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Termiflex, Wally, and the EUTermiflex
Industrial ComputerTerminals
MBB-Aerospatiale Surface-to-Surface Missiles
Rediffusion Flight Simulators
VolvoRobotics
GlobalizationThe 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 CO2 flows
Page 8
GlobalizationSome Unintended Consequences
What is Globalization?Perspective of Countries
o How are countries connected globally?How are countries connected globally?o How big is globalization?How big is globalization?o Why does it happen? Why does it happen? o Who’s doing it?Who’s doing it?o Is it connected to prosperity? Is it connected to prosperity?
Global Top-20
PoliticaPoliticaGlobalization Index =• Political Engagement +• Technology Contact/Transfer +• Personal Contact +• Trade and FDI
Foreign Policy and A.T. KearneyAnnual Globalization Report
CzechRepublic
U.S.
Singapore
Ireland
Merchandise Exports(US$ billions)
U.S.U.S.
Ger
man
yG
erm
any
Japa
nJa
pan
Fra
nce
Fra
nce
UKUK
IreIreMexMexKorKor
Merchandise Imports (US$ billions)
U.S.U.S.
Ger
man
yG
erm
any
Japa
nJa
pan
Fra
nce
Fra
nce
UKUKIreIreMexMexKorKor
Foreign Direct Investment - Out(% of World Total)
U.S.U.S.G
erm
any
Ger
man
y
Japa
nJa
pan
Fra
nce
Fra
nce
UKUK
Foreign Direct Investment - In(% of World Total)
U.S.U.S.G
erm
Ger
m
Japa
nJa
pan
Fra
nce
Fra
nce
UKUK
Comparative Advantageo 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 AdvantageGermany: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 AdvantageGermany: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 TradeIndexed: 1950 = 100
1950 1960 1970 1980 1990 2000 2010
1600
1200
800
400
100
Trade
GDP
What is Globalization?Perspective of Multinational Corporations (MNCs)
o Motivations for global operations and reachMotivations for global operations and reacho How are companies engaging in How are companies engaging in
globalization?globalization?o How big is their involvement?How big is their involvement?o What are the effects on managers, customers, What are the effects on managers, customers,
employees, profits, etc.? employees, profits, etc.?
Rank Firm or Country Value (in $bil)
1 United States $8,110.92 Japan 4191.53 Germany 2104.64 France 1394.15 United Kingdom 1288.26 Italy 1145.47 China 902.18 Brazil 802.19 Canada 618.3
10 Spain 531.311 Russia 449.912 South Korea 438.213 Mexico 409.614 Microsoft 407.215 Australia 390.8
16 India 380.817 Netherlands 360.518 General Electric 333.119 Argentina 326.420 Taiwan 283.421 Belgium 242.422 Sweden 227.823 IBM 214.824 Indonesia 214.625 Austria 207.526 Exxon 193.927 Royal Dutch Shell 191.328 Wal-Mart 189.529 Turkey 186.430 AT&T 186.131 Intel 180.232 Cisco Systems 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 TradeIndexed: 1950 = 100
1950 1960 1970 1980 1990 2000 2010
1600
1200
800
400
100
Trade
GDP
How Nations Influence Trade and Investment Activity Through Policy
o Overt/Visible Policieso Supporting/Strategic Policies
o Follow-up Questions:oHow well to these policies work?oWhat are the side effects?o Retaliation?oHow might managers of MNCs respond?
Overt Policy Alternatives
o Restrict Imports (tariffs, quotas, VERs)
o Restrict FDI o Incoming (F/X controls, local content)oOutgoing (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 ProtectionJapanese Rice Market
