EMBA 716 2008 Chapters 7&8 FDI Global Trading Blocks Competitiveness
Outline What is FDI? Government policy and FDI FDI inflow and outflow Capital inflow to US Regional economic integration (Global Trading Blocks) Global competitiveness
Foreign Direct Investment Foreign direct investment (FDI) occurs when a firm invests directly in new facilities to produce and/or market in a foreign country. Once a firm undertakes FDI it becomes a multinational enterprise (MNE) The flow of FDI refers to the amount of FDI undertaken over a given time period The stock of FDI refers to the total accumulated value of foreign-owned assets at a given time Outflows of FDI are the flows of FDI out of a country Inflows of FDI are the flows of FDI into a country McGraw-Hill/Irwin, Global Business Today, 5/e 2008 The McGraw-Hill Companies, Inc., All Rights Reserved.
Government Policy and FDI Radical view: inbound FDI harmful; MNEs Are imperialist dominators Exploit host to advantage of home country Extract profits from host country; give nothing back Keep less developed countries backward and dependent for investment, technology and jobs McGraw-Hill/Irwin, Global Business Today, 5/e 2008 The McGraw-Hill Companies, Inc., All Rights Reserved.
Government Policy and FDI Free market view: FDI should be encouraged Adam Smith, Ricardo, et al: international production should be distributed per national comparative advantage production in most efficient locations An MNE increases world economy efficiency Brings to bear unique ownership advantages Adds to local economy s comparative advantages McGraw-Hill/Irwin, Global Business Today, 5/e 2008 The McGraw-Hill Companies, Inc., All Rights Reserved.
GDP http://en.wikipedia.org/wiki/list_of_countries_by_gdp_(ppp) IMF World Bank CIA Factbook
FDI Inflows (http://www.unctad.org/en/docs/wir2007_en.pdf)
FDI Inflows (Billions) (http://www.unctad.org/en/docs/wir2007_en.pdf)
FDI Outflows (Billions) (http://www.unctad.org/en/docs/wir2007_en.pdf)
Capital Inflow to U.S. According to economic theory, capital should flow from slow-growing, rich countries with plenty of capital to fast-growing, poor countries that don't. This was certainly true before World War I, when Europeans exploited the natural wealth of their colonies. The situation is not so clear now. The more Americans import, the more dollars the sellers accumulate. It would be great if these countries spent all of their accumulated wealth on Fords or Hollywood movies. But they don t. For example, the Chinese, save almost half of their economic output. This year, China and the Persian Gulf oil countries are awash in dollars and looking for places to invest them. ( Capital Flow From Emerging Nations to U.S. Poses Some Risks, Wall Street Journal, Jun 23, 2008)
Capital Inflow to U.S. The U.S. has to import, on net, almost $2 billion in capital a day to cover its enormous trade gap. Foreigners pumped $920 billion into U.S. stocks, bonds and government securities last year. $361 billion (39%) came from emerging-market nations, according to Bank of America, using Treasury Department data. China accounted for 21% of the total, with Brazil at 8.4%, and Russia at 2.8% Capital from oil-rich Persian Gulf states often flows through London on its way to New York, so billions of investment flows that look British are actually Arab. ( Capital Flow From Emerging Nations to U.S. Poses Some Risks, Wall Street Journal, Jun 23, 2008)
Capital Inflow to U.S. ( Capital Flow From Emerging Nations to U.S. Poses Some Risks, Wall Street Journal, Jun 23, 2008)
Capital Inflow to U.S. It has long been argued that foreigners invest money in the U.S. because of the attractive returns here. But Kristin Forbes, MIT economist & former Bush adviser, finds that from 2002 to 2006, as the dollar slid, foreigners earned an average annual return of 4.3% on their U.S. investments, while Americans earned 11.2% on their investments overseas. The conclusion: It's not the profits that attract foreign money to the U.S., it's the sophistication of U.S. capital markets. Thus far, these governments have made the political decision that they're willing to hang onto their U.S. assets, despite the falling dollar. Private investors might have bailed out by now, looking for higher returns. ( Capital Flow From Emerging Nations to U.S. Poses Some Risks, Wall Street Journal, Jun 23, 2008)
Regional Economic Integration Regional economic integration refers to agreements between countries in a geographic region to reduce tariff and non-tariff barriers to the free flow of goods, services, and factors of production between each other. While regional trade agreements are designed to promote free trade, there is some concern that the world is moving toward a situation in which a number of regional trade blocks compete against each other. Grouping gives countries more political clout. Linkages of economies create interdependencies that reduce the potential for violent conflict. Could lead to painful adjustments in certain segments of economy. McGraw-Hill/Irwin, Global Business Today, 5/e 2008 The McGraw-Hill Companies, Inc., All Rights Reserved.
