Growth in Trade and FDI

Indexed: 1950 = 100

1600
1200

Trade

800

FDI
GDP

400
100

1950

1960

1970

1980

1990

2000

Global Linkages
Management Linkages

Country
A

Policy Linkages

Trade and Investment Linkages

Country
B

Managers choose to
Attack new markets
Entry modes
Shift manufacturing
Alliances, Mergers, etc.

Country
A

Governments try
Tariffs, quotas
FDI Regulations
Effects are
Persistent Trade Deficit
Loss of Jobs
Higher Domestic Prices

Country
B

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
Quantity
Produced

Domestic
Quantity
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
World Price

Extra Revenue

Tariff

Domestic
Demand
New
New
Domestic Domestic
Quantity Quantity
Produced Consumed

Cost of Import Protection

Japanese Rice Market
Domestic
Supply
Deadweight
Loss

Tariff Price
World Price

# Jobs saved?
At what price?

Extra Revenue

Tariff

Domestic
Demand
New
New
Domestic Domestic
Quantity Quantity
Produced Consumed

Cost to Domestic Consumers per

Job Saved

Extra Revenue for Firm

Tariff Revenue to Government
+ Deadweight Loss

$800 million
$800 million
10,000 jobs

$80,000

/job

FDI: Host Country Perspective

Primary Impact
Capital
Employment

Favorable
Aspects
Capital
inflow

Unfavorable
Aspects
Loss of
control

Creates
new jobs

Career limits/ Employment

low wages
regulations

Entrepreneurship Creates new

industries
Technology

Government
Revenues

Policy
Response
Ownership
restriction

Displaces
local ideas

Restrict
market acess

Appropriate
techology??

??

Increase tax
Foreign
base
dependency

??

Access to
new
technol.

FDI: Home Country Perspective

Primary Impact

Favorable
Aspects

Unfavorable
Aspects

Capital

Profitable
opportunities

Capital flight

Employment

Access to lower
wages

Export
jobs

Technology

Government
Revenues

Expand usage
Lose control
into new markets
over
sensitive
technol
Tax income on
Loss of
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