INTRODUCTION

In this introductory chapter we highlight some of the fundamental issues pertaining to the subject of international business in general by first discussing, albeit very briefly, the varieties of international business transactions.

International Business Transactions

The major international business transactions include exports, imports, direct investment, portfolio investment, foreign loans, unilateral transfers, and official transactions.

Exports are sales of products or services by a home-based firm to foreign business or government entities. Similarly, imports are purchases of goods and services by a domestic business or government entity from foreign suppliers. As will be shown below, these categories of international business have been growing very rapidly in the United States in recent decades.

Direct investment occurs when a firm from one country spends funds in purchasing physical capital (building facilities, factories, machinery, and equipment) and employing workers in another country in order to produce products and services. Examples of direct investments are Toyota Corporation's investment in manufacturing Camry automobiles in Kentucky and Disney Corporation's opening of Disneyland parks in Paris, France, and Tokyo, Japan. As will be discussed in detail in the next chapter, this category of international business has been expanding very rapidly in the United States in recent decades.

Licensing occurs when a firm in one country transfers technology to a foreign firm in order to produce the licensing firm's product(s) in the technology--recipient country. As an example, we may cite Germany's Volkswagon transfer of robotics technology to its subsidary Brazilian plant to produce cars with the VW trademark.

Portfolio investment occurs when a domestic firm purchases stocks or bonds of foreign firms. This category of international business has recently been on the rise in the U.S. and other developed countries.

Foreign loans are transfers of funds from a domestic entity to a foreign entity for the promise of the lender receiving a sum which equals to the principal as well as the accrued interests.

Unilateral transfers take place when foreign entities (individual, business, or government) receive gifts from a domestic source. The U.S. government's foreign assistance programs are examples of unilateral transfers.

Official transactions occur when a government agency or a central bank transfers funds in settlement of accrued liabilities due to international transactions. An example of the official transaction is a transfer of funds between the Federal Reserve Bank and Bank of England, with the latter as the central bank of the United Kingdom.

Globalization of the U.S. Economy

Statistics from the U.S. Department of Commerce indicate the phenomenal growth of the foreign trade sector of the U.S. economy. Table 1.1 illustrates the massive expansion of international sector of the economy in recent years, and gives data on the Gross Domestic Product(1), GDP, exports, imports, U.S. private assets abroad, and foreign private assets in the U.S. in 1987 prices. Note that the table has expressed exports plus imports, U.S foreign assets, and foreign assets in the U.S. as percentages of the GDP. To account for price inflation over the years, these values are expressed in 1987 prices.

Table 1.1: U.S. GDP, Exports, Imports, U.S. Assets Abroad and Foreign Assets in the U.S., Selected Years
(Values in Billions of 1987 Dollars)

Year	GDP	Exports	Imports	Ex+IM/GDP	USAA/GDP	FA/GDP
1960	1970.8	88.4	96.1	9.36	4.34	2.07
1970	2873.9	161.3	196.4	12.44	5.76	3.71
1975	3221.7	232.9	209.8	13.74	9.17	6.86
1980	3776.3	320.5	289.9	16.16	16.07	13.26
1985	4279.8	309.2	454.6	17.84	30.29	27.36
1990	4897.3	510.5	565.1	21.96	42.20	47.33
1991	4867.6	542.6	562.1	22.69	43.90	51.08
1992	4979.3	578.8	611.2	23.9	43.17	53.37
1993	5134.5	602.5	676.3	24.90	46.16	56.99
1994	5347.3	654.8	769.0	26.62	51.72	59.07

USAA (U.S. assets abroad) and FA ( Foreign assets in the U.S) are in current dollars.
Source: Economic Report of the President, Various issues.

According to the data in Table 1.1 both trade and capital flows have increased drastically in the last three decades, implying an expansion of the foreign trade sector of the economy. Note that in 1960 the sum of exports and imports constituted a little less than 10% of the GDP. By 1994, this figure increased almost threefold and stood at approximately 27% of the GDP. The data on capital flows and stocks (both U.S. investment abroad and foreign investment in the U.S.) indicate that these categories of international transactions have grown rapidly in the recent years also. The size of U.S. assets abroad has increased consistently since 1960, and constitutes almost 52% of the 1994 GDP . The amount of foreign assets in the U.S. has undergone even greater changes than other categories of the international sector of the economy. Foreign assets in the U.S. consisted of only 2% of the GDP in 1960. For a decade and half, the size of the foreign assets in the U.S. had a moderate rate of growth. However, since 1975, the size of foreign assets in the U.S. has grown at a very rapid rate, and by 1994 it constituted almost 60% of the GDP.

Why Study International Business

In this section, we attempt to motivate the reader to study the subject by showing how a thorough knowledge of different aspects of international business could lead to high wage--incomes and profits, not mentioning the non-pecuniary, psychic income one might derive from learning a subject.

