international trade and foreign investment - chapter 02 (1)

7/24/2019 International Trade and Foreign Investment - Chapter 02 (1)

1/46

Chapter 2

Internationa!

Trade and

ForeignInvestment

Exporting isn't always possible ...

Usually our approach has been to begin with di-

rect export of goods and services. With the EC,

we began with direct investment. ECrestrictions

are very efficient at controlling trade.

Kim Song Whan. international

finance director, Lucky-Goldstar(a Korean conglomerate ranked

32nd in the Fortune International

500 with sales of $14 billion)

Everything here is so cheap!

Japanese real estate agenr visiting

Manhanan

L E A R N I N G O B J E C T I V E S

In th is chapter . you wi l l s tudy :

1. The magn itude o f i n te rnat iona l t rade and how i t hasgrown.

2 . The d irec tion o f trade (who t rades w i th whoml .

3. The value of analyzing t rade statistics.

4 . The s ize , g rowth. and d i rec tion o f U.S . f o re ign d i rec t

investment.

5 . Who invests and how much i s invested in the Un i ted

States.

6 . The reasons fo r go ing abroad.

7 . The weaknesses in using G N P /ca ~ ita as a bas is f o r

comparing economies.8 . The in te rnat iona l market en t ry methods.

9. The importance of international l icensing.

10 . The many fo rms o f s t ra teg ic a l li ances.


2/46


3/46

:E Y W O R D S A N D C O N CE P TS

Port fol io investment

Direct investment

Preferent ia l t rading arrangement

In-bond plants (maqui ladorasl

Indirect export ing

Direct export ing

Sa les company

Joint venture

Management contrac t

Licensing

Franchising

Contract manufacturing

Strategic al l iances

B U S I N E S S IN C I D EN T

Internat ional f irms both export and invest overseas.

The expor t mach ine i s s ti ll chugg ing a long. A f te r a 21

percent jump in 1988 and a 14 percent ga in in 1989, an 8

percent i ncrease in sh ipments abroad by Amer ica 's t op 50

exporte rs in 1990 may look s lugg ish . But U.S . compan ies

scored an impor tan t v ic tory last year , mov ing the coun-

t ry 's merchandise t rade def ic i t (excluding oi ll to a four-

year low. And fo r those who fear t hat t he Un i ted S tates

is los ing ou t i n the wor ld t echno logy marke t, t he good

news i s t hat t he techno logy component o f American ex-

ports accounted for 47 percent of al l 'merchandise exports

as compared to on ly 43 percent i n 19B7,

Foreign investments are also signi f icant for 32 of t hese compan ies . The percentages o f f o re ign to t o ta l as-

se ts ranged f rom 58.8 percent f o r Exxon to 10 .9 percent

fo r General E lec tr ic , w i th 31 percent be ing the average

for a ll 32 f i rms. Every one o f t h is g roup a t ta ined sa les o f

a t l east $2 b il li on f rom overseas opera t ions in 1990. The

percentages o f f o re ign sa les to t o ta l sa les ranged f rom

74.6 percent for Exxon to 12.1 percent for Chrysler, wi th

an average fo r t he group o f 42 percent . A l l sa les are to

unrelated f i rms: intergeographic sales between af fi liates

are not included,

Tab le 2 -1 l is t s t he vo lumes o f export s and fo reign

sa les fo r t he 32 compan ies tha t a re among the top 50

exporters and also have sizable foreign operat ions. To see


4/46

34 S e c ti o n O n e I.T h e N a t u re o f I n t er n a ti o n al B u s i ne s s

o T AB LE 2 -1 E xp or ts a nd F or eig n S ale s o f T op 5 0 U .S . Ex po rte rs 1 $ billions)

Foreign Exports +Sales Foreign Sales

R a n k i n F o r e i g n R a nk i n Total R ank in Exports

T otal To ta lCompany U.S. Exports Fo rt u ne 5 0 Sales Fo rb e s 1 0 0 Sales Fo rt u ne 5 00 Sales Sales Sales

General M otors $10.31 2 $37.74 3 $126.02 1 8.2% 29.9% 38.1%

General Electric 7.13 3 8 .27 14 58.41 6 12.2 14.2 26.4

Ford 7.10 4 35.88 4 98.27 3 7.2 36.5 43.7

IBM 6.20 5 41.89 2 69.02 4 9.0 60.7 69.7

Chrysler 5.00 6 3 .73 42 30.87 11 16.2 12.1 28.3

D uPon t 4.35 7 17.41 8 39.84 9 10.9 43.7 54.6

United Tech. 3.61 8 7.84 18 21.78 1 7 16.6 36.0 52.6

Caterpillar 3.44 10 3.08 51 11.54 39 29.8 26.7 56.5

Eas tman Ko d ak 2 .96 11 8.25 15 19.08 20 15.5 43.2 58.7

Phi l ip Morr is 2 .93 12 10.47 10 44.32 7 6.6 23.6 30.2

Hewlen.Packard 2 .82 13 7.21 19 13.23 29 21.3 54.5 75.8

M otoro la 2 .80 14 5.90 24 10.89 42 25.7 54.2 79.9

Unisys 2.20 15 5.24 28 10.11 49 21.8 55.8 73.6

Digital Equip. 1.92 17 7.12 20 13.08 30 14.7 54.4 69.1

Al l i ed Signa l 1.84 18 2 .95 56 12.40 36 14.8 23.8 38.6

Do w C he mi ca l 1.34 22 10.28 11 20.01 18 6 .7 51.4 58.1

Uni on C arb id e 1.28 2 3 2 .78 61 7 .62 23 16.8 36.5 53.3

M inn. M ining 1.20 25 6 .22 23 13.02 3 1 9 .2 47.8 57.0& Mfg.

Merck 1.16 28 3 .63 44 7 .82 63 14.8 46.4 61.2

C o mp aq C o mp u te r 1.12 29 1.94 93 3 .63 1 36 30.9 53.4 84.3

Exxon 1 .10 32 79.02 1 105.89 2 1. 0 74.6 75.6

International 1 .10 33 3 .04 54 12.96 32 8.5 23.5 32.0Paper

Monsanto 1.08 3 5 3.31 50 9 .05 5 3 11.9 36.6 48.5

A l um . Co . o f 0 .93 36 4.33 34 10.87 43 8.5 39.8 48.3Amer.

Xerox 0 .90 37 8.11 17 18.38 22 4.9 44.1 49.0

Aockwelllnt ' l . 0.84 40 2.41 68 12.44 35 6.7 19.4 26.1

Ab b o tt l a b. 0 .81 41 2.25 75 6.21 82 13.1 36.2 49.3

Deere 0 .76 42 2.00 90 7.88 62 9.6 25.4 35.0

Honeywell 0.75 43 2 .01 89 6.99 69 10.7 28.8 39.5

Amoco 0.74 44 8.03 16 28.28 12 2 .6 29.1 31.7

Bris tol-Meyer 0.74 4 5 4 .42 33 10.51 46 7 .1 42.1 49.2Squibb

Tenneco 0.71 46 4.53 31 1489 26 4 .8 30.4 35.2

fortune 50 ~ America's 50 B ig g es t Ex p on e ls I mm For tune.

~orbes 100 "" Th e 10 0 l a rges t U.S. Mul tina t iona l s I rom F o r bes

fOHune 5 0 0 " " FOftune 50 0 la rycst Indust r i al COIpora tions f rom For tune.

S o u rce : " Ex po r ts : S h i p 1m Out : For tune, Spri l19-Summm 1991. pp , 58-59; a n d ~The 10 0 l a rges t U.S Mul t inat ional s : F o r bes , J ul y 2 2 . 1991, p p 2 8 6 -8 8


5/46

C h a p t e r 2 I I n t er n a t i o n al T r a d e a n d F o r ei g n I n v e s tm e n t 3 5

l U S IN E S S I N C ID E N T (concludedl

he importance o f in te rna tiona l t rade and fo re ign invest -

nen t fo r these f i rms . examine the las t co lumn. wh ich

haws the percen tages o f expor t sa les and fo re ign sa les

a t h e ir t ot a l s a le s . N o t e t ha t C o m p a q C o m p u te r d e p e n d s

, n th e m f o r 8 4 p e r c e nt o f a l l i t s s a le s . a n d 1 9 o f a l l 3 2

ompan ies (59 percen t l de r ive a t l eas t ha l f the i r sa les

f rom in te rna tiona l bus iness . W i thou t i t. many cou ld no t

s u r v i v e .

Sou r c es : " Ex por t s : Sh i p 'Em O u t : F o rtu n e, S p r i n g -S u m m e r 1 9 91 , p . 5 8 ; a n d

.U.S. Cor po r a t i ons w i t h t he B i gges t Fo r e i gn R ev enu es , " F o rb es , J u l y ' 1 1 ,1 9 9 1 , P O 186-88

The Business Incident illustrates the importance of both aspects of interna.

tional business-exporting and overseas production-to many of the

major U.S. corporations. However, these international business activities are

not confined to manufacturing firms. Of the Forbes 100 largest U.S. multina-

tionals, 26 are service companies in banking, finance, construction, insurance,

entertainment, transportation, and retailing. Smaller firms also have overseas

operations. According (Q a study by the United Nations Centre on Transna.

tiona ICorporations, "in most home countries, SI11


6/46

36 Sec t i on O ne I T h e N a t u r e o f I n t e rn a t io n a l B u s i n e s s

o TABLE 2-2A v e rag e A n n ua lWorld Trade in 1960 1910 1980 19116 1990 Percentage Increase

Merchandise Exports (FOBTo ta l wor ld export s $128 $314 $2 ,003 $2,111 $3 ,382 11 .3%values; in bi ll ions of

currenl U,S, dollarsl Deve loped count ries 86 225 1 ,268 1,411 2,444 11.8

W est Germant 12 35 19 3 24 6 41 1 12.5

United States 20 43 221 206 394 10.4

Japan 4 19 129 209 281 15.3

France 1 1 8 111 119 210 12 .0

Great Br i tain 10 19 110 101 18 6 10.2

Italy 4 13 18 9 8 169 13.3

Devel opi ng coun tr i esb 21 56 213 422 161 11 .8

OP E C n .e. 18 301 115 151 7. S k

Cent ra lly p lanned

economies

E ur ope and U . S .S . R. 13 31 151 190 11 2 1. 1

U.S.S.R. 6 13 16 91 105 10.0

E C 30 0 88 0 66 2d 790- .1 1.342 13.5

E F T A 18 ' 51 ' 117 ' 1 33 1 22 6 8. 8

L A I A 9 13 81 11 10 1 8. 6

Notes ' n.e. = Nonexistent

E C = Eu ropean Com m un i t v .

