D270 Final Exam

Company Approaches to Dealing with Government Influence in Trade

- move operations to a lower-cost country (e.g., China, India, Vietnam, Mexico) - concentrate on markets that attract less international competition - adopt internal innovations: increase efficiency of current operations, innovate and create superior products, target high value market segments and increase branding - try to get government protection: "be careful what you ask for - you may get it."

why do the lessons of CH.5 matter to future managers?

- need a sharp understanding of stakeholders' views and their possible impacts on the MNC - need to understand the possible FDI impacts on the host and home countries - need to manage conflicting demands through effective communication - may need to negotiate directly with government policy makers - need to demonstrate ethical behavior and foster social responsibility - in a global environment with conflicting standards and many gray areas

Key problems with catfish intervention

- not all U.S. states have laws to allow the name change - difficult to get accurate production cost figures - no evidence that Vietnamese catfish poses health risks - cost to US government enforcement of regulations is too high (budget worries) - likely retaliation by Vietnam toward U.S. beef imports - likely dispute by Vietnam before the WTO. This would hurt U.S. trade relations with other countries - if protectionism succeeds, the consumer ends up paying with higher prices at supermarket and more taxes for government enforcement

major take away points chapter 7

- on one side, governments have to intervene in order to protect the best interests of their domestic stake holders - however, too much government intervention (in the form of protectionism) hurts consumers and tends to protect weak and inefficient industries and stifles competition - the US and China are still in a full-blown tariff war. stay tuned for small, slow changes the Biden administration unfolds and as the world recovers from Covid-19

implications/conclusions of economic systems

- the benefits of doing business in a given country are directly influenced by the size of the market, the wealth of consumers, and the openness, the stability, and the growth potential of the economy - the type of economic system is a strong predicator of a nation's present economic performance and its future economic prospects - the power of economic analysis is a function of identifying the best possible indicators and then understanding how they work both in isolation and interactively - there are many tools to help international managers analyze the Economic Environment. The key challenges involve the quality of the information and the ability to predict future changes

key topics in economic environment

- types of economic environment - degree of economic freedom - orientation of economic system - drivers of economic performance - foundations of economic potential

How did we get here (CH4 intro slide)

- we've talked about globalization, culture, political, and legal systems, their relationship to society and to an entire country - all of these shape the economic system that a nation uses and how it tries to manage it - the economic system then determines the characteristics and performance of the country market - this in turn provides opportunities, challenges, costs, and risks for international managers - understanding the economic environment is critical for an entry strategy and long term success of a foreign firm d

moral mazes: how should individuals and MNCs behave when doing business abroad?

- what is right and wrong may DIFFER by country: cultural dimensions, individualism vs. collectivism, religious values, economic circumstances, laws, social values, etc. - relativism vs. normativism - what is legal in the host country - what is legal in the home country - the problem of Extraterritoriality KEY: Societal views are influences by ALL of these

MNC stakeholders: what do they want?

MNCs must balance the interests of all these people - trade-offs among constituencies stakeholders, the collection of constituencies that an organization must satisfy to survive in the long run, include: - shareholders - employees - customers - suppliers - government (home and host country) - NGOs and environmental groups - society at large - etc. in the long run, the aims of all stakeholders must be adequately met or the firm may not survive

country characteristics and conditions

measures (conditions): economic wealth, economic growth rate, per capita income, purchasing power, population size, labor force demographics, human development index, gross national wellness, natural resource endowments, geographic size, geographic location measures (outcomes): political freedom index, economic freedom index, level of globalization, investment in infrastructure, treatment of outsiders, level of bureaucracy in business, level of centralization/decentralization, rule of law or rule of man, level of transparency, corruption perceptions index, level of stability (political/economic)

Misery index

specification: the sum of a country's inflation and unemployment rates. the higher the sum, the greater the economic misery implication: higher misery discourages spending and investment in the face of growing austerity

developing economies

low incomes, inefficient capital movement, uneven economic environment, trade restrictions, unstable institutions, uneven infrastructure and development, limited competition, cronyism and corruption, low economic freedom

public debt

specification: the total of a state's financial obligations; measures what the government borrows from its citizens, foreign organizations, foreign governments, and international institutions implication: decreasing debt opens growth opportunities, growing debt signals increasing austerity, rising taxes, and if uncontrolled, debt crises that impose political, economic, and social costs

