Growth in Trade and FDI

Indexed: 1950 = 100

1600

1200

Trade 800
FDI
400
GDP

100
1950 1960 1970 1980 1990 2000
Global Linkages
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
Policy Exemplars . . .
Buyout Bid of Fairchild Semiconductor
Buyout blocked by DoD -- national security
Big-3 Automakers
VERs of 1980s
Lobbying during Bush administration
Kodak in Japanese Market
SII Talks
301 Filing
GEs Acquisition of Honeywell
Blocked by EU
How Nations Influence Trade and
Investment Activity Through Policy
Overt/Visible Policies
Supporting/Strategic Policies

Follow-up Questions:
How well to these policies work?
What are the side effects?
Retaliation?
How might managers of MNCs respond?
Free Trade Doubletalk
USTR Definition of Trade Barriers
Government laws, policies, or practices
that either:
Protect domestic products from
competition
Artificially stimulate exports of particular
domestic products
Overt Policy Alternatives
Restrict Imports (tariffs, quotas, VERs)
Restrict FDI
Incoming (F/X controls, local content)
Outgoing (tax code, expatriation disincentives)

Restrict Exports (DoD restrictive munitions)

Export Promotion (subsidies, tax credits)
Import Promotion (tax credits, favors)
FDI Incentives (subsidies for infrastructure,
training & development, market access)
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
 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
Porters Diamond of
National Competitive Advantage
The Economy, Stupid!
Strategic Supporting Policies:
Free trade and FDI
Infrastructure
Education
Antitrust and competition
Intellectual Property Protection
Tax Incentives on R&D
Technical Standards
Many others