DomesticSupply
DomesticDemand
DomesticQuantityProduced
DomesticQuantity
Consumed
World Price
Cost of Import ProtectionJapanese Rice Market
DomesticSupply
DomesticDemand
NewDomesticQuantityProduced
NewDomesticQuantity
Consumed
World Price
Tariff Price
Tariff
Cost of Import ProtectionJapanese Rice Market
DomesticSupply
DomesticDemand
NewDomesticQuantityProduced
NewDomesticQuantity
Consumed
World Price
Tariff PriceExtra Revenue
DeadweightLoss
Tariff
Cost of Import ProtectionJapanese Rice Market
DomesticSupply
DomesticDemand
NewDomesticQuantityProduced
NewDomesticQuantity
Consumed
World Price
Tariff PriceExtra Revenue
DeadweightLoss
# Jobs saved?At what price?
Cost to Domestic Consumers per Job Saved
Extra Revenue for FirmTariff Revenue to GovernmentDeadweight Loss
$800 million+
$800 million10,000 jobs
$80,000/job
=
What is Globalization?Perspective of Consumers vs. “Regular Joes”
o OutsourcingOutsourcingo Cheaper Products vs. Job LossCheaper Products vs. Job Losso Fair Trade -- Product and Production Fair Trade -- Product and Production
StandardsStandardso Working standardsWorking standardso Living wageLiving wageo Environmental standardsEnvironmental standards
TMM-K Georgetown
1971 Honda 2008 Acura MDX
Managerial Responses to VERs
Shift Production to U.S.
Sell pricier, more profitable cars
FDI: Host Country PerspectivePrimary Impact Favorable
Aspects Unfavorable
Aspects Policy
Response Capital Capital
inflow Loss of control
Ownership restriction
Employment Creates new jobs
Career limits/ low wages
Employment regulations
Entrepreneurship Creates new industries
Displaces local ideas
Restrict market acess
Technology Access to new
technol.
Appropriate techology??
??
Government Revenues
Increase tax base
Foreign dependency
??
FDI: Home Country PerspectivePrimary Impact Favorable
Aspects Unfavorable
Aspects
Capital Profitable opportunities
Capital flight
Employment Access to lower wages
Export jobs
Technology Expand usage into new markets
Lose control over
sensitive technol
Government Revenues
Tax income on profits
Loss of domestic wage tax
base
Global Linkages
CountryA
CountryB
Management Linkages
IntegrationIntegration
Trade and Investment Linkages
Regionalization of Economic Activityo Levels of Economic Integration
o Free Trade Areao Customs Uniono Common Marketo Economic Union
o Questions and Issueso Effects on trade and FDI patternso Evolution toward worldwide integrationo Impact on management of MNCs
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 currencyo Harmonization of
Monetary and Fiscal Policies
Foreign Exchange
o What is it?o Why does it change?o Risk for international managerso How to manage risk
Trade, FDI, and the Economy
o Increase demand for Japanese computers – trade deficittrade deficito Increase demand for computer inputs (components, labor, etc.) –
inflationaryinflationaryo Increase demand for Yen – appreciatesappreciateso Stronger Yen increases U.S. prices – decreases demand for Japanese decreases demand for Japanese
computerscomputers
Computers
Cash $$
Foreign Exchange Fluctuations and VolatilityIndex of Swiss Franc vs. Dollar
1990 = 100
19901980 2000
A Medium of Exchange:The Linkage Between Currencies
World Market for Euros
World Market for DollarsPrice = $ /
€Price = € /
$S
D
S
D
$1.30 / € € .77 / $
Same “market”…different perspective.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 Changeo Foreign Direct Investmento Foreign Portfolio Investment
o MNCso Government Debt Instruments
o Currency Arbitrage and Speculationo 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
Big Mac: Local F/X
Actual
F/X Rate
Big Mac: in
US$
Implied
PPP Rate
% Under/ Over Value
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 Forward Contractso Optionso Negotiation of Ratcheted Pricing Schedule
o Adjustment of Prices and Target Profitso Lower foreign prices to keep market share when
home currency appreciates … lowers profit margino Raise foreign prices to keep profit margins when
home currency depreciates … less price competitive
Medium-Term F/X Managemento Balance sheet hedge
o Match foreign assets with same level of foreign liabilities in same currency
o Cash flow hedgeo Match foreign A/P with A/R in same currency
Long-Term F/X Management
o Shift sourcing and procuremento Shift production o Cut costs / improve productivity
Touareg Passat Jetta Beetle Golf
EngineGermany
HungaryGermany
Poland
MexicoMexico Hungary
Transmission Japan JapanArgentina
Japan
Argentina
JapanArgentina
Final Assembly
Slovakia Germany Mexico Mexico Brazil
Country of Origin for VW Models Sold in U.S.:Major Components and Final Assembly
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 69
Pontiac G8 BWM X5
Manufactured in Australia
Manufactured in South Carolina