Final Exam D270 Garcia

as countries go up in economic freedom, so does their

income

T/F - managers factor in multiple dimensions when trying to understand where to invest.

True

Broad economic performance measures

-GNI, GDP

-Rate of economic growth

- Population

- Purchasing power parity

- Degree of Stability

- Balance of payments

- Sustainability and happynomics

>> net national product

>> Genuine progress indicators

>> Human development index

>> your better life index

>> gross national wellness

>> Gross national happiness

>> happy planet index

GNI Explained

- Gross national income

- Market value of final goods and services new produced by domestically owned factors of production, at home and abroad

- Quick measure to compare one country against another

- Countries with large populations and high per capita GNI are most desirable in terms of market potential

- Although Toyota brings revenue and employment in the US, it should not count towards to the GNI because we are interested in domestic factors of production

GDP Explained

- Gross domestic product

- Market value of production that takes place within a nation's borders, without regard to whether the production is created by domestic or foreign enterprises

- Both a ford and Toyota manufactured in the USA counts towards our GDP

- Countries with large populations and high per capita GDP are most desirable in terms of market

Purchasing power Parity Explained

- Prices of goods and services vary from country to country due to differences in cost of land, labor, capital, productivity rates, government regulations etc.

- Estimated by calculating the value of a universal "basket of goods" purchased with one unit of a country's currency compared to the value which is equivalent unit of currency you can buy in another country

- example shown in class was differences in prices of big mac around the world

interest in emerging economies - common acronyms

> LDC - less developed countries

> BEM - big emerging markets

> BRIC - Brazil, Russia, India, China

> RDE - rapidly developing economies

> NIC - newly industrialized countries

> CIVETS - Columbia, Indonesia, Vietnam, Egypt, turkey, south Africa

G7 Most Economically developed group.

- Canada

- France

- Germany

- Italy

- Japan

- United Kingdom

- United states

Commonalities of Big emerging markets

- Large territory (Availability of land and natural resources)

- Big populations (Consumer and labor)

- Significant economic policy strides (liberalization)

>> Low income now, but rapid growth by using liberalization engine and by attracting foreign direct investment.

- Massive infrastructure needs

- Aspirations of technological leadership

- Market growth spill overs with their region

- Significant political influence in world

New reality to today in regard to advanced economies

- Advanced economy firms look toward emerging economies as growth markets

- Advanced economy influence in global governance is reduced

- Advanced economy governments view emerging economies as partners to solve regional and global problems

- Advanced economy citizens may view emerging economies as a competitive threat for jobs

ways great opportunities come with big challenges

- Lack of developed communication, power generating, transportation infrastructure

- Inefficient distribution of channels

- Underdeveloped financial markets

- High economic and political volatility

- Problems finding and working with suitable business partners

- High levels of government involvement and control

- High levels of corruption

economic issues for international business

- What is the level of development for a particular economy

- What type of economic system does the country have

>> View on foreign capital, partnership in local and private sectors

>> How does government control private/public enterprise

- How will doing business there affect our firm?

Why perform a country analysis?

- To decide most suitable countries in which to expand

- Choose order of expansion overtime

- Identify which products most effective entry modes

- Identify opportunities and risks of operating in particular countries

Chapter 4 conclusions: The economic enviorment

- Benefits of doing business in a given country are directly influenced by size of market, wealth of consumers, and the openness, stability, and growth of potential economies

- Type of economic system is strong predictor of present economic performance and future economic prospects of a nation

- Power of economic analysis is identifying best possible indicators and understanding how they work

- Many tools to help international managers analyze the economic environment, key challenges include quality of information and ability to predict future challenges

caution of economic measurement

- System complexity

>> 188-214 economies and each one functions uniquely

- Market dynamism

>> External and internal conditions are constantly changing

- Market independence

>> No country is isolated. Action is one market affects others

- Data overload

>> Flood of data today and there are differing levels of quality. Can create analysis paralysis

understanding economic systems

- Command

> Government owns most or all resource

> Advocates centralized, large scale, capital intensive production

> Applies the visible hand of the state, central planning, and collectivism

> Communism

- Mixed

> Government and private ownership of economic resources mixed in varying proportion

> Advocates optimizing economic efficiency, promoting egalitarianism, and preempting self interest

> Socialism

- Market

> Mostly private ownership of resources > Advocates decentralized, entrepreneurial innovation

> Applies the invisible hand, laisse faire, property rights, and individualism

> Capitalism

Problem of global economic diversity

- 214 separate, discrete economies

- Developed economies

- Developing economies

- Emerging economies/economies in transition

Case example of the rational for intervention: The U.S Vietnamese catfish dispute

- The context

> Rise of aquaculture, farmed not wild.

