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Chapter Two

International Trade and


Foreign Direct Investment

McGraw-Hill/Irwin Copyright © 2010 by The McGraw-Hill Companies, Inc. All rights reserved.
Learning Objectives
 Appreciate the magnitude of international trade
 Identify the direction of trade, or who trades with
whom
 Explain the patterns of worldwide foreign direct
investment
 Identify who invests and how much is invested in the
U.S.
 Understand the reasons for entering foreign markets
 Comprehend that an international firm
i. Globalizes along at least seven dimensions
ii. Can be global in some dimensions, partially global
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Large Firms Lead Overseas
Investment, They Also Export
 FDI from Large American international firms is at
its highest level ever because of
 global competition
 liberalization by host governments in regard to
foreign investment
 advances in technology
 U.S. FDI doubled from 2003 to 2006 reaching
$217 billion, even so…
 During the ten years to 2007, U.S. exports
increased 76% to $1,646 billion
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Large Firms Invest Overseas, They Also Export
Proportion of Foreign Sales and Profits
of the World’s Largest Multinationals
Rank: Income from
Foreign Sales
Fortune Foreign Operations
Company as Percentage
Global as Percentage of
of Total Sales
500 Net Income
1 Wal-Mart Stores 24 22
2 Exxon Mobil NA 73
3 Royal Dutch Shell* 58 NA
4 BP 75 84
5 General Motors # 43 NA
6 Toyota 77 37
7 Chevron 65 68
8 Daimler 77 NA
9 Conoco Philips 33 25
10 Total 76 NA
Source: Company annual reports; Fortune magazine’s 2007 Global 500 listing of world’s largest companies,
http://money.cnn.com/magazines/fortune/global500/2007/full_list/ (July 4, 2008).
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World Exports of Merchandise
(FOB Values; in Billions of Current U.S. Dollars)

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 Federation 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); 展 orld Merchandise Exports by Region and Selected
Economy, 1980, 1985, 1990, 1995 and 1999–2001,� WTO, Statistics Division, www.wto.org/english/res_e/statis_e/statis_e.htm (June 30, 2002);
展 orld Exports of Commercial Services by Selected Region and Economy, 1980–2001,� WTO, Statistics Division,
www.wto.org/english/res_e/statis_e/statis_e.htm (June 5, 2002); and International 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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World Exports of Commercial Services
(FOB Values; in Billions of Current U.S. Dollars)

Commercial 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 Federation 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
Source: Monthly Bulletin of Statistics (New York: United Nations, June 1997, August 2000); 展 orld Merchandise Exports by Region and Selected
Economy, 1980, 1985, 1990, 1995 and 1999–2001,� WTO, Statistics Division, www.wto.org/english/res_e/statis_e/statis_e.htm (June 30, 2002);
展 orld Exports of Commercial Services by Selected Region and Economy, 1980–2001,� WTO, Statistics Division, www.wto.org (June 5, 2002);
and International 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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Distribution of World Manufacturing Value
Added by Industrial Sector (% share)
Industrialized
Developing countries
Industrial Sector countries
1995 2000 2006 1995 2000 2006
15 - Food 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 - Furniture; manufacturing n. e. c. 79.9 80.5 73.5 19.3 18.7 25.3

Source: UNIDO, IDSB 2008 statistical database, “World – MVA Share of


Country Groups,” http://www.unido.org/index.php?id=o3474 (July 7, 2008). LO1
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Leading Exporters and Importers
in World Merchandise and Service (Billions of dollars and percentage)

Source: World Trade Organization, International Trade Statistics 2007, (Geneva: World Trade Organization, 2007) LO1
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Direction of Trade
(percentage of total merchandise exports)
Exports from Year DE U.S. Can. Jap. Eur. DA D. Am CIS
Developed 1980 71 19 4 10 43 5 6 3
economies (DE) 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
Developing 1980 83 26 <1 2 46 3 6 3
Africa (DA) 2006 61 27 2 4 28 13 4 <1
Developing 1980 64 32 3 4 22 2 21 7
America (D. Am.) 2006 67 48 2 2 14 1 20 2
Former USSR 1980 28 1 <1 1 19 3 3 51
and E. Europe (CIS) 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); 的 International Trade—World Exports by Provenance and Destination, http://unstats.un.org/unsd/mbs/t41-July05-online.pdf (July 14,
2006); and International Trade—World Exports by Provenance and Destination, Monthly Bulletin of Statistics, July 2007, Table 40.
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Why do Managers Focus on
Major Trading Partner Countries?
1. Export and import regulations are not
insurmountable
2. Favorable 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
Major Trading Partner Countries?
1. Import channel members (merchants, banks,
customs brokers) are experienced in handling the
exporting country’s shipments
2. Foreign exchange is available to pay for exports
3. 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
Partners of the United States

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Exports to Major Trading
Partners of the United States

Source: “U.S. Aggregate Foreign Trade Data, 1999 and Prior Years,” U.S. Foreign Trade Highlights, tables 10 and 11, U.S. Department of Commerce International Trade Administration, http://
www.ita.doc.gov/td/industry/otea/usfth/tabcon.html “Table 11: Top 50 Suppliers of U.S. Imports in 2004,” U.S. Department of Commerce International 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. Department of Commerce International Trade Administration, www.ita.doc.gov/td/industry/otea/usfth/tabcon.html (July 14, 2006).

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Major Trade Flows

 Major trading flows are among developed nations


 Since 1990, trade flows among developed nations
and emerging nations (BRICs - Brazil, Russia, India,
China) have become important

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Two Aspects of Foreign Investment
 Portfolio investment
 The purchase of stocks and bonds of firms in other
countries to obtain a return on the funds invested
 Foreign Direct investment (FDI)
 The purchase of sufficient equity in a firm located
in another country to obtain significant
management control

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Two Dimensions of
Foreign Direct Investment
 Volume of Outstanding Stock of FDI
 The book value of all foreign direct investment
 Annual Inflows and Outflows of FDI
 The amount invested each year across national
borders

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Stocks of Outward
Foreign Direct Investment

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Foreign Investment
 Level and Direction of FDI
 Amounts of such investments and of the places in
which they are being made
 Trade Leads to FDI
 Foreign trade is typically less costly and less risky
than making a direct investment into foreign
markets

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U.S. FDI Position Abroad

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Foreign Direct Investment
in the U.S.

Note: Figures are based on current cost. 2002 figures are preliminary.
Source: Elena L. Nguyen, “The International Investment Position of the United States at Year-End 2002,” Survey of Current Business,
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Why Do Firms Enter
Foreign Markets?
 Firms enter foreign markets to increase sales
and profits
 New sales from
 new customer base
 better managerial control through improved
communications technologies
 Obtain greater profits
 increased revenues
 lower cost of goods sold (maybe)

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Why Do Firms Enter
Foreign Markets?
 Firms enter foreign markets to
 protect their domestic market
 attack in competitor’s home market and force
competitor to dedicate resources there
 guarantee supply of raw materials
 acquire technology and management know-how
 diversify geographically
 follow customers overseas
 satisfy management’s desire for expansion to a
particular country or region
 bypass protectionist regulations
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Dimensions Along Which
Management Globalizes a Firm
 Management globalizes a firm through
 products
 markets
 promotion
 where value is added to the product
 competitive strategy
 use of non-home-country personnel
 extent of global ownership in the firm

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