International Business EnvironmentStrategy 571

Dennis Quinn & James Vreeland

Final Exam – 6 May @ 6:30

Chinese Leader Firmly Defends Currency and Trade Policies

• Premier Wen Jiabao sharply defended China’s currency and trade policies on Sunday against what he called foreign “finger-pointing,” charging instead that the developed world seeks to force unfair changes in those policies “just for the purposes of increasing their own exports.”

• In a more than two hour news conference at the close of China’s annual legislative session, Mr. Wen repeated that China will keep its currency, the renminbi, “basically stable” despite calls by the United States and other developed nations to let its value increase.

• He also repeated the concerns he voiced a year ago, at China’s last legislative session, that the United States is failing to rebuild its own economy and maintain the value of the dollar. Protecting the dollar, which dropped sharply since the global crisis began in late 2008, is a matter of “national credibility” for the United States, he said.

US Public Debt as of 11 March 2010 ($12.6 Trillion)

$0

$2,000,000,000,000

$4,000,000,000,000

$6,000,000,000,000

$8,000,000,000,000

$10,000,000,000,000

$12,000,000,000,000

$14,000,000,000,000

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Source: http://en.wikipedia.org/wiki/Impossible_trinity

Capital mobility (open flows to FDI, e.g.)

Exchange Rates Domestic

Fixed/Floating Monetary & Fiscal Policy

Management

Post-Bretton Woods (1973 (±) to present)

Background notes – open economy macroeconomics• If a country chooses to forgo capital controls, that country can predictably only achieve EITHER a

stable exchange rate or domestic monetary and fiscal autonomy BUT NOT BOTH.A) A country that wants to have open capital markets and monetary policy autonomy

has to be willing to let its exchange rate float. B) A country that wants to have open capital markets and stable exchange rates has

to be willing to let its interest rates and its fiscal deficit used to defend the exchange rate (as with the Gold Standard)

C) A country that wants to have a stable exchange rate AND independent fiscal and monetary policies will have to impose some capital controls (see figure on capital controls)

• For example, the U.S. has maintained open capital accounts with few controls since the 1940s, the U.S. has a strong independent bank that sets monetary policies, and a strong legislature that likes to spend more than it taxes. Hence, the U.S. sacrifices a stable exchange rate and allows the dollar to float

• Smaller EU countries, Hong Kong, Singapore, and Panama (e.g.) want the benefits of open capital markets (low cost of capital, high FDI, being a financial center, e.g.) AND a stable exchange rate (pricing of imports and exports). These countries give up fiscal and monetary policy autonomy. Countries in the Gold Standard era did this.

• Thailand (1990s), Indonesia (1990s), and Argentina (1990s to 2001) are famous failures of countries seeking to maintain fiscal and monetary policy autonomy, manage or fix an exchange rate, and maintain open capital accounts

• Many emerging market countries maintain fiscal and monetary autonomy and practice either fixed or “dirty float” exchange rate policies. They impose capital controls to a greater or less extent. China, India, Argentina, Brazil, Malaysia, Ukraine, and Russia are contemporary examples of such countries.

13

from Prof. Nollen

Investment projects – 10-15 page text

3000~ words -only 6 weekends to do the work

• “Nollen” questions: what, why, where, how, when; choose a firm and look abroad for FDI

• http://www.library.georgetown.edu/guides/foreigninvest/

• http://resources.library.georgetown.edu/libdata/page.phtml?page_id=52

• http://www.export.gov/mrktresearch/index.asp (you have to register as a student)

• IMF’s Annual Report on Exchange Arrangements and Exchange Restrictions (capital rules – copy relevant country section)

Modes of Entry

Checklist of Considerations

Exporting/

Sourcing/

License/

Franchise

FDI- JV FDI-Subsidiary

Financial Capital Requirements Profit Potential Financial Risk

Managerial Management Requirements Operational control Speed of entry

Market ‘effective customer demand Competitors Foreign, domestic Export platform? Growth prospects

Technology Technology Risk Scale Economies Product and Process Improvements

Regulatory/Political Currency Risk Protection of Intellectual Property Expropriation Risk Agreements enforced? Corruption

Policy Forecasting rationally ignorant voters in contestable markets

Goals → Strategies → Institutions → Public policy

available and actors outcomes voters

party elites

YearVoting-age

populationVoterregistration Voter turnout

Turnout of voting-age population (percent)

