International Investement

INTERNATIONAL INVESTMENT

International business is not a new phenomenon; it
extends back into history beyond the Phoenicians around
1200 B.C.E..
Products have been traded across borders
throughout recorded civilization, extending back beyond
the Silk Road that once connected East with West from
Xian to Rome. The Silk Road was probably the most
influential international trade route of the last two millennia,
literally shaping the world as it is known today. For
example, pasta, cheese, and ice cream, as well as the compass
and explosives, were brought to the Western world
from China via the Silk Road.

What is relatively new—beginning first with large
U.S. companies in the 1950s and 1960s, second with
European and Japanese companies in the 1970s and
1980s, and third with companies from emerging
economies in Asia and Latin America in particular—is the
large number of companies engaged in international
investment with interrelated production and sales operations
located around the world.
At no other time in economic
history have countries been more economically
interdependent than they are today.

Although the second half of the twentieth century
saw the highest sustained growth rates of gross domestic
product (GDP) in history, the growth in the international
flow of goods and services has consistently surpassed the
growth rate of the world economy. Simultaneously, the
growth in international financial flow—including foreign
direct investment, portfolio investment, and trading in
currencies—has achieved a life of its own. Daily international
financial flows exceed well over $1 trillion in the
early twenty-first century.

Thanks to trade liberalization, heralded by the General
Agreement on Tariffs and Trade and its successor, the
World Trade Organization, the barriers to international
trade and financial flows keep getting lower in an era of
globalization. The emergence of competitive European
and Japanese multinational companies, followed by
emerging-economy multinational companies, has given


International Investment

the notion of global competition a touch of extra urgency
and significance that is seen almost daily in print media
such as the New York Times, Financial Times, and Nikkei
Shimbun, as well as television media such as the BBC,
NBC, and CNN.
The drive for globalization is being promoted
through more free trade; more international investment;
more Internet commerce; more networking of business,
schools and communities; and more advanced technologies
than ever before.
The Asian financial crisis in 1997,
followed by the terrorist attacks on the United States in
2001 and Argentina’s financial crisis that worsened in
2002, sent the world economy into a global slowdown.
On the other hand, the consistent demand in the United
States and Europe as well as in many emerging economies,
and some recovery in Asia have somewhat attenuated the
forces of those crises.
Since 2003 the world economy has
been on the road to recovery, thanks primarily to
increased investment in many parts of the world, particularly
led by a surge of investment in China.
Although the severe slump in various parts of the
world points up the vulnerabilities in the global marketplace,
the long-term trends of increasing trade and investment
and rising world incomes continue.
As a
consequence, even a firm that is operating in only one
domestic market is not immune to the influence of economic
activities external to that market.
The net result of these factors has been the increased interdependence of
countries and economies, increased competitiveness, and
the concomitant need for firms to keep a constant watch
on the international economic environment.

INTERTWINED WORLD ECONOMY

Human, natural, and capital resources shape the nature of
international business. A country’s relative endowments in
those resources shape its competitiveness. Although
wholesale generalizations should not be made, the role of
human resources, among other resources, has become
increasingly important as a primary determinant of industry
and country competitiveness. As evidenced in the
World Economic Forum’s global competitiveness index of
2004, all the top-ten-ranked countries, with
the exception of the United States, have scarce natural
resources. As a result, the increased portion of international
trade and investment has become human- and
capital-resources driven.

