M03 rugm 6563_05_ppw_ch03

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Alan M Rugman and Simon Collinson, International Business, 5th Edition, © Pearson Education Limited 2009

The Triad and international business

Chapter 3

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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.

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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.

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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.

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Table 3.1 Ten years of intra-regional FDI in the triad, 1993–2002Note: 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 AsiaSource: Authors’ calculations based on OECD, International Direct Investment Statistics Yearbook, 2004

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Reasons for FDI

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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.

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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.

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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).

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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 FDISources: Authors’ calculations; United Nations, World Investment Report 1998, pp. 379–400; United Nations, World Investment Report 2006, pp. 303–306

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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 insuranceSources: 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

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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.

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The triad and regionalbusiness 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.

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

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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.

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Table 3.4 The regional nature of the motor vehicles and parts industries, 2005*Weighted intra-regional sales average is weighted according to revenuesNote: 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 characteristicsSource: Authors’ calculations and the individual annual reports of each company

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Table 3.4 The regional nature of the motor vehicles and parts industries, 2005 (Continued)*Weighted intra-regional sales average is weighted according to revenuesNote: 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 characteristicsSource: Authors’ calculations and the individual annual reports of each company

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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.

M03 rugm 6563_05_ppw_ch03

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