Globalization and Business

Unit 1: The Global Integration Debate: Globalization in retreat?

Class 19th August: The global integration debate

US in global economy

o Colonial Period (1607-1783)

o Antebellum America (1783-1865)
o The Gilded Age (1865-1918)
o Interwar (1919-1941)
o Trente Glorieuse (1941-1971)
o Stagflation and crisis (1972-1982)
o Wintel and McWorld (1983-2008)
o Post-Globalization (2009-Present)

US Business Culture (EICIO)

o Efficiency: get to the point; say what you mean

o Individualism: be yourself, sell yourself
o Competitiveness: only you can take care of you
o Informality: smile, first names, small talk
o Openness (to innovation and change): constant change, policies and meeting to that
effect

US Business Regulatory Bodies

o Consumer Product Safety Commission (CPSC)

o Environmental Protection Agency (EPA)
o Equal Employment Opportunity Commission (EEOC)
o Federal Communications Commission (FCC)
o Federal Deposit Insurance Corporation (FDIC)
o Federal Reserve System (FED)
o Federal Trade Commission (FTC)
o Food and Drug Administration (FDA)
o Interstate Commerce Commission (ICC)
o National Labor Relations Board (NLRB)
o Occupational Safety and Health Administration (OSHA)
 o Securities and Exchange Commission (SEC)

US competitive advantages

The $ as global
Financial Large educated
reserve
Industry workforce
currency

Strong property
Open education
rights (real and Geography
system
intellectual)

Natural
Resources

US strategic weaknesses

Aging native- Infrastructure

Regulation and
born investment and
strict laws (?)
population maintence

Housing,
Political National and
Education and
Deadlock Personal Debt
Medical Costs

Uneven
development

What is Globalization?

The increasing integration of international markets such that foreign firms or costumers may
be accessed as easily as domestic.

o Erosion of borders and distance. “World becoming smaller”

o Competition of all against all without regard for culture, institutions or region
o Free movement of goods, services, ideas, labor and capital - ideas most free, and the
less free is labor (does not have free movement)

Hyperglobalization

No matter you are, you are in the same market globally. In this theory, wages should converge,
for example. Is that happening?
Causes of Hyperglobalization: Thomas Friedman

o Market Liberalization: Brazil, Russia, India and China (BRIC)

o New Technologies: global fiber-optic network allows individuals to connect seamlessly

(call centers, radiologists, accountants, reservations). Decreasing importance of
geographical distance and cultural differences (flat world)

o Revolutionary Structures and Strategies: new organizational forms develop to take

advantage of flat, interconnected world. Ex.: Wal-Mart, UPS, Skype, Infosys, Dhruva,
etc.

Global Interconnectivity and Digital Services

What is so dangerous?
o No privacy
o Addiction

The power of technology

o This is forcing marketing integration, and being in competition to one another

Globalization Backlash

“In a world where Shanghai is a click away from New York or Tokyo from Paris, geographic
distance loses meaning and the very idea of a shrinking world threatens the idea of the nation
or the “people.” The economic dislocations reinforce and are reinforced by perceptions of a
loss of national sovereignty and a fear of the other or the alien. The result has been a marked
increase in xenophobia and nationalism and a rise of anti-globalization populist parties in
many countries.”

- Kobrin. 2017. Bricks and Mortar in a Borderless World: Globalization, the Backlash, and the
Multinational Enterprise. Global Strategy Journal. March.

Hyperlocalization

The more we became integrated the more friction we feel in society, and the more we are
aware of our differences. “Ripping the world apart”

Return of Nationalism

o Focus on their own identity

So, where are we headed?

Hyperglobalization: no matter you are, you are in the same market globally. In this theory,
wages should converge, for example. Is that happening? “Being pulled together”
vs.
Hyperlocalization: The more we became integrated the more friction we feel in society, and
the more we are aware of our differences. “Ripping the world apart”

Both forces are possible due to tech

Semi-Globalization: Globalization and Localization

“At any one moment in history – and this is no exception – there are forces of order and
disorder, integration and disintegration, society and anarchy. At any one moment, forces and
actors are trying to bring the world together by creating rules, orderly interactions,
institutions, or arrangements. And there are forces and agents doing just the opposite, either
consciously, as a goal, or simply because of who or what they are.”