5 Levels of Economic Integration McGraw-Hill/Irwin, Global Business Today, 5/e 2008 The McGraw-Hill Companies, Inc., All Rights Reserved.
Free Trade Area In a Free Trade Area all barriers to the trade of goods and services among member countries are removed, but members determine their own trade policies with regard to non-members Example of free trade areas include the North American Free Trade Agreement (NAFTA) between the U.S. (GDP = US$13.84 trillion), Canada (GDP = US$1.256 trillion), and Mexico (GDP = US$1.346 trillion) McGraw-Hill/Irwin, Global Business Today, 5/e 2008 The McGraw-Hill Companies, Inc., All Rights Reserved.
Customs Union The Customs Union is one step further along the road to full economic and political integration, and eliminates trade barriers between member countries and adopts a common external trade policy The Andean Community (called Andean Pact until 1996) between Bolivia, Columbia, Ecuador and Peru is an example of a customs union. The Andean Community has 120 million people and GDP = US$745.3 billion McGraw-Hill/Irwin, Global Business Today, 5/e 2008 The McGraw-Hill Companies, Inc., All Rights Reserved.
Common Market The Common Market has no barriers to trade between member countries, a common external trade policy, and the free movement of the factors of production MERCOSUR (between Brazil, Argentina, Paraguay, and Uruguay, 1991) is aiming for common market status. 250 million people, GDP = US$2.78 trillion (fifth largest economy in the world) In December 2004, signed a cooperation agreement with Andean Community trade bloc (Bolivia, Ecuador, Colombia, & Peru; 120 million people, GDP = US$745.3 billion) McGraw-Hill/Irwin, Global Business Today, 5/e 2008 The McGraw-Hill Companies, Inc., All Rights Reserved.
Economic Union An Economic Union involves the free flow of products and factors of production between members, the adoption of a common external trade policy, and in addition, a common currency, harmonization of the member countries tax rates, and a common monetary and fiscal policy. The EU with 27 member countries (500 million people) is an economic union, although an imperfect one since only 12 members of the EU have adopted the Euro since 1/1/2002 (Sweden, Denmark, Britain opted out), & differences in tax rates across countries still remain. GDP of EU (US$14.38 trillion) > US (US$13.84 trillion) McGraw-Hill/Irwin, Global Business Today, 5/e 2008 The McGraw-Hill Companies, Inc., All Rights Reserved.
Political Union In a political union, independent states are combined into a single union The EU is headed toward at least partial political union, and the United States is an example of even closer political union McGraw-Hill/Irwin, Global Business Today, 5/e 2008 The McGraw-Hill Companies, Inc., All Rights Reserved.
Implications for Business Opportunities Less protectionism; higher economic growth Lower cost of doing business (fewer borders) Threats Cultural differences persist Increased price competition within blocks Across-trading-block rivalry can increase barriers Improvement of competitiveness of many local firms within the blocks McGraw-Hill/Irwin, Global Business Today, 5/e 2008 The McGraw-Hill Companies, Inc., All Rights Reserved.
