Trends in International Business

(last modified 8/19/98 )
 

Introduction

The most significant transformation the world economy has experienced during the second half of this century has been the internationalization of business.  The global restructuring of industries and work has been particularly pronounced within the last 25 years, as evidenced by the rapid growth in the volume of international business activities, worldwide and in the US.  International business activity is predicted to increase at an even faster rate in the future.
 
The business world of tomarrow will be quite different from that of the past.  Firms will purchase raw materials, parts and other inputs in different countries, assemble them in another country, and then sell them in yet other countries around the world.  For ex., Nike designs their products in the US, builds prototypes in Taiwan, manufactures them in 40 locations around Asia, and sells them around the world.  All firms will face competition from products and services that come from abroad.  Products, services, managers and employees will all participate in a global business community.
 
The purpose of this Web page is to describe trends in international business, first world wide and then for the US.  For both of these trends, changes in the amount of international business activity that have taken place in the past, predicted future international business activity, and the explanations for these changes are presented.

Within the context of the Gannon IB program Web site, of which this page is a part, and for students who may be in the process of selecting a career, this page is intended to explain why there will be increased job and career opportunities in the international area in the future, which are described on the Web page entitled "Job Opportunities in International Business".  Students interested in such a career may wish to consider the Gannon IB program, which was initiated in Fall, 1995, to meet the growing need for properly trained individuals, and is described on that part of  Web page entitled "Gannon International Business Program".

Outline

This Web page consists of the following parts:

Summary

The most important conclusions of this report as related to job opportunities in the international area, which are described on the Web page entitled "Job Opportunities in International Business,"  are as follows:

References

Much of the information contained in this report was obtained from the following sources:

International business defined

Before trends in international business can be presented and analyzed it is important to understand exactly what is being measured.  International business consists of transactions and activities that occur between people or organizations from different countries.  These transactions take on various forms.  There are two major categories of international business activities:  international trade and international investment.  The first category, international trade, involves the buying and selling of a product, which could be either a good or a service, or the renting of an asset, across a border.  A good is a tangible commodity, i.e., capable of being touched, such as a raw material, e.g.., coal, tin, copper, rubber, oil; agricultural product, e.g., wheat, corn, soybeans, cotton; semifinished goods, i.e., intermediate products, used in the production of other goods, e.g., computer chips, chemicals, seats and engines for automobiles, and fabrics for clothes; or finished products, e.g., transportation vehicles, computers, video recorders, TVs, shoes, and foods and beverages.  Services refer to intangible commodities, such as transportation, education, management, and financial services.   A licensing arrangement would be an example of the renting of an asset, such as a copyright, patent, or trademark.

The second category of international business activity, international investment, refers to the buying or selling of an asset, i.e., transfer, of assets across a national border.  There are two subcategories:  foreign direct investment, and foreign portfolio invesment, which correspond to the transfer of real or financial assets, respectively.  Foreign direct investment (FDI) is the creation, or establishment, of a production facility overseas.  FDI includes such activities as building a manufacturing facility, buying land, commercial property or a farm in a foreign country and purchasing or acquiring an existing foreign firm.  FDI may involve forming a joint venture (JV)  with a domestic firm.  Foreign  portfolio investment refers to buying less than 10% of the stock of a foreign company or purchasing debt instruments, such as bonds, bills, or notes, issued by a foreign company or government.  The purchase of a debt instrument is equivalent to making a loan to another party.

World wide International Business Activity Trends

In this first part of the document changes in the amount of international business activity worldwide are presented.  Some explanations for these trends are then presented.

Growth of international business activity world wide statistics

World wide international business activities have increased rapidly over the past 25 years as indicated by the following statistics: Some other statistics related to the growth of international business activity worldwide are the  following: International business activity is expected to continue increasing in the future.  International trade will continue to increase in both volume and value in the future.  It can be expected that additional products will be traded internationally, additional countries will become actively involved in international trade, more industries and companies will be involved in more locations in each country.  [Arpan, p. 30]    The future trends for foreign direct and portfolio investment also look promising.  [Arpan, p. 33]

Changes in world wide factors contributing to growth of international business activity

The explanations for the increased international business activity worldwide described in the previous section can be divided into the following two categories: The reasons why it is increasingly advantageous for firms to participate in international business are considered in the next section.  The purpose of this section of the document is to explain the broad overall changes in the world that have created the potential for increased international business activities.  Some of the factors explaining the past growth and predicted future growth in international business activity worldwide, each of which is explained in detail below, are as follows:

Rapid increase in and expansion of communication and transportation technologies

In the last couple of decades, there have been tremendous advances in communications and transportation technology, including commercial transatlantic supersonic air travel, faxing, email via the Internet, overseas direct dial telephone service, cellular and digital telephone service, and satellite TV.  One effect of these improvements in technology is that more people around the world are aware of the goods and services that are available in other countries, and this knowledge is more quickly available.  This knowledge increases the demand for products produced in other countries, which in turn increases the amount of international business activity.