Purchasing Power Parity (PPP)

the prices of goods and services vary from country to country due to, among other things, differences in cost of land, labor, capital, productivity rates, government regulations, etc. GDP/GNI can distort the usefulness of income PPP is estimated by calculating the value of a universal "basket of goods" purchased with one unit of a country's currency compared to the value which an equivalent unit of currency could buy in another country. This adjustment can provide a more useful assessment of country's income

economic issues for international business

what is the level of development of a particular economy? - what is the size, growth potential, and stability of the market? what type of economic system does the country have? - does the government view foreign capital as competition with or in partnership with public or local private enterprises? - is the company's industry in that country's public or private sector? - how does the government control the nature and extent of public enterprise? how will doing business there affect our firm? - which entry modes make most sense for the country? - what adjustments does a particular Environment require?

where in the world is the income and where are the people? why does it matter? (dollar street activity)

world population is $7 billion - level 1: $0-$3000 a year (1 billion) - level 2: $3000-$8000 a year (3 billion) - level 3: $8000-$24000 a year (2 billion) - level 4: $24000-$128000 a year (1 billion)

what is wrong with corruption and bribery?

- higher levels of corruption lead to lower economic growth and per capita income levels - corruption erodes the authority of the government which condones it - corruption disclosures damage the reputation of the country and the MNEs from there (locally and globally) - it is costly to companies and consumers (cost and prices NOTE: "relativism" may not apply - locals in highly corrupt countries may not necessarily condone it

what determines societal views toward international business?

- historical events (wars and foreign policy conflicts) - perceived impact of Globalization - trade and economic policy - national security issues - deteriorating economic situation - environmental, health, and safety issues - a sense of nationalism, ethnocentrism - we are unique, different - views toward immigrants and refugees - the targeted influence of the media

who wins by protectionism

- importing-competing industries: more sales, higher prices - government: revenues from tariffs, political appeasement of interest groups - domestic producers (e.g., VERs) - some stakeholders and special interest groups

responsible responses by managers and MNCs

- knowing and obeying local and home country laws - developing and enforcing a corporate-wide code of conduct - fostering a Socially Responsible approach to doing business abroad - the Bottom of the Pyramid Approach (BOP): partnering with governments and NGOs to develop products and services for the poorest consumers

big challenges with emerging economies

- lack of developed communication, power generating, and transportation infrastructure - inefficient distribution channels - underdeveloped financial markets - high economic and political volatility - problems finding and working with suitable busienss partners - high levels of government involvement and control - high levels of corruption

Market Economic System

- mostly private (individual or business) ownership of resources - advocates decentralized, entrepreneurial innovation - applies the invisible hand, laissez faire, property rights, and individualism - Philosophical Anchor: capitalism high degree of economic freedom

the value of economic freedom

"the "index," the first comparative analysis of its kind, measures the degree of economic freedom each country allows in 10 key areas: trade policy; taxation policy; government consumption of economic output; monetary policy; capital flows and foreign investment; banking policy; wage and price controls; property rights; regulations; and the black market. Each country's performance in these areas was given a numerical score. E.g., in the area of corporate taxes, a nation earns a "1" if it has limited or no taxes imposed on corporate profits. A flat corporate tax of less than 25% or a progressive top tax of less than 25% earns it a "2"; a top rate between 26% and 35% earns it a "3"; a rate between 36% and 45% earns a "4"; and top rates above 46% earns a "5". The lower the score, the better. 1994 WSJ Survey/Heritage Foundation higher economic freedom means less government control that helps managers act in their own right

other areas in which international managers and MNCs are under societal scrutiny today

- environmental sustainability - energy conservation and sustainability - pharmaceutical/medical industry issues - labor issues (sweatshops and more): low wages, child labor, poor work conditions, long work hours, right to unionize, etc. - intellectual property protection - anticompetitive industrial behaviors

four MNC choices toward business abroad

"exploitive": views differences in wages, working conditions, and living standards as exploitable opportunities "transactional": engages in law-abiding, non-exploitive, commercial interactions "responsive": acts in a way that is sensitive and responsive to the needs of all its immediate stakeholders "transformative": commits to leading initiatives to bring life-enhancing changes to the broader society.

