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					                Termiflex, Wally, and the EU
    Termiflex                      MBB-Aerospatiale
Industrial Computer            Surface-to-Surface Missiles
     Terminals




                                                              Volvo
                                                             Robotics
                           Rediffusion
                         Flight Simulators
Country of Origin for VW Models Sold in U.S.:
Major Components and Final Assembly

               Touareg     Passat     Jetta      Beetle       Golf

               Germany               Poland
  Engine                  Germany                Mexico     Hungary
               Hungary               Mexico

                                    Argentina   Argentina
Transmission    Japan      Japan                            Argentina
                                     Japan       Japan

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




Assembly
 Mexico
VW International Strategy - Jetta

  U.S.                       Japan
Marketing                    Transmission


                              Mexico
                               Final
            Germany           Assembly
             Misc.
                              Poland
                              Engine
VW International Strategy - Touareg

  U.S.                        Japan
Marketing                     Transmission



                               Slovakia
                                Final
              Germany          Assembly
            Steel & Engine

                              Hungary
                                Misc.
          Which is the American car?
         Pontiac G8          BWM X5




Page 9
            Which is the American car?
           Pontiac G8          BWM X5




          Manufactured          Manufactured
           in Australia       in South Carolina

Page 10
          Which is the American car?
     Toyota Sequoia          Jeep Patriot




Page 11
          Which is the American car?
     Toyota Sequoia          Jeep Patriot




 80% U.S. Content           66% U.S. Content


Page 12
          The Last “American” Car




               Ford Crown Victoria
                  92% U.S. Content
               …but assembled in Canada

Page 13
  Globalization and Attitude Adjustment




Page 14
               Globalization and Life
                                 Appliance Call Center
                                        Bangalore




Unemployment Center
          Detroit




Page 15
          Globalization and Life




Off-shoring manufacturing
to Honduras, El Salvador

Page 16
          Globalization and Life




  In-shoring of manufacturing
      to Louisiana, Texas
        via immigration

Page 17
Global Corporate “Chess Board”
                     Globalization
                   The Objective Realities

   The integration of national economies into the
    international economy through:
       Trade
       Foreign direct investment
       Capital flows
       Technology




    Page 19
                 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 20
               Globalization
          Some Unintended Consequences
     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 21
Fair Trade and Outsourcing




 …in the media         …in politics
Factors/Issues of Globalization

         Economic



   Political   Cultural



                          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?
Foreign Policy and A.T. Kearney         Ireland
         Global Top-20
Annual Globalization Report
                                     Singapore



                      U.S.

            Czech
           Republic




                              Globalization Index =
                             Politica Engagement +
                              • Political
                              • Technology Contact/Transfer +
                              • Personal Contact +
                              • Trade and FDI
 Merchandise Exports
                 (US$ billions)


       Germany

U.S.              Japan
                          France
                                   UK
                                        Kor Mex
                                                  Ire
 Merchandise Imports
                 (US$ billions)




U.S.
       Germany
                  Japan
                          France

                                   UK
                                        Kor Mex
                                                  Ire
Foreign Direct Investment - Out
       (% of World Total)




     U.S.   Germany




                              France
                      Japan            UK
Foreign Direct Investment - In
       (% of World Total)




     U.S.



                      France
            Germ

                               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 = 100


                                          1600


                                          1200


                     Trade                800


                                          400
                                 GDP

                                          100
1950   1960   1970    1980     1990    2000
         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.?
Rank      Firm or Country   Value (in $bil)

 1    United States         $8,110.9
 2            Japan          4191.5
 3         Germany           2104.6
 4           France          1394.1
 5  United Kingdom           1288.2
 6              Italy        1145.4
 7            China           902.1
 8             Brazil         802.1
 9          Canada            618.3
10            Spain           531.3
11           Russia           449.9
12     South Korea            438.2
13           Mexico           409.6
14 Microsoft                  407.2
15         Australia          390.8
16                  India   380.8
17          Netherlands     360.5
18   General Electric       333.1
19            Argentina     326.4
20               Taiwan     283.4
21              Belgium     242.4
22              Sweden      227.8
23   IBM                    214.8
24            Indonesia     214.6
25               Austria    207.5
26   Exxon                  193.9
27   Royal Dutch Shell      191.3
28   Wal-Mart               189.5
29               Turkey     186.4
30   AT&T                   186.1
31   Intel                  180.2
32   Cisco Systems          174.1
 Extent of Globalization for MNCs
                   Foreign Sales as   Foreign Assets as
                   Percent of Total    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 and FDI
         Indexed: 1950 = 100


                                           1600


                                           1200


                     Trade                 800
                                  FDI
                                           400
                                 GDP

                                           100
1950   1960   1970    1980     1990     2000
      Globalization with a Human Face
   Bhagwati – In Defense of Globalization
    – Negative impact on social issues?
        Gender   equity, environment, living wage, job loss, democracy?
    – Free vs. Fair Trade
        Fairtrade opportunities vs. outcomes in a free-trade context
        Sector-dependent – low-skill jobs vs. skilled jobs

        Perspective-dependent
          – Voters as workers vs. consumers (Regular Joes)
          – Governments
          – Multinational companies
Trade and Investment Policy
Free Trade?
Free Trade?
   Global Linkages Model

          Management Linkages



Country      Policy Linkages          Country
  A                                     B

      Trade and Investment Linkages
          Managers choose to…
          Attack new markets
          Entry modes
          Shift manufacturing
          Alliances, Mergers, etc.