Since conducting a multinational business usually involves greater distances than in domestic business, and greater distances increase operating costs and make control of a multinational company’s foreign operations more difficult, these technological advances also improve communications, speed up interactions, and increase managers’ ability to control foreign operations.  The resultant reduction in the costs of managing integrated production world wide encourages foreign direct investment..   [WSJ 3/15/95]

Technological improvements also reduce the transaction costs involved in many forms of international business activity and thus increases the quantity of such activities.

Reduction of government restrictions regarding cross-border movement of trade and resources

Every country restricts the movement across its borders of goods, services and resources, such as capital and labor, and attempts to make its products relatively more competitive, using such trade instruments as tariffs, quotas, subsidies, and other non tariff barriers.  Government intervention of this nature reduces the volume of international trade and investment.  Thus, reductions in such restrictions increases trade.

Generally, governments today impose fewer restrictions on cross border movements than they did a decade or two ago.  Many governments have unilaterally lowered  restrictions for the following reasons:

The greatest reduction in trade restrictions, however, has resulted from increased economic integration, i.e., the formation of regional trading blocs, such as NAFTA, MERCOSUR, and the EU, as well as from international trade agreements such as those created by GATT/WTO.

Development of the institutions needed to support and facilitate international trade

Today, most producers can be paid relatively easily for goods and services sold abroad due to a host of innovations, including the following: These institutional arrangements reduce the risk of default on the part of the other party involved in a  trade transaction and thus increase the volume of trade.

Increased global competition

Today it would be difficult to find a company, large or small, that is not affected by global events and competition because most companies sell output to and/or secure supplies from foreign countries and/or compete against products and services that come from abroad.  Even the domestic firm that does not want to become involved in international business is affected by international events since it still has to compete with imported substitutes for its product in the domestic market.  The pressures of increased competition can persuade a company to expand its own business into international markets.  Firms, particularly those that hitherto operated only domestically and confronted with just domestic competition, are now facing increased competition from foreign firms, as well as from other domestic firms that operate internationally, which may have resulted in a decrease in their domestic market share, and necessitating one or both of the following changes: As more and more companies set up manufacturing operations abroad, other firms may also do so as well to prevent competitors from capturing the foreign market with a head start. [WSJ 3/15/95]

Advantages of Going International to Businesses

The changes in the world environment described in the previous section have made possible investment strategies and business opportunities that offer tremendous opportunities.  But, in order for these technological, government and institutional developments to produce measured increases in international business activities, firms must take advantage of the opportunities created.  Thus, the second reason that international business activity has increased and will continue to increase in the future is that it is increasingly advantageous for firms to participate in international business.  Individual firms and entire industries are coming to recognize that in today’s trade environment, isolation is no longer possible.  There is not a big company today that doesn’t talk about being global.  [WSJ 4/21/95]

The purpose of this section of the document is to explain why firms are increasing going global.  As there are different reasons that particular firms engage in the various types of international business activities, it is difficult to generalize the advantages or importance of  going international to businesses.  However, considered from the perspecitve of a firm selling a manufactured product, say, some of the advantages, benefits, or importance of being involved globally to business firms, each of which is explained in detail below, are as follows:

