1
Q
Two Most Important Variables for Growth (O’Neill)
A
- Productivity - the more a group of workers can produce with a given set of inputs, the faster the economy will grow.
- Demography - more people means more workers to produce
2
Q
Factors of Growth in China and India
A
They have the most people
- the leadership of India is now pro-business, more opportunity to expand
- India has IT, China has manufacturing
- More education causes both variables to increase. US’s schools are declining. China and India (and Africa) have growth in education.
3
Q
Globalization and Jobs
A
Most Americans and Europeans are against globalization because of jobs
Most Asians, Latin Americans and Africans are for globalization because of jobs
3
Q
Second World Reading (by Khanna) - main points
A
- The G-3 (China, USA, Europe) are all competing for dominance - they are “frenemies”
- friends = they trade, they have treaties, “run the world”
- enemies = the battlefield on which they compete? 2nd world countries (middle east countries, parts of Africa, Latin America) “swing states”
- the key is Brazil (China is winning)
- USA is losing ground in the 2nd world competition because, according to the author, USA puts up barriers, pushes American idealology but there is resistance to Americanization - people want to be more like European (as they have more empathy and more of an understanding about the rest of the world)
- Why isn’t India in the G-3(4)? It will be - Modi is going to implement Transformation
4
Q
Changing Culture of Multi-National Corporations
A
multi-national enterprise (MNE) - any company that has productive activities in two or more countries
- from 1960 - 2010, US and UK went down in terms of the largest MNEs, Japan, France and Germany went up
- Another trend in the rise of mini-multinationals - small and medium sized MNEs are becoming increasingly involved with international trade (rise of the internet is lowering the barriers)
5
Q
Main Points McKinsey Africa Article
A
- Africa is growing and developing
- 1980-2000 at 2%, 2000-2008 at 5% (becoming more important), 2014-2024 projected to be 7-8% (while the US at 2%) - will become very important
- 1/3 of the growth is from natural resources - oil prices have gone up,, gold, metal, etc. is abundant
- 2/3 from the usual
- productivity - e.g. cell phones
- demography - e.g. urbanization - more workers available vs. India still lots of farms, China is aging - less workers in the next 10 years. e.g. education - increasing in Africa
- reasons - government got their act together, implemented policies to stimulate the market, ended arms conflicts, reduced inflation and debt
- result - growth prospects for Africa are positive companies within should expand now, outsiders should consider investing
6
Q
Changing Demographics of World Output
A
1960 - US dominated at 38%, China wasn’t even a player, China wasn’t even a player
2011 - US 21% - still the biggest player (and actually grew) but down relatively in size, China at 10.5% (2nd largest) and other newly-industrialized asian countries Japan, South Korea, etc. also increased
- Rise of BRICS in the future, a further decline in US output is expected
7
Q
Critical Year When Globalization Takes Off
A
1989 - Berlin Wall comes down…Market Reforms
1990 - of 400K employees at IBM, 300K are in US, 100K elsewhere
2010 - US 100K, India 150K, rest of the world 150K
- globalization of products fueled by outsourcing
- globalization of markets
- rise of technology
8
Q
WTO
A
World Trade Organization
- responsible for policing the world trading system
- 98% of international trade goes through WTO giving it enormous scope and influence
- promoted the lowering of barriers to cross-border trade and investment
9
Q
What is the Most Global of Business?
A
- Consumer goods tend to still be country to country
- Industrial goods tend to be more global - can get parts cheaper in other countries and offer a competitive advantage
10
Q
Drivers of Globalization
A
- Declining Trade and Investment Barriers
2. The role of technological change (microprocessors, internet, transportation technology)
11
Q
The Globalization Debate
A
- Jobs and Income
critics - loss of manufacturing jobs in economically developed countries because the jobs go where the labor is cheaper
supporters - lower costs = more money for people to spend in their own country. Increase in standard of living off-sets loss of jobs. - Labor Policies and the Environment
critics - manufacturing moves to places with less regulation in terms of labor policies and the environment causing and increase in exploitation and pollution
supporters - by creating wealth and incentive, allows more regulations. Economic development will lead to lower pollution and exploitation. - National Sovereignty
critics - more reliance on global organizations (e.g. WTO) = nations not having control over their own destiny (they didn’t elect the WTO)
supporters - organizations such as WTO have to work hand-in-hand with individual states or they will quickly collapse - The World’s Poor
critics - the gap between rich and poor has gotten bigger
supporters - countries with poor are plagued by debt, free-trade will allow countries to boot-strap out of it
12
Q
Three Things to Look at When Evaluating a Country
A
- Politics
- Economics
- Legal System
13
Q
Rule of Law
A
legal principal that law should govern a nation versus the arbitrary decisions of individuals (e.g. kings, queens, etc.)
