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1、Chapter,INTRODUCTION&OVERVIEW,1,1-2,What is globalization?,The shift towards a more integrated and interdependent world economy Two components:The globalization of marketsThe globalization of production,1-3,Globalization of markets,The merging of distinctly separate national markets into a global ma
2、rketplaceTastes and preferences converge onto a global normFirms offer standardized products worldwide creating a world market,1-4,Globalization of markets,Significant differences still exist between national markets on many relevant dimensionsThese differences require that marketing and operating s
3、trategies and product features be customized to best match conditions in a country.,1-5,Globalization of markets,Countries are differentRange of problems are wider and more complexGovernment intervention in trade and investment creates problemsInternational investment is impacted by different curren
4、cies,1-6,Globalization of production,Refers to sourcing of goods and services from locations around the world to take advantage of Differences in cost or quality of the factors of productionLaborLandCapital,1-7,Swan Optical,Manufacturing,1-5,Design,Global Production,Example 1,1-8,Emergence of global
5、 institutions,Globalization has created the need for institutions to help manage,regulate and police the global marketplaceGATTWTOIMFWorld bankUnited Nations,1-9,Global drivers,Macro factors that underlie trend towards greater globalizationDecline in trade barriersTechnological change,Chapter,Countr
6、y Differences in Political Economy,2,1-11,Political Systems,System of Government in Nations”Political systems have two dimensionsDegree of collectivism vs.individualismDegree of democracy vs.totalitarianism,1-12,Types of economic systems,Market economy:what is produced&in what quantity is determined
7、 by supply/demand and signaled to producers through a price systemCommand economy:planned by governmentMixed economy:a balance of both of the aboveState-directed economy:the state directly influences the investment activities of private enterprise through“industrial policy”,1-13,Legal systems,Three
8、main types of legal systems in use around the world:common lawcivil law theocratic law,1-14,Legal systems,Four issues important to international businessContract lawProperty rights Protection of intellectual propertyProduct safety and liability,1-15,States in transition,Reasons for rise of democrati
9、c systems in the 1980s and 1990sTotalitarian regimes failed to deliver economic progress Real time information with modern telecommunication technologiesEmergence of prosperous middle classes,1-16,The nature of economic transformation,DeregulationRemoval of legal restriction to the free play of mark
10、et systemsAllowing establishment and operations of private enterprisesPrivatizationTransfer of ownership of state owned enterprise to private individualsLegal systemsLaws that support a market economy,Chapter,Differences in Culture,3,1-18,Determinants of culture,Social structureReligionLanguageEduca
11、tionEconomic philosophyPolitical philosophy,Fig:3.1,Chapter,International Trade Theory,4,1-20,Mercantilism:mid-16th century,A nations wealth depends on accumulated treasureGold and silver are the currency of tradeTheory says you should have a trade surplus.Maximize export through subsidies.Minimize
12、imports through tariffs and quotasFlaw:“zero-sum game”,1-21,Mercantilism-zero-sum game,David Hume in 1752 pointed out that:Increased exports leads to inflation and higher pricesIncreased imports lead to lower pricesResult:Country A sells less because of high prices and Country B sells more because o
13、f lower pricesIn the long run,no one can keep a trade surplus,1-22,Theory of absolute advantage,Adam Smith:Wealth of Nations(1776)argued:Capability of one country to produce more of a product with the same amount of input than another country can varyA country should produce only goods where it is m
14、ost efficient,and trade for those goods where it is not efficientTrade between countries is,therefore,beneficial Assumes there is an absolute balance among nationsExample:Ghana/cocoa,1-23,Theory of comparative advantage,David Ricardo:Principles of Political Economy(1817).Extends free trade argumentE
15、fficiency of resource utilization leads to more productivity.Should import even if country is more efficient in the products production than country from which it is buying.Look to see how much more efficient.If only comparatively efficient,than import.Makes better use of resourcesTrade is a positiv
16、e-sum game,1-24,Heckscher(1919)-Olin(1933)Theory,Export goods that intensively use factor endowments which are locally abundantCorollary:import goods made from locally scarce factors Note:Factor endowments can be impacted by government policy-minimum wagePatterns of trade are determined by differenc
17、es in factor endowments-not productivityRemember,focus on relative advantage,not absolute advantage,1-25,Product life-cycle Theory-R.Vernon,(1966),As products mature,both location of sales and optimal production changesAffects the direction and flow of imports and exportsGlobalization and integratio
