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International Investment

Leading exporters and importers in world trade in merchandise and services, 2003

Value Value per Value Value per
Rank Exporters (in $ billions) capita Rank Importers (in $ billions) capita
1 United States 1011.5 3,440 1 United States 1531.2 5,208
2 Germany 863.9 10,472 2 Germany 772.5 9,364
3 Japan 542.4 4,271 3 United Kingdom 509.1 8,542
4 France 485.6 8,093 4 Japan 493.5 3,886
5 China (excl. Hong Kong) 484.3 373 5 France 474.2 7,903
6 United Kingdom 448.0 7,517 6 China (excl. Hong Kong) 468.0 360
7 Italy 364.8 6,311 7 Italy 364.8 6,311
8 Netherlands 357.4 22,338 8 Netherlands 327.7 20,481
9 Canada 314.6 10,148 9 Canada 295.0 9,516
10 Belgium 297.7 29,770 10 Belgium 276.9 27,690
SOURCE: Computed from trade statistics in International Trade Statistics 2004, http://www.wto.org/english/res_e/statis_e/its2004_e.pdf,
accessed September 30, 2005.

Table 2

higher the per capita trade, the more closely intertwined is to 2003, which is the lowest level since 1993. It was only
that country’s economy with the rest of the world. Inter- developing countries, most of which are from Asia, Africa,
twining of economies by the process of specialization due and the Pacific Rim, that witnessed an increase. The
to international trade leads to job creation in both the United States—once the world’s largest FDI recipient
exporting country and the importing country. country in the world—was outperformed by China,
Nevertheless, beyond the simple figure of trade as a whose FDI inflow reached $53 billion in 2003.
rising percentage of a nation’s GDP lies the more interest- In the past, FDI was considered to be an alternative
ing question of what rising trade does to the economy of to exports in order to avoid tariff barriers. Today, how-
a nation. A nation that is a successful trader—that is, it ever, FDI and international trade have become comple-
makes goods and services that other nations buy and it mentary. For example, Dell Computer uses a factory in
buys goods and services from other nations—displays a Ireland to supply personal computers in Europe instead
natural inclination to be competitive in the world market. of exporting from Austin, Texas. Similarly, Honda, a
The threat of a possible foreign competitor is a powerful Japanese automaker with a major factory in Marysville,
incentive for firms and nations to invest in technology Ohio, is the largest exporter of automobiles from the
and markets in order to remain competitive. Also, apart United States. As firms invest in manufacturing and dis-
from trade flows, foreign direct investment, portfolio tribution facilities outside their home countries to
investment, and daily financial flows in the international expand into new markets around the world, they have
money markets profoundly influence the economies of added to the stock of FDI.
countries that may be seemingly completely separate. The increase in FDI is also promoted by the efforts of
many national governments to attract multinationals and
FOREIGN DIRECT INVESTMENT by the leverage that the governments of large potential
Foreign direct investment (FDI)—which means invest- markets, such as China and India, have in granting access
ment in manufacturing and service facilities in a foreign to multinationals. Sometimes trade friction can also pro-
country—is another facet of the increasing integration of mote FDI. Investment in the United States by Japanese
national economies. Since the 1980s, the overall world companies is, to some extent, a function of the trade
inflow of FDI increased twenty-five-fold and in 2000 the imbalances between the two nations and of the U.S. gov-
inflow of FDI reached a record high of $1.39 trillion. In ernment’s consequent pressure on Japan to do something
2000, developed countries represented more than three- to reduce the bilateral trade deficit. Since most of the U.S.
quarters of world FDI inflow, while developing countries trade deficit with Japan is attributed to Japanese cars
reached only $249 billion in the same year. In 2003, how- exported from Japan, Japanese automakers, such as
ever, global inflows of FDI declined for the third year in a Honda, Toyota, Nissan, and Mitsubishi, have expanded
row, which was prompted again by a fall in FDI inflows to their local production by setting up production facilities
developed countries. In particular, the FDI inflows to the in the United States. This localization strategy reduces
United States fell by 53 percent to $30 billion from 2000 Japanese automakers’ vulnerability to retaliation by the

414 ENCYCLOPEDIA OF BUSINESS AND FINANCE, SECOND EDITION