E F T A = E u r o pe a n F r e e T r a de A s s o c ia t io n .

LAIA = lat in American Integrat ion Asso ciat ion l Io rm e r ly LAnAI .

- I nc lu d e s e xp or ts t o E a s t G e r ma n y

bDefined b y the Wor ld Bank as low- and middle. level income nat ions as indicated by GNP/capita

'Or ig inal6 members only (Belg ium. luxembourg. FIance. West Germany, Ita ly. and the Nether lands).

"Includes original 6 plus Denmark., Ireland. and Great Britain.

-And beyond inc ludes Greece

lAnd beyond inc ludes Spain and Por tugal.

~f ig inal 7 members !Aust r ia, Denmark. Norway. Por tugal. Sweden, Great Br i ta in, and Sw itzer landl

~lncludes Finland as associate member.

' Inc ludes Iceland and exc ludes Great Br i ta in and Denmark

'And beyond exc ludes Por tugaL

kForyears 1970 through 1990.

Sources: United N ations, Monthly Bulletin of Statistics, June 1991, pp . 90-11', and var ious ear t ier issues

o TABLE 2-3

1990/1960 Export Ratios

Based on Current Dollars

and Quantum Indexes

To ta l wor ld export s

Deve loped coun tr ies

W es t G erm any

United States

Japan

France

Great Br i ta in

Italy

Deve lop ing count ries

E C

E F T A

Current Dollars (1990/1960)

26.4 t imes

28.4

34.3

19.1

143.1

30.0

18.6

42.3

26 .011989)

44.1

12.6

Quantum Indexes (1990/1960

5.1 t imes6.3

1. 3

4. 4

18.1

6 . 4

3 .9

9. 1

3 .6119891

6. 5

5. 2

Sources: United Nat ions. Monthly Bulletin of S wtislics, Junrl 1991.I I 2S 8 . Auyus t 1991, P D. 124-54: and var iou

carlier issllcs


7/46

C h a p t er 2 / I n t er n a ti o o a l T r a d e an d F o r e i g n In v e s t m e n t 3 7

is only half the 1980 value. Much of the Ee's increase has come from theadmission of six new members, and the relatively low growth rate of EtTA's

exports is the result of losing Denmark, Great Britain, and Portugal to the

EC. While the exports of the developing nations as a whole are at the world

average, those of the Latin American nations (LAIA) are growing at a much

slower pace. Note also that the dollar valucs of the exports of the former

communist nations of Central Europe were actually one third lower in 1990(U.S.S.R. exports were higher) than they were in 1980.

The quintupling of world exports in only 30 years indicates that opportu-

nities to export continue to grow, but the export growth of individual nations

signifies increasing competition from imports in domestic markets. Figure

2-1 shows somc of the American industries in which this has occurred. For

example, U.S. exports of motor vehicles and car bodies increased by $3.7 bil-lion from 1989 to 1990, but imports increased by $6.8 billion. In other

words, even though the volume of American exports of these products in-

creased from 1989 to 1990, so did the deficit in this account. Note, however,

that the aerospace and aircraft industries continue to export far more than

they import.

o Direction of Trade

What are the destinations of these $4 trillion in exports? If you have never

examined trade nows, you may believe that international trade consists

mainly of industrialized nations exporting manufactured goods to developingnations in return for raw materials. However, Table 2-4 shows that this is

not so. Over three fourths of industrialized nations' trade is with each other.Note, though, that the major part (62.5 percent) of developing countries' ex-

ports do go to industrialized countries. The main exceptions to this generality

have been (1) japan, (2) the United States, and (3) Central Europe and theSoviet Union.

japan and the United States. japan, being entirely dependent on foreign

sources for raw materials, must import to survive. In fact, until the 1980s,

japan behaved more like a resource-poor developing nation than a rich one.

It imported raw materials, processed them, and exported the finished prod-

ucts. The distribution system for imports, dominated by large, well-estab-

lished general trading companies, was designed to provide industry with the

raw materials and components it needed and to secure outlets for its produc-

tion. As other industrialized nations have imposed import restrictions on Jap-anese exports to protect their home industries, Japanese trading companies

have increased their efforts to sell to developing nations.' Table 2-4 shows

their efforts have succeeded, although long-term indications are that they areshifting their attention back to the industrialized nations. While the devel-

oped countries as a whole sent 77.4 percent of their exports to other devel-oped countries (DC) and only 19.3 percent to less developed nations (LDe),

japan sent 59.3 percent of its exports to the DCs and 39.5 percent was soldto LDCs.

The United States also exported a smaller proportion to DCs and more to

the developing nations than did developed countries generally, but for some-

\...hat different reasons than Japan. American firms have significantly more


8/46


9/46

(p o r ts h av e fu e led J ap an 's

'p id ec o n o m ic g ro w th . Th is

jS r es u l ted in a tr em en d o u s

'o w th in J ap an 's m a jo r

t ies . s u c h as To k y o .

C h a p t e r 2 I International T ra d e an d Fo r ei g n In v e st m e n t 3 9

Co u r t e s y 01 J ap an Na t io n a l To u r i s t O r g an i za t io n

subsidiaries in developing nations than japanese companies do; these subsid-

iaries are captive customers for their American owners. In addition, some

buyers in Southeast Asian countries, remembering that japan \\'as an aggres-sor nation, prefer to buy from American firms. Notice, also, the high percent-

age of American exports that go to Latin America. The United States exports

to Latin America as much as all of the Latin American nations do to each

other.

Central Europe and the U.S.S.R. With the exception of 1990, the data in

Table 2-4 are from when these nations had communist governments that, as

a group, attempted to be as self-sufficient as possible, trading with the West

only for goods and services unavailable in the East. Even this trade was some-

what restricted because of their lack of foreign exchange. The communist

bloc was simply unable to produce the kinds and quality of goods that West-

ern nations were \\'illing to pay for.

Now that these countries arc establishing market economies with closerties to Western Europe, we can expect to see greater trade with the developed

nations.

The changing direction of ,rade. The percentages in Table 2-4 also indi-

cate how the direction of trade changes. In 1980, only 47.5 percent of Ja-pan's exports went to ,he developed countries "hile ,he LDCs received 45.4

percent. B y 1990,59 percent (25 percent increase) of its exports went to DCs

and only 39.5 percent to LDCs. Note, however, that japan exported more to

all categories of developed nations and less to developing nations in Africa

and Latin America ,han did the developed nations generally. The large na-

tional debts that many of the developing countries incurred while the indus-

trial economics were expanding were a salient factor.


10/46

o T A B L E 2- 4 Direction of Trade for Selected Regions and Countries (Percentage of region's or country"s total

merchandise exports to regions or country in columns)

E x p o rt s t o

Exports from Year D C U.S . Can. J.p. U.S .S .R. E C E FT A LO C D A D .A m . O P E C C P E

Deve loped 1960 70.5% 10.3% 5 .7% 2.9% 1 .2% 24 .4% 18 .8% 25 .5% 6.2% 11 .0% o.e . 2.9~

countr ies 1970 76.9 12.8 5 .1 3 .9 5. 2 39 .5 9 .4 18.7 4 .1 8 .3 3 .4% 3. 1

( D C I 1980 71.2 9. 7 3 .4 3 .2 1. 9 41 .1 9 .0 23.3 5. 2 6. 0 7. 9 3. 6

1990 77 .4 12 .6 4 .1 4. 2 1. 1 4 6 .1 7 .9 19.3 2 .3 3 .8 3 .3 2. 1

U ni ted States 19 60 6 3.8 18 .3 7 .1 0 .2 19 .3 11 .9 34.7 2.4 17 .4 R .e. 1. 0

IU.S.1 1970 69.5 20 .7 1 0 .8 0 .3 26.6 4 .0 29.6 2 .3 15 .2 4.8 0. 8

1980 59.8 15 .7 9 .5 0. 7 2 4.8 3 .7 36 .2 2 .9 17 .6 8 .1 1. 8

1990 64.7 20.9 12.3 0. 8 26 .8 2.8 34.0 1 .6 14.0 3 .6 1. 1

C a n a da I C a n. ) 1960 91.7 56.6 3. 3 0.2 8 .2 19.5 7 .6 0.5 3.5 o.e . 0. 7

1970 90.7 65 .4 4. 7 0. 6 16 .4 1 .8 7 .4 0. 7 U 1. 1 0. 8

1 98 0 85 .2 63.4 5. 7 2. 0 1 2 .8 1 .5 10 .5 1 .4 5 .1 2 .9 2.7

1 99 0 91 .1 75 .0 5. 5 0. 8 8 .1 1 .5 8.0 0 .7 1 .8 1 .3 0.9

J'p.n (J.p.1 1960 47 .7 27 .4 3 .0 1. 5 4. 3 5 .7 50 .6 6 .6 6 .8 n .e . 1. 6

1970 54 .6 31 .1 2. 9 1. 8 11.2 3 .0 40 .0 5 .6 5 .8 5 .1 2. 3

1980 47 .5 24 .5 1.9 2. 1 1 3.2 2 .7 45 .4 4 .6 6 .6 14 .2 2. 8

1 99 0 5 9.3 31 .7 2 .3 0. 9 1 8.8 2 .9 39 .5 1. 3 3. 4 4. 7 1. 2

U.S.S .R. 1960 19 .2 0 .4 0 .1 1 .4 6 .7 6.2 6 .6 1 .8 1 .8 n.e. 56.1

1970 21 .2 0.5 0 .1 3 .0 10 .8 4.2 21 .0 4.5 5 .1 2 .9 52.8

1980 36 .1 0.3 neg. 1. 9 22 .6 7 .1 25 .8 1 .8 4. 8 2. 3 42.2

1990 36.0 0.9 0.1 2. 4 27 .1 5 .5 30 .0 2 .7 6 .1 1 .2 34.0

European 1 96 0 7 1.9 7.5 1 .0 0. 7 1. 4 34 .5 21.7 22 .4 9 .8 5 .2 o.e . 4. 1

Com m unity 1 97 0 8 0.5 8.1 1 .3 1. 2 1. 2 4 8.9 16 .8 14.0 4 .9 3 .9 3 .4 4.0

(EC) " 1980 77 .7 5 .6 0 .7 1. 0 1. 6 53 .6 11 .9 17 .6 6 .5 3 .0 7 .8 3. 5

1990 83.1 12 .7 0 .9 2 .1 1. 0 60.7 1 0 .3 12.7 2 .8 1. 7 3. 2 2. 2

European 1 96 0 7 1.3 8.7 3 .7 0. 7 1. 2 2 4.1 21 .9 24 .6 6 .7 4 .9 n,e. 3. 5

Free Trade 1970 82.2 6 .6 1 .3 1 .3 2. 8 26.4 26 .4 10 .8 3 .5 3 .6 1 .8 6. 6

Association 1 98 0 7 9.6 4.9 0 .7 ~.3 3 .4 53 .1 15 .3 13 .3 3 .6 2.9 5 .0 6. 6

(EFTA)1 1 99 0 83 .6 6.8 1 .3 2.6 4 .9 57 .6 13 .4 10 .9 1.3 1 .6 2.3 4. 9

Less developed 1960 72 .3 10 .3 1 .8 5. 1 1. 9 2 2 .8 16.2 22 .3 3 .2 3.9 n.e. 3. 5