> 4 US states dominate in production.

> Vietnam has advantages (weather, labor, etc.)

- Who cares, who acts? > 4 US states (86% of production in just 2 states)

> 90% domestic production, 10,000 employees

- The Tactics?

> Lobby US government to change Vietnam type to "tra", "basa", "pangasius" > Marketing - change local catfish name to premium brand 'Delecata"

> Accuse Vietnam of predatory pricing - below cost of production

> Claim contamination and possibly affecting health of US consumers

- Government Rationale and Intervention tools?

> Improving comparative position

> Dumping and 64% tariff, standards and labeling with country of origin

Key problems with catfish intervention

- Not all US states have laws to allow the name change

- Difficult to get accurate production cost figures

- No evidence that Vietnamese catfish poses health risks

- Cost to US government enforcement of regulations is too high (budget worries)

- Likely retaliation by Vietnam toward US beef imports

- Likely dispute by Vietnam before the TWO. This would hurt US trade relations with other countries.

- If protectionism succeeds, the consumer ends of paying with higher prices at supermarket and more taxes for government enforcement

rationales for intervention Economic and Non-economic

- Economic

> Fighting unemployment

> Protecting infant industries

> Promoting industrialization

> Improving comparative positions >> Comparable access, fairness, trade balance issues

- Non-economic

> Marinating essential industries

> Promoting acceptable practices abroad

> Maintaining or extending spheres of influence

> Preserving national culture

Government intervention tools

- Tariffs

- Subsides

- Tied aid and loans

- Import quotas

- Voluntary export restraints

- Embargoes

- Domestic content laws/buy local legislation

- Regulatory standards and labels

- Specific permission requirements

- Administrative delay

- Anti-dumping actions and countervailing measures

- Immigration

Ford Motor CO and the chicken tax explanation/conclusions

- History

> In 1963 several European governments slap a 25% tariff on US chickens, hoping to protect their chicken farms US government retaliates with a 255 tariff on several European products and pickups and other work vehicles from Europe

- Fast Forward to 2013: > To avoid 25% import tariff on its own cargo van from Europe, ford imports passenger version and converts them in the USA

> US government finds out, ford has to pay fines and back tariffs anyway

- Rationale and Tools for interventions

> Main rationale: improving comparative position

> Main tools: countervailing measures, tariff

- Conclusions/lessons > Government policy may negatively impact the firms and industries it was intending to help > Once government intervention is implemented, it may be extremely difficult to eliminate

Walmart in India

- Wal-Mart sells 125 billion outside of USA in 26 countries, but not in Germany, South Korea, Russia, nor India

- Reason for pulling out of India now

> Indian government is requiring foreign retailers to source 30% of products from small and medium sized Indian businesses

- Rationales and tool for interventions

> Main rationales: Fighting unemployment

> Maintaining essential industry

> Main tool: Domestic content legislation

Boeing vs Airbus: anatomy of a government subsidy

- Key challenges

> Price of aircraft: 90-442 million

> Cost to develop in R&D: billions

- Gov't rationales and tool

> Maintaining an essential industry, fighting unemployment > Tool: direct and indirect subsides

> How do government subsidize the industry >> Cash disbursements >> Tax breaks

>> Infrastructure construction

>> Direct gov purchases

>> Indirect gov contracts

>>> Defense, Nasa

- Why do governments subsidize

> Protection from foreign competition

> Promotes economic development

> Creates local jobs

> Generates spinoff industries

> Generates tax revenues

The CHIPS act: anatomy of a government subsidy. Rationales/tools /early impacts

- Amount and targets

> 52 billion for semiconductor industry

>> Majority for US, but also for Japan, SK, and Taiwan

> For: Construction, R&D, new startups

> To foster: quantum computing and AI

> To entice: Intel, Taiwan semiconductor, micron, global foundries etc.

