The increasing world trade, as reported in the Directory of Trade Statistics (1993) of the international Monetary Fund, stood at $3,687 billions of exports and $3,846 billions of imports involving goods and services, can be used as a good indicator of globalisation of markets. The major trading units contributing to this world trade are the European Community (exports $1,458 billion; imports $1,524 billion), Asia, including Japan (exports $916 billion; imports $850 billion), and North America (exports $623 billion; imports $744 billion). In addition to international trade involving exporting and importing, international business activities include foreign direct investment, licensing, and joint ventures.
Trade activities helps one to understand MNE practices and strategies. They also help to understand the impact of international business on the economy. Research indicates that export and international business activities are critical to the success of a country’s economy by opening additional markets. If employment is growing at a faster rate than the export sector, then a country must either emphasise exports and create more jobs or find employment for people in faster-growing domestic industries (Mandel and Bernstein 1990). Imports on the other hand affect those seeking jobs in industries relating to this sector, who will find work scarcer and wages lower. Jobs lost by the importing sector of an economy need to be filled by the exporting sector.
A second international business activity as a result of globalisation is the growing foreign direct investment (FDI, or equity funds invested in other nations). These investments range from industrialised nations to less developed countries (LDCs) and newly industrialised countries (Hong Kong, Korea, and Singapore). Most of the world FDI is in the United States, EC, and Japan. The European Community (EC) or Common Market was founded in 1957. Its initial members were Belgium, Germany, Italy, France, Luxembourg, and the Netherlands. Since then Denmark, Ireland, the United Kingdom, Greece, Portugal, and Spain have joined. Foreign holdings in the United States by 1990 amounted to about $1.5 trillion, while the U.S. holdings abroad totalled about $1.2 trillion. In 1992 alone the FDI in the United States was $420 billion and FDI by the United States was $487 billion (U.S. Department of Commerce, Survey of Current Business, July 1993). As nations become more affluent they have pursued foreign direct investments in geographic areas that have economic growth potential.
To become strong in markets conditioned by recent global developments, nations must excel in three areas. They must:
• Economic competitiveness requires quality products and ability to develop unique capabilities in certain areas (such as Italy’s leather goods and ceramic tiles, Germany’s printing press industry, U.S. mainframe computers, and the like. In the service areas, specialty retailing in Britain, design services in Italy and fast-food services of the United States).
Economic competitiveness is in a continual state of flux whose determinants are generally believed to be labour costs, interest rates, exchange rates, and economies of scale. However, this view fails to take into consideration the true sources of international competitive advantage (Porter 1990). The best way for companies to achieve competitive advantage is with innovation. To maintain this competitive advantage, firms have to make their past innovations obsolete by developing new products to replace old ones. Ability to innovate rests in four broad attributes:
• factor conditions
• demand conditions
• related and supporting industries
• the environment in which firms compete
The premise of international trade theory is that a nation will export those goods that make most use of the factor conditions with which it is relatively well endowed. The factor conditions are land, labour, and capital. Export of labour-intensive goods by a country with an uneducated workforce and sophisticated finished goods by a country that has a highly educated labour force are examples of the impact of distinctive factor conditions that other countries may find hard to match. Nations at times have developed factor conditions they need through innovative approaches (by Italy, technologically advanced minimills that use less energy and modest capital and locate close to sources of scrap and end-use customers, with efficiency at small scale).
To be innovative a company needs to have access to people with necessary skills (factor conditions), domestic competition that creates pressure to innovate (rivalry), customers who want a better or less expensive product (demand conditions), and suppliers who can supply low-cost materials (supporting industry). Further, a firm needs to find ways to solve the problem through innovation rather than look for an easy way around a disadvantage (firm strategy).
A strong local demand for its goods and services strengthens a nation’s competitive advantage. Local demand helps the seller to understand buyer wants and also helps to monitor need for changes in the product, based on customers’ signals of desires. Related and supporting industries that are internationally competitive act as low-cost suppliers and adjust to changing conditions that help producers maintain their competitive position and, thus, add to the national competitive advantage.
The structure of the firms and a rivalry that is distinctive to an industry and is congruent with its nation’s culture and characteristics provide yet another dimension of national advantage. Small and medium-sized firms managed like extended families (Italy’s lighting, furniture, footwear industries), hierarchical organisations emphasising technical and engineering content and a disciplined management structure (Germany’s optics, machinery industries), and organisations with unusual cooperation across functional lines (as in Japan) are all instances of national advantages based on firms’ strategy, structure, and rivalry. Competitive global success, thus, comes from vigorous competition at home that pressures companies to improve and innovate and puts them in a position to compete globally.