2008* 231,229,580 NA 132,618,580* 56.8%

2006 220,600,000 135,889,600 80,588,000 37.1%

2004 221,256,931 174,800,000 122,294,978 55.3

2002 215,473,000 150,990,598 79,830,119 37.0

2000 205,815,000 156,421,311 105,586,274 51.3

1998 200,929,000 141,850,558 73,117,022 36.4

1996 196,511,000 146,211,960 96,456,345 49.1

1994 193,650,000 130,292,822 75,105,860 38.8

1992 189,529,000 133,821,178 104,405,155 55.1

Voting turn out – 1992-2008 sources: Federal Election Commission; www.infoplease.com

US Voter Turnout 2008, by Age and Gender

0.0

10.0

20.0

30.0

40.0

50.0

60.0

70.0

80.0

90.0

..18

year

s

..20

year

s

..22

year

s

..24

year

s

..26

year

s

..28

year

s

..30

year

s

..32

year

s

..34

year

s

..36

year

s

..38

year

s

..40

year

s

..42

year

s

..44

year

s

..46

year

s

..48

year

s

..50

year

s

..52

year

s

..54

year

s

..56

year

s

..58

year

s

..60

year

s

..62

year

s

..64

year

s

..66

year

s

..68

year

s

..70

year

s

..72

year

s

..74

year

s

..76

year

s

..78

year

s

..80-

84 y

ears

source: US Bureau of the Census (self reported) http://www.census.gov/population/www/socdemo/voting/cps2008.html

0

5

10

15

20

25

30

35

All Voters

Men

Women

Voters by age

D R

R DR D

R R

R R

R R

D D

D R

Keynes in one slide

• Y = I + G+ C + (ex/im)

• Role of expectations

• If consumers have poor expectations, won’t consume (save instead)

• If businesses/banks have poor expectations, won’t invest or lend (manage to cash)

• What’s left? ($800 billion stimulus (+/-))

US Public Debt as of 11 March 2010 ($12.6 Trillion)

$0

$2,000,000,000,000

$4,000,000,000,000

$6,000,000,000,000

$8,000,000,000,000

$10,000,000,000,000

$12,000,000,000,000

$14,000,000,000,000

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Figure 2. Growth Rates and Growth Volatility, 1960-97, By Level Of 1960-97 Democracy(64 countries; Polity 98 and WB data)

-8

-6

-4

-2

0

2

4

6

8

10

1 10 100

Growth Volatility (Standard Deviation)--Log Scale (source: Quinn/Woolley 2001)

Gro

wth

Rat

e A

vera

ge

Most Democratic

Least Democratic

Democracies Have Better Economic Outcomes, part I - 152 countries(Economic Growth and Volatility 1980-2004 by Level of Democracy 1975-79)

-12

-9

-6

-3

0

3

6

9

12

1 10 100

Standard Deviation of Growthsources: Penn World Tables 6.2, 2006; Freedom House, 2008; Adapted from Quinn and Woolley 2001

Rat

e o

f P

PP

Ad

just

ed G

row

th p

er c

apit

a

All Other Countries (Freedom House 5-10)

Most Democratic (Freedom House 13-14)

Democratic (Freedom House 11-12)

Least Democratic (Freedom House 2, 3,4)

Vietnam

China

US

CzeBra

ZafZaf

Investment projects• “Nollen” questions: what, why, where, how,

when; choose a firm and look abroad• http://www.library.georgetown.edu/guides/foreig

ninvest/• http://resources.library.georgetown.edu/libdata/p

age.phtml?page_id=52

• http://www.export.gov/mrktresearch/index.asp (you have to register as a student)

• IMF’s Annual Report on Exchange Arrangements and Exchange Restrictions (capital rules – copy relevant country section)

Vietnam• 1) How attractive is Vietnam as an

investment opportunity?• 2) we have three companies we will

consider. what recommendations do you have for them whether to enter, how to enter, and when to enter.

• 3) what are the factors leading to successful investment in Vietnam?

Vietnam & US tradeFree trade increases the domestic price of the goods that are exported AND

increases the return to the abundant factor (Vietnam – Labor; US – K; tech; NRes; HSkilled L)

Factor

Advantage Factor

Disadvantage

U.S.

K, α, HSkilled L,

Natural Resources

Semi-Skilled L

Unskilled L

Vietnam Semi-Skilled L

Unskilled L K, α, HSkilled L

Why trade?

• What determines the exports and imports of a nation or a firm?

• Why does India export software?