countries 1970 72 .4 18 .4 1 .8 10 .8 3. 1 2 2 .9 3.0 20 .2 2.8 6.7 1. 9 5. 1

( L O C I 1 98 0 70 .2 20.5 1 .3 14 .0 1 .7 27 .1 2 .7 24.9 2. 4 8 .0 3 .7 2 .9

1990 62.5 22.6 1. 5 12.9 2 .6 21 .8 1 .9 32 .5 2.2 4.2 3 .6 3. 9

D evelop ing 1960 79 .2 7 .9 0 .4 1 .5 2. 7 43 .8 21.7 12 .8 6. 6 0. 7 n .e . 5. 7

Afr ic . IDAI 1970 81.1 6.7 0 .7 4.0 4. 1 6 1 .4 4 .3 10 .7 5 .6 2 .0 1. 2 6. 5

(South Africa 1 98 0 8 3.6 31 .1 0 .2 2. 1 0 .8 42 .8 2 .9 12 .6 3 .1 6 .4 1.1 2 .E

and Zimbabwe 1990 79 .7 15 .5 0.5 2. 3 2 .1 59 .0 1 .5 14 .8 6 .2 1.6 2 .4 4. ,

excluded)

Developing 1 96 0 7 8.9 42.1 1. 7 2. 8 1 .6 18 .5 11 .8 18 .0 0 .7 7 .9 n.e. 3. 1

Am erica 1970 74.2 32 .4 3 .4 5 .4 3 .5 26 .3 3 .3 19 .1 0 .7 17 .3 0. 9 5. 1

10 . Am' ! IU.S . 1980 64 .6 32.2 2. 6 4. 2 4. 8 1 8 .9 2 .3 26 .5 2 .2 21.4 3. 3 6.!

& Can. 1990 70.2 38.1 1 .5 5 .6 4. 4 22.4 1 .5 21 .1 1.0 14 .0 2 .6 6 .1

excludedl

O rg an iz atio n o f 1 96 0 o.e. n.e. n,e. n.e. n.e. n,e. n.e. n .e . n,e. n.e. n .e . n.

Petroleum 1 970 7 5.3 9. 7 2 .5 12.2 0. 9 43 .5 2 .0 19.3 2 .3 9 .1 0 .7 1. 1Export ing 1 980 7 5.8 18.4 1 .5 17 .3 0. 3 3 0 .8 3 .1 22 .2 1. 4 8. 5 1. 3 I.:Countr ies 1990 72.6 19.1 1. 5 22.2 0 .6 2 7 .1 1.8 24 .9 2 .3 6 .1 2 .5 1. ;

(DPECI I

C e n tr a l E u r op e \960 19 .4 06 0.1 0 .2 17 .1 7 .2 6.8 6 .5 1.9 1. 8 n.e. 62. :

an d U . S . S .R . 1970 23 .0 0.7 0. 2 1. 5 21 .7 12 .7 4 .6 13 .2 3 .3 3.1 2 .9 60 .:

(CPEI I I 1 98 0 31 .1 0. 9 0 .2 1 .1 1 7 .4 18 .7 6.5 14 .9 2.8 3. 3 3 .2 50:

1990 38 .5 1.3 0 .2 1. 8 1 1 .6 28 .2 5 .8 22 .7 2.4 4 .2 1. 7 38. :----- ---._--

N o te : n ,e . = Nonexisten t .ne g = Negligible .

1960 data include D enm ark. G lCat Br i ta in . and I re land Gleece , Spa in . and Po l tugal aTe included in 1 990 data

tExc lud e s De n m a rk an d G Te a tBT i la in an d i n c lud e s I ce land i n 1 9 6 0

10P EC includes A lgcf la. E cuadOl .G abon, Indonesia. I ran . I raq . Kuwai t l ibya, N iger ia. Oatar . Saud i Arab ia. Un i ted Arab Em i rates. and Venezue la

I1lnclude~Alban ia. Bu lgal ia. C zechoslovakia. East Germ any, Hungary. Po land . Rom an ia. and U.S,S A

Sources' Monfhly Bulletin of Sfar ist ies {N e w Y o rk : U n i l e d N a t ion s , Ju n e 19 9 1) . p p , 2 5 0-5 4 . an d S to lf i ,wea l Y earbook , 19 6 9 ( N e w Y o rk : U n i te d N a t ion sJ .

376-83


11/46

C h a p t e r 2 I In t e rn a t io n a l T r a d e a n d F o r ei g n In v e S lm e n t 4 1

Another interesting observation is that the LDCs as a group are selling asmaller percentage of their exports to the DCs-with the exception of the

United States and the centrally planned economies- bur morc to each other.

This is due in part to their increasing ability to export manufactured goods.

Their scarcity of convertible currency is also a factor.

o Major Trading Partners

An analysis of the major trading partners of the firm's home country and

those of the nations where it has affiliates that export can provide valuable

insights to management.

Why focus on major trading partners? There are a number of advantages in

focusing attention on a nation that is already a sizable purchaser of goodscoming from the would-be exporter's country:

1. Business climate in importing nation is relatively favorable.

2. Export and import regulations are not insurmountable.

3. There should be no strong cultural objections to buying that nation's

goods.

4. Satisfactory transportation facilities have already been esrablished.

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 thatnation's exports. \Vle have seen the efforts of the Japanese, Korean,

and Taiwanese governments to persuade their citizens to buy more

American goods. They have also sent buying missions to the UnitedStates.

Major trading partners of the United States. Table 2-5 shows the major

trading partners of the United States, The data indicate that the United States,

an industrialized nation, generally follows the tendency we found in Table

2-4; that is, developed nations trade with one another. 1v1exico and Canada

are major trading partners in great part because they share a common border

with the United States. Freight charges are lower, delivery times are shorter,

and contact between bu)'crs and sellers is easier and less expensive.

Canada's importance as a trading partner is becoming even greater as a

result of the U.S.-Canada Free Trade Agreement, which went into effect in

1989. Although 75 percent of the $170 billion in trade between the partners

is already duty free, the progressive removal of import duties from the re-

maining 25 percent (to be finished by January 1998) will further increase

cross-border trade.' Mexico's trade with the United States has reached $60

billion ($34 billion in 1987) after Mexico drastically reduced its import du-

ties at the end of 1987. l\1exico is now negotiating to become a member of

the U.S.-Canada Free Trade Agreement.

Note that in just two decades, there as been a marked change in the rank-

ing of America's trading partners. Not only have the r;]qkings changed, but

nations have been added while others have become relatively less importallt.

The newly industrializing nations of Korea, Taiwan, and Singapore < lrc


12/46


13/46

C h a p t e r 2 I International T ra d e a n d F o re ig n In v e st m e n t 4 3

of Commerce publication, the FT

925, details the quantities, dollar values,and destinations of specific products. We shall discuss this in greatcr detail in

Chapter 14.

The topic that we have been examining, international trade, exists because

firms export. As you know, however, exporting is only one aspect of interna~

tional business. The other, overseas production, generally requires foreign in-

vestment, our next subject of discussion.

FOREIGN INVESTMENT

p o r tf o li o i n ve s tm e n t t h e

p u r c h a s e o f s t o c k s a n d b o n d s

t o o b t ai n a r e tu r n o n t h e

f u n d s i n v e s t e d

d i re c t i n ve s tm e n t t h e

p u r c h a s e o f s u f f i c i en t s t o c k i n

a f i r m t o o b t a i n s i g n i fi c a n t

m a n a g e m e n t co n t r o l

Foreign investment may be divided into two components: portfolio invest-

ment, which is the purchase of stocks and bonds solely for the purpose of

obtaining a return on the funds invested, and direct investment, by which theinvestors participate in the management of the firm in addition to receiving a

return on their money.

o Portfolio Investment

Although portfolio investors are not directly concerned with control of a

firm, they invest immense amounts in stocks and bonds from other countries.

Dara from the U.S. Department of Commerce show that persons residing our-

side the United States hold American stocks and bonds valued at $475 billion

($231 billion in stocks).' Of this, 63 percent is owned by European residents,

13 percent by japanese residents, and 9 percent by Canadian residents!

American residents, on the other hand, own $222 billion in foreign securities,

of which $93 billion is in corporate stocks" As you can see, foreign portfolioinvestment is sizable and will continue to grow as more companies list their

bonds and equities on foreign exchanges.

o Foreign Direct Investment

Volume. Attempts bave been made to estimate the rotal book value of for-

eign direct investment by summing yearly totals of new investments, but this

procedure understates the present value because of the effects of appreciation

and inflation.

In Chapter 1, we stated that the book value of all foreign investments is

about $1,200 billion. Table 2-6 indicates how this toral is divided among

the largest investor nations. Note that the United States has almost double

the foreign direct investment of the next largest, the United Kingdom, whichin turn has invested 24 percent more than japan, the third largest. japan,

however, experienced the greatest percentage increase from 1983 to 1989.

Although, in dollar terms, japan's foreign direct investment increased by

480 percent, it cost japanese investors much less in japanese currency be-

cause by 1989 the yen was worth nearly twice as much in U.S. dollars as in

1983.

