International Trade and Direct Foreign Investment Chapter 2

International Trade Volume of Trade Where has it grown? 1990= $4 trillion 2003= $9 trillion 2008= $16.1 trillion 2012= $18.2 trillion 2016= $15.96 trillion Where has it grown? Top 10 countries produce: 56% of exports 63% of imports

International Trade Where is trade going? Japan U.S. Developed countries  developed countries (75%) Japan Developing countries Lack of resources U.S. Captive market Australia and New Zealand Shifting focus

International Trade Changing Direction of Trade Trade agreements NAFTA’s effects World trade between agreement partners 1980= 37.3% 1990= 59.9% 1999= 70.7%

Why Focus on Major Trading Partners? Demonstrates Business climate Regulations No strong cultural objections Transportation Intermediaries Foreign exchange Government Asian imports

Foreign Investment Two components Portfolio investment Less than 10% $2.86 trillion invested in U.S. stocks and bonds from overseas Direct investment More than 10%

Foreign Investment Volume Annual Outflows Annual Inflows U.S.= $1.5 billion (largest in world) Declining proportion (35.5% tp 21.9%) Annual Outflows US & EU= 80% Developed countries Annual Inflows Developed countries Developed countries Trends

Foreign Investment Level and Direction Trade Leads to FDI? What does it tell you? Trade Leads to FDI? Exporting leads to investment FDI Leads to Trade Lower barriers, increased competition, new production and communication technology

U.S. Foreign Investment Investment Abroad Investment in the U.S. Increasing areas Decreasing areas Investment in the U.S. Where is it coming from? More invested in U.S. than U.S. is investing abroad

U.S. Foreign Investment What is being purchased in U.S.? Existing companies Assets are for sale Fast access to technology Known brand Competitive pressures

Why Enter Foreign Markets? Increased Profits and Sales Enter new markets New market creation GDP per capita Preferential Trading Arrangements Larger markets Faster-Growing Markets Consumer support Government support Improved Communications Easier to oversee Supplement work done domestically

Why Enter Foreign Markets? Obtain greater profits Greater revenue Reduced costs Spread out fixed costs Economies of scale Higher profits Test markets

Why Enter Foreign Markets? Protect Markets, Profits, and Sales Protect domestic market Follow customers overseas Follow main accounts Attack competitors’ home markets Using foreign production to lower costs In-bond industry (maquiladora) Impact Caribbean Basin Initiative Growth Triangles Export Processing Zones

Why Enter Foreign Markets? Protect Foreign Markets Lack of foreign exchange Local production by competitors Downstream markets Protectionism Guarantee supply of raw materials Acquire technology and management experience Geographic diversification Satisfy management’s desire

Multidomestic or Global? Usual flow for exporting and investment Why more standardization? Seven dimensions Product Market Promotion Where value added Competitive strategy Use of non-home country personnel Extent of global ownership