14
Q
Two Categories of Cultural Differences
A
- Collectiveism (socialism, communists) - entire community is more important than the individuals (mostassoicated with Japan. Also in China and Southeast Asia)…Confucious values. Also, Tawain (perhaps more Chinese than China?)
- Individualism - most strongly in US and UK. Adam Smith. pg 40 - first tenant is importance of guaranteeing individual self-expression and freedom. Letting people go for their own economic interest. Invisible Hand.Second tenant is welfare of society is best served by letting people pursue their own economic self-interest
15
Q
Democracy vs. Totalitarianism
A
Democracy - political system in which govt is by the people
Totalitarianism - one person or political party exercises absolute control (opposing parties are prohibited)
16
Q
Foreign Corrupt Practices Act of 1977
A
- if you are an american citizen/company or a foreign company operation in the US, you must obey this act
- not allowed to bribe a government official to get business
- are allowed to facilitate payments - allowed to pay money to get the government to get what it should do without the bribe - if all facilitating payments are recorded and reported to the SCC
17
Q
Market Economy
A
all productive activities are privately owned (versus owned by the state) and production/price is driven by supply and demand
18
Q
Command Economy
A
- the government plans the goods and services that a country produces plus their quantity and prices “for the good of the society”
- all businesses are state owned
- since the demise of communism, command economies have been on the decline
19
Q
Mixed Economy
A
- between market and mixed economies
- certain sectors left to private ownership, while others have state ownership and govt planning (often take owndership of troubled firms whose continued operation is thought to be vital to national interests)
- until the 1980’s, UK, France, Sweden were mixed - less so now
20
Q
Common Law vs. Civil Law vs. Theoretic Law
A
Common - (US) based on tradition, precedent and custom (degree of flexibility)
Civil - (Germany, France, Russia) based on a detailed set of laws organized into codes (less flexible)
Theoretic - (Islam) based on religious teachings
- in terms of Contracts, under common law, they tend to be very detailed while under civil, they are shorter and less specific because everything is already laid out in codes
21
Q
Free Trade
A
- government does not attempt to influence through quotas or duties what a citizen buys from another country or what they produce and sell to another country
- Adam Smith’s theory of absolute advantage - the invisible hand of market mechanism (versus government policy) should determine what a country imports/exports
- Ricardo and Heckscher-Ohlin theories are similar
22
Q
Benefits of Trade
A
- common sense (people in Iceland want Oranges but can’t grow them)
- efficiency (countries can specialize in certain goods and produce them more cheaply)
23
Q
Patterns of International Trade and New Trade Theory
A
- climate and natural resources
- New Trade Theory = in some cases, countries specialize in certain goods because they did it first and it’s hard to enter the market once the good is established (the market can support only a limited number of firms)
24
Mercantilism
- main tenant was for a country to export more than it imported so it would accumulate gold/silver and increase national wealth
- advocated government intervention to achieve a surplus of trade by making policies to support more export (subsidized) and minimize imports (tariffs and quotas)
- flaw was "zero-sum game" - a gain by one country was a loss by another
25
Two Major Facets of Globalization
1. Globalization of Markets
| 2. Globalization of Production
26
Absolute Advantage
- Adam Smith
- production of a product when it's more efficient than any other country in producing it
- a country should never import goods if it can produce them more efficiently and they should never make goods if another nation can produce more efficiently (should instead import them)
27
O'Neill's View of Inflation for the Developing World
- the most important thing a country can do in terms of growth is control inflation
- if people can't trust prices, they won't invest or do anything to improve their future. Without giving people a sense that what they are going to earn has value, can't talk about growth