F D I F D I

Y en /U S I S b ill io ns l ( ye n b ill io ns ) 1 98 9/ 19 83

1 9 8 3

1 9 8 9

237.52

137.96

32.2

154 .4

7.64 8

21 .30 1 2 .78 5 = 279%


14/46

44 S e c t i o n O n e I T h e N a t u r e o f I n te r n a ti o n a l B u s i n e s s

o TA BLE 2-61989 1983

D irec t OverseasI nv es tm e nt ( 19 83 a n d 1 9 89

Amoun t Share Amount Share

i n c u rr en t d o ll ar slIUSS bi l l ions) (percent) IUSS bi l lionsl (percent)

U nited Sta tes $ 373.4 19.6% $116.1 43.9%

Uni ted Kingdom 191.9 15.1 91 .1 17.7

Japan 154.4 11.1 31 .1 6.1

Germany 111.6 8. 9 37.3 7. 1

Net he rla nd s 88 .1 7.0 33 .3 6.5

France 55 .9 4.4 111.6 4.1

C a n a d a 63 .9 5.1 21.0 4.3

Other 111.3 17 .6~

10.0-.--

World t o ta l SI,161.6 100.0% S515.1 100,0%

Sources: J a p a n 1992: A n In t e rna t iona l C om par i son !Tokyo: Japan Institute for Social and Econom ic Affairs. December20, 19911. p. 58: and Japan . 1985. p . 58 .

Direction. Even though it is impossible to make an accurate determinationof the present value of foreign investments, we can get an idea of the rate and

amounts of such investments and of the places in which they are being made,

This is the kind of information that interests managers and government lead.

ers, It is analogous to what is sought in the analysis of international ttade, II

a nation is continuing to receive appreciable amounts of foreign investment.

its investment climate must be favorable, This means that the political force,

of the foreign environment are relatively attractive and that the opportunit}

to earn a profit is greater there than elsewhere. Other reasons for investin~exist, to be sure, but if the above are absent, foreign investment is not likel}

to occur.

In which countries are investments being made, and where do the invest.

ments come from? Table 2-7 indicates that the industrialized nations inves

primarily in one another just as they trade more with one another.

Actually, foreign investment follows foreign trade. Managements observ.

that the kinds of products they mauufacture are being imported in sizabl.

quantities by a country, and they begin to study the feasibility of setting U l

production facilities there. They are spurred to action because it is comm01

knowledge that competitors are making similar analyses and may arrive a

the same conclusion, Often the local market is not large enough to suppor

local production of all the firms exporting to it, and the situation become

one of seeing who can become established first. Experienced managers kno\\"too, that governments often limit the number of local firms producing a givel

product so that those who do set up operations will be assured of having

profitable and continuing business.

o U.S. Foreign Direct Investment

The United States is by far the largest investor abroad (abuut one third of tho

total; see Table 2-6), and as you can see from Table 2-X, American firm

have invested much more in the developed than in the developing countrie~

Also, as with international traue, the relative importance of regions ani

countries has been changing. In a period of 30 years, the percentage of Amer


15/46

Chap te r 2 II n te r na ti o na l T r a de a nd F o r ei g n I n ve s tm e n t 4 5

J TABLE 2-71973 1979 1989D i re ct io n o f F o re ig n D i re ct

-----_.- _ .

----

_.-

I nye s tm en t f o r Se l e c ted W h er e f u nd s o ri gi na te ( ne t i nv es tm e nt )

R e gi on s a nd C o un tr ie s W o n d S23.44 S 48 .37 SI90.33"

.Cur r en t US$ b i ll i ons} Indus tr i a l na t ions 23.13 48.08 188.29

United Sta tes 11.53 24.84 31.73

Uni ted K ingdom 4.01 5.91 31.96

Japan 1.92 2.95 44.16

Ge rmany 1.69 4.73 13.55

France 0.94 2.07 19.05

N et he rl an ds 0.93 2.35 10. t6

Canada 0.77 1.89 3.66

Be lg ium and luxembourg 0.27 1.36 6.81~aly 0.26 0.55 2.01

Switzerland 0.30 0.64 6.94

Deve lop ing na t ions (o i l e xpo r t) 0 .16 -0.15 0.64

Deve lop ing na t ions fnono il l 0.15 0.41 1 .40

W h er e f un d s g o ( ne t i nv e st m en t)

Indus tr i a l na t ions 10.62 24 .60 163 .24

United Sta tes 2.85 9.92 72.23

Uni ted K ingdom 1.80 2.76 32.19

France 1.14 2 .59 10 .29

Spain 0.39 1 .43 8 .43

Canada 0.83 1.50 2.85

~aly 0.63 0 .37 2 .54

Be lg ium and luxembourg 0.73 1 .08 7 .06

N et he rl an ds 0.87 1.24 5 .94

Ge rmany 2.06 1.13 6.56

Japan 0.21t 0.24 1.06

Deve lop ing na t ions fa il e xpo r tl 0.27 0 .09 3 .28

Deve lop ing na t ions (nono il l 4 .04 8 .42 15 .24

Africa 0.32 0 .36 2 .57

Asia 0.80 2.t4 7 .65

P e o pl e' s R e p ub li c o f C h i na n.a. 0 .431 3 .39

Singapore 0.39 0 .83 4 .04

M alaysia 0.17 0.89 1 .85

W e s te rn hemisphere 2.50 4 .38 5 .41

M exico 0.46 0.68 1.85

Brazi l 1.39 2.46 2.9711

Colombia 0.02 0.16 0.58

Argentina 0.01 0.18 1.03

n. a =N ot a . .ailable .

Amounts do not coincide because 01 report ing lag

tl9),

11982 .

n l 9 68 .

Sources : Internat ional M onetary fund, B a l a n ce o f P a y m e n t s Y e a r bo o k S u p p l e m e n t to Vo l um es 31 an d 33lW ashington.D.C.: December 1980); and Ba l anc e of Pay m en t s S t a t i s t ic s Yea r book , vo l . 38 . pa r t 2 , 1990 , pp . 68-69 .


16/46

46 S e c t i o n O n e I T h e N a t u re o f I n te r n a ti o n a l B u s i n e s s

o TA BLE 2-8 U . S . D i r ec t I n ve s tm e n t P o s it i o n O v er s e as o n a H i s to r i c al -C o s t B a s is 1 $ b i l li o n s )

1960 1990

C ountry Percent Percent Manufac- P e rc e n t o f Percent Percentor R eg i on Tolal o f T otal T otal 01 T o la l t ur in g M a nu fa ct ur in g financee 01 Finance Other' o f O ther

Tota l 131.87 1 00% $4 21.4 9 100% 1168.22 tO O % 1120.29 100% 1132.98 100%

Developed 19.32 61 312.19 74 134.66 80 78 .91 66 98 .62 74countries

Canada 11 .18 35 68 .43 16 33.23 20 13 .08 11 22 .12 17

Europec 6.69 21 204.20 48 83 .99 50 60 .91 51 59.30 44

EC ' 2.65 8 172.94 41 81 .26 48 48 .22 40 43 .46 32

Bel . & lux,- 0.23 0 .7 10 .58 3 - 4.87 3 S S

france 0.74 2 17.13 4 11.05 7 1 .13


17/46


18/46


19/46

C h a p t e r 2 I In t e rn a ti o n al T r ad e a n d F o re ig n In v e s tm e n t 4 9

J GNP/Capi ta

PER CAPITA

GNP

(U.S. DOL L ARS)

10.000 and more

2,500 - 9,999

1,000 - 2,499

500 - 999

250 - 499

Less than 250

Not available

WHY GO ABROAD?

- -

,,'::

Tropic ~ c.prieom

60" 80"

INDIAN

OCEAN

60 '

International firms go abroad for a number of reasons, all of which are linked

to the desire to either increase profits and sales or protect them from being

eroded by competition. Any reason, depending on the firm's situation, may

achieve either goal.

o Increase Profits and Sales

Enter new markets. Managers arc always under pressure to increase the

sales and profits of their firms, and when they face a mature, satlltated mar-

ket at home, they begin to seatch for new markets outside their home coun-

try. They find that (1) a rising GNP/capita and population growth appear to

be creating markets that arc reaching the "critical mass" necessary to become

viable candidates for their operations and (2) the economies of some nations

where they arc not doing business are growing at a considerably faster rate

than is the economy of their ov.m market.

NCl'lt' market creation. Table 2-11 illustrates the great variety in growth

rates among the top and boltom countries ranked by GNP/capita. Note the

disparity among and between the two groups.

Although nearly everyone looks to GNP/capita as a basis for making com-

parisons of nations' economies, extreme care must be exercised to avoid

drawing unwarranted conclusions. In the first place, because the statistical

systems in many developing nations are deficient, the reliability of the data

provided by such nations is questionable.


20/46

50 S e c t i o n O n e I T h e N a t u r e o f I n t e r n a t i o n a l B u s i n e s s

o

T A B L E 2-10 Twenty Largest Foreign Investments in the United States 1$millions)

1990 P e r c e n t

R a n k Fore ign Investor C o u n t r y U .S . I n v e s tm e n t O w n ed I ndu s t r y R e v en u e A s s e t s

S e a gr a m C o lt d Canada E I du P o n t de N e m o u r s 15 C h e m i c a l s , e n e r g y 40,047 38,118

J E S e a g r a m 10 0 B everages 3 ,878 8,93543,715

1 Royal Dutch/Shell N e th e r l a n ds J U .K . She ll Oi l 10 0 E n e r g y , c h e m i c a ls 1 4,4 13 1 8,4 96

G r o u p

3 B r i t is h P e t r o l eu m U .K . B P Am e r i c a 10 0 E n e r g y 18,610 n .a.

Pi c S t an d a rd O i l 10 0 E n e rg y

4 G r a n d M e t ro p o l it a n U .K . B u r g e r K i n g 10 0 Fast food 6,100 n.8.

Ltd G r an d M e tr o p o li ta n U S A 10 0 B e v e r a g e s . r e t a il i n g 4,110 n.8.