- Richard Haass, President, Council on Foreign Relations

Is globalization moving forward, backwards or into a new phase?

“Contrary to what some experts believe, globalization is not dead. A new era, completely
different from the ones that preceded it, has begun. The previous phases of globalization were
based on the same model, which favored global economic integration over national interests.
The forces of digitization and decentralization have made that old model obsolete. In the next
phase, companies will need a country -by - country approach to strategies, business models,
risk management, and metrics.”

- Boston Consulting Group (BCG), July 2016, “What You Need to Know About Globalization’s
Radical New Phase”

Dramatic Transformation: General Electric

o “Globalization is being attacked as never before. This is not just true for the U.S., but
everywhere. These sentiments have traction in Europe and Latin America, on both the
right and the left. The future of the EU is an open question. Protectionist barriers are
 rising in Asia and Africa. China is repositioning its economy to be more sustainable and
inclusive.

o In the face of a protectionist global environment, companies must navigate the world
on their own. … This requires dramatic transformation.”

- GE CEO, Jeffrey Immelt, May 2016

Local Capability Inside a Global Footprint

o “With globalization, it is time for a bold pivot. GE has $80B of revenue outside the U.S.,
so global growth is critical to our success. In the face of a protectionist global
environment, companies must navigate the world on their own. …

o Going forward: We will localize. In the future, sustainable growth will require a local
capability inside a global footprint. GE has 420 factories around the world giving us
tremendous flexibility. We used to have one site to make locomotives; now we have
multiple global sites that give us market access. A localization strategy can’t be shut
down by protectionist politics.”

- GE CEO, Jeffrey Immelt, May 2016

The future of globalization

Global

o Free Trade Agreements

o Global Value Chains
o Finance
o Internet-enabled business

Local

o Protectionism and non-tariff barriers

o Indigenous production
o National-preferences
o Cultural reassertion
o Indigenization of management
Class 24th August: Outsourcing, Offshoring and Global Production Networks

READING: The globally integrated enterprise

Corporate Evolution

Globalization vs multinational and the evolution of companies in the past centuries.

“THE SHIFT”
Business changing its structure, operations and culture in response to globalization and
new tech
The concept of international corporation: import raw materials and export finished
goods
The MNC (multinational corporation) and its importance for building local productions
and adapt to trade barriers, without the need for other countries to incur in tariff
penalties
Shared technologies and business standards, because of the IT and communication
infrastructures, changed the perspective of what globalization is.

Global integration

2 new forms enter the decision-making process: who and where the production is
made?
Skills and knowledge as two new skills when gaining access ad investing in the global
market => connection of business activities
Impact in China and India regarding the creation of factories and manufacturing.
Change in corporation’s purpose and mission

Systemic Changes

The capability of manage different operations, allowing it to connect better with

partners, suppliers and costumers
MNC of national hubs is inefficient today due to an increase in innovation

Opportunities and challenges

Benefits for small/medium companies by creation infrastructures that only large

organizations could afford => pursue growth opportunities
Interests may diverse
Financial Interests

Short vs long term

Layoffs: start shifting production
Risk regarding trading connections in terms of prices or inability to

READING: Making a global poverty chain: export footwear production and gendered labor
exploitation in Eastern and Central Europe

Economic upgrading vs social downgrading

Same salaries for cheap and expensive companies
GPN tried to emphasizes the importance of the condition of labor and how it is related
to the outcome
Critical chain approaches
‘Connectivity Problem’—not explaining adequately how workplace-based labor
processes are co-constituted by broader (non workplace-based) social relations
Should manufacturing be offshores/outsourced?
Should the working conditions be regulated in offshore? By who?
Who should be held responsible if something goes wrong?

After the discussion, we concluded nothing. In fact, a lot of people for the different perspective
tend to blame the subcontractors for the working conditions, but is it really, they fault. It is the
perfect example that reflects the power of money in big organizations and the powerless acts
of the workers who suffer from that.

