Internationalization: Context, Strategy, Structure and Processes
STATISTICS ON INTERNATIONALIZATION TRENDS
International trade
The year 2001 saw the first decline in the volume of world trade since 1982, mostly due to a decline of economic activity in the three major developed markets (the USA, Japan and the European Union), the bursting of the global IT bubble and the aftermath of the tragic events of September 11 (WTO, 2002). However as Figure 1.1 indicates, historical data show that international trade has become much more important in the last 50 years. The growth in international trade has consistently surpassed the growth in production. While the world production in 2001 is seven times as high as in 1950, international trade is more than 20 times as high. It is important to note, however, that a lot of international trade could more properly be called regional trade, covered by major regional trade agreements such as NAFTA (North American Free Trade Agreement), the EU (European Union) and APEC (Asia Pacific Economic Cooperation): 43% of the exports within NAFTA, 65% of the exports within the EU and 68% of the exports within APEC do not leave the region (WTO, 2002). In Section 3 we will discuss a number of theories which explain the existence of international trade.
Foreign direct investment
Foreign investments of multinational firms are even more important than international trade for the growth of the world economy. In 2001 the sales of foreign subsidiaries of multinational companies (MNCs) were nearly twice as high as world exports, while in 1990 the two were roughly equal. Although, just like international trade flows, FDI flows have suffered a substantial decline in 2001, the longer term prospects remain promising, with major MNCs likely to continue their international expansion (UNCTAD, 2002). The influence of MNCs is reflected in the increase in the stock of foreign direct investment (FDI) and the growth in the number of multinationals and their foreign subsidiaries. As shown in Table 1.1, the total stock of foreign investment has reached almost $7 trillion. More than 850,000 foreign subsidiaries of about 65,000 parent firms contributed approximately $18.5 trillion to world sales in 2001, while the
number of employees in foreign affiliates has more than doubled in the last decade. In Section 4 we will discuss a number of theories which explain the existence of foreign direct investment.
DETERMINANTS OF INTERNATIONAL TRADE
In this section we will briefly consider a number of theories which explain why countries trade with one another. We will therefore be emphasizing the country level. In the following section we will shift our discussion to theories focusing on the multinational organization. These theories explain why multinationals exist.
First, we will consider two ‘classic’ theories of trade, which are based on the idea that country-specific factors (also known as location-specific factors) are decisive for international trade. Such country-specific factors may offer absolute or relative comparative cost advantages. A third theory explains why international trade may arise even in the absence of such cost advantages. The key term here is economies of scale. Later, in Section 5, we will explore Porter's analysis, the latest in a long line of international trade theories reaching back more than two centuries.
The Heckscher–Ohlin theorem
This brings us to the question: where do such cost differences come from? One answer, known as the Heckscher–Ohlin (H–O) theorem, was introduced by the Swedish economists Heckscher and Ohlin. Comparative cost differences are the result of differences in factor endowments (labour, land and capital). Some countries, for example, have a relatively large quantity of capital and relatively small labour force (for example, Western nations). Other countries have relatively little capital and a large labour force (for example, most of the developing nations).
Note that it is the relative position of these production factors with respect to one another that counts. We would not, for example, say that Zaire has more labour than the US (which is untrue) or that it has more labour than capital (how would one go about measuring that?). We can, however, say that Zaire has more labour available per quantity of capital than the United States does.
Production factors available in relatively large quantities will be inexpensive, and vice versa. (For the time being we will not consider the demand conditions. A country may, for example, have absolutely no demand for a domestic good produced with scarce production factors, resulting in a low price.) In a country that possesses a relatively large amount of capital and very little labour, capital-intensive products will be cheap and labour-intensive products expensive.
The reverse will be true for a country with a relatively small amount of capital and a large labour force. The same arguments can be offered for the production factor ‘land’. The impact on international trade is that commodities requiring for their production much of [abundant
factors of production] and little of [scarce factors] are exported in exchange for goods that call for factors in the opposite proportions.
Thus indirectly, factors in abundant supply are exported and factors in scant supply are imported. (Ohlin, 1933: 92) In global terms, we can explain international trade flows rather well using this theorem. Japan, a country with a relatively limited amount of land, imports many of its primary products. Third World countries with a relatively large body of (unskilled) labour export labour-intensive products such as textiles and shoes.