Global Competitiveness Competitiveness is defined as the set of institutions, policies, and factors that determine the level of productivity of a country. Competitiveness is a marathon, not a sprint. The level of productivity, in turn, sets the sustainable level of prosperity that can be earned by an economy. In other words, more competitive economies tend to be able to produce higher levels of income for their citizens. The productivity level also determines the rates of return obtained by investments in an economy. Because the rates of return are the fundamental determinants of the growth rates of the economy, a more competitive economy is one that is likely to grow faster over the medium to long run. (Source; World Economic Forum, http://www.gcr.weforum.org/)
12 Pillars of Competitiveness (Source; World Economic Forum, http://www.gcr.weforum.org/)
(Source; World Economic Forum, http://www.gcr.weforum.org/)
Porter s Stages of Development In the first stage, the economy is factor driven and countries compete based on their factor endowments, primarily unskilled labor and natural resources. Companies compete on the basis of price and sell basic products or commodities, with their low productivity reflected in low wages. Maintaining competitiveness at this stage of development hinges primarily on well-functioning public and private institutions (pillar 1), appropriate infrastructure (pillar 2), a stable macroeconomic framework (pillar 3), and a healthy and literate workforce (pillar 4). (Source; World Economic Forum, http://www.gcr.weforum.org/)
Porter s Stages of Development As wages rise with advancing development, countries move into the efficiency-driven stage of development, when they must begin to develop more efficient production processes and increase product quality. At this point competitiveness is increasingly driven by higher education and training (pillar 5), efficient goods markets (pillar 6), well-functioning labor markets (pillar 7), sophisticated financial markets (pillar 8), a large domestic or foreign market (pillar 9), and the ability to harness the benefits of existing technologies (pillar 10). (Source; World Economic Forum, http://www.gcr.weforum.org/)
Porter s Stages of Development Finally, as countries move into the innovation-driven stage, they are able to sustain higher wages and the associated standard of living only if their businesses are able to compete with new and unique products. At this stage, companies must compete through innovation (pillar 12), producing new and different goods using the most sophisticated production processes (pillar 11). (Source; World Economic Forum, http://www.gcr.weforum.org/)
(Source; World Economic Forum, http://www.gcr.weforum.org/)
US Ranked Number 1 The United States retains its leading position as the world s most competitive economy, just ahead of Switzerland, Denmark, and Sweden. The country is endowed with a winning combination of highly sophisticated and innovative companies operating in very efficient factor markets. This is buttressed by an excellent university system and strong collaboration between the educational and business sectors in research and development. These characteristics, combined with the scale opportunities afforded by the sheer size of its domestic economy, come together to make the United States arguably the country with the most productive and innovative potential in the world. (Source; World Economic Forum, http://www.gcr.weforum.org/)
US Weaknesses The country s greatest weakness concerns its macroeconomic stability, where it ranks a low 75th overall. The United States has built up large macroeconomic imbalances over recent years, with repeated fiscal deficits leading to rising levels of public indebtedness. These are areas that require attention from the authorities to ensure that the country maintains its competitive edge going into the future. (Source; World Economic Forum, http://www.gcr.weforum.org/)
Asia and the Pacific Nine Asia Pacific countries are among the top 30 in the GCI rankings, led by Singapore (7th), Japan (8th), Korea (11th), and Hong Kong (12th). The countries in the next tier are among the largest markets in the region, led by China (34th) and India (48th). (Source; World Economic Forum, http://www.gcr.weforum.org/)
Hong Kong Ranked 12th The country leads the world in two areas: financial market sophistication and goods market efficiency, and, to a lesser extent, labor market efficiency, infrastructure, and macroeconomic stability. In the financial market pillar, Hong Kong is 1st in the world on legal rights and 3rd in financial market sophistication, strength of investor protection, restriction on capital flows, and financing through the local equity market. In the goods market efficiency pillar, Hong Kong ranks 1st for both its low trade barriers and low tradeweighted tariff rate. Hong Kong has transport infrastructure rated among the best in the world, particularly air transport and port infrastructure. (Source; World Economic Forum, http://www.gcr.weforum.org/)
Thailand Ranked 28th Thailand, derives certain competitive strengths from its large market size and selected labor market efficiency indicators, such as cooperation in laboremployer relations, where it ranks 14th. But the country suffers weaknesses in the areas of health and primary education, with poor health indicators linked to high rates of diseases such as malaria, tuberculosis, and HIV/AIDS; in the area of education, it ranks a low 87th in primary enrollment and receives a mediocre assessment of the quality of primary education. Another source of competitive disadvantage is the financial markets pillar, where the country ranks 95th in terms of restrictions on capital flows and 71st in the soundness of banks.. (Source; World Economic Forum, http://www.gcr.weforum.org/)