International competition is a fact of life for today's companies. Manufacturers in the United States, for example, must compete not only with exports from other countries, but also with American subsidiaries of foreign corporations. The same is true for manufacturers and other companies in Japan and the European Union (EU). Newly industrialized countries such as China, Singapore, South Korea, Taiwan, Brazil, and Mexico are also competing for a share of the international marketplace. In short, international competition is the driving force behind the globalization of production and markets.
International trade in the 1990s has been dominated by the United States, Japan, and the European Union (EU). Together they generate 80 percent of all world trade and account for 65 percent of all foreign direct investment . One sign of increased international competition has been the growth of imports and exports. In the United States, for example, exports increased from less than 10 percent of manufacturing output in the 1960s to more than 20 percent in the 1990s. Similarly, imports of manufactured products increased from 5 percent of domestic output in the 1960s to more than 25 percent in the 1990s.
The growth of foreign direct investment is another sign of increased international competition. Since the 1980s, foreign direct investment has increased four times faster than world output. Trade between parent companies and their foreign subsidiaries in the early 1990s accounted for approximately 80 percent of all trade between the United States and Japan, 40 percent of all trade between the United States and the EU, and 55 percent of all trade between the EU and Japan.
Foreign direct investment is a strategy used by multinational enterprises to create international production networks. Through an equity investment by a parent company in a branch, subsidiary, or affiliate located in another country, the parent company gains managerial control of an enterprise located in another country.
Foreign direct investment is primarily used by companies to establish foreign subsidiaries that will produce goods and services for sale in local and international markets. In the early 1990s U.S. subsidiaries of foreign companies accounted for approximately 20 percent of all U.S. exports and 33 percent of all U.S. imports. Foreign subsidiaries of U.S. parent companies accounted for approximately 33 percent of U.S. exports and 20 percent of U.S. imports.
There is a tendency toward regional clustering of foreign direct investment. That is, Japanese firms tend to invest in Asian countries, EU firms in other European countries, and U.S. firms in North and South American countries. Among the three dominant international trading groups, the United States is the principal direct investor in the EU and Japan, and the EU is the principal direct investor in the United States.
The elimination of trade and investment barriers can encourage foreign direct investment. The North American Free Trade Agreement (NAFTA), for example, involves the United States, Canada, and Mexico. It eliminated many of the trade and investment barriers that existed among the three signatories. With the adoption of NAFTA, foreign direct investment by the United States increased in Mexico, just as foreign direct investment by U.S. companies in Canada increased following the passage of the U.S. Canada Free Trade Agreement of 1989. In other parts of the world, though, foreign direct investment can be discouraged through protectionist policies that regulate the amount of allowable investment. For example, Malaysia requires foreign partners to limit their investments to less than 50 percent, so that control of such ventures remains with a local partner.
There are three basic methods by which companies can compete in foreign markets: exporting, licensing and other contractual agreements, and investment. Each method has its own advantages and disadvantages. One method may be more appropriate for a certain line of business than another. For example, exporting works for best for physical goods. Licensing and other contractual arrangements are more appropriate for intangibles, services, and the transfer of technology. Investment involves the transfer of an entire enterprise to another country.
Exporting is limited to physical goods. When a company exports goods to another country, those goods are manufactured outside of the target market. Companies that export can use intermediaries located in their own country to facilitate exports, or they can use no intermediaries or only those located in the target country. International freight forwarders, banks , and other specialists can assist companies wishing to export by handling many of the details regarding documentation and financing.
Exporting is often the way a company initially becomes involved in international trade. Companies can gain valuable experience in international markets through exporting without being exposed to large capital losses. A recent variation on traditional exporting is mail-order exporting. Mail-order businesses based in the United States, for example, have found that with the use of fax machines, international toll free telephone calls , credit cards, and air courier delivery, consumers in Europe, Japan, and elsewhere are willing to place orders from catalogs and other direct-mail promotions.
International licensing is another way for domestic companies to compete internationally. Under an international licensing agreement , domestic companies provide foreign companies with rights to some of their intangible assets, such as their patents , trade secrets, know-how, trademarks, or even their company name and logo. Domestic companies often provide some type of technical assistance to make sure the licensed properties are used properly. Similar contractual agreements may include franchising , technical agreements, service or management contracts , and other variations.