> To deprive: China from acquiring high end chips

- Gov't intervention tool:

> Direct and indirect subsides

> Export controls (towards China)

- Rationales

> Essential industry/national security

>> High powered chips go to drones, missiles etc

> Fighting unemployment/Job creation

> Improving comparative position (China)

- Early impacts

> Micron - 40 billion for chip factories by 2029 and 5,000 jobs

> Intel - 20 billion for 2 chip factories in Ohio by 2025

> Taiwan - 40 billion for 2 plant chips in Arizona, 4,500 direct workers

> 1.8 billion chip factory near Purdue university

Why the urgency for the CHIPS act?

- Global computer chip shortage since COVID

- Critical for many domestic and export products

- US consumes 1/4 of all global chips

- China consumes about 24%

- US and China economic trade war

- One China policy tension toward Taiwan

- High end chips are critical for the defense industry (missiles and drones)

- Want to bring back production and reliance on American made Chips along with increase in national security, reduce dependence on foreign players

what is the name of the Asian alternatives to Chinese manufacturing that global firms are "eyeing"

Altasia

- philippines, taiwan, south korea, japan

goal rationale: fight unemployment Logic, tools, problems

- Logic: unemployed or those fearing imminent job loss are a powerful pressure group. Full employment is a politically positive goal for every government

- Tools: tariffs, quotas, domestic content laws

- Problems: affects another country's exports and, thus, their employment situation

goal rationale: Protect infant industries. logic, tools, problems

- Logic: long term growth comes from new, innovative industries. New industries are too small to compete with global competitors so gov needs to provide them with protection while they become competitive

- Tools: subsides, FDI regulations, domestic content laws

- Problems: Makes foreign products uncompetitive, limits foreign ownership,, when does a industry reach adulthood

goal rationale: maintaining essential industries. Logic, problems, tools

- Logic: Defense, transportation, scare resources should be under local control. Critical in times of war and during national emergencies

- Tools: FDI regulations, regulatory standards, subsidies, export bans

- Problems: hurts foreign competitors, affects other countries exports, how to define "essential"

goal rationale: maintain spheres of influence: logic, tools, problems

- Logic: politically friendly countries should be rewarded economically. Politically unfriendly countries should not be rewarded or even punished

- Tools: tied aid, subsidies, preferential tariffs/quotas, embargoes

- Problems: affects other countries exports, makes non favored countries less competitive, hurts firms and individuals who are not responsible for governments policies

mechanics of a tariff to affect foreign trade: how do tariffs raise prices?

- Raise price importers pay to bring a product into their country

- May raise the prices businesses charge

- Leading consumers to buy fewer or less expensive products

Definition of a Tariff, example

- TAX ON AN IMPORTED GOOD

- China charging the US a 25% tariff on X good means the US has to pay a 25% tax to sell these products into China.

- Tariffs raise money

- Protect from competition abroad

who wins by protectionism?

- Import competing industries

> More sales, higher prices

- Government

> Revenues from Tariffs, developing countries often use revenues

> Political appeasement of interest groups

- Domestic producers > E.g VERS

> Some stakeholders and special interest groups

who loses by protectionism

- Consumers

- Foreign producers

- Internal economy

> Efficiency loss

> Encourages lobbying

- Global economy

> Loss of specialization/efficiency

> Retaliation practices

reasons not to influence trade

- Expensive

- Creates inefficiencies > Domestically and worldwide

- Encourages lobbying

- Encourages retaliation

- Damages competitiveness

> Former soviet union, Argentina, Venezuela, many others

Company approaches to dealing with government influence in trade.

- Companies can

> Move operations to a lower cost country.

>> China, Mexico, Vietnam, India etc.

- Concentrate on markets that attract less international competition

- Adopt internal innovations

> Increase efficiency of current operations

> Innovate and create superior products.

