APPLIED ECONOMICS IN INTERNATIONAL BUSINESS
A graduate course in International Business
Professor Tamir Agmon
September 2015
School of Business, Economics and Law, Goteborg University
Goteborg, Sweden
In a message to the membership of the AIB following the 2013 annual meeting in July 3-6
in Istanbul Professor S. Prakash Sethi commented that over 90% of the studies presented at
the Meeting dealt with: "(the) pursuit of making multinational corporations more efficient
and profitable". He indicated that by doing so research in International Business ignores
important and relevant issues.
Professor Sethi comment reflects the fact that in the last 25 years or so research and
teaching in International Business has focused on strategy, marketing and intercultural
management all pertaining to multinational enterprises (MNEs). International Business is not
limited to multinational enterprises. As professor Stephen Kobrin commented some years
ago MNEs came into being due to the conflict between national states and their objectives
and value maximization by investors, labor and other stakeholders in the global world.
Economics as a field of research and teaching provides us with a number of concepts,
models and analytic tools that are useful to gain a better understanding of the complexities
of this conflict of interests in the global world and the ways by which the conflict is resolved
or managed.
The objective function assumed in economics is maximizing the utility of the long-term
consumption (including intergeneration transfers) of an individual consumers. In a complete
market and perfect competition such a behavior will maximize total welfare in the world. In
the real world of incomplete markets and transactions cost much of the business activity is
managed by firms and other organizations. In the global world the two main types of
organizations are national states and MNEs. The course begins with a discussion of a model
that examines the behavior of the individual consumer as a member of a given national state
and as an employee of a given MNE. In such a world prices are often determined by
negotiations such as the negotiation between a national state and a MNE. MNEs are
business organizations that trade (transfer) goods and services between countries (national
states). International trade theory beginning with the neoclassical comparative advantage
theory and through what is called “New Trade Theory” provides us with a thorough
understanding of why people trade across countries as well as why they chose the vehicle of
the MNEs to carry out a large share of the trade in goods and services across political
borders. The two major processes of growth of MNEs; the decision whether to serve a
market through export or through foreign direct investment (FDI) and the decision where to
locate different production facilities (vertical integration) are better understood in the light
of economic research of productivity and outsourcing in the international marketplace. In
the classic international trade model the countries are defined as geographical and political
locations. Development economics is about governments and not about countries. The main
assumption is that governments have a policy, an objective function. Often governments
want to change the current situation in their country. The famous notion of
“Industrialization” that was very popular in the development economics research in the
1960´s is an example to that. Major changes in MNEs headquartered in countries like South
Korea reflect government policy. The discussion of models in development economics
provides better insights into such processes. MNEs operate in a world of monopolistic
competition where they try to generate and maintain an economic rent. Models develops in
industrial organization (IO) like the Cournot’s model of oligopoly or Hotelling linear city
model are useful in understanding the way that MNEs compete as well as the nature of the
regulatory environment in which MNEs operate. Organizations like MNEs and other firms
respond to the need to act in incomplete markets through explicit and implicit contracts.
The discussion in economics of such contracts and their effects on the organization and the
operations of business firm is very relevant to international business in a period of changes.
Global business is risky. The changes in comparative advantage of countries and in
competitive advantage of firms generate substantial risk. The measurement and the
management of risk is one of the major topics discussed in financial economics. The cost of
capital and the capital structure models in a world of uncertainty provide us with an
understanding of the risk-return relationship and how the benefits from a high expected
return are allocated between holders of different liabilities issued by MNEs.
The course has two related objectives; first, to help students to gain better understanding
of the main issues in International Business by using economic models. The second purpose
is to teach graduate students in International Business how to use research papers in
economics as a tool to analyze different problems and business issues that they may
encounter in the future as professionals working in the global market. The educational goals
of the course are accomplished in three related ways; first, in each session an issue in
international business is discussed using one or more models and concepts in economics.
The focus is on the application. In what way the model presented and discussed in the class
helps in better understanding of the issue. Second, in each class one research paper is
discussed from the point of view of a non-technical reader. The questions are what parts of
the paper are important to a non-technical reader? How to deal with mathematical parts
that a layman may feel uncomfortable about? Third, the final exam is a take home that
simulates a business situation in which the student should use what they have learned to
find academic papers and models in economics that will help them in analyzing and solving
an international business issue presented in the exam. In addition the last session of the
course is dedicated to a class discussion on the topic: “How we as professionals in
management can use economic research in our work in the future?” In the final exam I
expect the students to be able to relate particular economic models that were discussed in
the class to issues in international business. To do better in the exam students should
demonstrate their ability to discuss problems in international business that were not discuss
in class and apply to such problems models and concepts in economics that we have
discussed in the class during the term.
