1. International Political Economy

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

3. Factors/Issues of GlobalizationEconomic Political Cultural Technology Competitive Legal

4. Globalization The Objective Realities  The integration of national economies into the international economy through:  Trade  Foreign direct investment  Capital flows  Technology Page 4

5. Global Corporate “Chess Board”

6.  …driven by a combination of economic, technological, sociocultural, political and biological factors  …the transnational dissemination of ideas, languages, or popular culture Page 6 Globalization The Human Factor

7. Fair Trade and Outsourcing …in the media In politics…

8. Globalization and Life Page 8 Off-shoring manufacturing to Honduras, El Salvador

9. Globalization and Life Page 9 In-shoring of manufacturing to Louisiana, Texas via immigration

10. Globalization and Life Page 10 Unemployment Center Detroit Appliance Call Center Bangalore

11.  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 11 Globalization Some Unintended Consequences

12. 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?

13. A.T. Kearney/Foreign Policy Globalization Index

14. 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

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

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

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

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

19. 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?

20. 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 = =

21. 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.

22. Growth in Trade Indexed: 1950 = 100 1950 1960 1970 1980 1990 2000 2010 1600 1200 800 400 100 Trade GDP

23. 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.?

26. 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%

27. 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

28. Growth in Trade Indexed: 1950 = 100 1950 1960 1970 1980 1990 2000 2010 1600 1200 800 400 100 Trade GDP

29. Trade and Investment Policy

30. Free Trade?

31. 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?

32. 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

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

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

35. 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

36. 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?

37. 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 =

38. 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

39. Outsourcing Bogeyman  “…a new way of doing international trade…a 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…? u What kind of jobs? u Causal factors –Outsourcing vs. technology and productivity gains? u Would occur anyway

40. “Voluntary” Export Restraints

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

42. FDI: Host Country Perspective

43. FDI: Home Country Perspective

44. Economic Integration

45. Global Linkages Country A Country B Policy Linkages

46. Global Linkages Country A Country B Integration

47. 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

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

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

50. Trade and Investment in Isolation 40% 33% Cheapest Producer Imports

51. Trade Creation from FTA Formation 33% Cheapest Producer Imports

52. Trade and Investment in Isolation 40% 33% Cheapest Producer Imports

53. Trade Diversion from FTA Formation 33% Cheapest Producer Imports

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

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

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

57. F/X

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

59. 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 $$

60. Foreign Exchange Fluctuations and Volatility Index of Swiss Franc vs. Dollar 1990 = 100 199019802000

61. Sharply Depreciating Peso vs. Dollar

62. 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.

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

64. 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)

65. The Big Mac Index www.economist.com

66. 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

67. Today: US Dealer to Import BMWs o Sales Contract: o Quantity: 100 BMW 750s o Price: € 100,000 each o Payment: Due in 3 months o Value of Sales Contract = o € 10.0 million o Spot Rate = $1.30 / € o $13.0 million

68. In Three Months: Payment is Due Uncovered Transaction o Euro appreciates o New spot rate = $1.35 / € o € 10.0 million o Adjusted Value of Sales Contract o “Risk penalty” = $0.05 per € traded o $13.5 million o US Dealer’s Loss = $500,000

69. Today: US Dealer to Import BMWs Hedged Transaction o Sales Contract: o Quantity: 100 BMW 535s o Price: € 100,000 each o Payment: Due in 3 months o Value of Sales Contract = o € 10 million o at 90-day Forward Rate = $1.305 / € o “Insurance premium” = $0.005 per € traded o $13.05 million

70. In Three Months: Payment is Due Hedged Transaction o Euro appreciates o New spot rate = $ 1.35 / € (Doesn’t matter!!!) o € 10 million o Adjusted Value of Sales Contract o Locked-in Forward Rate = $ 1.305 / € o $13.05 million o Cost of Hedge (insurance premium) = $50,000

71. In Three Months: Payment is Due Hedged Transaction o Euro Depreciates o New spot rate = $ 1.25 / € o € 10 million o Adjusted Value of Sales Contract o Locked-in Forward Rate = $ 1.305 / € (Spot better!!) o $12.5 million o Currency Windfall - Cost of Hedge = $450,000

72. 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

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