Mixed economic system

- government and private ownership of economic resources mixed in varying proportion - advocates optimizing economic efficiency, promoting egalitarianism, and preempting self-interest - Philosophical Anchor: Socialism middle/mixed degree of economic freedom

command economic system

- government owns most or all resources - advocates centralized, large-scale, capital-intensive production - applies the visible hand of the state, central planning, and collectivism - Philosophical Anchor: Communism low degree of economic freedom

Gross national Income (GNI)

- (formerly the GNP - Gross National Product) - GNI is the market value of final goods and services newly produced by domestically-owned factors of production, at home and abroad - Quick measure to compare one country against another: size and demand - Ford production value in USA and Mexico WOULD COUNT - Toyota (Japanese company) production value in USA would NOT COUNT - Countries with large populations and high per capita GNI are most desirable in terms of market potential

Alphabet of Emerging Economies

- BRIC: Brazil, Russia, India, China - BASIC: Brazil, South Africa (AS), India, China (same as BRIC without Russia and added South Africa) - BIC: Brazil, India, China - BRICA: Brazil, Russia, India, China, Arab countries (Saudi Arabia, Qatar, Kuwait, Bahrain, Oman, and the United Arab Emirates) - BRICET: Brazil, Russia, India, China, Eastern Europe, Turkey - BRICIT: Brazil, Russia, India, China, Indonesia, Turkey - BRICK: Brazil, Russia, India, China, South Korea - BRICS: Brazil, Russia, India, China, South Africa - BRIIC: Brazil, Russia, India, Indonesia, China - BRIMC: Brazil, Russia, India, Mexico, China - CARBS: Canada, Australia, Russia, Brazil, South Africa - CIVETS: Colombia, Indonesia, Vietnam, Egypt, Turkey, South Africa - MIST: Mexico, Indonesia, South Korea, Turkey - N-11 (the Next 11): Bangladesh, Egypt, Indonesia, Iran, Mexico, Nigeria, Pakistan, Philippines, South Korea, Turkey, Vietnam - PPICS: Peru, Philippines, Indonesia, Colombia, Sri Lanka

Emerging Economies at a Glance

- Contains 85% of world's population (6 billion) - Account for 60% of global GDP, up from 36% in 1980 and 50% in 2006 - Account for 50% of global Exports, up from 20% in 1970 - Have contributed huge reduction in global poverty (China alone has lifted 600 million people out of poverty in last 30 years) - Have contributed 80% of global growth since 2008 financial crisis (helping save jobs in advanced countries) - China is now 1st or 2nd largest Trading Partner for 78 countries So there is a new reality today... - Advanced economy firms look toward them as growth markets - Advanced economy influence in Global Governance is reduced - Advanced economy governments may view them as partners to solve regional and global problems - Advanced economy citizens may view them as competitive threats for jobs

key economic measures

- GNI, GDP - Rate of Economic Growth - Population Size - Purchasing Power Parity (PPP) - Degree of Stability - Balance of Payments - Sustainability of Happynomics [Net National Product (NNP), Genuine Progress indicators (GPI), Human Development Index (HDI), Your Better Life Index (YBLI), Gross National Wellness Index (GNWI), Gross National Happiness (GNH), Happy Planet Index (HPI)]

Commonalities of Big Emerging Markets (BEMs)

- Large territory (availability of land and natural resources) - Big populations (consumer and labor) - Significant economic policy strides (liberalization): low-income now, but rapid growth by using liberalization engine and by attracting foreign direct investment - Massive infrastructure needs - Aspirations of technological leadership - Market growth spillovers within their region - Significant political influence in the world

Efforts to control corruption

- NGOs like Transparency International - Multilateral efforts and accords at work: OECD, International Chambers of Commerce, United Nations, etc. - Regional Level Efforts as in the EU - National Level Efforts like in the US: Foreign Corrupt Practices Act of 1977 (FCPA), Example of Extraterritoriality - Industrywide Efforts - Company Level Efforts: Internal Codes of Conduct

what aspects of corruption are captured?

