New Developments in International Business
Authors: Fouraker Lawrence E. 
Published: December 2007

Introduction

Since the end of World War II enormous changes have taken place in international business activities. World trade has been the latest growing major economic variable with the exception of the growth in U.S. foreign direct investment. This is because (1) international trade barriers have been reduced; (2) the major industrial powers have made their currencies freely convertible (for current account settlements); and (3) the dollar has been used as a reserve currency and as a medium of international exchange.

Two factors have contributed to the increase of world trade. Tariff negotiations, such as the Kennedy Round, have reduced tariff levels and the number of quotas on a worldwide basis, and formation of common markets, especially the European Common Market, have eliminated trade tariffs between common market partners.

The elimination of many national exchange restrictions on current account payments facilitated the growth in trade. The growth in international trade far exceeded the growth in gold supplies available to central banks, so an additional source of international reserves was needed. Nations have to have sufficient "working capital" to carry on their increased trading activities while keeping the value of their currency within a 1-percent band in terms of the dollar (except in case of devaluation). It is need for liquidity has been filled by the large amount of dollars held abroad - nearly $50 billion at the present time (somewhat over half in private hands). The amount of dollars held abroad increased to a sum substantially in excess of the U. S. reserves. U. S. reserves are mostly gold and currently total about $17 billion. Some central bankers in foreign countries are apprenhensive about the strength of the dollar, and have pressed for reforms in international monetary arrangements. To make the world less reliant on dollars, a new form of international currency the Special Drawing Right of the International Monetary Fund (IMF) has begun to be issued periodically.

The importance of gold will continue to decline in all probability. The use of the dollar as an international currency will probably increase, supplemented by the IMF's Special Drawing Rights. There is a good possibility that two other developments will take place to enable countries to adjust their prices relative to the prices of other nations, which is necessary to correct recurring disequilibrium in the balance of payments. It is likely that there will be a widening of the exchange-rate bands. Instead of a currency staying within 1 percent of the fixed value, it will be allowed to vary several percentage points. This will permit nations to adjust their prices without going through the political trauma of a devaluation. It is unlikely the dollar will be devalued in terms of gold; instead, those nations whose prices tend to become too low relative to those of other nations so that they run a positive trade balance will appreciate their currency, making it more expensive in terms of dollars. The recent action of Germany is an illustration of this.

The net result of these environmental developments is that we will continue to have a relatively stable international monetary system in the future and a continued growth in international business.

THE UNIVERSE OF MULTINATIONAL ENTERPRISE

Probably two-thirds of all foreign direct investment is American owned and controlled. The value of U. S. foreign direct investment is about 10 times what it was in the late 1940's. The book value of overseas operations of U.S. companies now exceeds $70 billion and the total assets easily exceed $100 billion.

Approximately 4,000 U. S. companies have at least one foreign operation. About 200 of these companies control three-fourths of the total foreign assets owned by U. S. companies. These largest 200 U. S. firms have more than 8,000 foreign subsidiaries. The significance of these multinational enterprises lies not so much in their size, but in their concentration in key industries. These are the industries that require managerial skill and high technological levels.

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