Termiflex, Wally, and the EU Termiflex Industrial Computer Terminals MBB-Aerospatiale Surface-to-Surface Missiles Rediffusion Flight Simulators Volvo Robotics

Global Corporate “Chess Board”

Fair Trade and Outsourcing …in the media In politics…

Globalization and Life Page 4 Off-shoring manufacturing to Honduras, El Salvador

Globalization and Life Page 5 In-shoring of manufacturing to Louisiana, Texas via immigration

Globalization and Life Page 6 Unemployment Center Detroit Appliance Call Center Bangalore

Globalization The Objective Realities  The integration of national economies into the international economy through:  Trade  Foreign direct investment  Capital flows  Technology Page 7

 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 CO 2 flows Page 8 Globalization Some Unintended Consequences

Factors/Issues of GlobalizationEconomic Political Cultural Technology Competitive Legal

What is Globalization? Perspective of Countries o How are countries connected globally? o How big is globalization? o Why does it happen? o Who’s doing it? o Is it connected to prosperity?

Global Top-20Politica Globalization Index = Political Engagement + Technology Contact/Transfer + Personal Contact + Trade and FDI Foreign Policy and A.T. Kearney Annual Globalization Report Czech Republic U.S. Singapore Ireland

Merchandise Exports (US$ billions) U.S. Germany Japan France UK Ire MexKor

Merchandise Imports (US$ billions) U.S. Germany Japan France UK Ire MexKor

Foreign Direct Investment - Out (% of World Total) U.S. Germany Japan France UK

Foreign Direct Investment - In (% of World Total) U.S. Germ Japan France UK

Comparative Advantage o Germany: o 10 units of factor inputs (labor & capital) to produce 1 keg of beer o 2 units of factor inputs (labor & capital) to produce 1 box of pretzels o United States: o 15 units of factor inputs to produce 1 keg of beer; o 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?

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 = =

Comparative Advantage Germany: 10 labor  pretzels = 5 pretzels per beer beer 2 labor US: 15 labor  pretzels = 3 pretzels per beer beer 5 labor o Germany has absolute advantage in both beer and pretzels o U.S. has comparative advantage in beer, and should manufacture and export beer to Germany o Germany has comparative advantage in pretzels, and should manufacture and export pretzels to the U.S.

Growth in Trade Indexed: 1950 = Trade GDP

What is Globalization? Perspective of Multinational Corporations (MNCs) o Motivations for global operations and reach o How are companies engaging in globalization? o How big is their involvement? o What are the effects on managers, customers, employees, profits, etc.?

Extent of Globalization for MNCs Foreign Sales as Percent of Total Foreign Assets as Percent of Total Exxon72%64% IBM57%44% Ford31%44% General Electric32%48% Citigroup35%41% Hewlett-Packard55%52%

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

Growth in Trade Indexed: 1950 = Trade GDP

Trade and Investment Policy

Free Trade?

How Nations Influence Trade and Investment Activity Through Policy o Overt/Visible Policies o Supporting/Strategic Policies o Follow-up Questions: o How well to these policies work? o What are the side effects? o Retaliation? o How might managers of MNCs respond?

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

Cost of Import Protection Japanese Rice Market Domestic Supply Domestic Demand Domestic Quantity Produced Domestic Quantity Consumed World Price

Cost of Import Protection Japanese Rice Market Domestic Supply Domestic Demand New Domestic Quantity Produced New Domestic Quantity Consumed World Price Tariff Price

Tariff Cost of Import Protection Japanese Rice Market Domestic Supply Domestic Demand New Domestic Quantity Produced New Domestic Quantity Consumed World Price Tariff Price Extra Revenue Deadweight Loss

Tariff Cost of Import Protection Japanese Rice Market Domestic Supply Domestic Demand New Domestic Quantity Produced New Domestic Quantity Consumed World Price Tariff Price Extra Revenue Deadweight Loss # Jobs saved? At what price?