- bribery - effective criminal prosecution of corrupt officials - efforts to contain corruption and effectively enforce integrity - degree of officials using public funds for private gain without facing consequences - red tape and excessive bureaucratic burden which may increase opportunities for corruption - diversion of public funds - meritocratic vs. nepotism appointments in civil service - adequate laws on financial disclosure and conflict of interest prevention - state capture by narrow vested interests - legal protection for whistleblowers, journalists, investigators when they are reporting cases of bribery and corruption

key topics in globalization and society

- common societal views - conflicting demands again - dual impacts of the MNC - Balance of Payments Effect - various ethical dilemmas - company responses

key topics in government involvement

- conflicting demands - rationales for intervention - instruments of control - who wins and who loses? - dealing with government involvement part of institutional and physical factors

who loses by protectionism

- consumers - foreign producers - internal economy: efficiency loss (specialization and competition), encourages lobbying - global economy: loss of specialization/efficiency, retaliation practices

reasons NOT to influence trade

-expensive -creates inefficiencies: domestically and worldwide -encourages lobbying -encourages retaliation -damages competitiveness (e.g., Former Soviet Union, Argentina, Venezuela, many others)

G20

10 are now emerging economies Includes G7: Canada, France, Germany, Italy, Japan, United Kingdom, United States Other Advanced nations: Australia, South Korea Emerging: Argentina, Brazil, China, India, Indonesia, Mexico, Russia, Saudi Arabia (also developing), South Africa (also developing), Turkey Other: European Union

the problem of global economic diversity

214 separate, discrete economies - 188 countries (G-7, G20, 6 case studies in D270) - 26 other economies (autonomous regions, micro-states, etc.) - from US, Germany, China, Chile to Macao, San Marino, Vanuatu, Tuvalu

emerging economies/economies in transition

24-30 economies moving from developing toward developed; GDP growth, manufacturing exports, rising incomes, modernizing infrastructure and institutions, Foreign Direct Investment targets, liberalization, high aspirations

G7

Canada, France, Germany, Italy, Japan, United Kingdom, United States Most economically developed group - 7 top 10 largest economies - 7 top 15 leading exporters - 7 top 15 in per capita income - 7 top 10 UN donors - 6 countries with HDI of 9.0+ - 6 countries with Per Capita Income over $40,000 (PPP) - 3 of 9 with Nuclear Weapons

Goal for Government Intervention: Fight Unemployment

Logic: the unemployed (or those fearing imminent job loss) are a powerful pressure group. Full employment is a politically positive goal for every government Tools: tariffs, quotas, domestic content laws problems: affects another country's exports and, thus, their employment situation

how did we get here? (chapter 5)

Chapter 1: Globalization and IB - specific CRITICISMS of globalization (loss of sovereignty, local objectives, overdependence, xenophobia; environmental stress; growing income inequality) Chapter 2: Cultural Environment - the ethnocentric perspective - governments and society are motivated to protect their cultural identity - MNCs carry home country flag abroad Chapter 3: Political and Legal Environment - Political and legal system can favor or discriminate against foreign MNCs - Unstable political situations tend to create pressures for dramatic changes Chapter 4: Economic Environment - countries have differing opportunities and challenges for firms - unstable economic situations tend to create pressures for dramatic changes - the economic health of a country may affect local reactions toward foreign firms Chapter 7: Globalization Influence in IB - governments have legitimate control over its borders and economy due to Sovereignty - governments face conflicting demands from stakeholders Chapter 5: Globalization and Society - the MNC as an actor and instrument of FDI - MNC evokes a "Love-Hate" relationship from home and host countries - demands which may not always be rational and may often conflict - foreign managers may be impacted due to their country of origin

case example of the rational for intervention: the U.S. Vietnamese Catfish Dispute

Context - rise of aquaculture, farmed not wild - 4 US states dominant in production - Vietnam has advantages (weather, cheaper labor, etc.) Who cares, who acts? - 4 US states (86% of production in just 2 states): 90% of domestic production, 10000 employees - Vietnam share of US sales rising: 20% in 2005 to 75% in 2013, 1 million employees, 2% of Vietnam's economy Tactics? - Lobby US government to change Vietnam type to "tra", "basa", and "pangasius" - Marketing - change local catfish name to premium brand "delecata" - Accuse Vietnam of predatory pricing - below cost of production - Claim contamination and possibly affecting heath of US consumers Intervention tools? - Dumping and 64% tariff, Standards and Labelling with Country of Origin

