Transcript International Management

International
Political
Economy
Termiflex, Wally, and the EU
Termiflex
Industrial Computer
Terminals
MBB-Aerospatiale
Surface-to-Surface Missiles
Rediffusion
Flight Simulators
Volvo
Robotics
Factors/Issues of Globalization
Economic
Political
Cultural
Legal
Globalization
The Objective Realities

The integration of national economies into the
international economy through:




Trade
Foreign direct investment
Capital flows
Technology
Page 4
Global Corporate “Chess Board”
Globalization
The Human Factor


…driven by a combination of economic,
technological, sociocultural, political and
biological factors
…the transnational dissemination of ideas,
languages, or popular culture
Page 6
Fair Trade and Outsourcing
…in the media
In politics…
Globalization and Life
Off-shoring manufacturing
to Honduras, El Salvador
Page 8
Globalization and Life
In-shoring of manufacturing
to Louisiana, Texas
via immigration
Page 9
Globalization and Life
Appliance Call Center
Bangalore
Unemployment Center
Detroit
Page 10
Globalization
Some Unintended Consequences
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

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

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
Page 11
What is Globalization?
Perspective of Countries
o
o
o
o
o
How are countries connected globally?
How big is globalization?
Why does it happen?
Who’s doing it?
Is it connected to prosperity?
A.T. Kearney/Foreign Policy Globalization Index
Foreign Policy and A.T. Kearney
Annual Globalization Report
Global Top-20
Ireland
Singapore
U.S.
Czech
Republic
Globalization Index =
Politica
• Political Engagement +
• Technology Contact/Transfer +
• Personal Contact +
• Trade and FDI
Merchandise Exports
France
Japan
U.S.
Germany
(US$ billions)
UK
Kor Mex
Ire
Merchandise Imports
(US$ billions)
France
Japan
Germany
U.S.
UK
Kor Mex
Ire
Foreign Direct Investment - Out
(% of World Total)
France
Japan
Germany
U.S.
UK
Foreign Direct Investment - In
(% of World Total)
France
Germ
U.S.
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
o
o
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.
Growth in Trade
Indexed: 1950 = 100
1600
1200
800
Trade
400
GDP
100
1950
1960
1970
1980
1990
2000
2010
What is Globalization?
Perspective of Multinational Corporations (MNCs)
o
o
o
o
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.?
Rank
Firm or Country
1
United States
2
Japan
3
Germany
4
France
5
United Kingdom
6
Italy
7
China
8
Brazil
9
Canada
10
Spain
11
Russia
12
South Korea
13
Mexico
14 Microsoft
15
Australia
Value (in $bil)
$8,110.9
4191.5
2104.6
1394.1
1288.2
1145.4
902.1
802.1
618.3
531.3
449.9
438.2
409.6
407.2
390.8
16
17
18
19
20
21
22
23
24
25
26
27
28
29
30
31
32
India
Netherlands
General Electric
Argentina
Taiwan
Belgium
Sweden
IBM
Indonesia
Austria
Exxon
Royal Dutch Shell
Wal-Mart
Turkey
AT&T
Intel
Cisco Systems
380.8
360.5
333.1
326.4
283.4
242.4
227.8
214.8
214.6
207.5
193.9
191.3
189.5
186.4
186.1
180.2
174.1
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%
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 = 100
1600
1200
800
Trade
400
GDP
100
1950
1960
1970
1980
1990
2000
2010
Trade and Investment Policy
Free Trade?
How Nations Influence Trade and
Investment Activity Through Policy
o
Overt/Visible Policies
Supporting/Strategic Policies
o
Follow-up Questions:
o
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
o
Restrict Imports (tariffs, quotas, VERs)
Restrict FDI
o Incoming (F/X controls, local content)
o Outgoing (tax code, expatriation disincentives)
o
o
o
o
Restrict Exports (DoD restrictive munitions)
Export Promotion (subsidies, tax credits)
Import Promotion (tax credits, favors)
FDI Incentives (subsidies for infrastructure,
training & development, market access)
o
Preferential Govt. Procurement
Cost of Import Protection
Japanese Rice Market
Domestic
Supply
World Price
Domestic
Demand
Domestic
Quantity
Produced
Domestic
Quantity
Consumed
Cost of Import Protection
Japanese Rice Market
Domestic
Supply
Tariff Price
World Price
Domestic
Demand
New
New
Domestic Domestic
Quantity Quantity
Produced Consumed
Cost of Import Protection
Japanese Rice Market
Domestic
Supply
Deadweight
Loss
Tariff Price
World Price
Extra Revenue
Tariff
Domestic
Demand
New
New
Domestic Domestic
Quantity Quantity
Produced Consumed
Cost of Import Protection
Japanese Rice Market
Domestic
Supply
Deadweight
Loss
Tariff Price
World Price
Extra Revenue
Tariff
Domestic
Demand
# Jobs saved?
At what price?
New
New
Domestic Domestic
Quantity Quantity
Produced Consumed
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
What is Globalization?
Perspective of Consumers vs. “Regular Joes”
o
o
o
Outsourcing
Cheaper Products vs. Job Loss
Fair Trade -- Product and Production
Standards
o Working standards
o Living wage
o Environmental standards
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…?
 What
kind of jobs?
 Causal factors
– Outsourcing vs. technology and productivity gains?
