Growth in Trade and FDI Indexed: 1950 = 100

1
Growth in Trade and FDIIndexed 1950 100
1600 1200 800 400 100
Trade
FDI
GDP
1950 1960 1970 1980 1990
2000
2
Global Linkages
Management Linkages
Country A
Country B
Policy Linkages
Trade and Investment Linkages
3
Managers choose to Attack new markets Entry
modes Shift manufacturing Alliances, Mergers, etc.
Governments try Tariffs, quotas FDI Regulations
Country A
Country B
Effects are Persistent Trade Deficit Loss of
Jobs Higher Domestic Prices
4
Policy Exemplars . . .

• Buyout Bid of Fairchild Semiconductor
• Buyout blocked by DoD -- national security
• Big-3 Automakers
• VERs of 1980s
• Lobbying during Bush administration
• Kodak in Japanese Market
• SII Talks
• 301 Filing
• GEs Acquisition of Honeywell
• Blocked by EU

5
How Nations Influence Trade and Investment
Activity Through Policy

• Overt/Visible Policies
• Supporting/Strategic Policies
• Follow-up Questions
• How well to these policies work?
• What are the side effects?
• Retaliation?
• How might managers of MNCs respond?

6
Free Trade Doubletalk
7
USTR Definition of Trade Barriers

• Government laws, policies, or practices that
  either
• Protect domestic products from competition
• Artificially stimulate exports of particular
  domestic products

8
Overt Policy Alternatives

• Restrict Imports (tariffs, quotas, VERs)
• Restrict FDI
• Incoming (F/X controls, local content)
• Outgoing (tax code, expatriation disincentives)
• Restrict Exports (DoD restrictive munitions)
• Export Promotion (subsidies, tax credits)
• Import Promotion (tax credits, favors)
• FDI Incentives (subsidies for infrastructure,
  training development, market access)
• Preferential Govt. Procurement

9
Cost of Import ProtectionJapanese Rice Market
Domestic Supply
World Price
Domestic Demand
Domestic Quantity Produced
Domestic Quantity Consumed
10
Cost of Import ProtectionJapanese Rice Market
Domestic Supply
Tariff Price
World Price
Domestic Demand
New Domestic Quantity Produced
New Domestic Quantity Consumed
11
Cost of Import ProtectionJapanese Rice Market
Domestic Supply
Deadweight Loss
Tariff Price
Extra Revenue
Tariff
World Price
Domestic Demand
New Domestic Quantity Produced
New Domestic Quantity Consumed
12
Cost of Import ProtectionJapanese Rice Market
Domestic Supply
Deadweight Loss
Tariff Price
Extra Revenue
Tariff
World Price
Domestic Demand
New Domestic Quantity Produced
New Domestic Quantity Consumed
Jobs saved? At what price?
13
Cost to Domestic Consumers per Job Saved
Extra Revenue for Firm Tariff Revenue to
Government Deadweight Loss

800 million
800 million 10,000 jobs
80,000

/job
14
FDI Host Country Perspective
15
FDI Home Country Perspective
16
Porters Diamond of National Competitive
Advantage
17
The Economy, Stupid!

• Strategic Supporting Policies
• Free trade and FDI
• Infrastructure
• Education
• Antitrust and competition
• Intellectual Property Protection
• Tax Incentives on RD
• Technical Standards
• Many others