International Business Environment Strategy 571 Dennis Quinn & James Vreeland

Larry Summers on the U.S. economy – 16 July =RdLKipJM6Go =RdLKipJM6Go Questions: Given the current state: should investors pull out of the US? or continue to invest in the US? or, invest somewhere else?

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.”Wen JiabaoChina 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.the renminbi 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.

Today’s NYTimes Will China Listen? China’s Currency Manipulation Japan Eases Monetary Policy to Fight Deflation E.U. Warns Euro Zone Heavyweights on Deficits Ailing Euro Seen as a Signal of Deeper Woes on Continent Schumer-Graham (s. 1254) currency manipulation Jobs Bill Passes in Senate With 11 Votes From Republicans Led by Energy, U.S. Wholesale Prices Fall

2008 California Struggles to Close a Projected $41 Billion Deficit California: $143 Billion budget; $41 Billion deficit!

Source:

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

International Economic Variables as a Percentage of US GDP

US Interest-bearing Debt rates/pd/avg/2009/2009_06.htm rates/pd/avg/2009/2009_06.htm [2010/2010_02.htm updated] Interest-bearing Debt: 2/28/2010 6/30/09 6/30/08 Marketable: Treasury Bills (<1 year) Treasury Notes (2-10 years) Treasury Bonds (20 to 30 years) Treasury Inflation-Protected Securities(TIPS) Federal Financing Bank Total Marketable

Investment projects – 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 ninvest/ ninvest/ age.phtml?page_id=52http://resources.library.georgetown.edu/libdata/p age.phtml?page_id=52 (you have to register as a student) IMF’s Annual Report on Exchange Arrangements and Exchange Restrictions (capital rules – copy relevant country section)

Examples from EP-10s Netflix-India Cheesecake London Harley Davidson-India Best Buy-India Sunpower-Brazil Dell-Costa Rica Zipcar-Hong Kong Marriot-Sri Lanka China National Petro-Iraq Vail-Honduras GE-Hungary Dreamworks-India Acciona Energia-Algeria

Policy Forecasting rationally ignorant voters in contestable markets Goals →Strategies → Institutions → Public policy available and actors outcomes voters party elites

D  R R  D R  R D  D D  R

FIGURE 2 The U.S. Senate: Four Standardized Indicators of Policy Liberalism, O O

FIGURE 3 The House of Representatives: Four Standardized Indicators of Policy Liberalism, O

FIGURE 4 The Presidency: Three Indicators of Policy Liberalism, O O

Public Opinion and Public Policy Liberalism, ─ public opinion …Senate... Presidency ─ House O O

Year Voting-age population Voter registrationVoter turnout Turnout of voting-age population (percent) 2008*231,229,580NA132,618,580*56.8% ,600,000135,889,60080,588, % ,256,931174,800,000122,294, ,473,000150,990,59879,830, ,815,000156,421,311105,586, ,929,000141,850,55873,117, ,511,000146,211,96096,456, ,650,000130,292,82275,105, ,529,000133,821,178104,405, Voting turn out – sources: Federal Election Commission;

US public sentiment – Mood from Stimson; Consumer Sentiment from U. Mich/Fed Reserve St.L.

Volatility index

Two visions of Modern Capitalism

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 (+/-))

Investment projects the incredible shrinking paper – 5 pages, 1500 words, of text “Nollen” questions: what, why, where, how, when; choose a firm and look abroad ninvest/ ninvest/ age.phtml?page_id=52http://resources.library.georgetown.edu/libdata/p age.phtml?page_id=52 (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 trade