Licensing and other contractual agreements are typically long-term associations between an international company and an entity in the host country. They typically involve the transfer of technology or human skills. Characteristically there is no equity investment by the international company in such agreements.
Licensing and other contractual arrangements can offer several advantages over or alternatives to exporting. Exports are often subject to another country's import barriers, such as tariffs and quotas. Licensing agreements can circumvent such barriers, since only intangible assets and services are being exchanged. When exports are no longer profitable, companies can enjoy incremental income from licensing agreements. In some cases a country's currency may experience a prolonged devaluation , making exports no longer profitable. Licensing agreements can overcome some of the risks associated with such currency fluctuations. There is also less of a political risk with licensing, which avoids the risks associated with expropriation of the international company's investment by the host country's government. Licensing can also provide the host country with much-desired technology transfer , so that its government is likely to view such agreements as beneficial.
Investment is the third way in which companies can compete in other countries. Typically, foreign direct investment involves ownership by an international company of a manufacturing plant or other production facility in a target country. Investments may be sole ventures, with full ownership and control by the parent company; or they may be joint ventures , with ownership and control shared with one or more local partners. Investment may be in a new establishment, or it may involve the acquisition of an existing enterprise.
International companies generally make direct investments in foreign countries for one of three reasons. One reason is to obtain raw materials from the host country. Such investors are known as extractive investors. Very little of the extracted resource is sold in the host country. Most of it is either exported back to the international company's home country for use in manufacturing there, or sold on the world market. The steel, aluminum, and petroleum industries are examples of this type of investment.
A second reason for foreign direct investment is to source products at a lower cost. Sourcing investors establish manufacturing or assembly operations in a foreign country for the purpose of obtaining components or finished goods more cheaply than they could in their home country. These components or finished goods are then exported back to the investor's home country or shipped to other countries. In the U.S. consumer electronics industry, for example, assembled products are obtained by U.S. companies from Mexico, Taiwan, or elsewhere for sale in the United States.
The third and most prevalent reason for foreign direct investment is to penetrate local markets and compete internationally. As noted above, international companies use direct investment to establish a production base in another country for the purpose of competing in that country's marketplace.
Countertrading is a type of contractual agreement in international trade that provides special arrangements for financing an exchange of goods and services. There are many forms of countertrading, ranging from simple barter agreements to complex offset deals that involve the exporter agreeing to compensatory practices with respect to the buyer. Countertrading commonly takes place between private companies in developed nations and the governments of developing countries, although countertrading also occurs between developed nations. It has become popular as a means of financing international trade to reduce risks or overcome problems associated with various national currencies.
Buybacks are a common form of countertrading that typically take place between a private corporation from a developed country and the government (or government agency) of a developing nation. Under the first contract of a buyback arrangement, the exporting private corporation agrees to provide a production facility or other type of capital goods to the developing nation. Then, under the second contract, the developing nation repays the exporting private corporation with output produced at the facility or derived from the originally exported capital goods. The exporter, in effect, buys back the output of the facility it has constructed.
Buybacks are used to finance direct investment in developing countries. They are popular because they meet the needs and objectives of both parties. From the developing country's viewpoint, buybacks expand the country's export base, provide employment , and help it meet its goals for industrialization and development. From the point of view of a private cor-poration, the buyback may help it gain a market presence in the country and provide it with a source of products it can use or sell. If the particular output of the facility is not needed by the corporation, it can involve a third party to help it meet its countertrade obligations.
Another type of countertrade is the compensation trade. An exporter and importer agree to make reciprocal purchases of specific goods. The exchange is covered under a single contract. It may or may not take place simultaneously. Each delivery is invoiced in an agreed currency, with payments going either to the supplier or to a clearing account. A third party may be involved to fulfill the purchase commitment of one of the parties. There are many other types of countertrading; it has become firmly established as a method of financing international trade. For developing countries that have hard currency shortages, or whose national currencies are not readily convertible to other types of foreign exchange, countertrading offers them a means of financing imports.
