The Triad and international business Chapter 3 The Triad and international business

The Triad and international business Objectives Introduction Reasons for FDI FDI and trade by triad members The triad and regional business strategy The world’s regional automotive industry.

Objectives Describe the major reasons for FDI. Explain the role of triad-based MNEs in worldwide FDI and trade. Relate select examples of inter-triad MNE business activity. Discuss the economic interrelationships among triad members.

Introduction Most FDI and trade is conducted by MNEs. MNEs from the triad continue to dominate international business. The triad is the basic unit of analysis in international business.

Table 3.1 Ten years of intra-regional FDI in the triad, 1993–2002 Note: EU intra-regional FDI is FDI stocks within Europe as a whole. NAFTA intra-regional FDI is US and Canada stocks within NAFTA. Asia intra regional FDI is Japan, South Korea, Australia and New Zealand stocks within Asia Source: Authors’ calculations based on OECD, International Direct Investment Statistics Yearbook, 2004

Reasons for FDI

Foreign direct investment FDI is the ownership and control of foreign assets. FDI usually involves the ownership, whole or partially, of a company in a foreign country: a foreign subsidiary. FDI is different from portfolio investment, which is the purchase of financial securities in other firms for the purpose of realizing a financial gain when these marketable assets are sold.

Some reasons for FDI Increase sales and profits. Enter rapidly growing markets. Reduce costs. Gain a foothold in economic blocs. Protect domestic markets. Protect foreign markets. Acquire technological and managerial know-how.

FDI and trade by triad members The triad accounts for about 80% of world FDI. Two important FDI destinations are: Intra-regional: from one triad member to another Inter-regional: from one triad member to the geographic region that surrounds it. (e.g. from the US to the Americas).

Table 3.3a Ten years of triad FDI *EU15 numbers are in outward stocks of FDI by every EU15 member and thus include intra-EU15 FDI Sources: Authors’ calculations; United Nations, World Investment Report 1998, pp. 379–400; United Nations, World Investment Report 2006, pp. 303–306

Table 3.3b Ten years of triad trade *EU includes intra-EU FDI. Note: Exports are calculated by including freight and insurance while imports do not include freight and insurance Sources: Authors’ calculations and International Monetary Fund, Direction of Trade Statistics Yearbook, 2006 (Washington, DC: IMF, 2006), pp. 2–5; International Monetary Fund, Direction of Trade Statistics Yearbook, 2002 (Washington, DC: IMF, 2002), pp. 2–5

Triad FDI clusters A group of developing countries usually located in the same geographic region as a triad member and having some form of economic link to this member. The US tends to be a dominant investor in Latin America, and countries such as Mexico and Brazil are part of its FDI cluster. The EU tends to be a dominant investor in Eastern Europe and countries like the Czech Republic and Poland are part of its FDI cluster.

The triad and regional business strategy MNEs pursue market opportunities within their own triad as well as that of the other members. International expansion does not necessarily mean “global” expansion. The nature of international business is regional, not global. For example, Wal-Mart has 94.5% of its sales in North America, and only about 20% of Wal-Mart’s stores are located outside of North America.

Figure 3.1 Wal-Mart’s globalization: regional distribution of stores Note: Data are for 2004. US stores include 53 stores in Puerto Rico Source: Wal-Mart, Annual Report, 2004.

The world’s regional automotive industry There are 30 automotive firms in the world’s largest 500 firms. None of these are global firms! 23 of the 30 firms are home-region based, with an average of 60 % of their sales as intra-regional. There are 2 host-region oriented and 5 bi-regional automotive firms on the list.

Table 3.4 The regional nature of the motor vehicles and parts industries, 2005 *Weighted intra-regional sales average is weighted according to revenues Note: Data are for 2005; Goodyear Tire & Rubber, Lear, China FAW Group and Shanghai Automotive are included in the largest 500 companies, but their regional sales data are not either available or enough to determine their regional characteristics Source: Authors’ calculations and the individual annual reports of each company

Table 3.4 The regional nature of the motor vehicles and parts industries, 2005 (Continued) *Weighted intra-regional sales average is weighted according to revenues Note: Data are for 2005; Goodyear Tire & Rubber, Lear, China FAW Group and Shanghai Automotive are included in the largest 500 companies, but their regional sales data are not either available or enough to determine their regional characteristics Source: Authors’ calculations and the individual annual reports of each company

Key reasons for the automotive industry’s regional operations The auto industry operates in “clusters” of localized activity within each major triad region. Auto firms are strongly embedded in downstream activities and after-sales markets. Cultural barriers across regions. Fuel. Different environmental regulations. Tariffs.  Local competitors are more adept at meeting the demands of their regional markets.