State of Emerging Economies

Emerging economies permeate a large part of the world, with many countries in South America and Asia. Forecasted to make a combat in terms of long-term growth

countries on the economic freedom scale

Free (80-100 economic freedom score) (Australia, Singapore): - companies, both domestic and foreign, face none to few restrictions making or selling products - government institutes enforce extensive property rights - negligible government interference in the marketplace - slight corruption or risk of expropriation - government endorse openness to international trade and investment - regulation is minimal and centers on improving transparency, fairness, and firm conduct Mostly Free (70-79.9) (U.S. Canada, Taiwan): - limited state interference in the movement of labor, capital, and goods - property rights are acknowledged and protected - foreign companies are subject to few discriminatory restrictions - judicial system is subject to delays and may inconsistently enforce contracts - corruption is unusual; the risk of expropriation is low - sizable government ownership of compnaies in key sectors Moderately Free (60-69.9): - inflexible, often rigid, labor regulations - inward and outward capital movements face restrictions - moderate government interference in economic affairs - regulations are somewhat burdensome and costly - the government exercises ownership and control of significant economic sectors - the judiciary may be unduly influenced by public officials and private agents Mostly Unfree (50-59.9) (Bangladesh, China, India): - considerable state action interferes with individual choice - government owns or controls some to many companies - foreign companies are subject to cursive policies - regulations restrict repatriation of funds foreign headquarters - private use of capital faces significant barriers - laws are often opaque and arbitrarily enforced - the court system is inefficient and subject to delays - the State hinders the free flow of foreign commerce Repressed (0-49.9) (Argentina, North Korea, Iran): - an oppressive bureaucracy administers burdensome regulations - corruption is pervasive and endemic - foreign companies, if permitted, navigate extensive barriers to entry and mobility - private property ownership is, at best, weakly protected, at worst, outlawed - supervision and regulation restrict, if not eliminate, personal choice in the marketplace - the State owns some to all property and directly produces goods and services - coercion and constraint pervade an unfair market system

Gross Domestic Product (GDP)

GDP: the market value of production that takes place WITHIN a nation's borders, WITHOUT regard to whether the production is created by domestic or foreign enterprises Examples: - BOTH a Ford and Toyota manufactured in the USA COUNTS towards our GDP - A Ford produced in Mexico would NOT - Countries with large populations and high per capita GDP are most desirable in terms of market potential

Conflicting and Economic Growth and Employment Effects of FDI

Home Country Losses: - FDI outflows may: create jobs abroad at the expense of jobs in the home country Gains: - FDI outflows may: create additional jobs at home by increasing sales abroad Host Country Losses: - FDI inflows may: drive up local labor costs, displace domestic investment, disadvantage local competitors, destroy local entrepreneurship Gains: - FDI inflows may result in: transfer of capital, technology, and/or managerial expertise; creation of new jobs

Boeing vs. Airbus: Anatomy of a Government Subsidy (example of government intervention)

Key Challenges: - Price of aircraft: $90-442 million - Cost to develop in R&D: Billions of dollars Government intervention tool: - direct and indirect subsidies How do governments subsidize the industry? - cash disbursements - tax breaks - infrastructure construction - direct government purchases - indirect government contracts (defense, NASA) Why do government subsidize? - protection from foreign competition - promotes economic development - creates local jobs - generates spinoff industries - generates tax revenues

common acronyms of emerging economies

LDCs - less developed countries BEMs - big emerging markets BRICs - Brazil, Russia, India, China RDEs - rapidly developing economies NICs - newly industrialized countries CIVETS - Colombia, Indonesia, Vietnam, Egypt, Turkey, South Africa

Goal for Government Intervention: Improve Comparative Position

Logic: Because some countries subsidize, employ high tariffs/quotas, or manipulate their currency, their firms are more competitive internationally. Therefore, the playing field must be made level Tools: anti-dumping actions, countervailing duties, tariffs Problems: difficult to prove dumping versus effective cost containment, leads to prolonged retaliation (tit-for-tat actions)

Goal for Government Intervention: Maintaining essential industries

Logic: defense, transportation, scarce resources should be under local control. critical in times of war and during national emergencies Tools: FDI regulations, Regulatory standards, subsidies, export bans Problems: hurts foreign competitors, affects other countries' exports, how to define "essential"?

Goal for Government Intervention: Protect "Infant" Industries

Logic: long-term growth comes from new, innovative industries. new industries are too small to compete with global competitiors, so government needs to provide them protection while they become competitive Tools: subsidies, FDI regulations, domestic content laws Problems: makes foreign products uncompetitive, limits foreign ownership, when does an industry reach "adulthood"?