Cost to Domestic Consumers per Job Saved Extra Revenue for Firm Tariff Revenue to Government Deadweight Loss $800 million + 10,000 jobs $80,000 /job =

What is Globalization? Perspective of Consumers vs. “Regular Joes” o Outsourcing o Cheaper Products vs. Job Loss o Fair Trade -- Product and Production Standards o Working standards o Living wage o Environmental standards

“Voluntary” Export Restraints

TMM-K Georgetown 1971 Honda2008 Acura MDX Managerial Responses to VERs F Shift Production to U.S. F Sell pricier, more profitable cars

FDI: Host Country Perspective

FDI: Home Country Perspective

Economic Integration

Global Linkages Country A Country B Management Linkages Policy Linkages Trade and Investment Linkages

Global Linkages Country A Country B Management Linkages Integration Trade and Investment Linkages

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

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

Free Trade Area 20% 100% 33% o No tariffs among members o Tariffs with non-members unchanged

Customs Union 33% o FTA plus... o Common tariff policy for non- members 33%

Common Market o Customs Union plus... o Reduction of non-tariff barriers among members No Non-Tariff Barriers

Economic Union o Common Market plus... o Single currency o Harmonization of Monetary and Fiscal Policies

F/X

Foreign Exchange o What is it? o Why does it change? o Risk for international managers o How to manage risk

Trade, FDI, and the Economy trade deficit o Increase demand for Japanese computers – trade deficit inflationary o Increase demand for computer inputs (components, labor, etc.) – inflationary appreciates o Increase demand for Yen – appreciates decreases demand for Japanese computers o Stronger Yen increases U.S. prices – decreases demand for Japanese computers Computers Cash $$

Foreign Exchange Fluctuations and Volatility Index of Swiss Franc vs. Dollar 1990 =

Sharply Depreciating Peso vs. Dollar

A Medium of Exchange: The Linkage Between Currencies World Market for Euros World Market for Dollars Price = $ / € Price = € / $ S D S D $1.30 / € €.77 / $ Same “market”…different perspective.

Linkage Between Currencies World Market for Euros World Market for Dollars Price = $ / € Price = € / $ S D S D €.77/$ D’ S’ $1.30/ € $1.35/ € €.74/$

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

The Big Mac Index

Short-term F/X Management o Currency Hedges o Forward Contracts o Options o Negotiation of Ratcheted Pricing Schedule o Adjustment of Prices and Target Profits o Lower foreign prices to keep market share when home currency appreciates … lowers profit margin o Raise foreign prices to keep profit margins when home currency depreciates … less price competitive

Medium-Term F/X Management o Balance sheet hedge o Match foreign assets with same level of foreign liabilities in same currency o Cash flow hedge o Match foreign A/P with A/R in same currency

Long-Term F/X Management o Shift sourcing and procurement o Shift production o Cut costs / improve productivity

Automakers’ Global Strategy Field Study

TouaregPassatJettaBeetleGolf Engine Germany Hungary Germany Poland Mexico Hungary TransmissionJapan Argentina Japan Argentina Japan Argentina Final Assembly SlovakiaGermanyMexico Brazil Country of Origin for VW Models Sold in U.S.: Major Components and Final Assembly

VW Jetta…just a little “German” Transmissions Japan Assembly Mexico Engines Poland Customers Lexington

VW International Strategy - Jetta Germany Japan Mexico Poland Transmission Final Assembly Engine Misc. U.S. Marketing

VW International Strategy - Touareg Germany Japan Slovakia Hungary Transmission Final Assembly Misc. Steel & Engine U.S. Marketing

VW International Strategy - Touareg Germany Japan Slovakia Hungary Transmission Final Assembly Misc. Steel & Engine U.S. Marketing

Which is the American car? Page 68 Pontiac G8 BWM X5

Which is the American car? Page 69 Pontiac G8 BWM X5 Manufactured in Australia Manufactured in South Carolina

Page 70 Toyota SequoiaJeep Patriot Which is the American car?

Page 71 Toyota SequoiaJeep Patriot 80% U.S. Content66% U.S. Content

The Last “American” Car Page 72 Ford Crown Victoria 92% U.S. Content …but assembled in Canada

Globalization and Attitude Adjustment Page 73