> Target high value market segments and increase branding.

- Try to get government protection > Be careful what you ask for - you may get it

Major take away points from chapter 7

- On one side,, governments have to intervene in order to protect the best interests of their domestic stakeholders

- However, too much government intervention (in the form of protectionism) hurts consumers and tends to protect weak and inefficient industries and stifles competition

- The US and China are still in a full blown tariff war. Stay tuned for small, slow changes the Biden administration unfolds as the world recovers from Covid-19

Goal rationale: improve comparative position

- Logic: because some countries subsidize, employ high tariffs/quotas, or manipulate their currency, their firms are more competitive internationally. Therefore, the playing field must be made level

- Tools: anti-dumping actions, countervailing duties, tariffs

- Problems: difficult to prove dumping versus effective cost containment, leads to prolonged retaliation (tit for tat actions)

what determines societal views towards international business? a few key factors

- Historical events (wars and foreign policy conflicts)

- Perceived impact of Globalization

- Trade and Economic Policy

- National Security Issues

- Deteriorating Economic Situation

- Environmental, Health, and Safety Issues

- A sense of Nationalism, Ethnocentrism - we are unique, different

- Views Toward Immigrants and Refugees

- The Target Influence of the Media

trade-offs among constituencies

- Stakeholders, i.e., the collection of constituencies that an organization must satisfy to survive in the long run, include:

> Shareholders

> Employees

> Customers

> Suppliers

> Government (home and host country)

> NGOs and Environmental Groups

> Society at large

- In the long run, the aims of all stakeholders must be adequately met or the firm may not survive

Positive Contributions of MNE: intel in Ohio

- Chips Act signed by President Biden in 2022 gives $52 Billion subsidy to Semiconductor Manufacturers

- Intel makes $20 Billion investment for 2 chips plants in Ohio, August 9, 2022

- Intel: World's largest Semiconductor firm

- Headquarters: Santa Clara, California

- Revenue in 2021: $79.02 Billion

- Expected to increase US production of chips from 2% to 10%

- Total Economic Impact to Ohio: $300 Billion

positive contributions of MNE's: Ford in Kentucky

- Ford announces new $700 million investment in Kentucky Truck Plant

- Will result in 500 new hourly work hires

- This is on top of $5.8 Billion battery plant in 2025

- Ford already employs 12,000 direct workers in Kentucky

- Ford supports 120,000 jobs indirectly in Kentucky (10-1)

- (Ford has manufactured in Kentucky for over 100 years)

A country's balance of Payments (BOP) accounts at a glance (what are the 2 accounts, what do they mean, definition of BOP)

- summarizes the economic transactions of an economy with the rest of the world

- Current Account

> value of exports and imports of physical good, such as oil, grain, computers

> private and official transfers of money and international aid

- Capital Account

> long term capital flows (money invested in foreign firms as well as profits made by selling those investments and returning the money home)

> short term capital flows

Host countries BOP effects

- Net Import Effect (m-m1)

> Positive: if the FDI results in the substitution of imported products for local production

> Negative: if it results in an increase in imports

- Net Export effect (x-x1)

> Positive: if the FDI results in the generation of exports

> Negative: if it results in a decline of exports

- Caution: FDI may also stimulate home country exports of complementary products to the host country

- Net Capital Flows (c-c1)

> Positive: if the FDI results in capital inflows to build plants and capacity

> Negative: if it results in outflows to repatriate profits back to the home country

Conflicting economic growth and employment effects of FDI

Balance of Payments effects of FDI

- A firm doing business abroad should monitor a host country's balance-of-payments effects to:

- Anticipate possible corrective actions by the host country government:

> Import Restrictions

> Export Requirements

> Local Content regulations

> Ownership restrictions

> Foreign exchange restrictions

- Develop a firm-government negotiation strategy

- To prepare a PR strategy toward stakeholders (i.e. trade unions)

Moral Mazes: How should individuals and MNC's behave when doing business abroad.

- What is right and wrong may differ by country

> Cultural dimensions, individualism vs collectivism, religious values, economic circumstances, laws, social values, etc.

