The Growth in World Trade

International Marketing 10th edition, Michael R. CzinkotaIlkka A. Ronkainen, 2012.

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After its stock market crash of 1929, the United States turned its back on free trade. Fearing losses of jobs at home, this country tried to assist local industries by sharply increasing taxes on imports from other countries. Unfortunately, other countries retaliated with similar measures. In less than a year, world trade collapsed, sending the world into a global depression. Two hard-hit countries were Germany and Japan. Many believe that this severe economic downturn encouraged the militaristic regimes that precipitated World War II. After the war, the United States and other industrialized nations were eager for world trade to be promoted and to expand.

Their vision has certainly come to pass. World trade has increased over 22-fold since 1950, far outstripping the growth in world GDP. This growth has been fueled by the continued opening of markets around the world. The Bretton Woods conference of world leaders in 1944 led to the establishment of the General Agreement on Tariffs and Trade (GATT), which we will discuss in detail later. GATT, and subsequently the World Trade Organization (WTO), helped to reduce import tariffs from 40 percent in 1947 to an estimated 4 percent today. The principle of free trade has led to the building of market interdependencies. International trade has grown much more rapidly than world GDP output, demonstrating that national economies are becoming much more closely linked and interdependent via their exports and imports. This interdependence has created many opportunities for international marketers but has made world trade more vulnerable to global recessions. The WTO predicted a 9 percent drop in world trade as a result of collapsing global demand in 2009.3

Foreign direct investment, another indication of global integration, increased over 100 percent in a single decade, and services are an important and growing part of the world’s economy. Industries such as banking, telecommunications, insurance, construction, transportation, tourism, and consulting make up over half the national income of many rich economies. A country’s invisible exports include services, transfers from workers abroad, and income earned on overseas investments.

What do you think about global trade trends today? (Share your point of view in comments)

This is an excerpt from Dr. Czinkota’s book International Marketing 10th edition, co-authored by Dr. Ilkka Ronkainen.

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Expanding into Global Markets: Direct Investment

Some companies find that they cannot meet their global marketing objectives by continuing to export, so they make direct investments in international markets to gain access to manufacturing facilities, supplies, or labor, among other reasons. They become multinational corporations which the United Nations defines as “enterprises which own or control production or service facilities outside the country in which they are based.” While this definition makes all foreign direct investors “multinational corporations,” large corporations are the key players.

Building and managing operations outside the domestic market requires skills and resources beyond those used for exporting. Multinational firms with subsidiaries and other investments in other countries also deal with issues ranging from local versus headquarters control, to product or service standardization versus customization for individual market needs. At the highest level of marketing globalization, companies integrate thie international and domestic operations into relatively seamless enterprises that have portfolios of nations that they market to with unified strategies.

Putting products into the hands of customers overseas involves some degree of direct financial investment, whether it is done by acquiring assets in other countries or gaining access to another company’s assets through contracts. International marketers invest directly via full ownership, strategic alliances, or joint ventures to create or expand a permanent interest in an enterprise. It typically requires substantial capital and an ability to absorb risk, so the most visible players in this arena are large multinational corporations who invest either to enter new markets or to ensure reliable supply sources.

Foreign direct investment is defined by the United Nations as “enterprises which own or control production or service facilities out of the country in which they are based.” U.S. firms have significant investments in the developed world as well as in some developing countries. It is a major avenue for global market entry and expansion.

The top multinational companies come from a wide range of countries and depend heavily on their international sales, with their original home market accounting for only a fraction of total sales. Some have revenues larger than the domestic output of some countries. Many operate in more than 100 countries and do not even reference “global” and “domestic” anymore. Through their direct investment, these companies bring economic vitality and jobs to their host countries, often paying higher wages than the average domestically owned firms. At the same time, though, trade follows investment, and companies that invest in other nations often bring with them imports that could weaken a nation’s international trade balance.