There have been a number of studies in recent decades which show the existence of a rare consensus among business, labor, governments, and academic leaders on the necessity of international business education.

As early as 1974, in response to the changing business enviroment, the American Assembly of Collegiate Schools of Business (AACSB), a major business school accreditation organization, required that business school curricula should reflect the emerging globalization of business.

In 1979, a Presidential Commission on Foreign Language and International Studies found that a leading factor responsible for a declining U.S. competitiveness was a lack of foreign language and area expertise in American businesses.

Recently, in 1987, a committee consisting of sixty-five prominent members from business, labor, academia, and governments also recommended internationalization of business curricula. Specifically, the Committee recommended that business schools should teach their students about comparative business practices, foreign languages, and cultural diversity.

In a survey of business leaders' views conducted by Nehrt (1977), a large portion of the respondents (70% ) disagreed with the statement that ``business graduates can learn all of the international aspects of business on the job.'' (Ball and McCulloch, Jr. 1993).

In a survey of 284 largest Canadian firms, Beamish and Calof (1989) found that the Canadian corporate leaders did not feel that business schools were adequately responding to their international business needs by training students who upon graduation can operate in a global context. These same respondents also recommended that business schools should internationalize business curricula.

Apparently, globalization of business has had a major impact on business schools' curricula everywhere. In a comprehensive, global survey of business schools in 1991-1992, Kwok, et al. (1994) found that a large portion of the respondents appeared to have ``substantial formal commitment'' to internationalize their curricula. Interesting enough, one popular approach taken by the business schools in implementing their commitment to internationalization of curricula was offering a general international business survey course.

The implications of the above cited studies for employment opportunities should be rather clear. Domestic economies have become very open, businesses have become globalized, and the need for personnel who have expertise and knowledge of international business have increased. The critical needs for people who have received training in the intricacies of international trade and finance provide an impetus for writing a book of this nature. This book aims to give the readers a concise treatment of the practical aspects of international business. Hopefully, by serious study of this book, the reader would survey all facets of international business. From that point, the reader would acquire the prerequisite for specialized training or more focused, concentrated study of any part of international business.

Yet, there are another group of people who may benefit from reading this book. The massive size of the foreign trade sector of the U.S. economy implies excellent profit-making opportunities for both domestic and foreign enterprises. Certainly, foreign firms have already taken full advantage of these opportunities and have aggressively penetrated U.S. markets in selling their products; yet the number of U.S. companies engaged in export markets is relatively small. Oddly enough, the statistics show that over the years, only 10% of U.S. manufacturers have attempted to sell in overseas markets.

Which U.S. companies are active exporters? What is the size distribution of firms which actively export products and services from the U.S.?

Unfortunately there is no publically available data on U.S. exports at the company level. The U.S. Department of Commerce, due to a confidentiality problem, does not publish the annual export sales of individual U.S. firms. Needless to say such data would be extremely useful in determining the relative export shares of large and small firms. Nevertheless, given that FORTUNE publishes the annual export sales of the top fifty U.S. industrial firms, we can make the following observations.

First, the top fifty U.S. industrial exporters exported almost $140.00 billions in 1993. This figure constitutes about 21% of the total U.S. exports in that year.

Table 1.2 shows the export sales and ranking of 25 leading U.S. exporters in 1993.

25 Leading U.S. Industrial Exporters: 1993

RANK	EXPORTERS	$ MILLIONS
1	General Motors	14,913.1
2	Boeing	14,616
3	Ford Motor	9,483
4	General Electric	8,498
5	Chrysler	8,397
6	Intl. Business Machines	7,297
7	Motorola	4,990
8	Hewlett-Packard	4,738
9	Philip Morris	4,105
10	Caterpillar	3,743
11	United Technologies	3,503
12	E.I. Du Pont De Nemours	3,500
13	Intel	3,406
14	McDonnel Douglas	3,405
15	Archer Daniels Midland	2,900
16	Eastman Kodak	2,242
17	Ray Theon	2,063
18	Compaq Computer	1,922
19	Digital Equipment	1,800
20	Lockheed	1,743
21	Allied Signal	1,699
22	Textron	1,589
23	Minnesota Mining & Mfg.	1,491.7
24	Weyerhaeuser	1,445
25	Dow Chemical	1,442

Source: Fortune, August, 1994.

In chapter two we will explore, in detail, the commodity composition and geographic distribution of U.S. exports and imports.

Factors Determining Firms' Export Activities

The literature on the subject identify three factors that determine firms export behaviour.

First, internationalization requires appropriate financial and personnel resources. The more financial and human resources available to a firm, the higher the probablity of its active involvement in export markets. This also implies that small firms do not have adequate resources to enter international markets, explaining the smaller proportion of small firms in the export markets.