18、n of the economy makes this theory less valid,1-26,Product life cycle theory,Fig 4.5,1-27,New trade theory,In industries with high fixed costs:Specialization increases output,and the ability to enhance economies of scale increases learning effects are high.These are cost savings that come from“learn
19、ing by doing”,1-28,New trade theory-applications,Typically,requires industries with high,fixed costsWorld demand will support few competitorsCompetitors may emerge because of“First-mover advantage”Economies of scale may preclude new entrantsRole of the government becomes significantSome argue that i
20、t generates government intervention and strategic trade policy,1-29,Porters diamond,Success occurs where these attributes exist.More/greater the attribute,the higher chance of successThe diamond is mutually reinforcing,Fig 4.6,1-30,Determinants of Competitive Advantage in nations,Fig 4.8,Chapter,Pol
21、itical Economy Of International Trade,5,1-32,Instruments of trade policy,Tariffs-oldest form of trade policySpecificAd valoremGood for governmentProtects domestic producersReduces efficiencyBad for consumersIncreases cost of goods,1-33,Instruments of trade policy-subsidies,Government payment to a do
22、mestic producerCash grantsLow-interest loansTax breaksGovernment equity participation in the companySubsidy revenues are generated from taxesSubsidies encourage over-production,inefficiency and reduced trade,1-34,Instruments of trade policy-Quota,Import quotaRestriction on the quantity of some good
23、imported into a countryVoluntary export restraint(VER)Quota on trade imposed by exporting country,typically at the request of the importing country,1-35,Instruments of trade policy-Quota,Benefits producers by limiting import competitionJapan limited exports to 1.85 mm vehicles/yearCost to consumers-
24、$1B/year between 81-85.Money went to Japanese producers in the form of higher pricesEncourages strategic action by firms in order to circumvent quota,1-36,Instruments of trade policy-local content,Requires some specific fraction of a good to be produced domesticallyPercent of component partsPercent
25、of the value of the goodInitially used by developing countries to help shift from assembly to production of goods.Developed countries(US)beginning to implement.For component parts manufacturer,LCR acts the same as an import quotaBenefits producers,not consumers,1-37,Instruments of trade policy-admin
26、istrative policies,Bureaucratic rules designed to make it difficult for imports to enter a country.France video tapesJapanese masters in imposing rules.Tulip bulbs.Federal Express,1-38,Instruments of trade policy-anti dumping policies,Defined asSelling goods in a foreign market below production cost
27、sSelling goods in a foreign market below fair market valueResult ofUnloading excess production.Predatory behaviorRemedy:seek imposition of tariffs,1-39,Political arguments for intervention,Protecting jobs and industriesCAP(Europe)and VERNational securityDefense industries-semiconductorsRetaliationPu
28、nitive sanctions,1-40,Political arguments for intervention,Protecting consumersGenetically engineered seeds and cropsHormone treated beefFurthering foreign policy objectivesHelms-Burton Act.DAmato ActProtecting human rightsMFN,1-41,Economic arguments for intervention,Infant industry.Oldest argument-
29、Alexander Hamilton,1792Protected under the WTOOnly good if it makes the industry efficient.Brazil auto-makers-10th largest-wilted when protection eliminatedRequires government financial assistance.Today if the industry is a good investment,global capital markets would invest,1-42,Economic arguments
30、for intervention,Strategic trade policyGovernment should use subsidies to protect promising firms in newly emerging industries with substantial scale economiesGovernments benefit if they support domestic firms to overcome barriers to entry created by existing foreign firms,1-43,Development of the wo
31、rld trading system,Great DepressionUS stock market collapseSmoot-Hawley tariff(1930)Almost every industry had its“made to order tariff”Foreign response was to impose own barriersUS exports tumbled,1-44,The World Trade Organization,The WTO was created during the Uruguay Round of GATT to police and en
32、force GATT rulesMost comprehensive trade agreement in historyFormation of WTO had an impact onAgriculture subsidies(stumbling block:US/EU)Applied GATT rules to services and intellectual property(TRIPS)Strengthened GATT monitoring and enforcement,Chapter,Foreign Direct Investment,6,1-46,Two forms of
33、FDI,Horizontal Direct InvestmentFDI in the same industry abroad as company operates at home.Vertical direct investmentBackward-investments into industry that provides inputs into a firms domestic production(typically extractive industries)Forward-investment in an industry that utilizes the outputs f