Greater potential to expand sales

The desire to increase sales is a major motive for a company’s expansion into international business.  A company could increases sales through increased exporting or FDI.  Ordinarily, higher sales mean higher revenues and higher profits.  Exports account for 20% of the profits of American corporations.   A firm could attempt to increase sales domestically, but foreign markets offer greater opportunities.  From the perspective of US businesses there is a greater potential to increase sales outside the US than within for the following four specific reasons, each of which is explained in more detail below:
The numbers thing
The first reason that there is greater potential to increase sales by going international is just a number’s thing - the fact that 90% of the world’s population is outside the U.S., and 60% of the world’s purchasing power is outside the U.S.
Changes in international politics
The second reason that there is greater potential to increase sales by going international is that changes in international politics are opening up more markets.  As a result of the demise of communism around the world, many more markets are now accessible to US firms, including those in the following countries:  the former USSR; eastern European countries that were formerly part of the Soviet bloc, i.e., Soviet satellite countries, including East Germany, Poland, the Czech Republic, Slovakia, Hungary, Romania, Bulgaria, Albania, and the former Yugoslavia; China; and India.  Many South America countries, such as Brazil, Argentina, and Chile, have opened up as the result of the overthrow of military juntas or dictatorships.  Even in countries that weren’t previously communistic, there has been a demise in socialist ideas, and an adoption of more free market economic policies.  [WSJ 1/20/97]

For companies that are prepared to go international, the above mentioned countries offer potential, new markets and tremendous opportunities that were not there just 10 years ago.  "With the fall of communism and the ebbing of  Third World protectionism, the global market for US products has tripled in the past decade.."  [WSJ 3/29/95]  Thus, not only are there more people outside the US, but more of those people are now available to sell product to.

The following are some specific examples of the future opportunities in different parts of the world:

Higher growth rates in other countries
A third reason that there is greater potential for increasing sales overseas is that the predicted future  rates of growth in output, as measured by GDP, and various measures of income received by the households for foreign countries, is greater than for the US.  Income is one of the most important factors affecting the demand for a particular product.  As other countries develop economically, and output and various measures of income increase, there will be an increase in the number of households in the middle class which will increase the demand for many products, especially consumer products.

The rates of growth for many foreign countries, particularly the developing countries, has been and will continue to be greater than that for the US, as demonstrated by the following statistics:

Saturated domestic markets
The fourth reason that foreign markets offer a greater potential to increase sales is that, for many products, the US market has become saturated.  For many products, such as fast foods, soda, cosmetics, automobiles, and PCs there is not as much potential for sales growth in the US as in foreign markets.

Acquire resources

The second reason that it has become important for a firm to be involved internationally is to acquire resources or inputs.  While a distributor may seek out a finished product produced in a foreign country in order to resell in the domestic market, or a company may actively seek to import new foreign finished products to complement its existing lines, manufacturers seek out parts, services, components and other intermediate products produced in foreign countries for the following reasons:

Diversify sources of sales and supplies in order to spread risk

The third reason that international business is important to businesses is that it enables them to increase the number of markets for their product and sources of supply of inputs, i.e., intermediate products.  The result is a reduction of wild swings in sales and prices and availability of inputs, i.e., reduced risk.  In the following, the effect on sales is considered first and then the effect on sourcing.
Diversify sales
Manufacturing firms prefer to maintain a constant rate of output as large variations in the level of  production result in big changes in the amount of inputs used.  By spreading sales over many markets, a producer may be able to minimize fluctuations in the total demand for its product and hence production rates.  The more customers a firm has the less vulnerable it would be to the loss of a single customer or a few.  In addition, globalization enables a manufacturer to smooth out sales for the following two reasons: Many international companies take advantage of the fact that the timing of business cycles differs among countries as demonstrated by the following examples:
 Diversify sources of inputs
Consider now the advantage to a firm of having alternative sources of supply of inputs.  The larger the number of alternative suppliers of various inputs used, the less vulnerable the company is to price increases or shortages on the part of any single supplier.  By obtaining supplies of the same product from different countries, a company is able to reduce its risks, as illustrated by the following examples:

Hone competitive skills

The fourth advantage of going international is that it enables a firm to increase its competitive skills.  By going abroad, firms can challenge their competitors on their own ground, learn from them and hopefully translate the absorbed knowledge into productivity improvements back home.  If nothing else, at least they become aware regarding what is happening in foreign markets.  Firms that only operate in a domestic market are at risk of being surprised by the entry of foreign competition and seeing their domestic market share threatened.  More and more companies are becoming aware that the only way to expand and remain competitive is to enter the international marketplace.

Economies of scale

The fifth advantage of going international is to take advantage of economies of scale.  Economies of scale are various factors that enable a firm to decrease average costs of production as output increases during what is referred to as the long run length of time, which is a period of time during which a firm can change the amount of all resources used, which in the case of a manufacturing firm, includes the size of the plant.  Studies have shown that a company can generally reduce its costs/unit by 20-30% each time output is doubled.

