The Triad and international business

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Chapter 3
The Triad and international business
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The Triad and international business

• Objectives
• Introduction
• Reasons for FDI
• FDI and trade by triad members
• The triad and regional business strategy
• The worlds regional automotive industry.

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Objectives

• Describe the major reasons for FDI.
• Explain the role of triad-based MNEs in worldwide
  FDI and trade.
• Relate select examples of inter-triad MNE
  business activity.
• Discuss the economic interrelationships among
  triad members.

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Introduction

• Most FDI and trade is conducted by MNEs.
• MNEs from the triad continue to dominate
  international business.
• The triad is the basic unit of analysis in
  international business.

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Table 3.1 Ten years of intra-regional FDI in the
triad, 19932002 Note EU intra-regional FDI is
FDI stocks within Europe as a whole. NAFTA
intra-regional FDI is US and Canada stocks within
NAFTA. Asia intra regional FDI is Japan, South
Korea, Australia and New Zealand stocks within
Asia Source Authors calculations based on OECD,
International Direct Investment Statistics
Yearbook, 2004
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Reasons for FDI
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Foreign direct investment

• FDI is the ownership and control of foreign
  assets.
• FDI usually involves the ownership, whole or
  partially, of a company in a foreign country a
  foreign subsidiary.
• FDI is different from portfolio investment, which
  is the purchase of financial securities in other
  firms for the purpose of realizing a financial
  gain when these marketable assets are sold.

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Some reasons for FDI

• Increase sales and profits.
• Enter rapidly growing markets.
• Reduce costs.
• Gain a foothold in economic blocs.
• Protect domestic markets.
• Protect foreign markets.
• Acquire technological and managerial know-how.

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FDI and trade by triad members

• The triad accounts for about 80 of world FDI.
• Two important FDI destinations are
• Intra-regional from one triad member to another
• Inter-regional from one triad member to the
  geographic region that surrounds it. (e.g. from
  the US to the Americas).

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Table 3.3a Ten years of triad FDI EU15 numbers
are in outward stocks of FDI by every EU15 member
and thus include intra-EU15 FDI Sources Authors
calculations United Nations, World Investment
Report 1998, pp. 379400 United Nations, World
Investment Report 2006, pp. 303306
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Table 3.3b Ten years of triad trade EU includes
intra-EU FDI. Note Exports are calculated by
including freight and insurance while imports do
not include freight and insurance Sources
Authors calculations and International Monetary
Fund, Direction of Trade Statistics Yearbook,
2006 (Washington, DC IMF, 2006), pp. 25
International Monetary Fund, Direction of Trade
Statistics Yearbook, 2002 (Washington, DC IMF,
2002), pp. 25
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Triad FDI clusters

• A group of developing countries usually located
  in the same geographic region as a triad member
  and having some form of economic link to this
  member.
• The US tends to be a dominant investor in Latin
  America, and countries such as Mexico and Brazil
  are part of its FDI cluster.
• The EU tends to be a dominant investor in Eastern
  Europe and countries like the Czech Republic and
  Poland are part of its FDI cluster.

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The triad and regionalbusiness strategy

• MNEs pursue market opportunities within their own
  triad as well as that of the other members.
• International expansion does not necessarily mean
  global expansion.
• The nature of international business is regional,
  not global.
• For example, Wal-Mart has 94.5 of its sales in
  North America, and only about 20 of Wal-Marts
  stores are located outside of North America.

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Figure 3.1 Wal-Marts globalization regional
distribution of stores Note Data are for 2004.
US stores include 53 stores in Puerto
Rico Source Wal-Mart, Annual Report, 2004.
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The worlds regional automotive industry

• There are 30 automotive firms in the worlds
  largest 500 firms.
• None of these are global firms!
• 23 of the 30 firms are home-region based, with an
  average of 60 of their sales as intra-regional.
• There are 2 host-region oriented and 5
  bi-regional automotive firms on the list.

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Table 3.4 The regional nature of the motor
vehicles and parts industries, 2005 Weighted
intra-regional sales average is weighted
according to revenues Note Data are for 2005
Goodyear Tire Rubber, Lear, China FAW Group and
Shanghai Automotive are included in the largest
500 companies, but their regional sales data are
not either available or enough to determine their
regional characteristics Source Authors
calculations and the individual annual reports of
each company
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Table 3.4 The regional nature of the motor
vehicles and parts industries, 2005
(Continued) Weighted intra-regional sales
average is weighted according to revenues Note
Data are for 2005 Goodyear Tire Rubber, Lear,
China FAW Group and Shanghai Automotive are
included in the largest 500 companies, but their
regional sales data are not either available or
enough to determine their regional
characteristics Source Authors calculations and
the individual annual reports of each company
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Key reasons for the automotive industrys
regional operations

• The auto industry operates in clusters of
  localized activity within each major triad
  region.
• Auto firms are strongly embedded in downstream
  activities and after-sales markets.
• Cultural barriers across regions.
• Fuel.
• Different environmental regulations.
• Tariffs.
• ? Local competitors are more adept at meeting
  the demands of their regional markets.