ood and beverages 67.8 66.6 60.3 30.5 31.6 37.3
16 - Tobacco products 44.2 37.0 24.5 55.3 62.1 74.7
17 - Textiles 53.0 48.6 36.1 45.8 50.3 62.6
18 - Wearing apparel, fur 71.0 61.6 41.2 28.2 37.3 57.5
21 - Paper and paper products 82.5 79.5 72.2 16.5 19.4 26.3
22 - Printing and publishing 89.4 89.2 85.0 10.4 10.5 14.5
23 - Coke, refined petroleum products, nuclear fuel 56.1 53.1 46.4 42.4 45.4 51.9
24 - Chemicals and chemical products 75.5 72.3 67.5 23.5 26.6 31.5
25 - Rubber and plastics products 73.3 70.8 61.8 26.0 28.5 37.3
26 - Non-metallic mineral products 67.3 66.6 60.1 30.5 31.6 37.3
27 - Basic metals 68.5 64.7 52.6 28.0 31.6 43.6
29 - Machinery and equipment n. e. c. 82.2 81.3 74.8 16.3 17.5 23.7
31 - Electrical machinery and apparatus 76.3 72.3 55.7 22.9 27.0 43.4
35 - Other transport equipment 71.0 65.8 48.4 27.0 32.4 50.2
36 - urniture; manufacturing n. e. c. 79.9 80.5 73.5 19.3 18.7 25.3

Source: UNO, SB 2008 statistical database, "World MVA Share of

Country Groups, http://www.unido.org/index.php?id=o3474 (July 7, 2008).
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Leading Exporters and Importers
in WorId Merchandise and Service
(BiIIions of doIIars and percentage)
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Source: World Trade Organization, nternational Trade Statistics 2007, (Geneva: World Trade Organization, 2007)
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Direction of Trade
(percentage of totaI merchandise exports)
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Exports from ear DE U.S. Can. Jap. Eur. DA D. Am CIS
eveloped 1980 71 19 4 10 43 5 6 3
economies (E) 2006 73 12 4 2 54 1 5 2
United States (U.S.) 1980 60 16 10 27 2 18 2
2006 52 22 6 22 1 21 1
Canada (Can.) 1980 85 63 6 13 1 5 3
2006 91 82 <1 7 <1 2 <1
Japan (Jap.) 1980 48 25 2 14 5 7 3
2005 42 23 1 15 1 4 1
Europe (Eur) 1980 77 6 1 1 56 7 3 4
2006 81 8 1 1 71 1 2 2
eveloping 1980 83 26 <1 2 46 3 6 3
Africa (A) 2006 61 27 2 4 28 13 4 <1
eveloping 1980 64 32 3 4 22 2 21 7
America (. Am.) 2006 67 48 2 2 14 1 20 2
ormer USSR 1980 28 1 <1 1 19 3 3 51
and E. Europe (CS) 2006 60 3 <1 1 55 <1 2 7

Source: Monthly Bulletin of Statistics (New York: United Nations, 2001, 2000, 1997, 1993); Statistical Yearbook (New York: United Nations,
1969); nternational TradeWorld Exports by Provenance and estination, http://unstats.un.org/unsd/mbs/t41-July05-online.pdf (July 14,
2006); and nternational TradeWorld Exports by Provenance and estination, Monthly Bulletin of Statistics, July 2007, Table 40.
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Why do Managers Focus on Why do Managers Focus on
Major Trading Partner Countries? Major Trading Partner Countries?
1. Export and import regulations are not
insurmountable
2. avorable business climate in the importing nation
3. Minimal cultural objections to buying that nation's
goods
4. Satisfactory transportation facilities already
established
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Why do Managers Focus on Why do Managers Focus on
Major Trading Partner Countries? Major Trading Partner Countries?
5. mport channel members (merchants, banks,
customs brokers) are experienced in handling the
exporting country's shipments
6. oreign exchange is available to pay for exports
7. The trading partner's government may be applying
pressure on importers to buy from the country's
good customer nations
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Imports from Major Trading Imports from Major Trading
Partners of the United States Partners of the United States
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Exports to Major Trading Exports to Major Trading
Partners of the United States Partners of the United States
Source: "U.S. Aggregate oreign Trade ata, 1999 and Prior Years, &S Foreign Trade Highlights, tables 10 and 11, U.S. epartment of Commerce nternational Trade Administration,
http://wwwitadocgov/td/industry/otea/usfth/tabconhtml "Table 11: Top 50 Suppliers of U.S. mports in 2004, U.S. epartment of Commerce nternational Trade Administration, www.ita.doc.gov/td/industry/otea/usfth/tabcon.html
(July 14, 2006); "Table 10: Top 50 Purchasers of U.S. Exports in 2004, U.S. epartment of Commerce nternational Trade Administration, www.ita.doc.gov/td/industry/otea/usfth/tabcon.html (July 14, 2006).
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Major Trade FIows Major Trade FIows
P Major trading flows are among developed nations
P Since 1990, trade flows among developed nations
and emerging nations (BRCs - Brazil, Russia, ndia,
China) have become important
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Two Aspects of Foreign Investment Two Aspects of Foreign Investment
P Portfolio investment
P The purchase of stocks and bonds of firms in other
countries to obtain a return on the funds invested
P oreign irect investment ()
P The purchase of sufficient equity in a firm located
in another country to obtain significant
management control
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Two Dimensions of Two Dimensions of
Foreign Direct Investment Foreign Direct Investment
P Volume of Outstanding Stock of
P The book value of all foreign direct investment
P Annual nflows and Outflows of
P The amount invested each year across national
borders
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Stocks of Outward Stocks of Outward
Foreign Direct Investment Foreign Direct Investment
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Foreign Direct Investment Foreign Direct Investment
OutfIows OutfIows
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Foreign Investment Foreign Investment
P Level and irection of
P Can only get an idea of the rate and amounts of
such investments and of the places in which they
are being made
P Trade Leads to
P oreign trade is typically less costly and less risky
than making a direct investment into foreign
markets
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U.S. FDI Position Abroad U.S. FDI Position Abroad
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ote: igures are based on current cost. 2002 figures are preliminary.
Source: Elena L. Nguyen, "The nternational nvestment Position of the United States at Year-End 2002, Survey of Current Business,
July 2003, pp. 2021;
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Foreign Direct Investment Foreign Direct Investment
in the U.S. in the U.S.
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Why Do Firms Enter Why Do Firms Enter
Foreign Markets? Foreign Markets?
P irms enter foreign markets to increase sales
and profits
P New sales from
P new customer base
P better managerial control through improved
communications technologies
P Obtain greater profits
P increased revenues
P lower cost of goods sold (maybe)
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Why Do Firms Enter Why Do Firms Enter
Foreign Markets? Foreign Markets?
P irms enter foreign markets to
P protect their domestic market
P attack in competitor's home market and force
competitor to dedicate resources there
P guarantee supply of raw materials
P acquire technology and management know-how
P diversify geographically
P follow customers overseas
P satisfy management's desire for expansion to a
particular country or region
P bypass protectionist regulations
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Dimensions AIong Which Dimensions AIong Which
Management GIobaIizes a Firm Management GIobaIizes a Firm
P Management globalizes a firm through
P products
P markets
P promotion
P where value is added to the product
P competitive strategy
P use of non-home-country personnel
P extent of global ownership in the firm
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