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International business is not a new phenomenon; it extends back into history beyond the Phoenicians. Products have been traded across borders throughout recorded civilization, extending back beyond the Silk Road that once connected East with West from Xian to Rome. The Silk Road was probably the most influential international trade route of the last two millennia, literally shaping the world as we know it. For example, pasta, cheese, and ice cream, as well as the compass and explosives, among other things, were brought to the Western world from China via the Silk Road.

What is relatively new, beginning with large U.S. companies in the 1950s and 1960s and with European and Japanese companies in the 1970s and 1980s, is the large number of companies engaged in international investment with interrelated production and sales operations located around the world. At no other time in economic history have countries been more economically interdependent than they are today. Although the second half of the twentieth century saw the highest sustained growth rates of gross domestic product (GDP) in history, the growth in the international flow of goods and services has consistently surpassed the growth rate of the world economy. Simultaneously, the growth in international financial flows—including foreign direct investment, portfolio investment, and trading in currencies—has achieved a life of its own. Daily international financial flows now exceed $1 trillion.

Thanks to trade liberalization, heralded by the General Agreement on Tariffs and Trade (GATT) and its successor, the World Trade Organization (WTO), the barriers to international trade and financial flows keep getting lower. While global GDP has grown fivefold since 1950, global trade has expanded seventeen fold during the same period. For forty-nine countries, average exports as a share of GDP also increased to approximately 24 percent in 1998 from 17 percent a decade earlier. Expanding world markets are a key driving force for the twenty-first-century economy. Although the severe slump in Asia in the late 1990s points up the vulnerabilities in

Country Competitiveness Report

Human Resources			Natural Resources			Capital Resources
Country	Score	Rank	Country	Score	Rank	Country	Score	Rank
Japan	73.2	1	Russia	74.1	1	France	97.3	1
United States	73.0	2	Australia	69.1	2	Japan	96.9	2
Indonesia	72.1	3	Canada	62.8	3	Luxembourg	96.4	3
Thailand	70.9	4	Iceland	60.3	4	Singapore	96.3	4
Singapore	70.7	5	Austria	53.7	5	United Kingdom	96.2	5
Taiwan	69.0	6	Norway	53.1	6	Norway	96.0	6
Korea	67.9	7	France	48.6	7	Denmark	95.8	7
Hong Kong	67.7	7	United States	48.5	8	Netherlands	95.6	8
Malaysia	66.5	9	Spain	47.5	9	United States	95.6	9
Austria	65.7	10	Italy	47.5	10	Hong Kong	95.4	10

the global marketplace, the long-term trends of increasing trade and investment and rising world incomes continue. As a consequence, even a firm that is operating in only one domestic market is not immune to the influence of economic activities external to that market. The net result of these factors has been the increased interdependence of countries and economies, increased competitiveness, and the concomitant need for firms to keep a constant watch on the international economic environment.

INTERTWINED WORLD ECONOMY

Human, natural, and capital resources shape the nature of international business. A country's relative endowments in those resources shape its competitiveness. Although wholesale generalizations should not be made, the role of human resources has become increasingly important as a primary determinant of industry and country competitiveness. As shown in Table 1, the Institute of Industrial Policy Studies' country competitiveness report in 1998 placed the Asian Tigers— Indonesia, Thailand, Singapore, Taiwan, Korea, Hong Kong, and Malaysia—among the world's top ten economies, along with Japan and the United States, in terms of human resources. A word of caution is in order when we use any aggregate reports. Although the rankings for human and natural resources may not vary much from year to year, the ranking for capital resources could change drastically from year to year because of their fluid nature. Once all these resources are combined, we could expect enormous complexity in country competitiveness.

