Topic 1:

Growth in international trade, foreign direct investment, wide

spread of offshore outsourcing globalization
Falling transportation costs and communication costs
Falling trade barriers (GATT/WTO now including 160 countries)
Large general reductions in tariffs
Large countries import and export a log, so ratio between
imports (or exports) to GDP will be small
Smaller countries with a lower GDP will have a higher ratio

Increase in vertical foreign direct investment

o As trade costs fall, incentive to undertake vertical FDI rises
(more intra-firm trade)
o Once vertical FDI is in place, lower trade costs enhance
intra-firm trade substantially
Vertical specialization:
o Goods are produced in multiple, sequential stages
o Two or more countries provide value added in the goods
production sequence
o At least one country must use imported inputs in tis stage
of the production process, and some of the resulting output
must be exported
Vertically specialized goods cross multiple international borders
while produced
o Each time these goods in process cross a border, a tariff is
incurred
o As global tariffs fall, the cost of vertically specialized goods
falls more than proportionately
4 main reasons explaining disparity of growth in world trade and
world output:
o lower transportation and communication costs
o lower trade barriers
o more vertical specialization
o more intra-firm trade
huge increase in FDI since 1990s?
o fewer restrictions an greater protection to property rights
o political and economic reforms in developing countries
o proliferation of regional trade agreements
a plant located in a country member of a RTA can
import from and export to all others within the bloc
freely
o fall of communication and transportation
why is offshoring growing?
 o Improvement in communications technology
o Reduction in transportation costs
o Reduction in tariffs
o Fewer FDI restrictions
Topic 2: is the world flat?
In reality, on many measures the world remains quite uneven,
bumpy, rough..just not flat
o Exporting firms are in the minority
o MNFs are in the micro-minority
Is the world getting flatter?
o In reality, geographical separation limits offshore trade in
services
o Distance is likely to increase the relative costs of using
remote workers
o Firms choose workers that offer the lowest costs after
adjusting waves for productivity and distance based
service delivery costs

Topic 3: business in the global environment

Starting a business
o Procedures, time, cost and paid-in minimum capital to open
a new business
Dealing with construction permits
o Procedures, time and cost to obtain construction permits,
inspections and utility connections
o Difficulty dealing with construction permits is associated
with corruption
Employing workers
o Difficulty of hiring index, rigidity of hours index, difficulty or
redundancy index, redundancy costs
o Low income economies have less flexible labor regulations
o Rigid labor regulations are associated with a larger informal
sector
Registering property
o Procedures, time and cost to transfer commercial real
estate
Getting credit
o Strength of legal rights index, depth of credit information
index

Bottom line:
o Easiness of doing business varies widely across countries
o Costs of doing business in a country have to be balanced
against the gains from doing business there
Topic 3: Management Practices
Not only the environment external to the firm varies a lot, what
happens inside the firms (management practices) also varies
widely across countries and within countries
Measuring management practices:
Interview-based evaluation tool that defines and scores 18 basic
management practices from one (worst practice) to five (best
practice)
Three broadly defined areas:
o Monitoring: how well do companies track what goes on
inside their firms and use this for continuous improvement?
o Target setting: do companies set the right targets, track
the right outcomes and take appropriate actions if the two
dont align?
o Incentives: are companies promoting and rewarding
employees based on performance and systematically
trying to hire and keep their best people
Management practices also vary significantly across different
types of firms
o Multinational firms, exporters, ownership structure
o Multinationals:
Better managed everywhere
Largely able to transport their better practices
abroad
o Exporters
Better practices than non-exporters, but not than
multinationals
o Ownership type
Family owned and managed, government owned:
bad practices
Dispersed shareholders: good practices
Why management practices vary across countries?
o 1. Product market competition
managers asked how many competitors they faced
strong correlation between answer MNG score
o How?
1. Selection: badly run firms have shorter life in more
competitive markets
2. Incentives: firms have greater incentive to improve
practices in more competitive markets
o 2. Labor market regulation
tougher labor market regulation lower MNG score
on incentives
 but labor market regulation does not relate to
different MNG score on monitoring and targets
o 3. Ownership types vary a lot across countries
o 4. Education
educational levels vary across countries
and educational levels matter for management
performance
o 5. Information
could it be that managers just dont know whether
they are adopting the best practices or not?
Internationalization of the firm
o When firms move part of their production process to
another country, they need to realize that they will have to
adapt to a new environment
On the labor market, the will have to compete with
local firms to attract talented employees
On the product market, competition for their goods
might be different than in the domestic market
o Adopting and maintaining good management practices
seems critical for productivity and profitability, but is far
from trivial
And is much more difficult in some places than
others
But exporters and multinationals do relatively well
even in difficult places
Slide 8?

Topic 4: causation? Correlation?

Topic 5: benefits vs. transportation and policy-related costs

Benefits of exporting: new markets, greater demand, scale
economies, hedging
Exporting: relatively rare activity
o Exporting firms are in the minority
o The rareness of exporting vary by sector
o Even for those firms that export, foreign markets are often
not the main focus: on average, only 14% of their output is
exported. This varies by sector, too
o Despite the rareness of exporting, there are exporters in
every manufacturing sector
Costs of exporting
o 1. Transportation costs
bigger impact on products with low value relative to
weight
 o 2. Tariffs, quotas, and other policy driven trade barriers
import tariffs: wedge between export price and
domestic price of a product (Pe = Pd/(1 + t)
import quotas: ceiling on how much can be imported
of a product
tariffs: defines wedge between export and domestic
prices
given wedge, market adjusts import volume
quotas: defines import volume
given volume of imports, prices adjust

Topic 6: The World Trade Organization

rules-based, member driven organization (not power based,
larger countries do not have more power)
in addition to non-discrimination and reciprocity, the WTO also
requires/allows for:
o protectionist policies in form of tariffs only
o establishment of tariff binding
o national treatment
after entering in a country, imported and locally
produced goods (as well as services, trademarks,
copyrights, and patents) must be treated equally
o special protection: anti-dumping regulations
o special protection: safeguards the escape clause
safeguards allow temporary protection of specific
industries if
there is an unexpected surge of imports
those imports threaten serious injury to
domestic producers
how can governments enforce an agreement when each
individual government has an incentive to disrespect what it had
agreed upon?
o WTO has no police power to enforce the agreements
o The WTO cannot even indirectly force governments to
abide by previous agreements
o Retaliation

Topic 7: regional trade agreements