Ricardo, Comparative Advantage (England-Portugal)

Production and consumption before trade

Wine Cloth

England 120 100

Portugal 80 90

TOTAL 200 190

Ricardo, Comparative Advantage (England-Portugal)

Production and consumption before trade

Wine Cloth

England 120 100

Portugal 80 90

TOTAL 200 190

Production after trade

Wine Cloth

England 0 220

Portugal 170 0

TOTAL Increase production 6.25% 10%

Exhibit 7b – HBS “India on the Move”

45

Manufacturing (NAICS 31, 32, 33)

0

20

40

60

80

100

120

140

160

20000 25000 30000 35000 40000 45000 50000 55000 60000 65000

U.S. Industry Average Annual Wage

Exp

ort

s/W

ork

er

($0

00s

)

Petroleum and coal products

Chemicals

Computers and electronic products

Transportation equipment

Primary metals

MachineryLeather and allied products

Textile productsApparel

Furniture and related products

Export Intensity in Manufacturing

Source: Dean, Lovely, and Mora, 2009, Journal of Asian Economics, 20:596-610.

COUNTRY INDUSTRY number %DRIndia Software&ComputerSvc 41 15.77%India Construct.&Materials 19 7.31%India Personal Goods 15 5.77%India Indust.Metals&Mining 15 5.77%India Pharma. & Biotech. 14 5.38%India Food Producers 12 4.62%India Chemicals 12 4.62%India Banks 11 4.23%India Electron.&ElectricEq 10 3.85%India Industrial Engineer. 10 3.85%India Financial Services 10 3.85%India Oil & Gas Producers 9 3.46%India Tech.Hardware&Equip. 8 3.08%India Travel & Leisure 7 2.69%India Fixed Line Telecom. 6 2.31%India Real Estate Inv&Serv 6 2.31%India Electricity 6 2.31%India IndustrialTransport. 6 2.31%India HealthCareEquip.&Ser 5 1.92%India General Retailers 5 1.92%

BSE=India, FXI=China, GSPC=S&P500

BSE=India, EWZ=Brazil, GSPC=S&P500

1999 General Election results

Party/alliance Lead Party % of votes Seats

National Democratic Alliance (Governing Party) BJP 38.67 279

Opposition Congress 61.33 266

2004 General Elections (4% or more of votes)

Party Name States

contested Seats

contested Seats won

No. of Votes

% of Votes

% in Seats contested

Indian National Congress

33 417 145 103,408,949 26.53% 34.43%

Bharatiya Janata Party

31 364 138 86,371,561 22.16% 34.39%

Communist Party of India (Marxist)

19 69 43 22,070,614 5.66% 42.31%

Bahujan Samaj Party

25 435 19 20,765,229 5.33% 6.66%

Samajwadi Party

23 237 36 16,824,072 4.32% 10.26%

Indian General Elections – May 2009

Party Congress BJP CPI

(Marxist)

Alliance United

Progressive Alliance

National Democratic

Alliance

Third Front

Leader Manmohan

Singh Lal Krishna

Advani Prakash Karat

Seats won 262 159 79 Seat change +80 -17 -30 Popular vote 153,482,356 102,689,312 88,174,229 Percentage 37.22% 24.63% 21.15% Swing +3.96% -4.88% -1.06%

China?

China's software export hit $14.2 bln in 2008

BEIJING, Feb. 11 (Xinhua) -- China's software export soared 39 percent last year to 14.2 billion U.S. dollars from 2007, despite the international financial crisis, according to the Ministry of Industry and Information Technology (MIIT) Wednesday. The export included 1.59 billion dollars from outsourcing services, up 54.3 percent year on year.

• Reuters India, March 2009

• India's software and services exports should rise

16-17 percent to about $47 billion in the year to March 2009, slower than 21-24 percent forecast earlier, as the global downturn crimps outsourcing, an industry body said. The National Association of Software and Service Companies (Nasscom) said on Wednesday it expects software and back-office outsourcing services export revenues to rise to $60-$62 billion in the fiscal year 2010/11.

Questions Nokia

• Why does Finland emerge as a leading produce of mobile telecom products?

• Why did Nokia because a world leader?

• What are the sustainable advantages of Finland and Nokia?

Euro: Who’s in, who’s out, Why?

• Eurozone countries

• EU states aiming to join Eurozone on 1 January 2008

• EU states aiming to join Eurozone on 1 January 2009 EU states bound by the Maastricht Treaty to ultimately join the Eurozone

• EU states with a derogation on Eurozone participation

Corporatism - Katzenstein

• Managing change (probably dominant model in EU)

• What are “peak” associations?

• Comparisons to “state planning”?

• Advantages?

• Disadvantages?

• Olson and collective action?

Post WW II & corporatism

• Austria (partitioned –’56), Finland (defeat & reparations), and Germany (partitioned)

• Belgium, Denmark, Netherlands, Norway occupied

• Social and political fragmentation as root of catastrophe

• Sweden and Switzerland (prior coordination – Sweden and great depression case)

• EU social policies – version of corporatism

2008 ADR volumes and values

• 4 Chinese• 8 Brazilian• Plus Nokia