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Appendix Indicators of Internationalization A small sample of indicators yields substantial evidence of the extent of internationalization. A simple economic measure of the degree of internationalization of a nation's economy is the ratio of direct investment abroad to domestic wealth or assets or the ratio of assets or employment abroad to that at home. Using these ratios, Robert Lipsey found that internationalization has been growing over the past 20 years In six foreign countries, though all continue to lag the United States substantially.) Other economic measures show the same trend. For instance, between 1977 and 1988 the stock of foreign direct investment held by U.S. firms more than doubled, from $146 billion to $327 billion, of which more than 40 percent was in manufacturing. More importantly, the stock of foreign direct investment in the United States multiplied 15 Ames between 1973 and 1988, reaching $328.8 billion; of that amount, $121.4 billion or about 37 percent was in manufacturing.2 These data deserve special emphasis. In the span of a decade a sea change occurred in global investment flows, with the United States shifting from the primary source country to the major home country. Beginning in 1978 the nation began to capture a growing proportion of foreign direct 1 Robert E. Lipsey, "The Internationalization of Production," Working Paper No. 2923, National Bureau of Economic Research, Inc., Cambridge, Mass., 1989. 2U.S. Department of Commerce, Bureau of Economic Analysis. These numbed are based on historic costs rather than current value as represented by replacement costs. 59

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60 investment inflows while supplying a decreasing share of outflows.3 In 1985 the United States captured 40 percent of total foreign direct investment while supplying only 25 percent of outflows. By 1988 capital inflows into the United States reached $58.4 billion, of which $28.2 billion was in manufacturing.4 Another indicator of internationalization is the growing importance of trade in the U.S. economy. Both exports and imports virtually doubled as a percentage of GNP since 1970; exports are now about 13 percent of GNP and imports about 15 percent.5 Manufactured exports as a percentage of shipments rose from 6.2 percent in 1978 to 8 percent in 1986; the fastest growth was in high-technology products, which rose from 25 percent of manufactured exports in 1975 to 37 percent in 1986.6 As the importance of international trade has grown, so has the role of intrafirm trade. Made earned out between affiliates of the same firm accounted for about 35 percent of U.S. exports and about 40 percent of imports in 1980. These percentages vain by industry and country, ranging as high as 80 percent of U.S. imports from Singapore.7 For trade in manufactures alone, United Nations estimates for 1982 show intrafirm trade accounted for 39 percent of U.S. manufactured exports and 63 percent of manufactured imports.8 Another critical factor is the rise of nonequity forms of cooperation be- tween international corporations, collectively called interfirm agreements, as major mechanisms for achieving internationalization. The use of li- censing, cross-licensing, cooperative marketing and research agreements, organizational services, turnkey contracts, and other formal and informal arrangements between customers and suppliers, as well as between com- peting firms, has proliferated in the past decade. Though comprehensive Data are difficult to obtain, various studies have documented the number and range of such alliances in a number of key industries.9 For example, a recent study of international ventures in the semiconductor industry found 183 instances of international activity, including acquisitions and foreign direct investment, by firms based in the United States, Europe, Japan, and 3 United Nations, Transnational Corporations in World Development: An Overview, 198S, p. 74. 4U.S. Department of Commerce, Bureau of Economic Analysis. 5 Of lice of Technology Assessment, Technology and the American Economic Transition, Washing- ton, D.C., U.S. Government Printing Office, 1988, p. 18. 6National Science Board, Science and Eng,ineeringIndicators 1989, pp. 376-377. 7Jane Sneddon Little, ''Intra-Flrm Trade and U.S. Protectionism: Thoughts Based on a Small Survey," New England Economic Review, JanuaIy-FebruaIy 1986, pp. 42-51. United Nations, Transnational Corporations in World Development: An Overview, p. 93. 9 For example, see David C. Mowe~y, ea., International Collaborative Ventures in US. Man~fac- turing, Cambridge, Mass., Ballinger Publishing Co., 198S, and Vonortas, The Changing Economic Context: Strategic Alliances Among Multinationals.

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61 Korea over the period 1978-1984; of these, 121 (66 percent) were interfirm agreements, including joint ventures, technology exchanges, licensing and cross-licensing, and second sourcing.~° Studies of other industries, includ- ing machine tools, commercial aircraft, and automobiles, document major increases in the use of interfirm agreements and many cases in which such alliances have become the preferred route to internationalization. Science and technology indicators also confirm the growing internation- alization of the U.S. economy. Between 1970 and 1988 foreign applicants increased their share of U.S. patents awarded from about 27 percent to 48 percent. In particular, Japan's share quintupled, from 4 percent to 21 percent, over this period. Another indicator is the number of foreign students in U.S. universities. In 1988 foreign students comprised approxi- mately 46 percent of full-time enrollments in engineering graduate schools, received half of U.S. doctorates in engineering, and comprised 66 percent of engineering postdoctoral students. This dominance of foreign students in the nation's universities is a major factor in the internationalization pro- cess. On one hand, they are an important resource for the United States since a significant number remain in this country. Those who go home, on the other hand, vastly upgrade the skills available in their countries, cre- ating new opportunities for multinational manufacturers to perform R&D and engineering functions globally and to use sophisticated production technologies in plants worldwide. These and other indicators clearly demonstrate both the growth of internationalization in the United States and the changing nature of the internationalization process. Though U.S. multinational corporations re- main preeminent in global assets and have maintained their share of world manufacturing exports at about 18 percent,~3 foreign investment in the United States is increasing rapidly. Even more importantly, simple mea- sures of assets no longer capture the pervasiveness of internationalization. The growing use of interfirm agreements in many forms is creating link- ages among companies that are virtually impossible to quantify or even to document fully. These alliances are based on corporate assessments of strengths and weaknesses and strategic decisions on how best to leverage corporate resources to build the global market presence that is now crucial to competitive success. i°Vonortas, pp. 39-46. National Science Board, Science and EngineenngIndicators 1989, p. 356. Ibid., pp. 218, 222, 225. 13Robert Lipsey and Irving Kravis, "The Competitiveness and Comparative Advantage of U.S. Multinationals, 1975-1983," Working Paper No. 2051, National Bureau of Economic Research, Inc., October 1986, Cambridge, Mass., p. 494.

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