The importance of international trade and investment
cannot be overemphasized for any country.
In general, the larger the country’s domestic economy, the less
dependent it tends to be on exports and imports relative
to its GDP.
For the United States (GDP = $10.9 trillion
in 2003), international trade in goods and services
(including exports and imports) rose from 10 percent in
1970 to about 23 percent in 2003. For Japan (GDP =
$4.3 trillion), international trade accounted for a little less
than 22 percent in 2003. For Germany (GDP = $2.4 trillion),
trade formed about 67 percent of the GDP. For the
Netherlands (GDP = $511 billion), trade value exceeded
GDP, for as high as 107 percent of GDP (due to reexport);
and for Singapore (GDP = $91 billion), trade was
more than 350 percent of its GDP.
These trade statistics are relative to each country’s
GDP. In absolute dollar terms, however, a small relative
trade percentage of a large economy still translates into
large volumes of trade . As shown in the last
column for both exports and imports in Table 2, the per
capita amount of exports and imports is another important
statistic for marketing purposes, since it represents,
on average, how much each individual is involved in or
dependent on international trade.
For instance, individuals (consumers and companies) in the United States and
Japan tend to be able to find domestic sources for their
needs because their economies are diversified and
extremely large. The U.S. per capita values of exports were
$3,440 and imports were $5,208. The numbers for Japan
were very similar to those of the United States, with
$4,271 in exports and $3,886 in imports.
On the other hand, individuals in rich but smaller
economies tend to rely more heavily on international
trade—as illustrated by the Netherlands, with per capita
exports of $22,338 and per capita imports of $20,481,
and by Belgium with exports at a whopping $29,770 and
imports at $27,690. Although China’s per capita exports
and imports are much smaller than the developed
economies, its per capita exports value increased to $373,
and imports to $360, in 2003—a 60 percent increase
since 2001. One implication of these figures is that the
National competitiveness ranking

higher the per capita trade, the more closely intertwined is
that country’s economy with the rest of the world. Intertwining
of economies by the process of specialization due
to international trade leads to job creation in both the
exporting country and the importing country.
Nevertheless, beyond the simple figure of trade as a
rising percentage of a nation’s GDP lies the more interesting
question of what rising trade does to the economy of
a nation. A nation that is a successful trader—that is, it
makes goods and services that other nations buy and it
buys goods and services from other nations—displays a
natural inclination to be competitive in the world market.

The threat of a possible foreign competitor is a powerful
incentive for firms and nations to invest in technology
and markets in order to remain competitive.
Also, apart
from trade flows, foreign direct investment, portfolio
investment, and daily financial flows in the international
money markets profoundly influence the economies of
countries that may be seemingly completely separate.

FOREIGN DIRECT INVESTMENT

Foreign direct investment (FDI)—which means investment
in manufacturing and service facilities in a foreign
country—is another facet of the increasing integration of
national economies. Since the 1980s, the overall world
inflow of FDI increased twenty-five-fold and in 2000 the
inflow of FDI reached a record high of $1.39 trillion. In
2000, developed countries represented more than threequarters
of world FDI inflow, while developing countries
reached only $249 billion in the same year. In 2003, however,
global inflows of FDI declined for the third year in a
row, which was prompted again by a fall in FDI inflows to
developed countries. In particular, the FDI inflows to the
United States fell by 53 percent to $30 billion from 2000
to 2003, which is the lowest level since 1993. It was only
developing countries, most of which are from Asia, Africa,
and the Pacific Rim, that witnessed an increase. The
United States—once the world’s largest FDI recipient
country in the world—was outperformed by China,
whose FDI inflow reached $53 billion in 2003.
In the past, FDI was considered to be an alternative
to exports in order to avoid tariff barriers. Today, however,
FDI and international trade have become complementary.
For example, Dell Computer uses a factory in
Ireland to supply personal computers in Europe instead
of exporting from Austin, Texas. Similarly, Honda, a
Japanese automaker with a major factory in Marysville,
Ohio, is the largest exporter of automobiles from the
United States. As firms invest in manufacturing and distribution
facilities outside their home countries to
expand into new markets around the world, they have
added to the stock of FDI.
The increase in FDI is also promoted by the efforts of
many national governments to attract multinationals and
by the leverage that the governments of large potential
markets, such as China and India, have in granting access
to multinationals. Sometimes trade friction can also promote
FDI. Investment in the United States by Japanese
companies is, to some extent, a function of the trade
imbalances between the two nations and of the U.S. government’s
consequent pressure on Japan to do something
to reduce the bilateral trade deficit. Since most of the U.S.
trade deficit with Japan is attributed to Japanese cars
exported from Japan, Japanese automakers, such as
Honda, Toyota, Nissan, and Mitsubishi, have expanded
their local production by setting up production facilities
in the United States. This localization strategy reduces
Japanese automakers’ vulnerability to retaliation by the
1 United States 1011.5 3,440 1 United States 1531.2 5,208
2 Germany 863.9 10,472 2 Germany 772.5 9,364
3 Japan 542.4 4,271 3 United Kingdom 509.1 8,542
4 France 485.6 8,093 4 Japan 493.5 3,886
5 China (excl. Hong Kong) 484.3 373 5 France 474.2 7,903
6 United Kingdom 448.0 7,517 6 China (excl. Hong Kong) 468.0 360
7 Italy 364.8 6,311 7 Italy 364.8 6,311
8 Netherlands 357.4 22,338 8 Netherlands 327.7 20,481
9 Canada 314.6 10,148 9 Canada 295.0 9,516
10 Belgium 297.7 29,770 10 Belgium 276.9 27,690
Leading exporters and importers in world trade in merchandise and services, 2003
Rank Exporters Rank Importers
Value per
capita
Value
(in $ billions)
Value
(in $ billions)
Value per
capita
SOURCE: Computed from trade statistics in International Trade Statistics 2004, http://www.wto.org/english/res_e/statis_e/its2004_e.pdf,
accessed September 30, 2005.
Table 2