P i l l s b u ry 10 0 F o o d p r o c e s s in g 2,600 n.3,

12,810

5 T en g el m a n n G r o up G e rm a n y G r e at A & P T e a 53 S u pe rm a rk e t s 1 1,39 1 3 ,3 07

6 C a m pe a u Canada F e d er a te d D e p t S t o r es 10 0 Reta i l i ng 4,576 6,126

A ll ie d S to re s 10 0 Reta i l i ng 2,561 3,024

R a lp h s G r o c e ry 10 0 S u pe rm a rk e t s 2,800 1,400

9,938

7 P e t r o l e o s d e V e n e z u e l a C i t g o P e t r o l eu m 10 0 R e f in i n g , m a r k e t in g 9,049 1,881

V e n ez u el a, S A

8 U n il ev e r NV N e th e r l a n ds U n i le v e r U n i te d S t at e s 10 0 F o od p r o c , p e rs p r o ds 8 ,680 9,039

U n i le v er P i c U .K .

9 B . h l A .T . I n d u s t r i e s U .K . B ro w n & W i l l ia m s o n To b a c c o 3,050 n.a.

Pic T o b a c c o 10 0 I n s u r a n c e 1 ,297 4,646

F a rm e r s G r o u p 10 0

I m a s c o l t d C a n a d a H a rd e e' s F o o d S y s t em s 10 0 F a s t f o o d 4,146 n .a .8,493

10 H an s o n P ic U .K . H a n s o n I n d us t r ie s 10 0 Mu l t i c o m pa n y 6,453 1,027

S m i t h C o r o n a 48 O f f i c e s u p p l i e s 47 1 12 2G R F o o d s 49 Re s ta u ra n t 289 202C av e nh a m F o re s t l n d s 10 0 T im ber 27 6 n .a .

7,489

Second, to arrive at a common base of U.S. dollars, the World Bank con-

verts local currencies to dollars. The Bank uses an average of the exchange

rate for that year and the previous two years, after adjusting for differences in

relative inflation between the particular country and the United States!

World Bank economists admit that official exchange rates do not reflect the

relative domestic purchasing powers of currencies, but they say, "However,

exchange rates remain the only generally available means of converting GNPfrom national currencies to U.S. dollars." 10

Finally, you must remember that GNP/capita is merely an arithmctic mean

obtained by dividing GNP by the total population, However, a nation with a

lower GNP but more evenly distributed income may be a morc desirable mar-

ket than one whose GNP is higher. 0" the other hand, as you will note in the

chapter on the economic forces, a skewed distribution of income in a nation

with a low GNP/capita may indico,Hethat there is a viable market, especially

for luxury goods, People do drive Cadillac;. in Bolivia.

The data from Table 2-11 indicate that, from a macro viewpoint, markct~

around the world arc growing, hut this docs not mean that equally good op-

portunities exist for all kinds of business. Perhaps surprisingly, economic


21/46

C h a p t e r 2 I Internat ional T r a d e a n d F o r e i g n I n v e s tm e n t 51

J T A B L E 2-10 (concluded)

1990 P e r c e n t

R an k F or ei gn In v es to r C o u n t r y U .S . In v es t m en t O w n ed I n d u s t r y R e v e n u e A ssets

11 S o n y C o r p J a p an S o n y M u s i c E n t e r t ai n m e n t 10 0 M u s i c e n t e rt a i n m e n t 7 ,460 n .a .C o l u m b i a P i c t u r es 10 0 M o v i e s

S o n y C o r p o f A m e r i c a 10 0 C o n s u m e r e l e c t r o n i c s

12 N e s tl e S A Sw i tzer land N e s tl e U S A 10 0 F o o d p r o c e s s i n g 7 .225 n ,a ,

A lc o n la b o ra to ri es 10 0 P h a r m a c e u t i c a l s

13 P h i l ip s N V N e t h e r l a n d s N o r t h A m e r i c an P h i l ip s 10 0 E l e c t r o n i c s 6 .119 3 .377

14 F r a n z H a n i el & Germ any S c r i v n e r 10 0 F o o d d i s t r ib u t i o n 6 .000 1 .400

C ie G a te w a y F o o d s 10 0 F o o d d i s t r i b u ti o n

15 P e c h i n e y F r a n c e A m e r i c an N a ti o n a l C a n 10 0 P a c k a g i n g 4 .506 6 .721

Ho w m ef 10 0 G a s t u r b i n e s 97 3

O t h e r c o m p a n i e s 10 0 A lum inu m 45 9

5.938

16 B a y e r A G Germ any M i l e s 10 0 H e a lt h c a r e 2 .568 2 .217M o b a y 10 0 Chem ica ls 2.224 1 .891

Agla 10 0 P h o t o g r a p h y 957 765O t h e r c o m p a n i e s 10 0 Chem ica ls 15 4 16 4

5.903

17 H o e ch s t A G Germ any H o e c h s t C e l an e s e 10 0 Chem ica ls 5 .881 6 .082

18 V o l v o A B Sw eden Hertz 26 C a r r e n t al 2 .666 3 .852V o l vo G M H e av y T r u c k 76 A u to m ot iv e 99 9 n .a .

V M E A m e r i c a s 25 A u to m ot iv e 360E n .a .

Reg ie Na t iona le F r a n c e M a c k T r u c ks 10 0 A u to m ot ive 1 .608 n ,a ,

d e s U s i n e s R e n a u lt 5 .633

19 ASEA AB Sw edenB B C B r o w n B o v e r i Sw i tzer land

A B B A se a B ro w n Sw i tzer land AB B 10 0 P o w e r g e n e r a ti o n 5 .600 5 .650B o v e r i

20 O e lh a iz e H l e l io nH B e l g i u m F o o d l i o n 50 S u p e r m a r k e t s 5 .584 1 .559

SA

o.a . = N u t a v a i l a h l e

S o u r c e ~The1 0 0 l a r g e s t F o r e i g n In v e s t o r s i n t h e U . S . : For~s, Ju'~'2 2 . 1 9 9 1 . p p . 2 8 0 - 8 4

growth in a nation causes markets for some products to be lost forever while

simultaneously markets for other products arc being created. Take the case of

a country in the inirial stage of development. With little local manufacturing,

it is a good market for exporters of consumer goods. As economic develop-

ment continues, however, businesspeople see profit-making opportunities in

(1) producing locally the kinds of consumer goods that require simple tech-

nology or (2) assembling from imported parts the products that demand

a more advanced technology. Given the tendency of governments to protect

local industry, the importation of goods being produced in that country will

normally be prohibited. Thus, rhe exporters of. the easy-to-manufacture con-

sumer goods, such as paint, adhesives, toilet articles, clothing, and almost

anything made of plastic, will begin to lose this marker, which now becomes

a new market to producers of the inpms to these


22/46

52 S ec t i o n O n e I T h e N atu re o f I n t er n at i o n a l B u s in es s

o T A B L E 2-11A n n u al G ro w th R at es

Population (1989). 1989 ( pe rcen tage)GNP/Capila (19891, and

G N P 1C ap ita Populat ion GNPIA ve ra ge G ro wt h R at es o f R ankin g Coun try - ( c u r re n t U S S ) (m i l l i ons ) Cap i ta t Populat ionGNP /eap il a (19 5 -8 9 ) an d

Swi t ze r l and $29,880 6.6 4.6% 0.5%Population (1980-1989) 1.

(Coun t r ie s w i th popu la t ion s 2. J a p a n 23,810 123.1 4.3 0.6

of 1 mi ll ion or morel 3. N o r w a V 22,290 4.2 3.4 0.4

4. Finland 22,120 5.0 3.2 0.4

5. S w e d e n 21,570 8.5 1.8 0.2

6. Un i ted Sta te s 20,910 248.8 1.6 1.0

7. Denm ark 20,450 5.1 1.8 0.0

8. G erm anv * 20,440 62.0 2.4 0.0

9. Canada 19,030 26.2 4.0 0.9

10 . U n i te d A r a b E m i r at e s 18,430 1.5 n.a 4.6

11 . F rance 17,820 56.2 2.3 0.4

12 . A u s t r i a 17,300 7.6 2.9 0.1

13 . B e lg i u m 16,220 10.0 n . 0.1

14 . K u w a i t 16,150 2.0 -4.0 4.4

15 . Ne ther l ands 15,920 14.8 1.8 0.5

16 . Italy 15,120 57.5 3.0 0.2

17 . U n i te d K i n g d o m 14,610 57.2 20 0.2

18 . A u s t r a l i a 14,360 16.8 1.7' t,4

19 . N e w Z e al an d 12,070 3.3 0.8 0.7

20 . S ingapore 10,450 2.7 7.0 1.2

21 . H o n g K o n g l l 10,350 5.7 6.3 1.522 . I s r ae l 9,79Q 4.5 2.7 1.7

23 . Spain 9,330 38.8 2.4 0.4

24 . I reland 8,710 3.5 2.1 0.4

25 . S a u di A r a b ia 6,020 14.4 2.6 5.0

p r e f er e n t ia l t r a d in g

a r r an g e m e n t a n a g r ee m e n t

b y a s m a l l g r o u p o f n a t io n s

to e s ta b l i s h f r e e t r a d e a m o n gth e m s e lv e s w h i l e m a in ta in in g

t r a d e r e s t r ic t io n s w i th a l l

o th e r n a t i o n s

international firm in either (1) an organization for marketing exports from

the home country or (2) in a local manufacturing plant. For many products, a

number of these nations still lack sufficient market porential. However, when

such nations have made some kind of a preferential trading arrangement (for

example, the European Community and the European Free Trade Associa-

tion), the resulrant market has been so much larger that firms frequently havebypassed what is often the initial step of exporting to make their initial mar-

ket entry with local manufacturing facilities.

Faster-growing foreign markets. Not only are new markets appearing over-

seas, but many of these markets are growing at a faster ratc than the home

market. One outstanding example has been the growth of the Japanese gross

national product and GNP/capita, which increased from $43 billion and

$458 in 1960 ro $2,920 billion and $23,810 in 1989.Table 2-11 shows that

Japan's real growth rate averaged 4.3 percent annually, one of the highest

among the industrialized nations. Check the annual growth rates of some of

the newly industrializing countries (NICs): Singapore, 7.0 percent; Hong

Kong, 6.3 percent; and South Korea, 7.0 percent.