34、rom a firms domestic production(typically sales and distribution),1-47,Decision framework,How high are transportation costs and tariffs?,Is know-how amenable to licensing?,Is tight control over foreign operation required?,Can know-how be protected by licensing contract?,Then license,Export,No,Yes,Ye
35、s,Low,No,Yes,No,Horizontal FDI,Horizontal FDI,Horizontal FDI,High,Chapter,The Political Economy Of Foreign Direct Investment,7,1-49,Political ideology and FDI,RadicalView,PragmaticNationalism,FreeMarket,1-50,Benefits of FDI to host countries,Balance-of-payments effect.Current account-surplus/deficit
36、Capital accountIncreases competition and spurs economic growth,1-51,Home country FDI benefits,Improves balance of payments for inward flow of foreign earningsCreates a demand for exports.Export demand can create jobsIncreased knowledge from operating in a foreign environmentBenefits the consumer thr
37、ough lower pricesFrees up employees and resources for higher value activities,1-52,Costs of FDI to host countries,Can drive out local competitors or prevent their developmentProfits brought home hurts(debit)a hosts capital accountParts imported for assembly hurt trade balanceCan affect sovereignty a
38、nd national defense,1-53,Home country problems with FDI,Negative effect on Balance of Payments Initial capital outflowMNC uses foreign subsidiary to sell back to home marketMNC uses foreign subsidiary as a substitute for direct exportsPotential loss of jobs,Chapter,Regional Economic Integration,8,1-
39、55,Levels of economic integration,Fig 8.1,Chapter,The Foreign Exchange Market,9,1-57,Economic theories of exchange rate determination,Exchange rates are determined by the demand and supply of one currency relative to the demand and supply of anotherPrice and exchange rates:Law of One PricePurchasing
40、 Power Parity(PPP)Money supply and price inflationInterest rates and exchange ratesInvestor psychology and“Bandwagon”effects,Chapter,The International Monetary system,10,1-59,The gold standard,Roots in old mercantile trade.Inconvenient to ship gold,changed to paper-redeemable for gold.Want to achiev
41、e balance-of-trade equilibrium,USA,Japan,Gold,Trade,1-60,Between the wars,Post WWI,war heavy expenditures affected the value of dollars against goldUS raised dollars to gold from$20.67 to$35 per ounceDollar worth less?Other countries followed suit and devalued their currencies,1-61,Bretton Woods,In
42、1944,44 countries met in New HampshireCountries agreed to peg their currencies to US$which was convertible to gold at$35/oz.Agreed not to engage in competitive devaluations for trade purposes and defend their currenciesWeak currencies could be devalued up to 10%w/o approvalIMF and World Bank created
43、,1-62,Principal duties,Surveillance of exchange rate policies(No longer fixed rate exchange)Financial assistance(including credits and loans)Technical assistance(expertise in fiscal/monetary policy),1-63,Role of the World Bank,International Bank for Reconstruction and Development(IBRD)Purpose:To fun
44、d Europes reconstruction and help 3d world countries.Overshadowed by Marshall Plan,Turns to developmentLending money raised by WB bond sales AgricultureEducationPopulation controlUrban development,1-64,Collapse of the fixed exchange system,Pressure to devalue dollar led to collapse President Johnson
45、 financed both the Great Society and Vietnam by printing moneyHigh inflation and high spending on importsAugust 8,1971,Nixon announces dollar no longer convertible into gold.Countries agreed to revalue their currencies against the dollar March 19,1972,Japan and most of Europe floated their currencie
46、sIn 1973.Bretton Woods fails when key currency(dollar)is under speculative attackNow have a managed-float system,1-65,The floating exchange rate,Jamaica Agreement-1976Floating rates acceptableGold abandoned as reserve assetIMF quotas increasedIMF continues role of helping countries cope with macroec
47、onomic and exchange rate problems,1-66,Exchange rates since 1973,More volatile:Oil crisis-1971Loss of confidence in the dollar-1977-78Oil crisis 1979,OPEC increases price of oilUnexpected rise in the dollar-1980-85Rapid fall of the dollar-1985-87 and 1993-95Partial collapse of European Monetary Syst
48、em-1992Asian currency crisis-1997,1-67,Floating exchange rates,Trade balance adjustmentsMonetary policy autonomy,1-68,Fixed exchange rates,Monetary disciplineSpeculationUncertaintyTrade balance adjustments,1-69,IMF members exchange rate policy,2002,Fig 10.2,1-70,Crisis management by the IMF,Role has
49、 expanded to meet crisisCurrency crisiswhen a speculative attack on a currencys exchange value results in a sharp depreciation of the currencys value or forces authorities to defend the currencyBanking crisisLoss of confidence in the banking system leading to a run on the banksForeign debt crisisWhe
50、n a country cannot service its foreign debt obligations,1-71,Crises have common underlying causes,Common causes:High inflationWidening current account deficitExcessive expansion of domestic borrowingAsset price inflation,Chapter,The Global Capital Market,11,1-73,The main players in a generic capital
