Chapter 1 T rade and i nvestment in a g lobal economy

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Copyright 2006 McGraw-Hill Australia Pty Ltd. PPTs t/a International Trade and Investment: An Asia–Pacific Perspective 2e by Gionea. Slides prepared by John Gionea.

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Chapter 1 Trade and investment in a

global economy

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Lecture plan

• Scope of international business– exports of goods and services– international contracting– foreign direct investment

• What is globalisation? Main indicators

• The drivers of globalisation

• Arguments pro and against globalisation

• International business versus domestic business

• Why study international business?

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National GDP and exports as % of world GDP and exports of goods and services

% of world GDP % of world exports of goods & services

Economy 1983 2003 1983 2003

United States 31.8 30.3 11.2 11.1

Japan 10.9 11.9 7.1 6.0

Australia 1.7 1.4 1.1 1.0

New Zealand 0.2 0.2 0.3 0.2

China 2.1 3.9 1.1 5.3

Hong Kong 0.3 0.4 1.2 3.0

Malaysia 0.3 0.3 0.7 1.2

Singapore 0.3 0.4 1.2 3.0

Source: adapted from UNCTAD, World Investment Report (http://www.unctad.org/wir) and GATT/WTO data

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Scope of international business

• Exports (goods and services)

• Contracting

• Joint ventures

• Wholly owned direct investment

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Exports of goods

• Primary products– agricultural products (food, raw materials)– mining products (ores, fuels, non-ferrous metals)

• Manufactures– iron and steel– chemicals– other semi-manufactures– machinery and transport equipment– textiles and clothing– other consumer goods

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Exports of services

• Transportation (shipment and other)

• Travel

• Other services – telecommunications– non-merchandise insurance– banking– other professional services (engineering,

legal, accounting, education, market research)

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Contracting

• Licensing– rights for production and sales of a product– licensing fee– territorial restrictions

• Franchising– Pepsi Cola, Shangri-La, Burger King

• Turnkey project– planning, construction, commissioning, training– Large plant projects

• Subcontracting (e.g. the car sector)

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Foreign investment

• Foreign Direct Investment (FDI)

– joint venture and wholly-owned investment

– effective control; managerial participation

• Portfolio investment

– investment income; capital gains

• Dividing line: 10% of the company shares

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FDI concepts

• FDI (flow): measures movement of FDI in a given period, usually a year– FDI outflows– FDI inflows

• FDI (stock): book value of accumulated investment flows over the years– outward FDI (stock)– inward FDI (stock)

• Foreign production: value of goods and services produced abroad by multinationals.

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Global–multinational–transnational

• Global company: company operating globally, e.g.

– exporting to many countries, or

– investing in many countries.

• Multinational (MNE): engages in foreign production in three or more countries.

• Transnational (TNC): a corporation with owners in more than one nation.

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The world's top 500 global corporations by region (1992)

Region/HQs No of Corp’s

Main countries

Nth America 169 US (161) West Europe 164 UK (40), Germany (32) Nth East Asia 141 Japan (128), S.Korea (12) SE Asia 2 Thailand (1), Malaysia (1) Sth Asia 3 India (3) Australasia 10 Australia (9), NZ (1) Latin America 6 Mexico (2) Africa 5 S. Africa (4), Zambia (1)

Source:adapted from Fortune, 22 July 1992, 13 August 1998

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The world’s top 500 global corporations by region (2003)

Region/ Country

No of Corp’s

Main countries

Nth America 202 US (189), Canada (13) West Europe 167 UK (36), Germany (37)

Nth East Asia 109 Japan (82), China (15) South Korea (11)

South & SE Asia 7 India (4), Thailand (1), Singapore (1), Malaysia (1)

Australasia 7 Australia (7) Latin America 5 Brazil (3), Mexico (1) Africa 0 East Europe 3 Russian Fed. (3)

Source: adapted from Fortune, 8 July 1995, 13 August 1998, and 21 July 2004

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Global integration

‘The process by which markets and production in different countries are becoming increasingly interdependent due to the dynamics of trade in goods and services and the flows of capital and technology.’

OECD

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Drivers of globalisation

Two key factors seem to underlie the trend towards the increasing globalisation of markets and production:

1. decline of barriers to trade and investment

2. technological change

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Indicators of globalisation

• Increasing trade/GDP ratio

• FDI as % of GDP

• Growth of intra-industry trade

• Declining concentration of international business flows

• Aggregate international business as % of GDP

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Ratio of world exports of goods and services to GDP and ratio of global FDI flows to world fixed investment (GFCF)*, %, 1983–2003

0

5

10

15

20

25

30%

Exports asa % of GDP

FDI flows asa % of GFCF

Source: adapted from GATT International Trade 1993, WTO International Trade 2004 and UNCTAD, World Investment Report (http://www.unctad.org/wir)

GFCF = Gross Fixed Capital FormationGlobal FDI Flows = Global FDI Outflows + Global FDI Inflows/2

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Share of exports of goods and services in GDP

0

5

10

15

20

25

30

35

Low& MiddleIncome

High Incomecountries

World

1980

2001

Source: adapted from World Bank, 2003 World Economic Indicators

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Why FDI is growing more rapidly than world trade or world output

• Can circumvent future trade barriers

• World political and economic change

• Democratisation of markets

• Globalisation of world markets

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Answers to critics of globalisation

• Decisions in WTO and other international organisations are made by consensus of governments

• Globalisation is more effective with strong governments and sound institutions

• Globalisation benefits both large and small/medium companies

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Anti-globalisation arguments

• Destroys manufacturing jobs in wealthy, advanced countries

• Wage rates of unskilled workers in advanced countries decline

• Companies move to countries with fewer labour and environment regulations (‘export of jobs’)

• Loss of sovereignty

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Globalisation - arguments pro

• Lower prices for goods and services• Economic growth stimulation• Increase in consumer income• Job creation

– countries specialise in production of goods and services that are produced most efficiently

• Unprecedented advances in living standards

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International business vs domestic business

• International risk– financial (exchange, interest, inflation)– political (nationalisation, expropriation)– regulatory (legal systems, policies)– marketing (income levels, marketing

practices)

• Multinational conflicts– Multinational strategies vs national

interest

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International business training

• Reasons

- ‘multinationalisation’

- internationalisation (small and medium companies)

- international business policies (government)

- globalisation of financial markets

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Job opportunities

• Export departments of manufacturing firms (joint ventures) in Australia or overseas

• International traders• Exporters of services • Providers of services to international companies

– banking, insurance– shipping– construction; engineering

• Government; international organisations

Chapter 1 T rade and i nvestment in a g lobal economy

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