23/46

C h a p t e r 2 / I n t e r n at i o n a l T r a d e a n d F o r e i g n I n v e s t m e n t 53

o TA B L E 2-11A n n u a l G r o w t h R a te s(concludedl 1989 ( pe rcen tage )

G N P /C ap i ta P o p u l a t i o n GNP!R a n k i n g C o u n l r y - (c u r ren t U SS ) (m i l l i ons ) C ap i ta t P o p u l a t i o n

100. B en in $380 4.6% -0.1% 3 .2%

101. Pak i s tan 37 0 109.9 2. 5 3. 2

102. K enya 360 23.5 2. 0 3. 9

103. H a i t i 360 6.4 0. 3 1.9

104. C h i n a 350 1,113.9 5.7 1.4

105. I nd i a 340 832.5 1. 8 2.1

106. R w anda 320 6.9 1.2 3.2

107. B u r k i n a F a s o 320 8.8 1.4 2.6

108. N i ge r 290 7.4 -2.4 3. 4

109. Ma l i 27 0 8.2 1.7 2.5

110. Za i r e 26 0 34.5 -2.0 3. 1

111. U g a n d a 250 16.8 -2.8 3.2

112. N i ge r i a 250 113.8 0.2 3.4

113. M a d a g a s c a r 230 11.3 -1.9 2.9

114. S i e r r a l e o n e 22 0 4.0 0. 2 2.4

115. B u r u n d i 220 5.3 3.6 2.9

116. Chad 190 5.5 -1.2 2.4

117. N e p a l 180 18.4 0.6 2.6

118. Malaw i 180 8.2 1.0 3.4

119. l ao , P D A 180 4.1 n .a . 2.7

120. B ang l adesh 18 0 110.7 0.4 2.6

121. Som a l i a 170 6.1 0.3 3.0

122. Tanzan i a 13 0 23.8 -0.1 3.1

123. E th i op i a 120 49.5 -0.1 3.0

124. Mozam b i que 80 15.3 n .a . 2.7

N o t e s : n . a " " N o t a v a i l ab l e .

-C k l l y cou n t r i e s fo r w h i ch da ta w e l e repo r ted to the W o r l d B ank a re l i s ted .

tG N P /cap i ta g row th ra te s a l e rea l .

tR e fe f s t o f o rm e r Fede ra l R epub l i c o f G e rm any

U G N P d a t a r e f e r t o G O P .

$ o o r c e : W orld D evelopm en t Repo rt . 1991 (W ash i ng t on . D .C . : W o r l d B ank , 1991 ) .

Another group of high-growth markets-the OPEC nations, especially

those of the Middle East-came into being almost overnight when crude oil

prices quadrupled in 1980. Managements suddenly found these new markets

to be worth billions of dollars. Iran's imports, for example, increased by eight

times in only six years. Interestingly, of the 124 nations in the World Bank

table on which Table 2-11 is based, 52 had average annual GNP/capita

growth rates higher than the American growth rate for the period from 1965

to 1989.

Improved communications. This might be considered a supportive reason

for opening up new markets overseas, because certainly the ability to commu-

nicate with subordinates and customers by telex and telephone has given

managers confidence in their ability to control foreign operations if they


24/46

5 4 S e c t i o n O n e I Th e N a tu re o f In te r n a t i o n a l B u s in e s s

should undertake them. Managers also know that because of improved trans-

portation, they can either send home-office personnel to help with local prob-lems or be there themselves within a few hours if need be.

Good, relatively inexpensive international communication enables large in-

suran..::e,banking, and software firms to "body shop," that is, transmit com-

puter-oriented tasks worldwide to a cheap but skilled labor force. New York

Life, for example, employs 50 people in Ireland to process insurance claims in

a computer linked to the firm's computer in New Jersey. American employees

coming to work in the morning find the claims processed during the night in

Ireland have been transmitted to their computer in the United States. Some

computer consultants in the United States are earning $75 an hour while their

Indian counterparts are working for the same firms via an overseas telecom-

munications link for $5 an hour."

Shorter traveling time has also been responsible for numerous business op-

portunities because foreign businesspersons have come to the home country

to look for new products to imporr or new technology to buy.12 The Depart-

ment of Commerce, in Business America, regularly publishes a list of arrivals

who desire to contact suppliers.

Faster growth in the markets of developing nations frequently occurs for

another reason. When a firm that has supplied the market by exports builds a

factory for local production, the host government generally prohibits im-

ports. The firm, which may have had to share the market with 10 or 20 com-

petitors during its exporting days, now has the local market all to itself or

shares it with only a small number of other local producers. Before General

Tire began manufacturing tires in Chile, probably a dozen exporters, includ-

ing General Tire, were competing in the market. However, once local produc-

tion got under way, there was only one supplier for the entire market-Gen-eral Tire. That is growth.

Obtain greater profits. As you know, greater profits may be obtained by ei-

ther increasing total revenue or decreasing the cost of goods sold, and often

conditions arc such that a firm can do both.

Greater revenue. Rarely will all of a firm's domestic competitors be in every

foreign market in which it is located. Where there is less competition, the firm

may be able to obtain a better price for its goods or services. For example,

General Tire had only three competitors in Spain for its V-belt line when doz-

ens of brands were available in the United States.

Increasingly, firms are obtaining greater revenue by introducing products

in overseas markets and their domestic markets simultaneously. This results

in greater sales volume while lowering the cost of goods sold.LOlVercost of goods sold. Going abroad, whether by exporting or by pro-

ducing overseas, can frequently lower the cost of goods sold. Increasing total

sales by exporting will not only reduce R&D costs per unit, but will also

make other economies of scale possible. The president of a Westinghouse di-

vision stated, "The people who can spread their R&D and engineering and

manufacturing development costs across those three markets [Europe, Japan,

and North America] have a substantial advantage." Westinghouse, like many

companies, obtains lower unit costs through long production runs made pos-

sible by having one factory supply one product internationally.1J The man-

agement of \'Varner-Lambert, a global health care and consumer products


25/46

C h a p t e r 2 I I n te r n at i o n al T f a d e an d F o r ei g n In v e s t m e n t 5 5

manufacturer, evidently agrees as it states, "Warner-Lambert is addressing

each new product as a global opportunity, particularly pharmaceuticals. Only

in the context of a worldwide marketplace can Warner-Lambert hope to re-

capture the escalating costs of bringing new drugs to market. Estimates con-

servatively place development costs at more than $230 million for a singledrug. ,,14

Another factor that can positively affect the cost of goods sold is the in-

ducements that some governments offer to attract new investment. For exam-

ple, Greece offers the following to new investors: (I) investment grants of up

to 50 percent of the investment, (2) interest subsidies to cover up to 50 per-

cent of the interest cost of bank loans, and (3) reduction of up to 90 percent

of a firm's taxes on profits. Incentives such as these are designed to attract

prospective investors and generally are not a sufficient motive for foreign in-

vestment. Nevertheless, they do have a positive influence on the cost of goodssold.

Higher o~'erseasprofi ts ;)s an ill l'csrm enr moti~'e. There is no question that

greater profits on overseas investments were a strong motive for going abroad

in the early 1970s and 1980s. Bllsiness International reported that 90 percent

of 140 Fortune 500 companies surveyed had achieved higher profitably on

foreign assets in 1974, for example. The survey showed that for the period

from 1978 to 1985 the average growth in foreign earnings outpaced foreign

sales growth (5.9 percent versus 4.1 percent), whereas domestic earnings

were down an average of 27 percent despite a domestic sales growth of 5.2

percent. IS l\.1::myAmerican firms continue to earn greater profits on their for-

eign sales. In 1990, of the 100 U.S. firms with the biggest foreign revenues,

only 21 obtained more than 50 percent of their revenue overseas but 42earned over 50 percent of their profits overseas.IO

Acquire products for the home market. The relative ease of foreign travel

has both created markets for new products and facilitated the search for new

products to be introduced into the U.S. market. Americans have traveled

abroad in unprecedented numbers since World War II, and in their travels

they have encountered products and customs previously unknown to them.

Those who acquired the European habit of dtinking wine with theit meals,

for example, returned home wanting to continue this custom. American mar-

keters, sensitive to this trend, have sent buyers around the world to bring

back these new products, and many manufacturers have begun to produce

them here.

Minnetonka executives were browsing in a German supermarket when they came

across an intriguing product-toothpaste in a pump dispenser, which had not yet

appeared in the United States-so they contacted the German manufacturer. This

was the beginning of Check-Up toothpaste. A marketing vice president stated,

"We make grocery shopping a regular part of our business trips to Europe. I e

helps give us a jump on our bigger competitors."

American firms have found products such as aseptic beverage cartons (which

permit storage without refrigeration), hair-styling mousses, and body fragrance

sprays. "The search across oceans and borders for new products is heating up."

said the president of General Food's international division. 17

Let's now look at some reasons for going abroad that are more related to

the protection of present markets, profits, and sales.


26/46

5 6 S e c t i o n O n e I Th e N atu re o f In ter n at i o n al B u s in es s

o Protect Markets, Profits, and Sales

Protect domestic market. Frequently, a firm will go abroad to protect itshome market.

Follow customers overseas. Service companies (accounting, advertising,

marketing research, banks, law) will establish foreign operations in markets

where their principal accounts are, to prevent competitors from gaining ac-

cess to those accounts. They know that once a competitor has been able to

demonstrate to top management what it can do by servicing a foreign subsid-

iary, it may be able to take over the entire account. Similarly, suppliers to

original equipment manufacturers (for example, battery manufacturers to au-

tomobile producers) often follow their large customers. These suppliers have

an added advantage in-that they are moving into new markets with a guaran-

teed customer base.

This is true for the over 250 japanese auto parts makers that have come to

the United States, the world's largest auto parts producer, to supply the eight

Japanese auto plants in this country. For example, Tokyo Seat has established

a subsidiary to make seats, exhaust systems, and other parts for Honda, who

also asked Nippodenso, a japanese producer of radiators and heaters, to ser

up an American plant.