Goal for Government Intervention: Maintain Spheres of Influence

Logic: politically friendly countries should be rewarded economically. politically unfriendly countries should not be rewarded or even punished Tools: tied aid, subsidies, preferential tariffs/quotas, embargoes Problems: affects other countries exports, makes non-favored countries less competitive, hurts firms and individuals who are not responsible for government's policies

post 2020 U.S. Presidential Election Approach to the Recent Tariff Wars-Abrupt Change

Previous U.S. Government Approach - pursue unilateralism in trade and relations - use national security as key rationale to use tariffs and quotas (breach of WTO rules) - reject the role of WTO and rules-based trade system - pull out of or re-negotiate previous trade agreements - battle on trade issues with strong allies (mexico, canada, EU, japan, South Korea) to send signal to China - most aggressive battle with China one-on-one Current U.S. Government Approach - regain multilateral approach: support the WTO, rejoin WHO, rejoin Paris Climate Accord, etc. - encourage/pressure China to change its trade policies and join too - use the WTO rules to address unfair trade issues with China - lead by example - quickly repair trade relations with Canada, Mexico (NAFTA/USMCA), Japan, South Korea, and EU - partner with strong trade allies to exert common pressure on China (power of the group)

economic freedom index dimensions (heritage foundation)

Rule of Law - Property Rights: ability of individuals to accumulate, use, trade, and sell private property, protected and safeguarded by clear, specific, and explicit laws that are fully and fairly enforced by the state - Government Integrity: how does corruption, in forms such as cronyism, extortion, graft, bribery, patronage, nepotism, and self-dealing, by creating insecurity, coercion, uncertainty, and opportunism, subvert economic transactions, activities, and relationships - Judicial Effectiveness: degree that the judicial system impartially interprets the legal framework and justly applies the law in order to sustain the public's confidence that the legal system operates with an absence of bias against parties Limited Government - Fiscal Health: extent that a government institute systematic policies that manage taxation, public revenues, and public debt to support and sustain stable economic conditions - Government spending: the burden imposed on the economic system by the monies spent by government agents in acquiring goods, providing services, and transferring income payments to its citizens - Tax Burden: the proportion of total income and profits that residents and compnaies pay, in the form of taxes such as income, payroll, consumption, tariff, sales, and property, to the local, state, regional, and federal government Regulatory Efficiency - Labor Freedom: the legal codes and regulatory policies that influence workers' rights in the workplace on matters such as occupational safety and health, wages and hours of work, collective bargaining, and employment discrimination - Business Freedom: the legal, regulatory, infrastructure contexts that influence an enterprise's efficient management of matters such as the ease of starting, operating, and closing a business - Monetary Freedom: measure of price stability and scale and scope of price controls in terms of their support and distortion of market activity Open Markets - Trade Freedom: the openness of an economy to the export and imports of goods and service as moderated by the scale and scope of tariff and nontariff barriers applied by the govenrment to regulate trade - Investment Freedom: the absence of investment restrictions, such as burdensome bureaucracy, private property regulation, and foreign exchange controls, that complicate or control an individual's choice to allocate resources to activities and opportunities - Financial Freedom: the independence an individual or company attains that buffers, defends, and protects them from interference by government agents, officials, and policies each of the 12 economic freedoms within these categories is graded on a scale of 0 to 100. A country's overall score is derived by averaging these 12 economic freedoms, with equal weight being given to each (higher the better)

Emerging Market Hot Spots 2020

Seems to be in Asia (China) and South America

A Caution on Economic Measurement

System Complexity: between 188-214 economies and each one functions uniquely Market Dynamism: external and internal conditions are constantly changing. Yesterday's explanations may not hold today. Market Interdependence: no country is isolated. Actions in one market affects others Data Overload: there is a flood of data today and there are differing levels of quality. This may create analysis paralysis

Bottom of the Pyramid Approach (BOP)

Tier 1: - Annual per capita: more than $20,000 - Population in millions: 75-100 Tier 2 and 3: - Annual per capita: $1500-$20000 - Population in millions: 1500, 1750 Tier 4: - Annual per capita: less than $1500 - Population in millions: 4000

country's balance of payments (BOP) accounts at a glance

current account - value of exports and imports of physical goods, such as oil, grain, or computers (referred to as visible trade) - receipts and payments for services, such as banking and advertising, and other intangible goods, such as copyrights and cross-border dividend and interest payments (also referred to as invisible trade) - private transfers, such as money sent home by expatriate workers - official transfers, such as international aid, on which the government expects no returns capital account - long-term capital flows (e.g., money invested in foreign firms as well as profits made by selling those investments and returning the money home) - short-term capital flows (e.g., money invested in foreign currencies by international traders as well as funds moved around the world for business purposes by companies with international operations)

