Beruflich Dokumente
Kultur Dokumente
Course Objectives: The objectives of this course are to help you gain tools
that will enable you to systematically think about issues in international
economics. The course will cover two main areas in international economics:
international trade and international development.
International trade will cover: development of trade among nations;
theories of trade; policies, factor endowments, trends, and barriers to
trade.
International Development will cover basic development topics
such as: the role of free trade, foreign aid, and institutions for
economic growth and development.
Suggested Readings:
International Economics By Dominick Salvatore
International Economics By D.M. Mithani
International Economics By Francis Cherunilam
Case Study- I
Most of the growth of the Indian software industry has been based on
contract or project-based work for foreign clients. Many Indian companies,
for example, maintain applications for their clients, convert code, or migrate
software from one platform to another. Increasingly, Indian companies are
also involved in important development projects for foreign clients. For
example, TCS, India's largest software company, has an alliance with Ernst &
Young under which TCS will develop and maintain customized software for
Ernst & Young's global clients. TCS also has a development alliance with
Microsoft under which the company developed a paperless National Share
Depositary system for the Indian stock market based on Microsoft's Windows
NT operating system and SQL Server database technology. The Indian
software industry has emerged despite a poor information technology
infrastructure. The installed base of personal computers in India stood at just
1.8 million in 1997, and this in a nation of 1 billion people. Moreover, with
just 1.5 telephone lines per 100 people, India has one of the lowest
penetration rates for fixed telephone lines in Asia, if not the world. Internet
connections numbered just 45,000 in 1997, compared to 30 million in the
United States. Sales of personal computers are starting to take off; over
500,000 were expected to be sold in 1998. The rapid growth of mobile
telephones in India's main cities is to some extent compensating for the lack
of fixed telephone lines. In explaining the success of their industry, India's
software entrepreneurs point to a number of factors. Although the general
level of education i~ India is low, India's important middle class is highly
educated and its top educational institutions are world class. Also, there has
always been an emphasis on engineering in India. Another great plus from
an international perspective is that English is the working language
throughout much of middle-class India-a remnant from the days of the British
raja.
Martin's Textiles
August 12, 1992, was a really bad day for John Martin. That was the day
Canada, Mexico, and the United States announced an agreement in principle
to form the North American Free Trade Agreement. Under the plan, all tariffs
between the three countries would be eliminated within the next 10, to 15
years, with most being cut in 5 years. What disturbed John most was the
plan's provision that all tariffs on trade of textiles among the three countries
were to be removed within 10 years. Under the proposed agreement, Mexico
and Canada would also be allowed to ship a specific amount of clothing and
textiles from foreign materials to the United States each year, and this quota
would rise slightly over the first five years of the agreement. "My' God!"
thought John. "Now I'm going to have to decide about moving my plants to
Mexico."
John is the CEO of a New York-based textile company, Martin’s Textiles. The
company has been in the Martin family for four generations, having been
founded by his great-grandfather in 1910. Today, the company employs
1,500 people in three New York plants that produce cotton-based clothes,
primarily underwear. All production employees are union members, and the
company has a long history of good labor relations. The company has never
had a labor dispute, and John, like his father, grandfather, and great-
grandfather before him, regards the work force as part of the "Martin
family." John prides himself not only on knowing many of the employees by
name, but also on knowing a great deal about the family circumstances of
many of the longtime employees.
Over the past 20 years, the company has experienced increasingly tough
competition, both from overseas and at home. The mid-1980s were
particularly difficult. The strength of the dollar on the foreign exchange
market during that period enabled Asian producers to enter the US market
with very low prices. Since then, although the dollar has weakened against
many major currencies, the Asian producers have not raised their prices in
response to the falling dollar. In a low-skilled, labor-intensive business such
as clothing manufacture, costs are driven by wage rates and labor
productivity. Not surprisingly, most of John’s competitors in the
northeastern United States responded to the intense cost competition by
moving production south, first to states such as South Carolina and Missis-
sippi, where nonunion labor could be hired for significantly less than in the
unionized Northeast, and then to Mexico, where labor costs for textile
workers were less than $2 per hour. In contrast, wage rates are $12.50 per
hour at John's New York plant and $8 to $10 per hour at nonunion textile
plants in the south eastern United States.
The last three years have been particularly tough at Martin's Textiles.
The company has registered a small loss each year, and John knows the
company cannot go on like this. His major customers, while praising the
quality of Martin's products, have warned him that his prices are getting
too high and they may not be able to continue to do business with him.