Companies from the Mitsubishi group in Japan creared a version of the

japanese supplier network in Ohio to supply the plant of the Mitsubishi-

Chrysler joint venture, Diamond Star. In addition, there are captive suppliers

rhat are not part of the Mitsubishi group. just an hour's drive'away from the

Diamond Star factory, a cooperative of 16 nonaffiliated Mitsubishi suppliers

called Eagle Wing Industries has built a $37 million plant to produce compo-

nents such as engine mounts and bumpers. We had a direct request fromMitsubishi to build this project here in the United States," said Eagle Wings

president 1samu Kawasaki." According to a University of Michigan study, a

similar situation exists in Honda's Ohio plant. The study found that Ameri-

can-owned manufacturers are supplying only 16 percent of the plant's parts

requirements; the other 84 percent come either from Japan or Japancse-

owned plants in the United States.19

But not only auto parts manufacturers

are involved. Mitsubishi bank, the lead bank for Honda in japan, opened an

office in Columbus, Ohio, to serve Honda's Ohio plant.20

Occasionally, a firm will set up an operation in the home country of a ma-

jor competitor with the idea of keeping it so occupied defending rhat market

thar it will have less energy to compere in the home country of the first com-

pany. Although Kodak claimed its decision to open a manufacturing plant in

japan had nothing to do with its japanese competitor (Fuji), its announce-

ment came just 10 days after Fuji began construction of its flrst manufactur-

ing facility in thc United States.>'

Using foreign production to lower costs. A company may also go abroad to

protect its domestic market when it faces competition from lower-priced for-

eign imports. By moving part or all of its production facilities to the countries

from which its competition is coming, it can enjoy such advantages as less

costly labor, raw materials, or energy. Management may decide to produce

certain components abroad and assemble them in the home country; or, if thl:

final product requires considerable labor in the final assembly, it may send

the components overseas for this final operation.


27/46

n.bond plants

m a q u il ad o r as } p r o d u c ti o n3 c i li t ie s i n M e x i c o t h a t

em p o r a r i l y im p o r t r aw

rJ a te r ia ls , c o m p o n en ts . o r

, a r t s d u t y - f r e e t o b e

n an u fac tu red . p ro c es s ed , o r

I s s em b l ed w i t h l e s s

~xpensive local labor; th ein is h ed o r s em if in is h edl ro d u c t is th en ex p o rte d

C h a p t e r 2 I Internat ional T ra d e a n d F o re i g n I n . . . .es tm en t 57

Zenith Electronics, the last American-owned producer of television sets

in t he U nit ed S ta res , a nn ou nc ed in 1 99 2 t ha t i t \\ 'ouJd move i ts televisioll

ass~mbly operations from !\.1issouri to Mexico. Zenith, which has not

earned a profit since 1984, expected to save many millioll5 of dollars in an-

nual labor costs from the move. A spokesman said the cutbacks in Missouri

should help the company remain competitive in areas such as color picture

tuhes.22

Zenith was able to take advantage of the lower-cost Mexican labor

because of the in-bond (maquiladora in Mcxico) program, a version of

the export processing zones that began in the 1960s in Hong Kong, Tai-

wan, and Singapore. These all pertain to using foreign production to lower

costs.

In-bond (maquiladora) industry. In-bood plants (maquiladoras) came into

existence because of an arrangement between !vtexico and the United States.

The Mexican government permitted plants in the in-bond area to import

parts aod processed materials to be assembled, packaged, and processed

without paying import duties, provided that the finished products were reex-

ported; the American government permitted the finished product containing

the American.made parts and materials to be imported with import duty be-

ing paid only 00 the value added in Mexico.

Presently, there arc over 2,000 in.bond plants employing nearly one.half

million people." Assembly operations now cam more foreign exchange for

Mexico than any other export except petroleum. The leading industrial sec-

tors arc automobiles, with 112 plants and 90,500 employees; electronics,

with 348 plants and 103,500 employees; and textiles, with 245 plants and

39,000 employees. Nearly 90 percent of the in.bond plants arc located on theMexican-U.S. border, but four inland states have important in-bond indus-

tries: Jalisco (39), Yucatao (25), Durango (23), and the state of Mexico (18).

U.S. in-bood activities raoge from stuffing junk mail in envelopes and pro-

cessing supermarkets' discount coupons to building yachts and home appli-

ances. Because of Japanese firms such as San yo, Sony, and Matsushita, and

the Korean Samsung Electronics, Tijuana has become the TV assembly capi-

tal of the world. Estimates arc that 70 percent of all television sets sold in the

United States are made there.24

Caribbean Basin Initiative. This was started by President Reagan to stimu.

late investment in the Caribbean nations. The advantages arc similar to those

enjoyed by Mexican in.bond industries, but the Caribbean Basin has more

liberal American textile and apparel import quotas. The American apparel in-

dustry sends precut pieces to these countries where they are assembled and

returned for sale in the United States. This work has created over 100,000

jobs in Haiti, the Dominican Republic, Jamaica, and other nearby coun-

tries.25

Singapore's growth triangle. To remain competitive in attracting new in-

dustry in the face of rising wages, Singapore is promoting a "growth trian-

gle" covering a 30-mile radius arouod Singapore. The highly technical phases

of production will be done in Singapore, where skilled workers cam up to

$400 per month; product assembly will be done in the Indonesian island of

Batam (12 miles away) or the Malaysian state of Jahore, where wages arc

about $50 per month.26

Export processing zones. Many developing nations have a form of the ex.

port processing zone in which firms, mostly foreign manufacturers, enjoy


28/46

5 8 S e c t i o n O n e I Th e N atu re o f In ter n at i o n al B u s in es s

almost a complete absence of taxation and tegulation of materials brougbt

into the zones for processing and subsequent reexport.27

Protect foreign markets. Changing the method of going abroad from ex-

porting to overseas production is often necessary to protect foreign markets.

The management of a firm supplying a profitable overseas market by exports

may begin to note some ominous signs that this market is being threatened.

Lack of foreign exchange. One of the first signs is a delay in payment by

the importers. They have sufficieut local currency but are experiencing delays

in obtaining foreign exchange from the government's central bank. The credit

manager, by checking with the firm's bank and other exporters, learns that

this condition is becoming endemic-a reliable sign that the country is facing

a lack of foreign exchange. In examining the country's balance of payments,

the financial manager may find that its export revenue has declined while the

import volume remains high. Experienced exporters know that import and

foreign exchange controls are iu the offing and that there is a good chance of

losing the market, especially if they sell consumer products. In times of for-

eign exchange scarcity, governments will invariably give priority to the im-

portatiou of raw materials and capital goods.

If the advantages of making the investment outweigh the disadvantages,

the company may decide to protect this market by producing locally. Manag-

ers know that once the company has a plant in the country, the government

will do its utmost to pro"ide foreign exchange for raw materials to keep the

plant, a source of employment, in operation. Because import~ of competing

products are prohibited, the only competition, if any, will have to come from

other local manufacturers.

Local production by competitors. Lack of foreign exchange is not the only

reason why a company might change from exporting to manufacturing in a

market. Its export business may be growing and payments may be prompt,

but still the firm may be forced to set up a plant in the market. The reason is

that competitors are also enjoying good profits on a volume that may be

reaching a point at which it will support local production.

Should a competing firm decide to put up a factory in the market, manage-

ment must decide rapidly whether to follow suit or risk losing the market for-

ever. Managers know that many governments, especially those iu developing

uations, will not only prohibit further imports once the product is produced

in the country but will also permit only two or three other companies to enter

so as to maintain a sufficient market for these local firms. General Motors

tried for years to enter Spain, but the Spanish government, believing therewere already enough automobile manufacturers in the country, refused the

company entry. Only when Spain joined the European Community was Gen-

eral Motors permitted to cnter.

Downstream markets. A number of OPEC nations have invested in refining

and marketing outlets, such as filling stations and heating oil distributors, to

guarantee a market for their crude oil at more favorable prices. As shown in

Table 2-10, Petroleos de Veuezuela, owner of Citgo, is one of the largest

foreign investors in the United States. Kuwait bought Gulf Oil's refining and

marketing network in threc European countries and also owns 20 perccnt of

British Petroleum, v.:hich has the third-largest foreign investment in this COUIl-

try. These arc just two examples.2!!


29/46

C h a p t e r 2 I I n te r n at i o n al T r ad e a n d F o r ei g n In v e s t m e n t 5 9

WORLDV IEW

M o s t T e le v is io n S e ts A r e M e x ic an

N o m at te r w ha t th e Sony sa le sp er so n te ll s yo u, th e te le -

v is io n s et h e i s s e ll in g p ro b ab ly c am e f ro m M e x i co ,

w h er e i t w a s a ss em b le d i n an i n- bo n d p la nt o n t he

M e x i ca n s id e o f t h e M e x i ca n -U .S . bo rde r. A n d S o n y i s

n o t t h e o n ly o n e. N e a rl y a l l th e J a pa n es e , K o r ea n , a n d

Am e r ic a n t e le v is io n m a n u fa c tu r er s a re m o v in g t he i r

p la n ts fr om th e Far Eas t to M ex ic o. D on N ib be , pu b-

l is h er o f a t ra d e pub li c at io n fo r t h e i n -bo n d i n du s tr y

s a ys , "M e x ic o h a s b e co m e t h e t e le v is io n c a pi ta l o f t h ew o r ld ." O n av e ra ge, J a pa n e se c o m pan i es s h ip n i n e T V

se ts a m in u te a c r o ss t h e bo rder .Zen i th E lec tron ics , the on ly Amer ican-owned te lev i -

s io n m a n u fa c tu r er i n t he U n i te d S t a te s , i s t h e l a te s t t o

a n n oun c e t h at i t i s r e lo c at in g t el e vi si o n a s se m b ly t o

Mexico f rom Ta iwan . The f i rm a l ready employs 20 ,000

w o rker s i n M e x i co i n i ts o t h e r bu si n es s es . S o n y, P an a -

son ic, and o the rs tha t ope ra te in Mex ico a re a l so s low-

ing produc t ion in the i r home coun t r ie s .

" Th e m o v em e nt t o M e xi co i s m a i nl y b ec au se o f

lower wages : c la ims Pro fesso r S idney W e in traub a t the

Unive rs i ty o f Texas . He sa id tha t fo re ign compan ies hadto b e l u re d t o M e x ic o by lo w w a ge s b e fo r e M e x ic a ns

c o u ld h a v e t h e o ppor tun it y t o l e ar n h igh - te c h s k il ls .