 Would
occur anyway
“Voluntary” Export Restraints
Managerial Responses to VERs
TMM-K Georgetown
 Shift
 Sell
Production to U.S.
pricier, more profitable cars
1971 Honda
2008 Acura MDX
FDI: Host Country Perspective
Primary Impact
Capital
Employment
Favorable
Aspects
Capital
inflow
Unfavorable
Aspects
Loss of
control
Creates
new jobs
Career limits/ Employment
low wages
regulations
Entrepreneurship Creates new
industries
Technology
Government
Revenues
Policy
Response
Ownership
restriction
Displaces
local ideas
Restrict
market acess
Appropriate
techology??
??
Increase tax
Foreign
base
dependency
??
Access to
new
technol.
FDI: Home Country Perspective
Primary Impact
Favorable
Aspects
Unfavorable
Aspects
Capital
Profitable
opportunities
Capital flight
Employment
Access to lower
wages
Export
jobs
Technology
Government
Revenues
Expand usage
Lose control
into new markets
over
sensitive
technol
Tax income on
Loss of
profits
domestic
wage tax
base
Economic Integration
Global Linkages
Country
A
Policy Linkages
Country
B
Global Linkages
Country
A
Integration
Country
B
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%
15%
Prevailing
Tariff Rates
on Imports
10%
33%
40%
100%
Free Trade Area
o
o
No tariffs
among
members
Tariffs with
non-members
unchanged
20%
33%
100%
Trade and Investment in Isolation
33%
40%
Cheapest
Producer
Trade Creation from FTA Formation
33%
Cheapest
Producer
Trade and Investment in Isolation
Cheapest
Producer
33%
40%
Trade Diversion from FTA Formation
Cheapest
Producer
33%
Customs Union
o
o
FTA plus...
Common tariff
policy for nonmembers
33%
33%
33%
Common Market
No Non-Tariff Barriers
o
o
Customs
Union plus...
Reduction of
non-tariff
barriers among
members
Economic Union
o
o
o
Common Market
plus...
Single currency
Harmonization of
Monetary and
Fiscal Policies
F/X
Foreign Exchange
o
o
o
o
What is it?
Why does it change?
Risk for international managers
How to manage risk
Trade, FDI, and the Economy
Computers
Cash $$
o
o
o
o
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
Foreign Exchange Fluctuations and Volatility
Index of Swiss Franc vs. Dollar
1990 = 100
1980
1990
2000
Sharply Depreciating Peso vs. Dollar
A Medium of Exchange:
The Linkage Between Currencies
World Market
for Euros
Price = $ / €
Price = € / $
World Market
for Dollars
S
S
€ .77 / $
$1.30 / €
D
Same “market”…different perspective.
D
Linkage Between Currencies
Price =
$/€
World Market
for Euros
Price =
€ /$
S
$1.35/ €
$1.30/ €
World Market
for Dollars
S S’
€ .77/$
€ .74/$
D
D’
D
Other Forces Causing Change
o
o
Foreign Direct Investment
Foreign Portfolio Investment
o
o
o
o
MNCs
Government Debt Instruments
Currency Arbitrage and Speculation
Governmental Intervention
o
o
o
Official and Unofficial “pegs”
International Agreements (e.g., G-7, the Euro)
Posturing (e.g., “talking” the dollar down)
The Big Mac Index
Big Mac: in Implied
US$
PPP Rate
%
Under/
Over
Value
Big Mac:
Local F/X
Actual
F/X Rate
U.S.
$2.55
–
$2.55
–
–
EU
℮ 2.44
℮ 1.08/$
$ 2.26
℮ .96/$
- 11%
Japan
Y 253
Y 118.2/$
$ 2.14
Y 99.2/$
- 16%
England
₤ 2.99
₤ .69/$
$ 4.33
₤ 1.17/$
+ 70%
Poland
Z 1.34
Z 4.12/$
$ .32
Z .52/$
- 87%
www.economist.com
Short-term F/X Management
o
Currency Hedges
o
o
o
o
Forward Contracts
Options
Negotiation of Ratcheted Pricing Schedule
Adjustment of Prices and Target Profits
o
o
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
Today: US Dealer to Import BMWs
o
Sales Contract:
o
o
o
o
Quantity: 100 BMW 750s
Price: € 100,000 each
Payment: Due in 3 months
Value of Sales Contract =
o
o
o
€ 10.0 million
Spot Rate = $1.30 / €
$13.0 million
In Three Months: Payment is Due
Uncovered Transaction
o
Euro appreciates
o
o
o
Adjusted Value of Sales Contract
o
o
o
New spot rate = $1.35 / €
€ 10.0 million
“Risk penalty” = $0.05 per € traded
$13.5 million
US Dealer’s Loss = $500,000
Today: US Dealer to Import BMWs
Hedged Transaction
o
Sales Contract:
o
o
o
o
Quantity: 100 BMW 535s
Price: € 100,000 each
Payment: Due in 3 months
Value of Sales Contract =
o
o
o
o
€ 10 million
at 90-day Forward Rate = $1.305 / €
“Insurance premium” = $0.005 per € traded
$13.05 million
In Three Months: Payment is Due
Hedged Transaction
o
Euro appreciates
o
o
o
Adjusted Value of Sales Contract
o
o
o
New spot rate = $ 1.35 / € (Doesn’t matter!!!)
€ 10 million
Locked-in Forward Rate = $ 1.305 / €
$13.05 million
Cost of Hedge (insurance premium) = $50,000
In Three Months: Payment is Due
Hedged Transaction
o
Euro Depreciates
o
o
o
Adjusted Value of Sales Contract
o
o
o
New spot rate = $ 1.25 / €
€ 10 million
Locked-in Forward Rate = $ 1.305 / € (Spot better!!)
$12.5 million
Currency Windfall - Cost of Hedge = $450,000
Medium-Term F/X Management
o
Balance sheet hedge
o
o
Match foreign assets with same level of foreign
liabilities in same currency
Cash flow hedge
o
Match foreign A/P with A/R in same currency
Long-Term F/X Management
o
o
o
Shift sourcing and procurement
Shift production
Cut costs / improve productivity