The ten sessions in the course are interconnected. Models and concepts that were
introduced and discussed in one session are used again to shed light on different issues. In
the first five sessions of the course the H-O factor proportion model, the relations between
the relative productivity of the firm and which market (domestic, export, foreign direct
investment) and the role of transactions cost and contracts in determining the spatial and
business development of MNEs are discussed in the context of a number of international
business issues. The topic of session six is the globalization of Sweden. In particular the
question is how the changes Swedish MNEs in the period 1960-2014 can be better
understood. In the discussion of this issue all the models used in the first five sessions are
apply to this question.
The course consists of ten sessions. The discussion in each of the first nine sessions is
organized around one or two research papers in economics. In general each class consists of
three parts;(1) describing and understanding an issue in International Business, (often an
issue that has been discussed in some other course in International Business like Global
Strategy, International Marketing, or such like). (2) Discussing one or two research papers
pertaining to the issue. (3) Applying the discussion of the paper and using the concepts
developed in the discussion to better understanding of some issues of International
Business.
Class schedule:
1. The economics of International Business
Session One: People, corporations and national states – The economics of International
Business
Read: Agmon, T. (2003)," Who gets what? The MNE, the national state and the distributional
effects of globalization”, Journal of International Business Studies, September
Krug, J.A., (2012), "New Challenge for International Business Research", Journal of Teaching
in International Business, 23:59-68
Main concepts: Compete and incomplete markets. The uneasy tension between national
state and multinational enterprise as the main feature of International Business
2. International trade theory and international economics
Session Two: Export of FDI: International trade and International Business
Read: Helpman et al., (2004), Export versus FDI, "Export versus FDI" AER, vol. 94 no. 1 pp.
300-316
Main concepts: National and corporate (competitive) comparative advantage. How tangible
and intangible costs affect international trade.
Session Three: Globalization a new paradigm of organization of production
Read: Baldwin, R. (2006) Globalization the great unbundling(s), The PM Office of Finland
Davidson, C. et al, (2001), "Globalization and Organization of the Firm", Research Institute of
Industrial Economic, Sweden
Main concept: MNE as a part of historical process of reorganization of production and trade.
Session Four: The effects of outsourcing on developed and developing countries
Read: Grossman, G. and E. Helpman, (2002), Outsourcing in the global economy, Harvard
Institute of Economic Research, Discussion Paper # 1966
Bhagwati, J. et al (2004),”The muddles of outsourcing", Journal of Economic Perspectives,
93-111.
Main concepts: outsourcing as trade. The dynamics of outsourcing.
3.
Development economics
Session Five: Comparative advantage as a policy variable
Read: Findlay, R. (1970), Factor proportions and comparative advantage in the long run,
Journal of Political Economy, 78(1), 27-34
Agmon, T., (2010), "Market Globalization by Firms from Emerging Markets: an Application of
the Neoclassical Trade Model", Review of Market Integration, vol.2, no. 3, December
Session six: The globalization of Sweden
Read: Blomstrom, M. and A. Kokko, (1994), "Home Country Effects of FDI: Evidence from
Sweden", NBER, WP#4639, February
Palmer, R., (2002), "Europeanization and Globalization", Stockholm University
McKinsey & Company, (2012), "Growth and Renewal in the Swedish Economy".
Main concepts: Industrial policy and comparative advantages and competitive advantages
and government policy.
4. Industrial organisation
Session seven: Global competition in incomplete markets
Read: Clougherty, J.A. (2004) Integrating industrial organization and international business
to explain the cross national domestic airline merger phenomenon, GESY Discussion paper #
19.
Muendler, M.A., (2013), "Export or Merge?", NBER WP #19751, December
Main concept: competition in incomplete markets and Industrial Organization models.
5. Financial economics
Session eight: Risk taking by small countries in the global market: the case of Iceland
Read: Modigliani, F. and M.H. Miller (1958), "The cost of capital, corporation finance and the
theory of the firm", American Economic Review, June
Main concepts: risk taking and the cost of risk in International Business. The rise and fall of
Icelandic multinational enterprises.
Session nine: MNEs in the Knowledge Economy: Open Platforms and Open Sources
Read: Eisenmann et al ,2010, "Platform Evolvement" WP 07-104, HBS
Main concepts: Relational contracts, trust as an economic factor, the effects of changes in
transaction costs and communication costs of the MNE.
Session ten: The development of the MNE: past, present and future
Read: Agmon, T., 2015, "The Dynamics of the MNE in a World of Transactions Costs: From
Assets' Holding to Relational Contracts" School of Business, Economics and Law, Goteborg
University
Main concepts: What we can learn from economics to gain better understanding of major
issues and processes in International Business? How we as professionals in International
Business can use research in economics in our future work?