International Political Economy

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International Political Economy
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Termiflex, Wally, and the EU
MBB-Aerospatiale Surface-to-Surface Missiles
Termiflex Industrial Computer Terminals
Volvo Robotics
Rediffusion Flight Simulators
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Factors/Issues of Globalization
Economic
Cultural
Political
Legal
Competitive
Technology
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GlobalizationThe Objective Realities

• The integration of national economies into the
  international economy through
• Trade
• Foreign direct investment
• Capital flows
• Technology

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Global Corporate Chess Board
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GlobalizationThe Human Factor

• driven by a combination of economic,
  technological, sociocultural, political and
  biological factors
• the transnational dissemination of ideas,
  languages, or popular culture

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Fair Trade and Outsourcing
in the media
In politics
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Globalization and Life
Off-shoring manufacturing to Honduras, El Salvador
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Globalization and Life
In-shoring of manufacturing to Louisiana,
Texas via immigration
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Globalization and Life
Appliance Call Center Bangalore
Unemployment Center Detroit
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GlobalizationSome Unintended Consequences

• Unemployment in some industry sectors and some
  skill levels
• Bankruptcies in some industry sectors
• Resurgence in economic and cultural nationalism
• Brain drain
• Easier transmission of H1N1 virus
• Transnational pollution and CO2 flows

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What is Globalization?Perspective of Countries

• How are countries connected globally?
• How big is globalization?
• Why does it happen?
• Whos doing it?
• Is it connected to prosperity?

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A.T. Kearney/Foreign Policy Globalization Index
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Global Top-20
Foreign Policy and A.T. Kearney Annual
Globalization Report
Ireland
Singapore
U.S.
Czech Republic

• Globalization Index
• Political Engagement
• Technology Contact/Transfer
• Personal Contact
• Trade and FDI

Politica
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Merchandise Exports(US billions)
U.S.
Germany
Japan
France
UK
Mex
Kor
Ire
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Merchandise Imports (US billions)
U.S.
Germany
Japan
UK
France
Mex
Kor
Ire
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Foreign Direct Investment - Out( of World Total)
U.S.
UK
Germany
Japan
France
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Foreign Direct Investment - In( of World Total)
U.S.
UK
France
Germ
Japan
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Comparative Advantage

• Germany
• 10 units of factor inputs (labor capital) to
  produce 1 keg of beer
• 2 units of factor inputs (labor capital) to
  produce 1 box of pretzels
• United States
• 15 units of factor inputs to produce 1 keg of
  beer
• 5 units of factor inputs to produce 1 box of
  pretzels
• Which country should manufacture
• and export only beer?
• Which country should manufacture
• and export only pretzels?

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Comparative Advantage

• Germany
• 10 labor ? pretzels 5 pretzels per beer
  
• beer 2 labor
• US
• 15 labor ? pretzels 3 pretzels per beer
  
• beer 5 labor

Opportunity Costs price of beer in terms of
pretzels, using labor
as common denominator
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Comparative Advantage

• Germany
• 10 labor ? pretzels 5 pretzels per beer
• beer 2 labor
• US
• 15 labor ? pretzels 3 pretzels per beer
• beer 5 labor
• Germany has absolute advantage in both beer and
  pretzels
• U.S. has comparative advantage in beer, and
  should manufacture and export beer to Germany
• Germany has comparative advantage in pretzels,
  and should manufacture and export pretzels to the
  U.S.

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Growth in TradeIndexed 1950 100
1600 1200 800 400 100
Trade
GDP
1950 1960 1970 1980 1990
2000 2010
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What is Globalization?Perspective of
Multinational Corporations (MNCs)

• Motivations for global operations and reach
• How are companies engaging in globalization?
• How big is their involvement?
• What are the effects on managers, customers,
  employees, profits, etc.?

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Extent of Globalization for MNCs
Foreign Sales as Percent of Total Foreign Assets as Percent of Total
Exxon 72 64
IBM 57 44
Ford 31 44
General Electric 32 48
Citigroup 35 41
Hewlett-Packard 55 52
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Orange Percentage of exports to
the U.S. by intra-firm trade (via
FDI) to total exports (This is
NOT volume of total
exports) Green Globalization Index
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Growth in TradeIndexed 1950 100
1600 1200 800 400 100
Trade
GDP
1950 1960 1970 1980 1990
2000 2010
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Trade and Investment Policy
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Free Trade?
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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?

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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

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Cost of Import ProtectionJapanese Rice Market
Domestic Supply
World Price
Domestic Demand
Domestic Quantity Produced
Domestic Quantity Consumed
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Cost of Import ProtectionJapanese Rice Market
Domestic Supply
Tariff Price
World Price
Domestic Demand
New Domestic Quantity Produced
New Domestic Quantity Consumed
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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
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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?
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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
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What is Globalization?Perspective of Consumers
vs. Regular Joes

• Outsourcing
• Cheaper Products vs. Job Loss
• Fair Trade -- Product and Production Standards
• Working standards
• Living wage
• Environmental standards