- inflation is the first factor of the GES index
e. g. Brazil controlled inflation and is growing (what was on a daily basis is now on a yearly basis)
e. g. Argentina is not controlling it - not growing
28
GES Index Definition and Forecasting Ability
- Growth Environmental Score - way to evaluate how governments conduct themselves all over the world and their growth prospects - score from 1 to 10, higher the score, higher the productivity
- measures what causes productivity to increase (and therefore growth)
- applied these 13 variables in 1960 to forecast what would happen in 1995 - he was about right
- from 2001 to 2010 - all the BRICs countries rose much more sharply than the most optimistic theories (felt he should have been more bold) - esp. Brazil
- GDP rose as well as exports in all countries
- Russia is failing in terms of natural resources, India is failing in terms of poverty
29
GES Variables
- macroeconomic variables (use of cell phones, use of internet, use of computers, life expectancy, education, rule of law, corruption, stability of government)
- microeconomic variables (*inflation*, government deficit, investment spending, external debt, degree of openness)
30
Emerging Markets vs. Growth Markets in terms of N11
- N11 = "Next 11" = the next group of developing countries to following in the wake of BRICs (Mexico and South Korea the most likely to be almost as important as BRICs)
- Originally, they were all categorized as "emerging markets" - economies stronger than the least developed but not as strong as developed
- In 2011, O'Neill decided four of the N11 (Indonesia, South Korea, Mexico, Turkey) should be re-categorized as "Growth Markets" - if their market accounted for at least 1% of their global GDP (sufficient resources to look after themselves and influence others)
31
Robertson - Four Stages of Economic Transformation and Africa
1. Agriculture
2. Industrialization
3. Middle Class Societies with Democracy
4. Information Age
The trajectory in Africa is unparalleled. Modernized faster than anyone else
32
Santoro - "White Paper" - Human Rights in China (3 contentions)
Written by China's State Council in 1991 defending the actions of the government regarding t;he Beijing Massacre of 1989 (Tiananmen Square)
1. China must give priority to political stability and economic opportunities over political rights
2. human rights fall within the purview of national sovereignty so foreigners should not interfere with China's internal affairs (i.e. "mind your own business")
3. the needs of the group are prioritized over the individual (China's distinctive culture)
Conclusion: the right to subsistence is the most important of human rights in which the other rights are out of the question (i.e. the highest priority of the Chinese government is economic development)
33
Robertson - Africa and Corruption
- corruption is widespread in Africa
- high correlation between higher per capita and lower corruption so as the economy grows (per capita), corruption will decrease so Africa's richest countries are the lowest on Transparency International's rankings
- in 2011 there are twice as many Africa outliers on the positive side (less corrupt than they should be) than on the negative side
- there's a myth about Africa being the most deadly place but it's not at the top of the list (Iraq, Sudan, Afghanistan) and it's going down
34
Santoro - China Poverty
- since the late 1970's, 90% of the world's poverty reduction has been in China BUT still 3 million people living on less than $1 per day (i.e. half of China still live below what the West would consider the poverty line)
- poverty problem exacerbated by deep regional divide...urban incomes are four times that of rural areas (while most countries the difference is rarely over 2x)
- poor parts are the "other China" that visitors don't see
- causes mass migration of young workers away from rural areas to dangerous mining industries or low paying urban jobs (men) or factories (women) - no safety net and no rights of the new region
- bonds to family remain strong
35
Santoro - Fair Share Theory of Corporate Responsibility for Human Rights (3 Factors)
- "social contract" signifies the relationship of trust between corporations and society.
- all corporations have a duty to avoid violating human rights (directly or indirectly).