The increase in sales that results through, say, exporting, can help firms achieve economies of scale that cannot be attained by operating only in domestic markets.  The resultant cost reduction enables the firm to gain an advantage over its competitors, not just at home but abroad as well.  Its profits/unit increase.  The firm becomes more competitive.

A good example of a product subject to economies of scale over a wide range of output is automobile production.  As output increases the manufacturer can take advantage of assembly lines, robots, body stamping equipment, multiple boring of engine block machinery, and other large, expensive equipment, all of which produce a decrease in costs/unit of production.  The following are two specific examples related to auto production:

Greater profitability

The sixth, and last, reason global business is important to businesses is that a producer might be able to sell the same product at a greater profit abroad than at home.  On reason for this may be that as a  result of  less competition in the foreign market, possibly because the product is in a different stage of its life cycle there, companies are able to charge premium prices for their product.  Even many small manfacturers are seeing higher profits as a result of their sales to foreign markets.  [WSJ 9/20/96]  Another reason is because of different government policies at home and abroad that affect profitability, e.g., differences in the taxation of earnings or in regulation of prices.  For example, McDonald’s profits are greater overseas.  Although US sales were higher than overseas sales by $2 billion in 1995, McDonalds international operation pre tax profits were higher than its domestic profits [WSJ 1/26/96].

Conclusions

In sum, the above discussed factors explain why more firms find it advanteous to go international,  which alone would increase international business activity.   But, when coupled with the greater opportunities created by the changes in the world wide factors discussed in previous section, the effect is even greater.  The following examples demonstrate the importance of going international to US firms:

US international business activity trends

In the previous part of this document, worldwide international business trends were considered.  In this part, the focus is on US international business trends.  First, some statistics related to changes in the amount international business activity in the past are presented.  Next, future predictions are presented.  Some explanations for these trends are then provided.  This part concludes by analyzing participation in international business by small and medium sized businesses.  This part of the document consists of the following sections:

Rise and Fall of the US in importance in international business, WWII to 1987

The US dominated international business activity from the 1950s through the early 1970s, despite a general increase in such activity by many other countries.  [Arpan, p. 27]   By the end of the 1960s, the US had become the dominant economic power in the world, and, in terms of volume and value, was the world’s largest international trader and investor.  American companies had established production, sales, and service facilities in virtually every country of the world.  [Arpan, p. 21]  The US had become the world's largest investor and lender, had a significant lead, if not monopoly, in most technologies, the widest range of products to sell, and the world’s largest companies and most productive labor force.

Then, bit by bit, this dominance began to erode, beginning in 1973.  While international business  activity by US firms continued to increase in dollar and volume amounts, the importance and international competitiveness of the US relative to other nations declined.  For example, in the early 1950’s the US accounted for nearly 25% of world exports; by 1991, this figure declined to 12%.  Significant competition for US firms in both their domestic and foreign markets began to emerge.  The US was no longer neither the leader in technology nor the lowest cost producer in many areas.  The rankings of US companies among the world’s largest companies declined.  In several industries, foreign companies became the largest in the world.  US trade surpluses turned into huge trade deficits, and the US changed from being the world’s biggest creditor to its biggest debtor nation.  [Arpan, p. 28]  In 1985, many bemoaned the decline of American industry, especially its technology sector.

Some of the factors that contributed to the decline in the relative trade position of the US from the early 1970s until the late 1980s include the following:

Rise of the importance of the US in international business in 1990s

A reversal of the decline of the US in international activities began in 1987, as evidenced by the following statistics:

Predicted future increase in US international activity

International business activity by US firms, both in absolute amounts and relative to other countries, is predicted to increase at an even greater rate in the future as evidenced by the following statistics:

Explanation for recent and predicted increase in US international business activity

The increase over the past ten years and the predicted future increase in international business activity by US firms is the result of the following two factors, each of which is explained in detail below.
Increased overseas opportunities
The first factor explaining the recent and predicted future increase in international business opportunities for US firms is increased opportunities overseas.  As output and various measures of income received by households increase in other countries demand for US products increase and US exports as well as other types of international business activities increase.  In the recent past as well as for the future, the growth of output, as measured by GDP, is greater for other countries than for the US, as demonstrated with the following statistics: It is being suggested that this future period of increased growth may rival two earlier periods of
high rates of world growth.  The first was the 40 year stretch before WWI, when mass production began, industries consolidated, and US firms took their operations abroad.  The second golden age was from 1950 to 1973 during which world growth averaged 4.9%/year, partly stemming from innovations that had been bottled up by the Depression and WWII.  This future period of increased growth is being referred to as the third golden age of growth.