His longtime banker has told him that he must get his labor costs down.
John agrees, but he knows of only one surefire way to do that, to move
production south..,-way south, to Mexico. He has always been reluctant to
do that, but now he seems to have little choice. He fears that in five years
the US market will be flooded with cheap imports from Asian, US, and
Mexican companies, all producing in Mexico. It looks like the only way for
Martin's Textiles to survive is to close the New York plants and move
production to Mexico. All that would be left in the United States would be
the sales force
John's mind was spinning. How could something that throws good honest
people out of work be good for the country? The politicians said it would be
good for trade, good for economic growth, and good for the three countries.
John-could not see it that way. What about Mary Morgan, who has worked for
Martin's for 30 years? She is now 54 years old. How will she and others like
her find another job? What about his moral obligation to his workers? What
about the loyalty his workers have shown his family over the years? Is this a
good way to repay it? How would he break the news to his employees, many
of whom have worked for the company 10 to 20 years? And what about the
Mexican workers, could they be as loyal and productive as his present
employees? From other US textile companies that had set up production in
Mexico he had heard stories of low productivity, poor workmanship, high
turnover, and high absenteeism. If this was true, how could he ever cope
with that? John has 'always felt that the success of Martin's Textiles is partly
due to the family atmosphere, which encourages worker loyalty, pro-
ductivity, and attention to quality, an atmosphere that has been built up over
four generations. How could he, replicate that in Mexico with a bunch of
foreign workers who speak a language that he doesn't even understand?
Caterpillar Inc.
In retrospect, Komatsu had been creeping up on Cat for a long time. In the
1960s, the company had a minuscule presence outside of Japan. By 1974, it
had increased its global market share of heavy earthmoving equipment to 9
percent, and by 1980 it was over 15 percent. Part of Komatsu's growth was
due to its superior labor productivity; throughout the 1970s, it had been able
to price its machines 10 to 15 percent below Caterpillar's. However, Komatsu
lacked an extensive dealer network outside of Japan, and Cat's worldwide
dealer network and superior after-sale service and support functions were
seen as justifying a price premium for Cat machines. For these reasons,
many industry observers believed Komatsu would not increase its share
much beyond its 1980 level.
An unprecedented rise in the value of the dollar against most major world
currencies changed the picture. Between 1980 and 1987, the dollar rose an
average of 87 percent against the currencies of 10 other industrialized
countries. The dollar was driven up by strong economic growth in the United
States, which attracted heavy inflows of capital from foreign investors
seeking high returns on capital assets. High real interest rates attracted
foreign investors seeking high returns on financial assets. At the same time,
political turmoil in other parts of the world and relatively slow economic
growth in Europe helped create the view that the United States was a good
place. in which to invest. These inflows of capital increased the demand for
dollars in the foreign exchange market, which pushed the value of the dollar
upward against other currencies
The effect for Caterpillar was almost immediate. Like any major exporter,
Caterpillar had its own foreign exchange unit. Suspecting that an
adjustment in the dollar would come soon, Cat had increased its holdings of
foreign currencies in early 1985, using the strong dollar to purchase them.
As the dollar fell, the company was able to convert these currencies back
into dollars' for a healthy profit. In 1985, Cat had pretax profits of $32
million without foreign exchange gains of $89 million, it would have lost
money. In 1986, foreign exchange gains of $100 million accounted for
nearly two-thirds of its pretax profits of $159 million. More significant for
Cat's long-term position, the fall in the dollar against the yen and
Caterpillar's cost-cutting efforts by 1988 had helped to eradicate the 40
percent cost advantage that Komatsu had enjoyed over Caterpillar four
years earlier. After trying to hold its prices down, Komatsu had to raise its
prices that year by 18 percent, while Cat was able to hold its price increase
to 3 percent. With the terms of trade no longer handicapping Caterpillar, the
company regained some of its lost market share. By 1989, it reportedly held
47 percent of the world market for heavy earthmoving equipment, up from
a low of 40 percent three years earlier, while Komatsu's share had slipped to
below 20 percent.
2. If you were the CEO of Caterpillar, what actions would you take now to
make sure there is no repeat of the early 1980s experience?
3. What potential impact can the actions of the IMF and World Bank have on
Caterpillar’s business? Is there anything Cat can do to influence the actions
of the IMF and World Bank?
4. As the CEO of Caterpillar, would you prefer a fixed exchange rate regime
or a continuation of the current managed-float regime? Why?