Second, management attitude is an important determinant of export behaviour of the firms. Smaller firms are more risk averse than the large firms. Thus, the lack of information and higher sensitivity of smaller firms to the financial impact of unsuccessful international ventures tend to reduce the smaller firms' export activities.

Third, the limited scope of domestic markets tend to force internationalization of firms. When companies, by reaching the limits of the domestic markets, exhaust the possibility of further growth, they tend to enter the export markets in order to enjoy a lower cost of production and economies of scale(2).

The above analysis points out that there is a positive relationship between the firm's size and export behaviors. In fact, in a study which aimed at the empirical testing of this theory, Calof (1994) questioned 14,072 Canadian manufacturing firms and discoverd that there is a significant, positive relationship between the size and a firms' propensity to export. The survey also found that larger firms tend to export to more countries. Additionally, studies show that other variables such as advertising and promotion, capital intensity of operations, affiliation with multinationals are important determinantes of export activities of the firms.

U.S. Trade Deficits and Characteristics of Exporters

One possible impact of export apathy among many American firms is the large balance of payments(3) deficits the economy has suffered in recent years. Granted, balance of payments and trade deficits(4) could be the result of myriad trade and macroeconomic policies. Nevertheless, one can not exclude export apathy of many U.S. firms as a leading cause of the nation's trade deficit difficulties.

Why is the gap between U.S. exports and imports growing? Several reasons are often postulated which we will briefly discuss below.

1. The higher cost of production in the United States.
The relative higher cost of production in the United States results in non-competitive prices for U.S.-made goods and services. Higher U.S. prices reduce foreign demand for American goods and services.
2. High U.S. national income.
Since American import demand is partially determined by American income, as the U.S national income increases, so does the U.S demand for imports.
3. U.S. consumers' preference for foreign-made products.
Another important factor that determines the import demand is the consumers' preferences. Apparently, many U.S. consumers prefer, for instance, beers from the Netherland and Germany, cars from Germany and Japan, perfumes and wine from France to the same American-produced goods in recent years(6).
4. Foreign trade barriers against U.S.-made products.
The trade restrictions and barriers imposed by the foreign government against American products are another source of the U.S.-trade imbalances. For instance, in mid May 1995, Bill Clinton, the President of the United States, accused the Japanese government of imposing trade restrictions against the American automobile industry, and he imposed a 100% tariff against Japanese luxury automobiles, to become effective in a later date, if the Japanese did not open their automotive and automotive parts markets to U.S. exporters. The Japanese government vehemently denied the U.S. accusation, declared the U.S imposition of the tariff illegal, and complained to the newly formed World Trade Organization (WTO) that the U.S has violated the provisions of the multinational trade agreements.
5. Foreign governments' subsidizing exported products to the U.S.
Some people argue that foreign governments subsidize their domestic products in export markets. As an example, one can cite the U.S. government's complaint that European agricultural exports to the U.S. are subsidized.
6. Export apathy.
As was mentioned above, another reason cited for the consistent American trade imbalance in recent years is the export apathy of many U.S. firms. According to the U.S. Department of Commerce's estimate, in 1986 only 30,000 of 300,000 U.S. firms exported, while 18,000 U.S. firms which were capable of exporting did not export (Woodward, 1986).

One may identify the export apathy of most U.S. firms as a practical problem emerging from the inadequate experience on the part of enterprise managers in dealing with international business issues. For example, a leading international businessman explains the export apathy of U.S. firms as follows: ``Export apathy comes mostly from fear of sailing into unknown waters, ignorance of what the rest of the world is all about, suspicion of `foreign' business situations, and just plain laziness.'' ( Wiklund , 1986). A close examination of this assessment reveals that it is a lack of adequate information that may cause export apathy. In short, one may state that the difficulty of obtaining timely, relevant, and accurate information on different phases of international business is among the most formidable obstacles to international trade.

Characteristics of Exporting Firms and Their Managers

Studies have shown that the attitudes and personal characteristics of senior management as well as certain features of the firm have a significant effect on exporting and success in the international markets.

What characteristics make a manager a successful exporter? What features should a firm have in order to be considered a successful exporter? Burton and Schlegelmich (1987) surveyed 1500 managing directors in the United Kingdom and Germany and received 310 valid responses. What follows is a summary of the findings of this study.

