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

GE’s 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
Extra Revenue
Tariff
Domestic
Demand
# Jobs saved?
At what price?
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
Porter’s 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…