Balance-of-Payments Effects of FDI

a firm doing business abroad should monitor a host country's balance-of-payments effects to: - anticipate corrective actions by host country government: import restrictions, export requirements, local content regulations, ownership restrictions, foreign exchange restrictions - develop a firm-government negotiation strategy - to prepare a PR strategy toward stakeholders (e.g., trade unions)

Mercedes-Benz and chicken tax (example of government intervention)

article explains how Mercedes-Benz vans was avoiding "chicken tax" on imported trucks to avoid taxes, MB would build complete vans in Germany, disassemble them and ship pieces to South Carolina, and American workers would put them back together, making them emerge as :locally made"

Ford Motor Co & Chicken Tax (example of government intervention)

article title: "Ford gets a scolding on 'chicken tax' maneuver in the U.S." History: - in 1963 several European Govs. slap a 25% on U.S. chickens - U.S. Gov. retaliates with 25% on several European products and pickups and other work vehicles from Europe Fast forward to 2013: - to avoid a 25% import tariff on its own cargo vans from Europe, Ford imports passenger version and converts them in the USA - US Gov. finds out, Ford has to pay fines and pay back tariffs anyways Conclusions/Lessons: - governemnt policy may negatively impact the firms and industries it was intending to help - once government intervention is implemented, it may be extremely difficult to eliminate

Wal-Mart in India (example of government intervention)

article: "Where Walmart isn't: four countries the retailer can't conquer" Wal-mart sells $135 billion outside USA in 26 countries. But NOT in Germany, South Korea, Russia, nor India Reason for PULLING OUT of India now: Indian government is requiring Foreign Retailers to source 30% of products from small and medium sized Indian businesses

corruption

citizens depend on the integrity of people in positions in authority corruption is the abuse of entrusted power for private gain

types of economic systems

command, mixed, market

effect of government involvement in IB

each country has - cultural values, attitudes, and beliefs - political policies and legal practices - economic forces through trade enhancements and restrictions, this affects the compnaies competitive environment in the foreign market

rationales for intervention (why governments intervene in trade)

economic rationales: fighting unemployment, protecting infant industries, promoting industrialization, improving comparative positions (economic relationships with other countries) noneconomic rationales: maintaining essential industries, promoting acceptable practices abroad, maintaining or extending spheres of influence, preserving national culture

why government intervention?

firm goals: competitive advantage, raise returns, market penetration, low cost resources, high productivity, risk reduction government goals: jobs, raise domestic incomes, increase tax base, environmental protection, comparative advantage, regional economic development common goals: community service

stakeholders and their conflicting demands: what do they want? can everyone win?

government policy makers have to consider - large, medium, and small firms - consumers - employee - local communities - NGOS and Environmental Groups - Industry Groups - Citizens

developed economies

high income, high industrialization, efficient capital movement, advanced infrastructure, significant international trade, stable institutions, high economic freedom

the dynamic aspects of the current tariff war

how relevant is the current situation? have we seen it before? (see "A Tariff War explained, Smooth-Hawley Act) how do countries react when targeted? what are effects for warring countries? (see "Tariff War and Reaction by EU and China (Harley Davidson and other sectors)

possible POSITIVE contributions of MNEs

investment: links to local companies, increased productivity, improved efficiency, capital formation human resources: training, employment, managerial skills technology: R&D, industrial upgrading, new capital equipment trade: export expansion, lower-cost imports environment: access to clean technologies, pollution - abatement skills, companywide standards

possible CRITICISMS and NEGATIVE impacts of MNEs

investment: sheer size of FDI threatens host country, instrument of home country foreign policy, can also hold home country hostage human resources: exploits cheap labor abroad, creates low wage pressure at home, undermines power of unions at home technology: outdated technology abroad, labor or capital intensive technology abroad, gives away valuable technology abroad trade: causes import increases in host country, causes import increases in home country, kills local firms in host country and thus expots environment: takes high pollution production abroad, searches for lax regulations abroad, lobbies governments to delay regualtions