Personal Characteristics of Senior Managers

1. Younger mangers are more likely to engage their firms in exporting than older managers.
2. There is a positive correlation between the export activities of the firm and the foreign language ability of the managers and the time the managers have spent in foreign countries.
3. Exporters have a higher commitment to planning and control than non-exporters.
4. The managers of the exporting firms tend to have more confidence in their firms competitive advantage(s), i.e., the ability to produce goods at a relatively lower cost or with a higher quality. This characteristic is a major factor in export initiation and commitment.
5. Exporters have tendencies toward less centralized organizational structures, pay higher wages, and tend to be more aggressive in their advertising as compared to non-exporters.
6. The top personnel of the exporting firms tend to have more formal education and apprenticeship training, are more fluent in foreign languages, and attach more importance to training.
7. Exporters tend to value development of new products and therefore allocate more resources to research and development.
8. Exporters tend to view entry into the new markets as an important strategy for improving security of the firm.
9. Exporters tend to value market knowledge and are more likely to conduct their own marketing research.
10. Exporters understand foreign business practices better than non-exporters and exhibit more dynamic behavior.
11. Exporters tend to be less pessimistic about the risks, costs, and obstacles associated with exporting than non-exporters.

Characteristics of Exporting Firms

1. Research and development is an important determinant for successful exporting as an innovative process.
2. Exporting firms tend to have more products than non-exporting firms.
3. Direct distribution of products becomes more appealing as the firm's foreign trade activities increase.
4. Export prices tend to be based more on cost factor rather than demand consideration.
5. Successful exporters tend to charge higher prices in the export markets relative to the domestic markets.

Chapter 2 describes the characteristics of the international sector of the U.S. economy. Chapter 3 deals with the structure of international trade and discusses the documents used in the conduct of the trade. Chapter 4 discusses the U.S. government's commercial policy and foreign trade support programs. Chapter 5 discusses international marketing research. Chapter 6 examines the problems of establishing distribution networks abroad. Chapter 7 discusses international promotion of exportable goods. Chapter 8 deals with pricing in international markets. Discussions pertaining to international banking, foreign exchange rates and markets, foreign exchange risk management, as well as international means of payments, are presented in chapters 9, 10, 11, and 12, respectively. Chapter 13 discusses foreign freight forwarding, and chapter 14 examines air and water transportation and warehousing. Finally, chapter 15 provides information on customshouse brokers.

Summary

The next section of the chapter stated some of the reasons for persistence of the trade deficit in the United States since the early 1980s. One of the reasons for the continuing trade imbalance is export apathy of many U.S. executives. The publically available data indicate that only a small fraction of Fortune 500 companies are active exporters.

Finally, the results of several studies dealing with the personality trait differences of the executives of exporting and non-exporting firms as well as the characteristics of exporting and non-exporting companies were examined.

Footnotes

1. Gross Domestic Product is defined as the monetary value of all the goods and services produced in a country irrespective of the national character of owners of the firms producing the output in a given year. The GDP is conceptually different than the Gross National Product (GNP). GNP is defined as the total monetary value of all goods and services produced by U.S.-owned firms anywhere in the world.
2. A firm enjoys the economies of scale if it can produce the output at the lowest total cost per unit.
3. The balance of payments account of a country is a systematic recording of all economic transactions between the residents of the reporting country and the residents of foreign countries.
4. The reader should recognize that the balance of payments and balance of trade are not identical concepts. The balance of trade, sometimes referred to as the net exports, is the difference between exports and imports. It constitutes only one part of the balance of payments account. In addition to the balance of trade, the balance of payments includes income flows from U.S. investments abroad and from foreign investments in the U.S., flows of capital to and from the U.S., official transactions, and statistical discrepancies.
5. For an interesting discussion of advertising, product--company image, and consumers' preferences see Assael, 1994.

References

Assael, H. (1994). Consumer Behavior and Marketing Action . Cincinnati: South-Western Publishing.

Ball, D. A. and McCulloch, Jr. (1993). ``The Views of American Multinational CEO`s on Internationalized Business Education for Prospective Employees'' Journal of International Business Studies, 24 (2):383-391.

Burton, F. N. and B. B. Schlegelmilch. (1987). ``Profile Analyses of Non-exporters Versus Exporters Grouped by Export Involvement,'' Mangement International Review 27:38-49.

Calof, J. L. (1994). ``The Relationship Between Firm Size and Export Behavior Revisited'', Journal of International Business Studies, 25 (2):367-387.

"Top 50 U.S. Industrial Exporters" , FORTUNE (August 22, 1994), P.132.

Kwok, Chuck C.Y., et al. (1994). ``A Global Survey of International Business Education in the 1990s.'' Journal of International Business Studies, 25 (3):605-623.

Nehert, L.(1977). Business and International Education. Washington, DC: American Council on Education, May.

Wiklund, E. (1986). International marketing: Marketing Exports pay Off. New York: McGraw-Hill.

Woodward, P. (1986). ``World Trade Week''. Business America , 9 (10):2-7.

For more information about this book, please contact the author at Soofi@UWPlatt.edu.