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Outsourcing Bogeyman

• a new way of doing international tradea good
  thing
• Gregory Mankiw, Bush Administration Economic
  Adviser
• CEOs who outsource are economic Benedict
  Arnolds
• John Kerry, 2004 Presidential Candidate
• owe apology to every worker in America
• Tom Daschle, 2004 Senate Minority Leader
• Job Losses in Manufacturing?
• What kind of jobs?
• Causal factors
• Outsourcing vs. technology and productivity
  gains?
• Would occur anyway

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Voluntary Export Restraints
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Managerial Responses to VERs
TMM-K Georgetown

• Shift Production to U.S.
• Sell pricier, more profitable cars

1971 Honda
2008 Acura MDX
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FDI Host Country Perspective
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FDI Home Country Perspective
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Economic Integration
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Global Linkages
Country A
Country B
Policy Linkages
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Global Linkages
Country B
Country A
Integration
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Regionalization of Economic Activity

• Levels of Economic Integration
• Free Trade Area
• Customs Union
• Common Market
• Economic Union
• Questions and Issues
• Effects on trade and FDI patterns
• Evolution toward worldwide integration
• Impact on management of MNCs

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Trade in Isolation
20
15
Prevailing Tariff Rates on Imports
10
33
40
100
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Free Trade Area
20

• No tariffs among members
• Tariffs with non-members unchanged

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100
50
Trade and Investment in Isolation
Imports
33
40
Cheapest Producer
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Trade Creation from FTA Formation
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Imports
Cheapest Producer
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Trade and Investment in Isolation
Cheapest Producer
Imports
33
40
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Trade Diversion from FTA Formation
Cheapest Producer
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Imports
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Customs Union

• FTA plus...
• Common tariff policy for non-members

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33
33
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Common Market
No Non-Tariff Barriers

• Customs Union plus...
• Reduction of non-tariff barriers among members

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Economic Union

• Common Market plus...
• Single currency
• Harmonization of Monetary and Fiscal Policies

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F/X
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Foreign Exchange

• What is it?
• Why does it change?
• Risk for international managers
• How to manage risk

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Trade, FDI, and the Economy
Computers
Cash

• Increase demand for Japanese computers trade
  deficit
• Increase demand for computer inputs (components,
  labor, etc.) inflationary
• Increase demand for Yen appreciates
• Stronger Yen increases U.S. prices decreases
  demand for Japanese computers

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Foreign Exchange Fluctuations and
VolatilityIndex of Swiss Franc vs. Dollar1990
100
1990
1980
2000
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Sharply Depreciating Peso vs. Dollar
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A Medium of ExchangeThe Linkage Between
Currencies
World Market for Euros
World Market for Dollars
Price /
Price /
S
S
.77 /
1.30 /
D
D
Same marketdifferent perspective.
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Linkage Between Currencies
World Market for Euros
World Market for Dollars
Price /
Price /
S
S
S
1.35/
.77/
1.30/
.74/
D
D
D
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Other Forces Causing Change

• Foreign Direct Investment
• Foreign Portfolio Investment
• MNCs
• Government Debt Instruments
• Currency Arbitrage and Speculation
• Governmental Intervention
• Official and Unofficial pegs
• International Agreements (e.g., G-7, the Euro)
• Posturing (e.g., talking the dollar down)

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The Big Mac Index
www.economist.com
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Short-term F/X Management

• Currency Hedges
• Forward Contracts
• Options
• Negotiation of Ratcheted Pricing Schedule
• Adjustment of Prices and Target Profits
• Lower foreign prices to keep market share when
  home currency appreciates lowers profit margin
• Raise foreign prices to keep profit margins when
  home currency depreciates less price
  competitive

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Today US Dealer to Import BMWs

• Sales Contract
• Quantity 100 BMW 750s
• Price 100,000 each
• Payment Due in 3 months
• Value of Sales Contract
• 10.0 million
• Spot Rate 1.30 /
• 13.0 million

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In Three Months Payment is DueUncovered
Transaction

• Euro appreciates
• New spot rate 1.35 /
• 10.0 million
• Adjusted Value of Sales Contract
• Risk penalty 0.05 per traded
• 13.5 million
• US Dealers Loss 500,000

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Today US Dealer to Import BMWsHedged Transaction

• Sales Contract
• Quantity 100 BMW 535s
• Price 100,000 each
• Payment Due in 3 months
• Value of Sales Contract
• 10 million
• at 90-day Forward Rate 1.305 /
• Insurance premium 0.005 per traded
• 13.05 million

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In Three Months Payment is Due Hedged
Transaction

• Euro appreciates
• New spot rate 1.35 / (Doesnt matter!!!)
• 10 million
• Adjusted Value of Sales Contract
• Locked-in Forward Rate 1.305 /
• 13.05 million
• Cost of Hedge (insurance premium) 50,000

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In Three Months Payment is Due Hedged
Transaction

• Euro Depreciates
• New spot rate 1.25 /
• 10 million
• Adjusted Value of Sales Contract
• Locked-in Forward Rate 1.305 / (Spot
  better!!)
• 12.5 million
• Currency Windfall - Cost of Hedge 450,000

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Medium-Term F/X Management

• Balance sheet hedge
• Match foreign assets with same level of foreign
  liabilities in same currency
• Cash flow hedge
• Match foreign A/P with A/R in same currency

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Long-Term F/X Management

• Shift sourcing and procurement
• Shift production
• Cut costs / improve productivity