International companies from developed countries who are willing to countertrade have found that it provides them with a competitive edge. By being flexible in the type of payment they are willing to receive, companies that are willing and able to countertrade have a stronger position in competitive bidding for projects involving emerging markets in developing countries. Many such companies are eager to find outlets for their products in emerging markets such as China and Mexico, for example.
International competition can be affected by political policies beyond the control of international companies. While various international trade agreements have served to reduce or eliminate trade barriers, such barriers continue to exist. The most common form of trade barrier in international trade is a tariff or duty that is usually imposed on imports. There is also a category of nontariff barriers that also serve to restrict global trade and affect international competition.
Governments can give international companies based in their own countries significant advantages by establishing trade barriers. Protecting domestic producers against foreign competitors—especially in infant industries—improving a nation's terms of trade, reducing domestic unemployment, and improving a nation's balance-of-payments position are some of the reasons given for imposing import tariffs on foreign-made goods.
In addition to duties and tariffs, there are also nontariff barriers (NTBs) to international trade. These include quantitative restrictions, or quotas, that may be imposed by one country or as the result of agreements between two or more countries. Examples of quantitative restrictions include international commodity agreements, voluntary export restraints, and orderly marketing arrangements.
Administrative regulations constitute a second category of NTBs. These include a variety of requirements that must be met in order for trade to occur, including fees, licenses, permits, domestic content requirements, financial bonds and deposits, and government procurement practices. The third type of NTB covers technical regulations that apply to such areas as packaging, labeling, safety standards, and multilingual requirements.
In 1980 the Agreement on Technical Barriers to Trade, also known as the Standards Code, came into effect for the purpose of ensuring that administrative and technical practices do not act as trade barriers. Additional work on promoting unified standards to eliminate NTBs was conducted by the General Agreement on Tariffs and Trade (GATT) Standards Committee.
Government subsidies are another way in which government policies can provide assistance to domestic companies involved in international trade. Export subsidies are given to domestic producers of goods that will be exported. Export subsidies may take the form of a variety of government benefits, including direct payments, support prices, tax incentives, and funds for training. Export subsidies are given on the condition that the goods being produced will be exported. In the European Union (EU), export subsidies are called variable subsidies. Rules affecting variable subsidies of EU countries are found in the Common Agricultural Policy of the EU.
GATT contains restrictions on the use of export subsidies. Developed countries are forbidden to use subsidies to support the export of most manufactured goods, for example. Under GATT, less-developed nations are permitted to subsidize manufactured goods that will be exported, provided the subsidies do not significantly damage the economies of developed countries. GATT also provides for remedies, such as countervailing duties, when it has been determined that one trading partner is unfairly using export subsidies.
The World Trade Organization (WTO) was established in January 1995 as a successor to GATT, which officially ended in April 1994. The WTO's main function has been to resolve trade disputes, and it developed procedures for handling trade disputes that were much improved over the GATT procedures. In its first 18 months the WTO settled more than 50 trade disputes.
The WTO has encouraged international competition in several ways. It adopted a competition policy that promotes international competition and seeks to eliminate national policies that hinder international competition. At its December 1996 summit meeting in Singapore, more than 60 member nations agreed to eliminate tariffs on more than 300 high-technology products including telecommunications and computer equipment. The WTO also opened the telecommunication sector to international competition when its members agreed to eliminate national telecommunications monopolies.
It is clear that many factors will contribute to the growth of international competition. These include technological and political factors as well as economic factors. Industries that are experiencing rapid technological advancements are already global in nature. Production facilities can and are being located virtually anywhere in the world. As a result, consumer demand in the different industrial countries is converging, so that consumers in Germany, for example, want the benefits of the same technologies as consumers in Japan.
Politically it seems clear that international and multinational trade agreements are being written for the purpose of facilitating international trade. The formation of the European Union, the North American Free Trade Agreement, the General Agreement on Tariffs and Trade, and the World Trade Organization indicate that political leaders not only have realized the benefits of less restricted international competition, they have also been able to convince their constituents of those benefits.
It is likely that international competition will continue to increase. Companies will continue to enter international markets by exporting and through direct investment and licensing and other contractual agreements. International trade agreements will facilitate their efforts and potentially make them more profitable. Consumers throughout the world will benefit with a higher standard of living from access to a wider range of goods and services.
[ David P. Bianco ]
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