The factors explaining the recent and predicted increased world growth are the following:

Advantages of  US firms
This global growth wave that is unprecedented in size and scope will, in turn open up a new frontier for industrialized countries and represent an untapped bonanza. US firms are well prepared to capitalize on these opportunities, which increases international business activity, as a result of  following advantages:
Implications for US international business activity
As a result of the increased opportunities overseas and the advantages of  US firms, US international business activity is predicted to increase in the future.  One person who is especially bullish on America is Joseph P. Quinlan, senior international economist for Dean Witter.  In his opinion, the US is on the "cusp of a golden age in exports, one that promises to fuel domestic employment and income and fatten corporate profits."  Quinlan believes the best is yet to come, particularly because the US is now in its best competitive position in years.  In his view, it is the dawn of a golden age for US exporters and MNCs. [Barron’s, Jan 20, 1997]

In light of all time high stock prices in 1995 and 1996, Wall Street seems convinced of this potential for US firms.   [WSJ 4/18/95]  The increased stock prices are a reflection of predicted future increased earnings due to increased international business activities as much of the earnings of US based companies is from abroad.  A 1/13/97 WSJ article indicated that the companies contributing the most to the 20.3% rise in S&P in 1996 were MNCs that do a lot of exporting.  A 1/97 WSJ article noted that in Morgan Stanley’s list of companies with a global competitive edge that could help their stock performance, 22 of the 40 winners were American.

Increased Participation in International Business by Small and Medium Sized Firms

Most large multinational corporations (MNCs) have been involved in international business for some time and account for most of the international trade and investment activity described and explained in the previous sections of this part of the document.  The 50 largest US exporters account for 30% of the nation's merchandise exports.  An interesting aspect of the globalization of  business is that it is not only large multinational corporations that have sought to become involved.  There has also been increased participation by small and medium sized firms (s&ms).  S&ms are beginning to feel competition from less deveoped countries and realize that they can no longer afford to ignore the international market and are becoming involved.  Many smaller companies now depend on foreign sales.  As is the case with the large MNCs, due to the saturated domestic market, the opportunities for midsize manufacturers to increase sales are in new, overseas markets.  They understand that they better get into the game or its going to be too late. Not only are the s&ms involved in exporting, but also FDI, since technological developments in communications, transportation, and financial services have made it easier to manage foreign operations.

Small companies do have some advantages in international business, including the following [WSJ 12/20/96]:

Worldwide 30% of small and medium sized firms export.  While there are various definitions, s&ms in the US could be considered to be firms with fewer than 500 employees and annual sales of less than $250 million.  Fewer than 7,000 of the 20.1 million businesses in the US are considered to be large.  In the US, firms with as few as 16 employees have successful international operations.   [WSJ 12/20/96]
 
 The importance of US s&ms in export activity is revealed by the following statistics: The purpose of the remainder of this section of the document is to provide the details of some recent surveys regarding the involvement of s&ms in international business, the conclusions of which are as follows: The detailed results of several surveys of s&ms are presented below.

The results of a 1996 survey of 255 manufacturing firms with $10-500 million in annual sales by Grant Thornton LLP, an accounting and consulting firm that advises small manufacturers, are as follows:  [WSJ 12/20/96, 9/20/96]

The results of a 1995 survey by Ernst & Young of 400 CEOs of rapidly growing small and medium sized companies, the median sales for which were $25 million, are as follows [WSJ 9/1/95]: A survey of 919 small businesses by Arthur Andersen’s Enterprise Group, found that companies with more than 100 employees that export are particularly likely to hire new workers.  [WSJ 8/2/95]

The results of a 1996 Coopers and Lybrand survey of 434 fast growing small companies, including 204 with export activity [the median company in the survey had about 70 employees and annual revenue of $7M] are as follow [WSJ 6/19/96]:

While more s&ms are becomming involved internationally, the Commerce Dept estimates that there are tens of thousands of small and medium sized businesses that are capable of exporting but are not for the following reasons:

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