- in considering whether a firm has a secondary duty to help remedy human rights, three fairness factors are taking into account:
1. closer the relationship between the corporation and the human rights victim, the stronger the duty
2. the potential effectiveness of the company in promoting human rights, the greater the duty
3. the capacity of the company to withstand economic retaliation, the greater the duty
Conclusion: foreign business should have more courage and do its fair share to advance democracy and human rights
36
Santoro - Reforms (3)
Deng XiaoPing launched all the reforms since 1970:
1. Rural privatiztion
2. Privatization of state owned companies
3. opening up to FDI (foreign direct investment)
- the reforms caused huge growth rates in output of crops
- he fixed the errors of Chairman Mao and created economic growth
37
Corruption and Transparency International
- corruption has always been and still is a problem
- debate: some economists say corruption is necessary for functioning economy (grease money = removes barriers and creates jobs), others say it harms economic development and it feeds itself so there's no going back
- Transparency International - (non-partisan) coalition against corruption formed in 1993 - sharing one vision: a world in which government, business, civil society and the daily lives of people are free of corruption
38
Santoro - History and Future of ACFTU and Worker Rights
ACFTU - Chinese Trade Unions
- historically didn't represent workers - only provided services such as hobby centers and outings
- did what the Chinese communist party wants and that has a higher priority than protecting the workers (wants harmony not confrontation
- however, ACFTU is changing (has financial incentive to do so)
- have been representing migrant workers (which they hadn't before) and Wal-Mart employees (never done before 2001 - by 2006, 41 million migrant workers as members)
- mixed success in changing and still in the middle
- in terms of improving working conditions in China, govt is responsible (2008 passed Labor Contract Law which requires a written contract for every worker, after 10 years you become a permanent employee). On paper, more advanced but in reality, the law needs to be enforced. They key is not the law - it's how it's enforced. According to Santoro, sometimes officials are bribed, in terms of the labor cost, it will be 5-40% more expensive.
- Chinese Social Activists are other players along with the ACFTU - they are going to put pressure on Chinese govt officials to enforce the Labor Contract Law
39
Santoro - CSR Pyramid of workers (4 tiers)
Santoro says CSR in China is a hypocrisy - "race to the bottom"...in order for China to continue to win the competition to produce for US companies looking to pay "bottom dollar", the burden falls on factories and ultimately workers:
- bottom tier - companies serving the Chinese domestic market (far outside the CSR system)
- next level - serves the no-name export markets (non-branded toys, etc) - also far outside the CSR syatem
- third level - CSR-lite (e.g. Disney, Apple) - reactive. when they get into PR trouble, they react
- top level - CSR active - proactive (e.g. Coach) - 1-2 million = under 1%
40
Theory of Comparative Advantage - Ricardo
- concentrate on what you do best (e.g. even if England could make wine (even if it can more efficiently), it shouldn't...France should stick to it)
- Benefits: with specialization in trade by countries, efficiencies and economies of scale improve leading to more production at lower cost which leads to a higher standard of living for consumers
- Who loses under the Theory of Comparative Advantage? Employee who lose their jobs (middle-class). The primary beneficiary are consumers (all over the world)...the upper 10% in US and the lower class workers.
41
Samuel Huntington vs. Fukuyama
- 1989 Fukuyama wrote an article called "End of History" - with the fall of the Berlin Wall, the whole world was going to become a liberal democracy + market economy (i.e. fight between communism and freedom was over)
- - many countries had dictators and they all became democratic, with economic growth, bigger middle class = move towards democracy
- - strong state, rule of law, democratic accountability
- In response, 1993 Huntington wrote "The Clash of Civilizations" - while countries are modernizing, they are not becoming more Western
- - there are 8 civilizations with their own value systems and they've had clashes
- - Modernizing can even mean a retreat to the traditional -- the greatest clashes in the future will be the West vs. Islam and the West vs. China
42
Jeffrey Sachs & Warner
- relationship between trade and economic growth
- found that countries that are more "open" to international trade grow faster than those who are "closed"
- both in developing and developed countries
44
Heckster-Ohlm
- emphasized factors of production (Sweden is good with paper products because they have a lot of trees. Brazil makes coffee because they have the climate and skilled labor)
- "factor endowments" - e.g. natural resources, climate, location, demographics
- the more abundant the factor, the lower the cost
- countries should export goods that make intensive use of factors that are abundant while importing goods that make intensive use of factors that are scarce
- free trade is good but vs. Ricardo, this theory argues trade is determined by factor endowments versus productivity
45
Krugman (New Trade Theory)
- theory suggests nations may benefit from trade even when they do not differ in resource endowments of technology
- two dimensions:
1. Economies of Scale - unit cost reductions associated with large scale output (can spread out fixed asset costs). From trade, countries can increase the variety of goods while decreasing the average cost due to a bigger market to take advantage of economies of scale and being able to import.