ENCYCLOPEDIA OF BUSINESS AND FINANCE, SECOND EDITION 415
International Marketing
United States under the Super 301 laws of the Omnibus
Trade and Competitiveness Act of 1988.
PORTFOLIO INVESTMENT
The increasing integration of economies also derives from
portfolio investment (or indirect investment) in foreign
countries and from money flows in the international
financial markets. Portfolio investment refers to investments
in foreign countries that are withdrawable at short
notice, such as investment in foreign stocks and bonds.
In the international financial markets, the borders
between nations have, for all practical purposes, disappeared.
The enormous quantities of money that are traded
on a daily basis have assumed a life of their own. When
trading in foreign currencies began, it was as an adjunct to
the international trade transaction in goods and services—
banks and firms bought and sold currencies to complete
the export or import transaction or to hedge the exposure
to fluctuations in the exchange rates in the currencies of
interest in the trade transaction.
In today’s international financial markets, however,
traders usually trade currencies without an underlying
trade transaction. They trade on the accounts of the banks
and financial institutions they work for, mostly on the
basis of daily news on inflation rates, interest rates, political
events, stock and bond market movements, commodity
supplies and demand, and so on. The weekly volume
of international trade in currencies exceeds the annual
value of the trade in goods and services.
The effect of this trend is that all nations with even
partially convertible currencies are exposed to the fluctuations
in the currency markets. A rise in the value of the local
currency due to these daily flows vis-à-vis other currencies
makes exports more expensive (at least in the short run) and
can add to the trade deficit or reduce the trade surplus. A
rising currency value will also deter foreign investment in
the country and encourage outflow of investment.
It may also encourage a decrease in the interest rates
in the country if the central bank of that country wants to
maintain the currency exchange rate and a decrease in the
interest rate would spur local investment. An interesting
example is the Mexican meltdown in early 1995 and the
massive devaluation of the peso, which was exacerbated by
the withdrawal of money by foreign investors. The massive
depreciation of many Asian currencies in the 1997 to
1999 period, known as the Asian financial crisis, is also an
instance of the influence of these short-term movements
of money. Today, the influence of these short-term money
flows is a far more powerful determinant of exchange rates
than an investment by a Japanese or German automaker.
Despite its economic size, the United States continues
to be relatively more insulated from the global economy
than other nations. Most of what Americans consume
is produced in the United States—which implies
that, in the absence of a chain reaction from abroad, the
United States is relatively more insulated from external
shocks than, say, Germany and China.
The dominant feature of the global economy, however,
is the rapid change in the relative status of various
countries’ economic output. In 1830 China and India
alone accounted for about 60 percent of the manufactured
output of the world. Nevertheless, the share of the world
manufacturing output produced by the twenty or so
countries that today are known as the rich industrial
economies increased from about 30 percent in 1830 to
almost 80 percent by 1913.
In the 1980s, the U.S. economy was characterized as
“floundering” or even “declining,” and many pundits predicted
that Asia, led by Japan, would become the leading
regional economy in the twenty-first century. Then the
Asian financial crisis of the late 1990s changed the economic
milieu of the world; by the early twenty-first century,
the U.S. economy was growing at a faster rate than
that of any other developed country. The United States
and Western European economies have become the twin
engines of the world economy, driven by increased trade
and investment as a result of continued deregulation,
improved technology, and transatlantic mergers, among
other things. Obviously, a decade is a long time in the everchanging
world economy; and indeed, no single country has sustained its economic performance continuously