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 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 (see Table 1), 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
|National competitiveness ranking|
|source: World Economic Forum, Global Competitiveness Report 2004–2005, http://www.weforum.org/site/homepublic.nsf/Content/Global+Competitiveness+Programme%5CGlobal+Competitiveness+Report, accessed September 30, 2005.|
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 (see Table 2). 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
|Leading exporters and importers in world trade in merchandise and services, 2003|
|Rank||Exporters||Value (in $ billions)||Value per capita||Rank||Importers||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.|
|1||United States||1011.5||3,440||1||United States||1531.2||5,208|
|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|
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 three-quarters 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 United States under the Super 301 laws of the Omnibus Trade and Competitiveness Act of 1988.
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.
see also Capital Investments; International Business; Investments
United Nations Conference on Trade and Development. (2005). World investment report 2004. Geneva: UNCTAD.
U.S. Census Bureau. (2005). Statistical abstract of the United States. Washington, DC: U.S. Government Printing Office.
World Trade Organization. (2004, October 25). 2004 trade growth to exceed 2003 despite higher oil prices (Press release). Retrieved November 18, 2005, from http://www.wto.org/english/news_e/pres04_e/pr386_e.htm
"International Investment." Encyclopedia of Business and Finance, 2nd ed.. . Encyclopedia.com. (March 26, 2019). https://www.encyclopedia.com/finance/finance-and-accounting-magazines/international-investment
"International Investment." Encyclopedia of Business and Finance, 2nd ed.. . Retrieved March 26, 2019 from Encyclopedia.com: https://www.encyclopedia.com/finance/finance-and-accounting-magazines/international-investment
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