2018 Tariff Wars: the effects are unfolding in spite of Covid-19

mechanics of a tariff to affect foreign trade (how tariffs raise prices): 1. they raise the importers pay to bring a product into their country 2. that may raise the prices businesses charge 3. leading consumers to buy fewer or less-expensive (domestic) products main points to track: - who collects tariffs? - cost/price effect - who pays the tariff? - intended effects - who is impacted most for tariffs? outcomes of tariffs to present: - about 50% of US-China trade now has tariffs implemented in 2018 - average US Tariff on China goods is now 20%, up from 3% - measuring the effects these tariffs will take many years - negotiating to remove these tariffs will take many years, if ever

does it hold after all these years? economic freedom and standard of living today

most countries and free and seems to be growing a few repressed countries are resource rich (oil) (Algeria, Equatorial Guinea, Iran, Surinam) fewer repressed in number than mostly unfree... a few repressed countries skews category

who has responsbility for creating order in the World Economy

multilateral organizations: 1. International Monetary Fund (IMF): established 1944, 189 member countries. works to stabilize the system and help countries facing balance of payment and debt crises 2. United Nations (UN): established 1945, 193 member countries. seeks to prevent conflict with global security norms and assistance for humanitarian crises 3. World Bank: established 1945, 189 member countries. Founded to reconstruct postwar Europe, it now provides loans and policy advice to developing countries 4. World Trade Organization (WTO): established 1948 as the General Agreement on Tariffs and Trade (GATT), replaced 1995 by the WTO, 164 member countries. sets rules for international trade and adjudicates trade disputes. member countries agree to WTO rules, but can also negotiate free trade agreements with each other. US has trade deals with 30 countries 5. North Atlantic Treaty Organization (NATO): established 1948, 29 member countries (30 now). bulwark of western security and alliance

understanding the balance-of-payments effect of FDI (Host Country BOP Effects)

net import effect (m-m1): - POSITIVE if the FDI results in the substitution of imported products for local production - NEGATIVE if it results in an increase in imports net export effect (x-x1): - POSITIVE if the FDI results in the generation of exports - NEGATIVE if it results in a decline in exports CAUTION: FDI may also stimulate home country exports of complementary products to the host country net capital flows (c-c1): - POSITIVE if the FDI results in capital inflows to build plants and capacity - NEGATIVE if it results in outflows to repatriate profits back to the home country - are DIFFICULT to access because of the time lag between: i) inward flow of investment funds and ii) the subsequent outward flow of remitted earnings from that investment although initial capital flows to the host country are positive, they may be negative in the long run if capital outflows eventually exceed the value of the investment

top 20 largest economies by GDP, 2020

on nominal scale, US is largest and China is second with PPP adjustment, China becomes the top g and the US is second Takeaway: look at PPP adjusted, and GDP per capita that can give you a different better story

Understanding Societal Views

see 7 photos/graphics

foreign direct investment

specification: controlling ownership in a business enterprise in one country by an entity based in another country implication: promotes development, job expansion, industrialization and exports. Transfer skills and technologies

deflation

specification: general decline in prices, often caused by a reduction in the supply of money or credit or declining aggregate demand implication: slows economic growth; anticipating lower prices, consumers defer purchases, thereby risking a deflationary spiral. increases the real value of debt

Poverty

specification: multidimensional condition whereby a person or community lacks the essentials for a minimum standard of well-being and life implication: persistent poverty destabilizes performance and constrains potential. creates stress points that challenge civil society

balance of payments (BOP)

specification: summary of an economy's trade and financial transactions, as conducted by individuals, businesses, and government agencies, with the rest of the world implication: indicates if a country has sufficient savings to pay for its imports as well as if it produces enough income to finance growth

income distribution

specification: the distribution of income among a nation's population; estimated by the GINI coefficient implication: equality stabilizes society and opens opportunities: inequality promotes debt, stress, and risks

unemployment

specification: the share of out-of-work citizens actively seeking employment for pay relative to the total civilian labor force implication: people gainfully employed testify to the competency of policymakers to sustain a productive economy. Persistent unemployment indicates government ineptitude

government intervention tools

•Tariffs (various types) •Subsidies •Tied Aid and Loans •Import Quotas •Voluntary Export Restraints (VER's) •Embargoes •Domestic Content Laws/ Buy Local Legislation •Regulatory Standards and Labels •Specific Permission Requirements •Administrative Delays •Anti-dumping actions and Countervailing Measures •Immigration