           Governments try …
Country    Tariffs, quotas            Country
  A        FDI Regulations              B

           Effects are …
           Persistent Trade Deficit
           Loss of Jobs
           Higher Domestic Prices
     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?
USTR Definition of Trade Barriers
o   Government laws, policies, or practices
    that either:
    o Protect domestic products from
     competition
    o Artificially stimulate exports of particular
     domestic products
    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




World Price
                                           Domestic
                                           Demand
                  Domestic   Domestic
                  Quantity   Quantity
                  Produced   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
                 Extra Revenue   Tariff
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
                   Extra Revenue   Tariff
World Price
                                                              Domestic
                                                              Demand

                               New      New
                             Domestic Domestic
# Jobs saved?
                             Quantity Quantity
At what price?               Produced Consumed
 Cost to Domestic Consumers
         per Job Saved
  Extra Revenue for Firm
  Tariff Revenue to Government
+ Deadweight Loss
  $800 million

  $800 million
                  =   $80,000
  10,000 jobs                    /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
                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   Production to U.S.



 Sell   pricier, more profitable cars



     1971 Honda                     2008 Acura MDX
   Global Linkages Model

          Management Linkages



Country      Policy Linkages          Country
  A                                     B

      Trade and Investment Linkages

      Foreign Direct Investment
   FDI: Host Country Perspective
 Primary Impact   Favorable    Unfavorable       Policy
                   Aspects      Aspects        Response
    Capital        Capital       Loss of       Ownership
                    inflow       control       restriction

  Employment        Creates    Career limits/ Employment
                   new jobs     low wages     regulations
Entrepreneurship Creates new     Displaces      Restrict
                  industries    local ideas   market acess

  Technology       Access to   Appropriate         ??
                      new      techology??
                    technol.
  Government      Increase tax   Foreign           ??
   Revenues           base     dependency
FDI: Home Country Perspective
 Primary Impact      Favorable      Unfavorable
                      Aspects        Aspects
    Capital         Profitable      Capital flight
                   opportunities

  Employment      Access to lower      Export
                      wages             jobs

  Technology        Expand usage   Lose control
                  into new markets     over
                                    sensitive
                                     technol
  Government        Tax income on    Loss of
   Revenues             profits     domestic
                                    wage tax
                                       base
Globalization-related “Regimes”
Who “governs” or has extraterritorial
  policy reach for the following:
o   Cross-border Internet o   Greenhouse gases emissions
    commerce              o   Geo-synchronous satellites
o   Ocean floor
    magnesium nodes       o   International airline routes
o   Sea of Tranquility    o   Dolphins killed in tuna nets
o   Microsoft‟s copyright
    Windows XP in China
o   Mineral deposits in
    Antarctica
   Regimes as International “Soft Law”


               Management Linkages


     Country       No Policy           Country
       A                                 B


           Trade/Investment Linkages
NGOs and Treaties
            Law of the Sea Treaty
o   Outside territorial waters, anything goes
    o Early provisions:
       o   Anti-piracy efforts
       o   Access to and protection of shipping routes
       o   Fishing rights
    o Recent:
       o   Pollution
       o   Over-fishing
       o   Exploration and extraction of resources
            o (Oil, manganese, etc.)
Global/Comprehensive Regimes
  o   United Nations
        Functional Regimes:
            Military - Security
o   Nuclear Nonproliferation Treaty
o   NATO
o   Geneva Convention
o   Warsaw Pact (defunct)
Regional/Associative Regimes
  o   European Union
  o   NAFTA
  o   ASEAN
  o   OECD
          Functional Regimes:
               Environmental
o   Montreal Protocol for Greenhouse Gases
o   Law of the Sea Treaty
o   Moon Treaty
o   Antarctica Treaty
o   UN-based Consumer Protection Guidelines
        Functional Regimes:
                 Economic
o   Air transport
o   Ocean shipping
o   Telecommunications
o   GATT / WTO
o   IMF
o   Gold standard (defunct)
            Future Regimes
o   Internet commerce?
o   Animal rights?
o   Human rights?
o   Fair trade?
Non-Governmental Organizations
Common NGOs that influence trade/FDI:
  o   International Olympic Committee
  o   Greenpeace
  o   United Auto Workers Union
  o   World Council of Churches
  o   Save the Dolphins Organization
  o   National Rifle Association
  o   Amnesty International
Economic Integration
       Global Linkages

          Management Linkages


Country     Policy Linkages     Country
  A                               B


     Trade and Investment Linkages
          Global Linkages
           Management Linkages



Country        Integration
                                 Country
  A                                B


     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%
                15%
Prevailing
Tariff Rates          10%
on Imports
                            33%
               40%

                              100%
                   Free Trade Area

o   No tariffs             20%
    among
    members
o   Tariffs with
    non-members            33%
    unchanged

                             100%
                      Customs Union

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


                                 33%
                     Common Market
                     No Non-Tariff Barriers
o   Customs
    Union plus...
o   Reduction of
    non-tariff
    barriers among
    members
                 Economic Union

o   Common Market
    plus...
o   Single currency
o   Harmonization of
    Monetary and
    Fiscal Policies
F/X
Foreign Exchange Fluctuations and Volatility
        Index of Swiss Franc vs. Dollar
                  1990 = 100




       1980               1990            2000
Sharply Depreciating Peso vs. Dollar
             The Big Mac Index
                                                             %
          Big Mac:       Actual     Big Mac: in Implied    Under/
          Local F/X     F/X Rate        US$     PPP Rate    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 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