H o w e v er , o n c e t h e M e x i ca n w o rke r s h a d t h e m , f o re ign

TV manufac ture rs changed the ir p roduc t ion source a s i f

f l ick ing a remote con t ro l .I n th e s pa ce o f o n ly s ix y e a rs , M e x ic o w e n t f ro m

fo ur th t o f i rs t p l ac e a m o n g c o unt ri es s upply in g T V s t ot he U n it ed S ta te s. I n 1 9 8 5, M e x ic o a cc ou n te d f or 1 1

per ce n t of U .S . TV im por ts , bu t by O ct ob er 19 91 , th is

v a lu e h a d qua drupl ed . D u r in g th e s a m e pe ri o d, t h e p e r -

c e nt a ge o f T V s c o m in g f ro m J a pa n f e ll f r o m 25 .1 p e r-

c e nt t o 3 pe r ce n t. a n d t h e c o m b in ed t o ta l f ro m T a iw a n

and Korea wen t f rom 53 .6 pe rcen t to 22 .5 pe rcen t .

U .S . Te lev is ion Impor ts (Pe rcen t o f to ta l impor ts )

1985 1991

K o re a 32 .3% M exico 43.2%

Japan 25.1 K orea 14.8

Ta iw an 21.3 C h i n a 9. 2

Mexico 11.0 Malaysia 8. 8

S i n g a p o r e 5. 2 Ta iw an 7. 7

Ma l a y s i a 1. 7 T h ail an d 6. 2

H o n g K o n g 1. 3 Singapore 3. 9

C a n a d a 1. 0 O t h e r s 6. 2

T he Pa ci fi c R im c oun tr ie s a r e c o n ce rne d a bo ut w ha t

the proposed Nor th Amer ican Free T rade Agreemen t wi l l

b ri ng th em . Som e obs er ve rs bel ie ve th e el im in at io n of

t ar if fs a m o n g C a n ada , M e x i co , a n d t h e U n i te d S t a te sw i ll f u r th e r r e duce t h e p r e s en c e o f As ia n c o unt ri es i n

t he U . S. m a r ke t. " T he y d o n 't l ik e i t o n e b it b ec au se

they 're a f raid they 're go ing to be d isc r imina ted aga inst ."

W eintraub said.

S o u r ce s : . C h an g i ng C h a n n el s : M cA Jlen M on i tor, D e c em b e r 9 0 , 1 9 9 1 , p.l A ; - Z e n i t h t o S h i f t T V A . c ; se m b l y W o rk ou t o f U .S . P la n t: T h e W a i f S t r e e t

Jo u rna l. October 31 . 1991 . p . Al l

Protectionism, W h en a g ov er nm e nt s ee s th at lo ca l i nd us tr y is th re at en ed b yimports, it may erect import barriers to stop or reduce them. ' I l - Even threats to

d o th is c an b e su ff ic ie nt t o i nd uc e t he e x p or te r t o in v es t i n p ro d uc ti on f ac il i-

ti es i n t he i m po rti ng c ou nt ry . T his a nd th e h ig h- pri ce d y en , w h ic h m a ke s it

d if fic ul t f or Ja pa ne se e x p O tt s t o c om p et e w it h A m e ric an p ro du cts , a re t he

p ri nci pal te as on s fo r Ja pa nes e in ves tm en t in th e U nit ed S ta te s.

G ua ra nte e su pp ly o f ta w m ate ria ls. F ew d ev elo pe d n atio ns p oss ess s uffi-

c ie nt d o m e st ic s up p li es o f r aw m a te ri al s. J ap an a nd E u ro p e a re a lm o st t ot al ly

d ep en de nt o n fo re ig n s ou rc es , a nd e v en th e U n it ed S ta te s d ep en ds o n im p or ts

for more than half of its aluminum, chromium, manganese, nickel, tin, and

z in c. F ur th er mo re , th e D e pa rt me nt o f t he I n te rio r e sti ma te s th at b y th e e nd o f

See Chapter 3 for a discussion of import barriers.


30/46

6 0 S e c t i o n O n e I Th e N a tu re o f In te r n a t io n a l B u s in e s s

the centuty, iron, lead, tungsten, coppet, potassium, and sulfur will be added

to the critical list.To ensure a continuous supply, manufacturers in the industrialized COUIl-

tries are being forced to invest primarily in the developing nations, where

most new deposits are being discovered." japan, for years, has looked to the

United States as a source of raw materials. A japanese deputy general consul

stated,

The United States offers an abundance of raw materials. Because Japan has long

depended on the United States for various materials, such as grain, coking coal,

and lumber, it is entirely logical for Japanese firms to establish facilities close to

the sources of these essential raw materials.30

Some analysts claim that the japanese-American trade flows approximate

those between an industrialized and a developing country: the industrialized

nation sends manufactured goods to the developing nation in return for raw

materials. This is something of an exaggeration; nevertheless, in 1990,97.8

percent of Japan's exports to the United States consisted of manufactured

goods and 40 percent of U.S. exports to Japan were foodstuffs, raw materi.

als, and mineral fuels.3!

Acquire technology and management know-how. A reason often cited by

foreign firms investing in this country is the acquisition of technology and

management know-how. Nippon Mining, for example, a copper mining com-

pany, came to Illinois and paid $1 billion for Gould Inc. to aFquire technol-

ogy leadership and market share in producing the copper foil used in printed

circuit boards.32

In a similar situation, Taiwan's Acer Inc. wanted to learn

about small business computers so it bought Counterpoint Computers in Cal.

ifornia for just $20 million and saved millions in research."

Geographic diversification. Many managements have chosen geographic di-

versification as a means of maintaining stable sales and earnings when the do-

mestic economy or their industry goes into a slump. Generally, when one

economy or industry (building materials, for example) is in a trough, i t is at

its peak elsewhere in the world. In the early 1980s, the foreign operations of

American multinationals were outperforming their domestic counterparts.

Sunbeam and Ford, for example, reported that their Mexican business was

unusually strong, and Twin-Disc, a transmission manufacturer, said that the

slowdown in the European market "wasn't nearly as bad as in the United

States. ,,34 In 1987, earnings jumped 32 percent for Hoechst, the German

chemical producer, solely because of the earnings of its American subsidiary,

Celanese. "\Vithout those earnings, the company would have shown a profitdecline," declared Hoechst's chairman.35

Satisfy management's desire for exp3nsion. The faster growth mentioned

previously helps fulfill management's desire for expansion. Stockholders and

financial analysts also expect firms to continue to grow, and those companies

operating only in the domestic market have found it increasingly difficult to

sustain that expectation. As a result, many firms have expanded into foreign

markets. This, of course, is wh:tt companies based in small countries, such as

Nestle (Switzerland), SKF lIearing (Sweden), and Shell (Great Britain and the

Netherlands), discovered decades ago.

Another aspect of this rcason sometimes motiv:ttcs a company's top man-

agers to begin searching for overselS markets. Being able to claim thal the


31/46

C h a p t e r 2 I Internat ional T ra d e an d F o re ig n In v e s tm e n t 6 1

firm is a "multinational" creates the impression of importance, which can in-

fluence its customers. Sun Microsystems, a manufacturer of computer work

stations, recently opened a technical center in Germany and is building a fac-

tory in Scotland. "To be a major player in the marketplace, you have to be

internationally recognized," said the head of Sun's European operations.'6

We also know of instances where a company has examined and then en-

tered a market because the president brought it to the attention of the market

planners after enjoying a pleasant vacation there.

How else can you explain the fact that in pre-Castro Cuba, there were three

American tire factories in Havana, the "fun capital" of the world, with Miami

just 90 miles away? Delivery of tires to Cuba could have been made in hours and

at better prices. One of the authors found out why when he spent a winter in

Akron working fQr a tire company. That was the time of the year when the

Cuban subsidiary customarily had financial, marketing, and production problemsthat required the presence of Akron executives.

Political stability. U.S.-based multinationals have not been motivated by

political stability to go overseas, although it is often the prime factor in their

choice of where to go. However, European and Third World firms may actu-

ally make foreign investments (usually in the United States) for that reason.

"The U.S. is a very safe place to invest," says Gilbert de Botton, head of Lon-

don-based Global Asset Management, which manages $1.6 billion. "You are

as comfortable there, if not more so, than you arc in your own home. n37

HOW TO ENTER FOREIGN MARKETS

As you learoed in Chapter 1, all of the meaus for becoming involved in over.

seas business may be subsumed in just two activities: (1) exporting to a for-

eign market or (2) manufacturing in it.

i nd ir ec t e x po r ti ng t he

e x p o r t i n g o f g o o d s a n d

s e r v ic e s t h r o u g h v a r i o u s t y p e s

o f h o m e - b a s e d e xp o r t e r s

o Exporting

h10st firms have begun their involvement in overseas business by exporting-

that is, selling some of their regular production overseas. This method re-

quires little in the way of investment and is relatively free of risks. It is an

excellent means of getting a feel for international business without commit.

ting any great amount of human or financial resources. If management does

decide to export, it must choose between direct and indirect"exporting.

Indirect exporting. Indirect exporting is simpler than direct exporting be-cause it requires neither special expertise nor large cash outlays. Exporters

based in their home country will do the work. Management merely follows

instructions. Among the exporters available arc (1) manufacturers' export

agents, who sell for the manufacturer; (2) export commission agents, who

buy for their overseas customers; (3) export merchants, who purchase and

sell for their own account; and (4) international (irms, which use the goods

overseas (mining, construction, and petroleum companies are examples).

Indirect exporters, however, pay a price for such service: (1) they will pay

a commission to the first three kinds of exporters; (2) foreign business can be

lost if exporters decide to change their sources of supply; and (3) firms gain

little experience from these transactions. This is why many managements that

begin in this manner generally change to direct exporting.


32/46

6 2 S ec ti o n O n e I T h e Na t u r e o f I n t e r n a t i o n a l B u s i n e s s

d i r e c t e x p o r t i n g t h e

exportingof goods ands e r v i c e s b y t h e f i r m t h a t

p ro d u ces th em

s a l e s c o m p a n y a b u s i n e s s

establishedfor the purposeofm a r ke t i n g g o o d s a n d s e r v i c e s ,

not producingthem

Direct exporting. To engage in direct exporting, management must assign

the job of handling the export business to someone within the firm. The sim-plest arrangement is to give someone, usually the sales manager, the respon-

sibility for dcveloping the export business. Domestic employees may handle

the billing, credit, and shipping initially, and if the business expands, a sepa-

rate export department may be set up. A firm that has been exporting to

wholesale importers in an atea and servicing them by visits from either home

office personnel or foreign.based sales representatives frequently finds that

sales have grown to a point that will support a complete marketing organiza-

tion.

Management may then decide to set up a sales company in the area. The

international trade and foreign investment - chapter 02 (1)

Documents