York University
Department of Economics
Faculty of Liberal Arts and Professional Studies
AP/ECON3473 3.0 – Global Business Economics
Fall 2011
Instructor: George J. Georgopoulos
Office: Vari Hall, room 1080
Phone: (416) 736 2100 x30108
Email: georgop@yorku.ca
Lecture Time and Location: Thursdays 4-7pm, SC 302
Office hours: Tuesdays, Thursdays 1:15-2:15, or by appointment
Course Website: http://jacinth.eso.yorku.ca/2011f-apecon3473a-03
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Objectives and Structure of the Course
This course is organized along three themes:
International Trade
International Finance
International Investment and Business
International Trade
The course introduces (or reviews, depending on the student’s experience) the
fundamental economic principles of international trade including comparative advantage,
gains from trade and the determinants of industrial specialization.
Countries unequivocally gain from trade. On the other hand, individual companies and
industries may or may not gain from trade liberalization. Companies that do not gain
from trade liberalization tend to be those that have enjoyed the narrow benefits of trade
protection. Those that gain are typically those that come to enjoy easier access to
expanded markets. The general point is that production efficiency can be expected to be
enhanced in all industry as a result of trade liberalization. From the perspective a
particular industry or firm, it is our objective to understand the extent to which
international influences in general, along with impediments to trade and investment in
particular, shape opportunities for business.
The vast bulk of international trade is carried on within firms, so-called intra-firm trade by
transnational enterprise. More than 75 percent of trade in manufactured and processed
goods is intra-firm trade. In light of the overwhelming importance of intra-firm trade, and
also in view of the relevance for transnational corporate strategy and management, in
this course we extend and adapt the traditional trade model to better understand the
connections between cross-border investment and international trade including how
these connections reflect multinational corporate strategy.
Current issues in international trade addressed in the course include the multilateral
negotiations at The World Trade Organization and the increasingly regional focus of
trade liberalization – NAFTA, European Union, ASEAN and the FTAA. We also examine
a number of specific current issues in international business including trade dispute
mechanisms, trade in services (with special emphasis on financial services),
international aspects of competition policy and the so-called “new protectionism”.
International Finance
We include a selective introduction to international finance. This section of the course
includes a critical examination of the parity conditions in international finance. The parity
conditions underlie modern explanations of the determinants of exchange rates as well
as most models of international interest arbitrage, the cost of capital of multinational
enterprise, and foreign exchange hedging techniques. Managerial aspects of
international finance dealt with in the course include managing foreign exchange risk
and the cost of capital for multinational enterprise.
International Investment and Business
The vehicle for international corporate investment is multinational enterprise.
Multinationals engage in foreign direct investment – the international transfer and
management of capital, technology and production. This course examines the economic
motives for foreign direct investment with a focus on the opportunities and risks involved.
Special attention is directed to restrictions, regulations and policies that sovereign
countries impose on foreign direct investment. We also look at the strategies taken by
managers of international businesses when faced with challenges from venturing into
overseas markets.
th
Recommended Text : Thomas A. Pugel, International Economics, 13
McGraw-Hill Irwin 2007
Evaluation
Mid-term
October 20
50
Final Exam
T.B.A.
50
Toronto:
Missed Midterm
Students may miss an assignment or midterm test due to illness, domestic affliction, or
in the case of part time students, work commitments, without academic penalty providing
the appropriate documentation is received and approved in a timely manner.
There will be no makeup for the midterm. Appropriate documentation is required if you
miss the midterm, where the weight will then be allocated to the final exam.
Course Work & Academic Honesty
Lecture Material and Schedule
Along with the readings below, I will be posting lecture slides and other course material
on the Quickr Portal. Please visit this site regularly (at least twice a week) for recent
postings and announcements.
Lecture 1. Introduction, Course Organization, Evaluation
Pugel, Chapter 16, “Payments Among Nations”.
The Current Account, The Capital Account Reading: Bank of Canada Review
(International Tables).
U.S. Current Account Deficit and Global Imbalance.
Lecture 2. The Fundamentals of International Economics
Topics: Basic Theory of Trade / No Factor Movements Comparative Advantage Gains
from Trade, Terms of Trade, The Trade Triangle Factor Intensities & The Composition of
Trade, Factor Movements / Convergence
Pugel, Chapters 1, 2, 3, 4, 5, 6,
Krugman, Economist, April 2009 “The elusive link between trade and wage inequality”
Hufbauer, Gary C. and J.J. Schott (1998). “North American Economic Integration: 25
st
Years Backward and Forward”, Canada in the 21 Century; Industry Canada Research
Publications Program, Number 3, November
Items 3 and 4 above can be located at …
http://strategis.ic.gc.ca/sc_ecnmy/mera/engdoc/02e.html
Lecture 3. Trade Policies and Major Initiatives in Economic Liberalization
NAFTA, European Union, World Trade Organization
Pugel, Chapters 8,9,10, 11,12, 14
“Globalisation and trade”, The Economist, March 2009
Case: Toyota and the EU
The WTO Ten Years After
Daniel Schwanen “Trading Up: The Impact of Continental Integration on Trade,
Investment and Jobs in Canada”, C.D.Howe Institute, Toronto
http://www.cdhowe.org/pdf/Sch-01.pdf
Antweiler, Werner and Daniel Trefler (2002). “Increasing Returns and All That: A View
From Trade”, American Economic Review, Vol 92, No 1, March, pp; 93-119
Hints for Studying:
What we want to achieve in today and extending into next week’s session is a clear
understanding of the economic and industrial effects of interventions in trade – oldfashioned interventions such as tariffs as well as newer forms of intervention including
export subsidies. We develop a framework that despite its simplicity has substantial
explanatory power. The fundamental idea is that interventions in trade distort prices of
traded goods – producers adjust to the distorted prices and consumers in different
places pay different prices for similar products and services. We will address these
issues through examples, examples, examples in reference, for instance, to steel,
agriculture, aircraft, softwood lumber, textiles & shoes and financial services.