The importance of international trade and investment cannot be overemphasized for any country. In general, the larger the country's domestic economy, the less dependent it tends to be on exports and imports relative to its GDP. For the United States (GDP $7.43 trillion in 1998), international trade in goods and services (sum of exports and imports) rose from 10 percent of GDP in 1970 to about 20 percent in 1998. For Japan (GDP $5.15 trillion), with approximately two-thirds the U.S. GDP, trade forms a little over 14 percent of GDP. For Germany (GDP $2.37 trillion), with slightly less than

Leading Exporters and Importers in World Trade in Merchandise and Services, 1998

(IN $BILLION)

Rank	EXPORTERS	Value	Value per capita	Rank	IMPORTERS	Value	Value per capita
aRetained imports are defined as imports less re-exports.
1	United States	911.6	3,320	1	United States	1,106.1	4,090
2	Germany	615.4	7,500	2	Germany	588.4	7,170
3	Japan	448.0	3,560	3	United Kingdom	392.2	6,650
4	France	385.6	6,560	4	Japan	390.0	3,100
5	United Kingdom	372.2	6,310	5	France	350.0	5,950
6	Italy	311.0	5,480	6	Italy	283.3	4,990
7	Netherlands	246.5	15,670	7	Canada	239.8	7,820
8	Canada	243.1	7,930	8	Netherlands	228.9	14,550
9	Hong Kong, China	208.3	31,080	9	Hong Kong, China	211.4	31,530
	Domestic exports	24.3			Retained importsa	38.9
10	China	206.8	170	10	Belgium-Luxembourg	192.4	17,443

half the GDP of Japan, trade forms about 40 percent of GDP. For Taiwan (GDP $0.27 trillion), trade forms as much as 82 percent of GDP. These trade statistics are relative to the country's GDP. In absolute dollar terms, however, a small relative trade percentage of a large economy still translates into large volumes of trade (Table 2). As shown in the last column for both exports and imports in Table 2, the percapita amount of exports and imports is another important statistic for marketing purposes, since it represents, on average, how much each individual is involved in or dependent on international trade. For instance, individuals (consumers and companies) in the United States and Japan tend to be able to find domestic sources for their needs because their economies are diversified and extremely large. The U.S. per-capita values of exports and imports are $3320 and $4090, respectively. The numbers for Japan are very similar to those of the United States, with $3560 and $3100, respectively. On the other hand, individuals in rich but smaller economies tend to rely more heavily on international trade, as illustrated by the Netherlands, with per-capita exports and imports of $15,670 and $14,550, respectively, and by Hong Kong, with per-capita exports and imports of a whopping $31,080 and $31,530, respectively. Although China's overall exports and imports amounted to $206.8 billion and $168.8 billion (not shown in Table 2), respectively, per-capita exports and imports amounted to only $170 and $136, respectively, in 1998. One implication of these figures is that the higher the per-capita trade, the more closely intertwined is that country's economy with the rest of the world. Intertwining of economies by the process of specialization due to international trade leads to job creation in both the exporting country and the importing country.

However, beyond the simple figure of trade as a rising percentage of a nation's GDP lies the more interesting question of what rising trade does to the economy of a nation. A nation that is a successful trader—that is, it makes goods and services that other nations buy and it buys goods and services from other nations—displays a natural inclination to be competitive in the world market. The threat of a possible foreign competitor is a powerful incentive for firms and nations to invest in technology and markets in order to remain competitive. Also, apart from trade flows, foreign direct investment, portfolio investment, and daily financial flows in the international money markets profoundly influence the economies of countries that may be seemingly completely separate.

FOREIGN DIRECT INVESTMENT

Foreign direct investment—which means investment in manufacturing and service facilities in a foreign country—is another facet of the increasing integration of national economies. Between 1990 and 1997, the value of international trade grew by just under 60 percent in dollar terms, whereas foreign direct investment nearly doubled over the same period. Most of this investment went from one developed country to another, but a growing share is now going to developing countries, mainly in Asia. The overall annual world inflow of foreign direct investment reached $400 billion in 1997. Flows to developing countries in 1997 amounted to $149 billion, representing 37 percent of all global foreign direct investment, compared with $34 billion, or 17 percent of all foreign direct investment, in 1990.

In the past, foreign direct investment was considered to be an alternative to exports in order to avoid tariff barriers. However, today foreign direct investment and international trade have become complementary. For example, Dell Computer uses a factory in Ireland to supply personal computers in Europe instead of exporting from Austin, Texas. Similarly, Honda, a Japanese automaker with a major factory in Marysville, Ohio, is the largest exporter of automobiles from the United States. As firms invest in manufacturing and distribution facilities outside their home countries to expand into new markets around the world, they have added to the stock of foreign direct investment.