2. First Mover Advantage - economic and strategic advantages that accrue to early entrants, thus benefit from a lower cost structure. When the output required to attain economies of scale require the majority of the world's demand, the global market can only support a small number of competitors.
Large passenger airplanes is an example of this. there is only room for 2 competitors in this business (Boeing and Airbus - enemies). if China tried to get involved, it would lose money (there is not room for three competitors)
- this theory suggests countries may benefit from trade even if they do not differ in resource endowments or technology
46
Michael Porter - National Competitive Advantage
- explains why certain countries do so well in certain industries (goes further than CA saying "because they are productive at it")
- four broad attributes - factor endowments (basic and advanced), demand conditions, related and supporting industries, firm strategy, structure and rivalry - all of these = diamond
- Main attribute - "Industry Related Cluster"
- German cars built for speed, Japanese cars last a long time with quality engineering
- if you put a speed limit in Germany, there's no incentive to manufacture high-speed cars
- American is the world leader in pick-up trucks - gas is cheaper, ranches
- Clusters not only include the company but also the suppliers. e.g. German break pad companies need to produce breaks that can stop at high speeds
Other examples of Industry Related Clusters
- Denmark - worldwide center for diabetes - companies and hospitals
- Milan - fashion
- Shen Zen - electronic assembling (FoxConn)
- New York - financial services
- Southern California - entertainment
- Korea - IT/Internet
47
PPP
Purchasing Power of Parity
- gross national income (GNI) can be adjusted by the PPP which allows more direct comparison of living standards between the different countries
- the base for the adjustment is the cost of living in the US
48
Confucianism
- until 1949 the official ethical system of China
- attaining personal salvation through the right action
- ethical code that sets guidelines for relationships with others
1. loyalty (to one's superiors)
2. reciprocal obligations
3. honesty in dealings with others
49
Guanxi
- Confucianism is central to this concept
- means "relationships" or in business, "connections" supported by reciprocal obligations which are the glue that holds it together
- if favors done are not reciprocated, that person will be unable to draw on the guanxiwang for help in the future
- important mechanism because it's a society that lacks a rule-based legal system, this is the way business relationships are built (i.e. trust)
49
FDI and it's Two Types
- Foreign Direct Investment occurs when a firm invests directly in facilities to produce in a foreign country.
1. Greenfield - the establishment of a new operation in a foreign country (i.e. from scratch)
2. Merging with an existing firm in a foreign country
a. Minority (firm takes less than 50% voting stock)
b. Majority (firm takes 50%-99%)
c. Full outright (100%)
50
Trends in FDI since 1990
- From 1992 - 2012, the total flow of FDI from all countries increased around nine-fold, world trade value grew four-fold, and world output by about 55%
- Global Stock (total accumulated value of foreign-owned assets) by 2011 was $21 trillion
- The value added by multi-nationals reached $7 trillion in 2011 (roughly one-tenth of global GDP)
- grown faster than world trade and world output because
1. executives see FDI as a way to circumvent future trade barriers
2. general political and economic changes worldwide and the shift towards free market economies encouraged FDI
3. reductions of restrictions on FDI in Asia, Europe, Latin America as well as economic growth in those areas and programs open to FDI (90% of the 2700 changes made worldwide btw 1992-2009 in terms of FDI were favorable to it)
4. globalization in general (i.e. firms see the world as their market)
51
Comparative Advantage Extensions
- immobile resources - friction involved with shifting from producing one good to another. e.g. the country as a whole will benefit from shifting from textiles to computers but a textile worker prob doesn't know about computers. Benefits outweigh the costs but they remain
- diminishing returns - can't assume "constant returns to specialization" (no matter where on the PPF, returns remain constant) because 1. Not all resources are the same quality (land, labor, etc) 2. Different goods use resources in different proportions. It's worthwhile to specialize until that point where resulting gains outweigh diminishing returns - still benefit but not as much as in a perfect situation
- dynamic effects (gains) and economic growth - model assumes trade doesn't change stick of resources or it's efficiency. 1. Trade might increase stock (eg labor from overseas) 2. Trade might increase efficiency (eg better technology. Dynamic gains shift the PPF outward
53
Samuelson Critique of Dynamic Gains
- situation rich country trading with a poor country, Samuelson believes dynamic effects might be negative enough to outweigh the benefits.
