3460.01
Notes: A.P. Palasvirta, Ph.D.
 David
Ricardo
 Factors of production


Labor
Fixed assets




Capital


Buildings
Land
resources
Ability to attract financing
Technology

Intellectual capital
3460.01 globalization notes: a.p. palasvirta, ph.d.
July 17, 2016
2
 Seeks

lowest relative cost factors
Alberta increases taxes on gas and oil

Production migrates to Saskatchewan (lower cost)
 Appendix

Country A




1A
Food cost of textiles = 1.67 in inputs
Textile cost of food = 0.6 in inputs
Country A specializes in textiles
Country B



Food cost of textiles = 3.75 in inputs
Textile cost of food = 0.2667 in inputs
Country B specializes in food
3460.01 globalization notes: a.p. palasvirta, ph.d.
July 17, 2016
3


Globalization
International financial system





Foreign exchange exposure




Exchange markets
Banking and money markets
Bond and equity markets
Derivative markets
transaction
Economic
Translation
Financial management of the multinational firm



Foreign direct investment
Capital structure & capital budgeting
Imports, exports
3460.01 globalization notes: a.p. palasvirta, ph.d.
July 17, 2016
4
 Exchange

Trend




Standard error of estimate of time-series regression
Low value - low risk
Affect on real exchange rates


e t
Slope of trend line of time-series regression
Positive- currency depreciating
Volatility


rates (linear regression)
Violation of purchasing power parity condition
Something real is changing

   t
3460.01 globalization notes: a.p. palasvirta, ph.d.
July 17, 2016
5

Exists as a function of potential change in
rules (laws pertaining to business)

Expropriation (Venezuela, Hugo Chavez)



Quick compensation at fair market value
War (Iraq, Afghanistan)
Protectionism

Increasing the barriers to trade
 Tariffs (U.S. import tariffs on Canadian lumber)
 Quotas (European restrictions on genetically modify
food)
 Subsidies (export subsidies to produce wheat, corn)
 Regulatory (including labor & environmental
standards in treaties)
3460.01 globalization notes: a.p. palasvirta, ph.d.
July 17, 2016
6
 Those

redistribution of wealth and income




in power make the rules
Monetary policy
Fiscal policy
Regulatory policy
Corruption


Soft corruption - political contributions
Hard corruption - bribes
3460.01 globalization notes: a.p. palasvirta, ph.d.
July 17, 2016
7
 Inside

Stockholders


Concerned about value maximization
Board of directors


governance
Subset of stockholders
 Hire managers
 Strategic decision making
Managers

Tactical decisions making (strategic)
3460.01 globalization notes: a.p. palasvirta, ph.d.
July 17, 2016
8
 Many

No market power, thick markets
 Low

buyers, many sellers
or no transactions costs (taxes)
Transactions costs and taxes distort
 Perfect

information
Eliminates agency
3460.01 globalization notes: a.p. palasvirta, ph.d.
July 17, 2016
9
 U.S.,

Canadian, British
Market failures

Enron, etc.
 Failure of corporate governance structure
 Sarbanes
Oxley
CEO, CFO sign off on financial statements
 Audit, compensation committees external
 Corporate officers cannot take loans from firm
 Test their own financial controls against fraud

3460.01 globalization notes: a.p. palasvirta, ph.d.
July 17, 2016
10
 Protect

Majority and minority
 Protect


shareholder rights
stakeholder rights
Customers deserve good products and reasonable
prices
Firms should be good citizens
 Disclosure
and transparency
3460.01 globalization notes: a.p. palasvirta, ph.d.
July 17, 2016
11
 other


Government (privatized utilities)
Institutions


arrangements internationally
Banks, hedge funds, insurance companies
Family enterprises


Family conglomerates (France, South America)
Consortiums
 Keiretsus (Japan) chaebols (South Korea)
3460.01 globalization notes: a.p. palasvirta, ph.d.
July 17, 2016
12

China, Russia, Arab Emirates

Increasingly have huge resources to spend due to
trade and/or oil (sovereign wealth funds)










UAE
Norway
Singapore (GIC)
Saudi Arabia
Kuwait
China
Singapore (Temasek)
Libya
Quatar
Algeria
3460.01 globalization notes: a.p. palasvirta, ph.d.
$875,000,000,000
$360 billion
$330 billion
$300 billion
$250 billion
$200 billion
$59.2 billion
$50 billion
$50 billion
$42.6 billion
July 17, 2016
13
 Governments
do not necessarily worry about
the bottom line (maximizing profits/value)

Governments have political agenda??
 How much of what Russia and China do is politically
motivated


Chinese exchange rate policy
Russian interrupting gas supplies to Europe
 Central

bank holdings
U.S. Dollar denominate t-bills

China approximately $1 trillion
3460.01 globalization notes: a.p. palasvirta, ph.d.
July 17, 2016
14
 Family