The increase in foreign direct investment is also promoted by the efforts of many national governments to attract multinationals and by the leverage that the governments of large potential markets, such as China and India, have in granting access to multinationals. Sometimes trade friction can also promote foreign direct investment. Investment in the United States by Japanese companies is, to some extent, a function of the trade imbalances between the two nations and of the U.S. government's consequent pressure on Japan to do something to reduce the bilateral trade deficit. Since most of the U.S. trade deficit with Japan is attributed to Japanese cars exported from Japan, Japanese automakers, such as Honda, Toyota, Nissan, and Mitsubishi, have expanded their local production by setting up production facilities in the United States. This localization strategy reduces Japanese automakers' vulnerability to retaliation by the United States under the Super 301 laws of the Omnibus Trade and Competitiveness Act of 1988.

PORTFOLIO INVESTMENT

The increasing integration of economies also derives from portfolio investment (or indirect investment) in foreign countries and from money flows in the international financial markets. Portfolio investment refers to investments in foreign countries that are withdrawable at short notice, such as investment in foreign stocks and bonds. In the international financial markets, the borders between nations have, for all practical purposes, disappeared. The enormous quantities of money that are traded on a daily basis have assumed a life of their own. When trading in foreign currencies began, it was as an adjunct to the international trade transaction in goods and services— banks and firms bought and sold currencies to complete the export or import transaction or to hedge the exposure to fluctuations in the exchange rates in the currencies of interest in the trade transaction. However, in today's international financial markets, traders usually trade currencies without an underlying trade transaction. They trade on the accounts of the banks and financial institutions they work for, mostly on the basis of daily news on inflation rates, interest rates, political events, stock and bond market movements, commodity supplies and demand, and so on. The weekly volume of international trade in currencies exceeds the annual value of the trade in goods and services.

The effect of this trend is that all nations with even partially convertible currencies are exposed to the fluctuations in the currency markets. A rise in the value of the local currency due to these daily flows vis-à-vis other currencies makes exports more expensive (at least in the short run) and can add to the trade deficit or reduce the trade surplus. A rising currency value will also deter foreign investment in the country and encourage outflow of investment. It may also encourage a decrease in the interest rates in the country if the central bank of that country wants to maintain the currency exchange rate and a decrease in the interest rate would spur local investment. An interesting example is the Mexican meltdown in early 1995 and the massive devaluation of the peso, which was exacerbated by the withdrawal of money by foreign investors. The massive depreciation of many Asian currencies in the 1997-1999 period, known as the Asian financial crisis, is also an instance of the influence of these short-term movements of money. Today, the influence of these short-term money flows is a far more powerful determinant of exchange rates than an investment by a Japanese or German automaker.

Despite its economic size, the United States continues to be relatively more insulated from the global economy than other nations. Most of what Americans consume is produced in the United States—which implies that, in the absence of a chain reaction from abroad, the United States is relatively more insulated from external shocks than, say, Germany and China.

The dominant feature of the global economy, however, is the rapid change in the relative status of various countries' economic output. In 1830, China and India alone accounted for about 60 percent of the manufactured output of the world. However, the share of the world manufacturing output produced by the twenty or so countries that today are known as the rich industrial economies increased from about 30 percent in 1830 to almost 80 percent by 1913. In the 1980s, the U.S. economy was characterized as "floundering" or even "declining," and many pundits predicted that Asia, led by Japan, would become the leading regional economy in the twenty-first century. Then the Asian financial crisis of the late 1990s changed the economic milieu of the world; today, the U.S. economy has been growing at a faster rate than that of any other developed countries. In recent years, the United States and Western European economies have become the twin engines of the world economy, driven by increased trade and investment as a result of continued deregulation, improved technology, and transatlantic mergers, among other things. Obviously, a decade is a long time in the ever-changing world economy; and indeed, no single country has sustained its economic performance continuously.