- when outsourcing coupled with the rapid advance in education of foreign labor, effects middle-class wages by lowering the market clearing wage
- introducing protectionist measures might help (e.g. trade barriers)
- recent study found that regions exposed to competition from China, overall employment had declined
- in long run, Samuelson concedes trade is a good thing
54
The Leontief Paradox
- testing the Heckscher-Ohlin theory
- because the US is abundant in capital, H-O would suggest that it would export capital-intensive goods however, Leontief found the opposite (exports were less capital-intensive than imports)
- could be because exporting more skilled-labor goods while importing heavily manufactured goods
- Ricardo's comparative dilemma has more assumptions but has been found to be a better predictor of trade patterns (H-O assumes technologies the same across the board which is not the case)
55
Evolution of Comparative Advantage
1. Mercantilism
2. Absolute Advantage (Smith)
3. Comparative Advantage (Ricardo)
4. Heckscher - Ohlin
5. New Trade Theory (Krugman)
6. National Competitive Advantage (Porter)
56
Globalization of Boeing 777 and 787
- Boeing is one of two firms in the aircraft industry that is a product of the New Mover Advantage aspect of New Trade Theory
- It's existence and success supports New Trade Theory (and Comparative Advantage as it's success is centered around it's productivity) but is at odd with Heckscher-Ohlin because even though other countries are endowed with the resources to produce aircrafts, they are unable to enter the market and have to become a subcontractor of one of the two bigger firms in order to be involved)
- first mover advantage has to do with luck, innovation and entrepreneurship
- e.g. Boeing may not have been as successful if an early competitor's product failed technologically (luck)
- New Trade Theory also supports idea of government assisting firms in becoming new movers by providing subsidiaries (as they did for Boeing)
57
Singapore's (Lee Kuan Yew) view of Democracy
- when it comes to economic development, more important than democracy is discipline (e.g. Tiger Moms and education)
58
Appropriate Role for Govt. and CSR in Economic Development (6 Factors)
1. protecting jobs and industries from unfair foreign competition (e.g. tariffs places on imports like steel to save jobs in the steel industry...actually resulted in higher steel prices)
2. national security (e.g. protecting US semiconductor industry from foreign competition as it's a big part of our defense products - wouldn't be as safe to import them)
3. Retaliation - forcing trading partners to "play by the rules" with trade policy as a bargaining tool
4. protecting customers - banning or placing restrictive barriers on importing like beef to prevent mad cow disease
5. furthering foreign policy objectives - e.g. preferential trade terms to a country with which trying to build a relationship
6. protecting human rights - using trade policy to try to improve the human rights practices of trading partners
59
Licensing/Franchising (FDI) Pros and Cons
Pros
- quicker to execute (market moves very quickly)
- valuable strategic assets are less risky to acquire than build from the ground-up (e.g. brand loyalty, customer relationships, trademarks/patents, production systems, etc.)
Cons
- may give away valuable technological resources to a potential competitor
- does not give firm tight control over manufacturing, marketing, strategy in a foreign country that may be required to maximize profitability
- competitive advantage is sometimes based on the manufacturing, marketing, management capabilities of products (versus the actual product) and those capabilities are often not amenable to licensing
60
GNI
Gross National Income - regarded as the yardstick for the economic activity of a country; measures total annual income received by residents of a nation
- GNI per person can be misleading because don't consider differences in the cost of living (PPP accounts for these differences)
61
HDI
Human Development Index - measures the quality of human life in different nations
- based on three measures
1. life expectancy at birth (function of health care)
2. educational attainment (adult literacy rate and enrollment)
3. whether average incomes, based on PPP estimates, are sufficient to meet basic needs of life in a country (food, shelter, health care)
62
PPF
Production Possibility Frontier - the different combinations in which a country can produce certain goods given its resources
Pace
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Decks in class (13)
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