South America, Asia, France
Families own a diversified portfolio of real assets
 Bank

owned conglomerates
ownership of equity stakes
Germany, Korea
 Government

ownership of equity stakes
Canada, China, Russia
3460.01 globalization notes: a.p. palasvirta, ph.d.
July 17, 2016
15
 Concentration

Markets for equities and debt are thin




Few buyers, few sellers
Stock price manipulation
Lack of transparency


of power
Highly asymmetric information
Government often complicit with firms
Goods and service markets manipulated
3460.01 globalization notes: a.p. palasvirta, ph.d.
July 17, 2016
16
 Equity

Analysis and trading (information)

Stock price moves on information
 Up means excess demand at current price
 Down means excess supply at current price
 Debt

markets ( concern Value)
markets (concern risk)
Analysis and trading (information)

Debt prices move on
 Inflationary pressures, exchange rate movements,
central bank mutterings
 Risk
3460.01 globalization notes: a.p. palasvirta, ph.d.
July 17, 2016
17
 Hired


guns
Accountants
Lawyers
 Regulators
 Stakeholders




- Agency problems
Customers/management
Management/labor
Stock holders/management
Government/management
3460.01 globalization notes: a.p. palasvirta, ph.d.
July 17, 2016
18
 Cultural



differences
Corporate governance
Legal environment
Regulatory environment
 Different


currencies
Exchange rate risk
Hedging behavior

Forwards, futures, options, swaps
3460.01 globalization notes: a.p. palasvirta, ph.d.
July 17, 2016
19
 Simple



ratio
Canadian dollar (cd) price usd
usd price of cd
e cd , usd 
11371
.
cd
1 usd
e usd , cd 
0.8794 usd
1 cd
http://fx.sauder.ubc.ca/etc/CADpages.pdf
3460.01 globalization notes: a.p. palasvirta, ph.d.
July 17, 2016
20
 Complex
concept

Equilibrium price at which supply equals demand

Demand for USD (by Canadians)


Canadians buying American
 Importing goods
 Buying U.S. securities
Supply of USD (by Canadians)


Canadians selling to Americans
 Exporting goods
Attracting U.S. based investors
3460.01 globalization notes: a.p. palasvirta, ph.d.
July 17, 2016
21
 Deregulation

Elimination of fixed brokerage fees



Benefits





U.S. 1975
England 1986
Lower transactions costs
Cross border listings
International financial market integration
More innovation
Disadvantages

More innovation
 More opacity (lack of information)
3460.01 globalization notes: a.p. palasvirta, ph.d.
7/17/2016
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 Disintegration

Mortgage backed securities



Tranches of mortgages bundled for sale in secondaryh
markets
Housing bubble
Viral effects


Banking
 Lack of proper capital adequacy relative to risk
 Lack of oversight of new financial instruments
Other sectors
 Lack of liquidity led to failures
3460.01 globalization notes: a.p. palasvirta, ph.d.
7/17/2016
23
 Reregulation


Capital adequacy
Erection of walls to reduce conflicts of interest




Commercial banking
 Deposits insured by government
Investment banking
 Reporting requirements
Insurance
Mutual funds
 Increasing oversight (Madoff)
3460.01 globalization notes: a.p. palasvirta, ph.d.
7/17/2016
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 1999

Austria,Belgium, Finland,France, Germany,
Greece, Ireland, Italy, Luxembourg, Netherlands,
Portugal, Spains
 Benefits


Reduce exposure
Financial market convergence


Lower costs of borrowing
More depth, more liquidity
 Disadvantages

12 different fiscal policies
3460.01 globalization notes: a.p. palasvirta, ph.d.
7/17/2016
25
 Implosion

PIIGS (Portugal, Italy, Ireland, Greece, Spain)



Running large deficits (more than 10% of GDP)
Increasing large government debtt (around 100% of
GDP)
No exchange rate depreciation to bail them out
to make their products cheaper
 Retrenchment


Germany & France bailing out the PIIGS
New regulations and enforcement
3460.01 globalization notes: a.p. palasvirta, ph.d.
7/17/2016
26
 Trade



treaties
The European Union
North American Free Trade Association (NAFTA)
World Trade Organization (WTO)

Doho round trying to liberalize agricultural trade and
intellectual property
 Retrenchment

Protectionism


Labor regulations
Environmental regulations
3460.01 globalization notes: a.p. palasvirta, ph.d.
7/17/2016
27
 Business




firms operating in multiple countries
Inputs (raw materials, intermediate goods
(engines)
Financing alternatives
Labor & capital (outsourcing)
Product markets
 Advantages



Economics of scale & scope
Purchasing power with suppliers
Research & development
3460.01 globalization notes: a.p. palasvirta, ph.d.
7/17/2016
28
 Disadvantages

Loss of control







Different cultures
 Country & corporate
Distance
 Harder to supervise
Cost control
Quality control
Transportation costs
Different regulatory, political environments
Expropriation
3460.01 globalization notes: a.p. palasvirta, ph.d.
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