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THE TRIAD

AND
INTERNATIONAL
BUSINESS
By Aziz Ahmed Chaudhry

TRIAD
O The three major trading and

investment blocs in the international


arena:
O the United States,
O the EU,
O and Japan.

INTRODUCTION
O Over the last decade international

business activity has increased


dramatically, especially among the
triad nations.
O Foreign direct investment and trade
are at an all-time high.
O However, the most active economies
of the EU, specially Germany, France,
the UK, and Italy.

INTRODUCTION
O A growing number of other countries

will become increasingly prominent


on the international business stage.
O China is moving quickly to establish
itself as a major player.

INTRODUCTION
O Yet despite the increase of

international activity by these


countries and others in emerging
economies, MNEs from the triad will
continue to account for most of the
worlds foreign direct investment and
trade.
O We begin by examining some of the
main reasons for foreign direct
investment in a triad context.

REASONS FOR FOREIGN


DIRECT INVESTMENT
O Foreign direct investment (FDI) is the

ownership and control of foreign


assets.
O In practice, FDI usually involves the
ownership, whole or partial, of a
company in a foreign country. This is
called a foreign subsidiary.
O Equity investment can take a variety
of forms. One is through the
purchase of an ongoing company.

REASONS FOR FOREIGN


DIRECT INVESTMENT
O Another common example of FDI is to set

up a new overseas operation as either a


joint venture or a totally owned
enterprise.
O It is important to remember that FDI is
different from portfolio investment, which
entails the purchase of financial securities
(especially bonds) in other firms for the
purpose of realizing a financial gain when
these marketable assets are sold.

REASONS FOR FOREIGN


DIRECT INVESTMENT
O The objective of FDI is to provide the

investing company with the


opportunity to actively manage and
control a foreign firms activities.
O While the objective of portfolio
investment is to achieve growth in
the value of its financial holdings.

REASONS FOR FOREIGN


DIRECT INVESTMENT
O There are a number of reasons that

businesses are interested in taking


an ownership position or gain control
of foreign assets.
O The following examines some of the

most important of these.

INCREASE SALES AND


PROFIT:
OSome of the largest and best-known

multinationals earn millions of dollars each


year through overseas sales.
OCompanies in smaller economies need to

look outside of their home borders.


ONearly 90 percent of Nestles assets are

outside Switzerland.

INCREASE SALES AND


PROFIT
O Over 50 percent of Royal Dutch/Shells

sales originate outside its home markets.


O There are also thousands of smaller firms

worldwide that earn the bulk of their


revenue from international customers.

INCREASE SALES AND


PROFIT
O SMEs also find that with the growth of

large multinationals there is often a need


for local suppliers and, if they do well,
there is a good chance that the MNE will
extend the contract and allow them to
supply other worldwide locations.
O In addition, global markets often offer

more lucrative opportunities than do


domestic markets.

INCREASE SALES AND


PROFIT
O This helps to explain why Coca-Cola and

IBM now earn more sales revenue and


profits overseas than they do in the US, and
why PepsiCo has become Mexicos largest
consumer products company.
O In Japan, it helps to explain why 83 percent
of Nippon Mitsubishi Oils and over 50
percent of Toyotas revenues come from
overseas sales.

ENTER RAPIDLY GROWING


MARKETS
O Some international markets are growing

much faster than others, and FDI provides


MNEs with the chance to take advantage of
these opportunities.
O A good example is China. Over the past few
years the Chinese economy has grown at an
annual rate of around 7-8 percent.
O These date also point to the fact that, if the
country continues to move toward a marketdriven economy, MNEs are likely to find a
huge demand for goods and services that
cannot be satisfied by local firms alone.

REDUCE COSTS:
O An MNE can sometimes achieve

substantially lower costs by going


abroad than by producing at home.
O If labor expenses are high and
represent a significant portion of
overall costs, an MNE may be well
advised to look to other geographic
areas where the goods can be
produced at a much lower labor price.

REDUCE COSTS:
O A second important cost factor is materials.

If materials are in short supply or must be


conveyed a long distance, it may be less
expensive to move production close to the
source of supply than to import the
materials.
O A third critical cost factor is energy. If the
domestic cost of energy for making the
product is high, the company may be
forced to set up operations overseas near
sources of cheaper energy.

REDUCE COSTS:
O A fourth important factor is

transportation costs. In the recent


past Chinese textile firms had gained
a major share of the US market.
O Production costs were so low that,
even after adding in transportation
expenses, they were able to beat out
most competitors.
O This is no longer true, however.

REDUCE COSTS:
O Mexican firms, armed with the latest

technology, can now produce high


quality, low cost textiles that can be
quickly shipped to US customers.
O The US now buys more textile
products from Mexico than from
China.

GAIN A FOOTHOLD IN
ECONOMIC BLOCS
O There are three major international

economics blocs.
O MNEs that acquire a company in one of these
blocs or that enter into an alliance to do
business in one of these economic
strongholds can obtain a number of benefits
including the right to sell their output without
having to be burdened by import duties or
other restrictions.
O The final result will be three extended triads
and any company that wants to do business
worldwide will have to have a presence in all
three blocs.

PROTECT DOMESTIC
MARKETS:
O Another reason for FDI is to protect ones

domestic market.
O Many MNEs are now entering an
international market in order to attack
potential competitors and thus prevent
them from expanding their operations
overseas.
O These multinationals reason that a
competitor is less likely to enter a foreign
market when it is busy defending its home
market position.

PROTECT DOMESTIC
MARKETS:
O Similarly, sometimes an MNE will

enter a foreign market in order to


bring pressure on a company that
has already challenged its own home
market.
O For example, 10 days after Fuji
began building its first
manufacturing facility in the US,
Kodak announced its decision to
open a manufacturing plant in Japan.

PROTECT FOREIGN MARKETS:


O Sometimes MNEs will use FDI in order to

protect their foreign markets.


O British Petroleum (BP) merged with
Amoco, thus assuring itself of a solid
market share and, in the process,
protecting its investment in this foreign
market.
O Had it not done this, local competitors
would inevitably have eroded the firms
position.

TRAID ECONOMIES
O The triad nations dominate the world

trade and investment, and a great


deal of this activity takes place both
among and within triad nations.
O For example, the US and Japan do
approximately $210 billion of trade
annually, the US and EU account for
over $380 billion of trade, and the
EU and Japan do $120 billion of
business annually.

TRAID ECONOMIES
O One of the major area of triad trade

is automobiles, which provide an


excellent example of the economic
interrelationships that exits between
triad members.