Growth in Trade and FDI Indexed: 1950 = Trade GDP FDI

Global Linkages Country A Country B Management Linkages Policy Linkages Trade and Investment Linkages

Country A Country B Managers choose to… Attack new markets Entry modes Shift manufacturing Alliances, Mergers, etc. Governments try … Tariffs, quotas FDI Regulations Effects are … Persistent Trade Deficit Loss of Jobs Higher Domestic Prices

Policy Exemplars... n Buyout Bid of Fairchild Semiconductor u Buyout blocked by DoD -- national security n Big-3 Automakers u VERs of 1980s u Lobbying during Bush administration n Kodak in Japanese Market u SII Talks u § 301 Filing n GE’s Acquisition of Honeywell u Blocked by EU

How Nations Influence Trade and Investment Activity Through Policy n Overt/Visible Policies n Supporting/Strategic Policies Follow-up Questions: u How well to these policies work? u What are the side effects? u Retaliation? u How might managers of MNCs respond?

Free Trade Doubletalk

USTR Definition of Trade Barriers n Government laws, policies, or practices that either: u Protect domestic products from competition u Artificially stimulate exports of particular domestic products

Overt Policy Alternatives n Restrict Imports (tariffs, quotas, VERs) n Restrict FDI u Incoming (F/X controls, local content) u Outgoing (tax code, expatriation disincentives) n Restrict Exports (DoD restrictive munitions) n Export Promotion (subsidies, tax credits) n Import Promotion (tax credits, favors) n FDI Incentives (subsidies for infrastructure, training & development, market access) n Preferential Govt. Procurement

Cost of Import Protection Japanese Rice Market Domestic Supply Domestic Demand Domestic Quantity Produced Domestic Quantity Consumed World Price

Cost of Import Protection Japanese Rice Market Domestic Supply Domestic Demand New Domestic Quantity Produced New Domestic Quantity Consumed World Price Tariff Price

Tariff Cost of Import Protection Japanese Rice Market Domestic Supply Domestic Demand New Domestic Quantity Produced New Domestic Quantity Consumed World Price Tariff Price Extra Revenue Deadweight Loss

Tariff Cost of Import Protection Japanese Rice Market Domestic Supply Domestic Demand New Domestic Quantity Produced New Domestic Quantity Consumed World Price Tariff Price Extra Revenue Deadweight Loss # Jobs saved? At what price?

Cost to Domestic Consumers per Job Saved Extra Revenue for Firm Tariff Revenue to Government Deadweight Loss $800 million + 10,000 jobs $80,000 /job =

FDI: Host Country Perspective

FDI: Home Country Perspective

Porter’s Diamond of “National Competitive Advantage”

The Economy, Stupid! Strategic “Supporting” Policies: n Free trade and FDI n Infrastructure n Education n Antitrust and competition n Intellectual Property Protection n Tax Incentives on R&D n Technical Standards n Many others…