- Relativism versus Normativism

- What is legal in the Host country

- What is legal in the Home country

- The problem of Extraterritoriality

Corruption - Transparency International, what is it?

- Citizens depend on the integrity of people in positions of authority

- Corruption is: the abuse of entrusted power for private gain

what aspects of corruption are captured?

- Bribery

- Effective criminal prosecution of corrupt officials

- Efforts to contain corruption and effectively enforce integrity

- Degree of officials using public funds for private gain without facing consequences

Red tape and excessive bureaucratic burden which may increase opportunities for corruption

- Diversion of public funds

- Meritocratic versus nepotism appointments in civil service

- Adequate laws on financial disclosure and conflict of interest prevention

- State capture by narrow vested interests

- Legal protection for whistleblowers, journalists, investigators when they are reporting cases of bribery and corruption

what is wrong with corruption and bribery?

- Higher levels of corruption lead to lower economic growth and per capita income levels

- Corruption erodes the authority of the government which condones it

- Corruption disclosures damage the reputation of the country and the MNEs from there (locally and globally)

- It is costly to companies and consumers (costs and prices)

Efforts to control corruption

- NGOs like Transparency International

- Multilateral efforts and accords at work

> OECD, International Chambers of Commerce, United Nations, etc.

- Regional Level Efforts as in the EU

- National Level Efforts like in the US

> Foreign Corrupt Practices Act of 1977 (FCPA)

> Example of Extraterritoriality

- Industrywide Efforts

- Company Level Efforts

> Internal Codes of Conduct

Other Areas in which International Managers and MNCs are Under Societal Scrutiny Today

- Environmental sustainability

- Energy conservation and sustainability - Pharmaceutical/Medical Industry Issues

- Labor issues (Sweatshops and more)

> Low wages, child labor, poor work conditions, long work hours, right to unionize, etc.

- Intellectual Property Protection

- Anticompetitive Industrial Behaviors

responsible responses by managers and MNC's

- Knowing and obeying local & home country laws

- Developing and enforcing a corporate-wide code of conduct

- Fostering a Socially Responsible approach to doing business abroad

- The Bottom of the Pyramid Approach (BOP)

Partnering with governments and NGOs to develop products and services for the poorest consumers.

four MNC choices toward business abroad

- exploitive: views differences in wages, working conditions and living standards as exploitable opportunities

- Transactional: engages in law abiding, non-exploitative, commercial interactions

- Responsive: acts in a way that is sensitive and responsive to the needs of all its immediate stakeholders

- transformative: commits to leading initiatives to bring life enhancing changes to the broader society

why do the lessons of chapter 5 matter to future managers?

- need a sharp understanding of stakeholders views and their possible impacts on the MNC

- Need to understand the possible FDI impacts on the host and home countries

- need to manage conflicting demands through effective communication

- may need to negotiate directly with government policy makers

- need to demonstrate ethical behaviors and foster social responsibility- in a global environment with conflicting standards and many gray areas

Possible positive contributions of MNE's

- investment

> links to local companies

> increased productivity

> improved efficiency

>Capital formation

- Human resources

> training

> employment

> managerial skills

- Technology

> R&D

> industrial upgrading

> New Capital Equipment

- Trade

> export expansion

> lower cost imports

- Environmental

> access to clean technologies

> pollution - abatement skills

> companywide standards

possible criticisms and negative impacts of MNE's

- investment

> sheer size of FDI threatens host country.

> instrument of home country foreign policy

> can also hold home country hostage

- Human resources

> exploits cheap labor abroad

> creates low age pressure at home

> undermines power of unions at home

- Technology

> outdated technology abroad

> labor- or capital-intensive technology abroad

> gives away valuable technology abroad.

- Trade

> causes import increases in host country

> causes import increases in home country

> kills local firms in host country and thus exports.

- Environment

> takes high pollution production abroad.

> searches for lax regulations abroad

> lobbies governments to delay regulations.

what is a MNE

A multinational enterprise (MNE) is any business that has productive activities in two or more countries

what is a MNC

multinational corporation; manages prod. and delivers services in several countries