One of the more important issues that we explore in these classes is that the underlying
economics of production – economies of scale in particular but also the incentives for
non-competitive, collusive behaviour – have significant effects on the composition,
volume and directions of trade. This anticipates our discussion of competition policy later
in the course.
By the end of these classes, you will have a solid understanding of why nations
intervene in trade, the consequences of such interventions and why nations work
together to find ways of reaching mutual, enforceable agreements to dismantle barriers
to trade and international investment.
One objective from these cases is to have you come away with an understanding of the
WTO process of dispute resolution and the structure of remedies. Following this class
you will have a clear understanding of the extent to which export promotion via
subsidized finance is permitted within the rules of the WTO as well as the criteria for
identifying violation of those rules
Lecture 4. Canada’s Economy – Competitiveness, Trade Composition and
Evolutionary Patterns
Monetary Policy Report, Bank of Canada
Executive Summary: Foreign Exchange Hedging by Canadian Corporate Accounts,
Bank of Canada website
“The loonie takes wing” Economist, Sept. 27 2007
“Sharpening Canada’s Competitive Edge”, Industry Canada, 2007
“Compete to Win”, Government of Canada, June 2008
Trefler, Daniel (2000). “The Long and the Short of The Canada-U.S. Free Trade
Agreement”, Industry Canada Research Program – Perspectives on North American
Free Trade, Paper Number 6 Summary …
http://strategis.ic.gc.ca/epic/internet/ineasaes.nsf/vwapj/micro200102e.pdf/$FILE/micro200102e.pdf
October 20, 2011: Mid-term Examination
Lecture 5 . The Strategy of International Business
This section looks at how managers devise strategies to engage international markets in
ways that sustain the company’s growth and boost profitability.
“Shopping all over the world,” Economist, 1999
Rangan, “Seven myths of globalization,” Mastering Strategy, 1999
Porter, “The Competitive Advantage of Nations,” Harvard Business Review, 1990
Case Study: Zara Fashion
Lecture 6. Outsourcing/Offshoring and Global Supply Chain Management
“Outsourcing slow to catch on in Canada”, Financial Post, Oct. 20, 2007
“Hello, India? I Need Help with my Math”, New York Times, Oct. 31, 2007
“Opposite headings? Why both Boeing and Airbus are grumbling about their supply
chains”, Economist, Dec. 6th, 2007
“Relocating the Back Office”, The Economist, Dec. 13, 2003
Other Sources:
“Global Supply Chains: An Exploratory Survey of Management Practice and
Challenges”. Research paper, global production.com .
Case Study: Nike in China
Lecture 7. Foreign Direct Investment: Theory, Strategy, Policy
Pugel, Chapter 15
“Cross Border M&As: Does the Exchange Rate Matter?”, George J. Georgopoulos
Video: Is Walmart Good for Amerca?
Other sources:
“Access to Foreign R&D Should Not Undermine Domestic R&D Efforts”, Walid Hejazi
Hejazi, Walid and A.E. Safarian (2000).
“Modeling Links Between Canadian Trade and Foreign Direct Investment”, Industry
Canada, Research Program – Perspectives on North American Free Trade, Paper
Number
Lecture 8. Introduction to International Finance
Topics covered: Markets for Foreign Exchange; The International Parity Conditions.
Pugel, Chapters 16 - 19
Eun, Resnick & Brean, International Financial Management, Chapter 5.
“Carry on Living Dangerously”, The Economist, Feb 8 2007
A few years ago the most pressing issue in international finance was the exchange rate
turbulence associated with, for example, the Asian Financial Crises. That issue has
largely subsided, although there is continuing concern about the possibility of recurrence
in Asia or elsewhere, hence the widespread attention to “international financial
architecture”. Today, perhaps the most interesting and perplexing issue is the relations
between the Euro and the US dollar. Another serious issue concerns the value of
China’s yuan which, until recently, was pegged to the US dollar.
Lecture 9. The Global Financial Crisis, 2007-2009
-Reinhart, V. , “A Year of Living Dangerously: The Management of the Financial Crises
in 2008”, Journal of Economics Perspectives, Winter 2011, Vol. 25, No.1.
Mishkin, F., “Over the Cliff: From Subprime to the Global Financial Crisis”, Journal of
Economics Perspectives, Winter 2011, Vol. 25, No.1.
Rajan, R.G., “Has Financial Development Made the World Riskier?”, The Greenspan
Era: Lessons for the Future, pp. 313-69. Kansas City: Federal Reserve Bank of Kansas
City, 2005.
Thomas C. Baxter, Jr. “Too Big to Fail: Expectations and Impact of Extraordinary
Government Intervention and the Role of Systemic Risk in the Financial Crisis” , Sept 1.
2010. New York Federal Reserve Bank,
http://www.newyorkfed.org/newsevents/speeches/2010/bax100901.html
Thomas C. Baxter, Jr., “ What the Fed did and Why”, June 2010, New York Federal
Reserve Bank, http://www.newyorkfed.org/newsevents/speeches/2010/tra100625.html
Lecture 10. Foreign Exchange Risk and Exposure
Pugel, Chapters 18 - 20
Bodnar, Gordon, “Exchange Rate Exposure and Market Value”, in Mastering Risk: The
Complete Finance Companion, London: Pitmen Press for The Financial Times, 1998,
pp.331-319
“Management of Transaction Exposure”, Eun, Resnick, Brean: International Financial
Management: Chapter 13