Role of new technology

o Integrating
o Disintegrating

Mid-Continent Nail

o American firm, acquired and reinvested by Deacero in 2012: doubles in size

o Company employs 500 to make “Made in America” nails, using 24 types of imported
Mexican steel

Likely impact of a 25% tariff on Mexican Steel

o May 31, 2018: 25% tariff on imported raw steel and aluminum takes effect
o June: 50% of Mid-Continent Nail orders canceled
– Imported nails not subject to tariff
– US steel producers raise domestic
o price 30%
 o June 15: Mid-Continent lays off 60 workers
o July: Orders down 70% year on year
o Autumn 2018: 200 laid off
o October: 2018 sales down 30% versus 2017
o March 2019: Tariff waiver granted
o September 2019: Workforce up to 420

Pisano’s MNC

4 eras:

o 18th century
o 19th century
o Post – WWII
o Post – 1975

“a company that fashions its strategy, its management, and its operations in pursuit of a new
goal: the integration of production and value delivery worldwide”

Pisano’s Opportunities and Challenges

Opportunities

o Integration: increases and improves job opportunities worldwide

o Technology and Outsourcing: enables even small firms to manage administrative tasks
o Coding

Challenges

o Increased trade and competition (and hence displacement)

o Securing enough, and the right kind of, human resources
o Balance intellectual property regimes
o Maintain internal trust and consistency in a dispersed MNC
o Balancing short and long-term financial interests

Christmas in March?

Here we discussed the fact that most of the products that us consumers buy, are made in
March in Asian countries lie China, in this way this is the movement through the year:

o January – February: quiet season, most workers on holiday

o February – March: Design and prototype products for shopping year
o March – May: wholesale market displays; ordering season
o May – August: production season
o September – December: residual production
Global Supply Chain

Outsourcing Offshoring Modularization

Modularization

o Define a specific task

o Define requirements and standards for that task
o Maintain dose contact or QOS agreement with client

Outsourcing

o To have a business activity provide by another company to your firm.

o “Out of the company”
o Decide on “core competencies”
o Invest heavily in these
o Modularize all other activities
o Find a specialist to perform them

Ex.: Book store of UoSC it is from another company out of South Carolina
Food
Hotel

Offshoring

o Distinct from “outsourcing” – the movement of activities to a separate country

o You can outsource without offshoring and can offshore without outsource
o “Out of the country”

Driven by:

o Improved modularization and quality control

o Efficient containerized trade
o Free trade agreements
o Rise of large-scale overseas manufactures
o Low-cost labor

Risk of interference: if there is something happening like what happened with the Vergreen
ship, you can have more costs, and problems with the suppliers and customers. It can generate
problems to the global economy, as it was with this case.

In outsource/offshore, if something goes wrong, the fault happens to fall on the brand, I the
end of the day.
The engine of global supply chain: containerized trade

If you want something, it is probably on a ship. However, sometimes it may not go where you
want. Problems with these transportations can actually generate a lot of economical problems
worldwide, like what happened with the Vergreen, conditioning other shipments.

Rise of “Contract Manufacturers”

o Firms that do nothing but unbranded production

o Mostly (not always) Asian
o Thin profit margins, high volume
o Large low-middle skilled labor force

Ex.: Jabil, Foxconn, Flextronics

The globally integrated enterprise

Fragmentation of productions. Ex.: Boing 787 Dreamliner, that has many parts of the plane,
manufactured in different countries. Huawei: China’s leading Globally Integrated Enterprise.

Global Interconnections and Supply Chains

Producer Trader Wholesaler Manufacturer Retailer Consumer

Production Transformation Consumption

Value added trade: how it works

Not all activities are created equal

o It is not where the things are done, but also the value that is added in that activity that
matters.
o The interests of a country will tell you what kind of jobs you will find

Class 26th August: Do border matter in a financialized and tech world?

READING: Capital and Control – Lessons from Malaysia

» The thirty-year-old trend toward the free movement of capital: Many developing
countries opened their capital accounts in the hope of borrowing to finance domestic
investment and encouraging foreigners to invest directly in their emerging markets.
» But massive, mobile international capital markets bring high risks too.
» Devastating financial crisis of the past few years in Asia, Brazil, Russia and Argentina
have led to the reappraisal of the costs of liberalization. Debate about the balance
between financial market freedom and a government’s ability to manage its own
economy.
» Thailand, Indonesia, Korea, and the Philippines turned to the International Monetary
Fund (IMF) for financial assistance. Malaysia, however, did not, choosing instead to
manage the crisis alone and to regulate unilaterally capital flowing in and out of the
country.
» Important question: can governments unilaterally regulate global capital markets, or
should governments cooperate in order to control international capital markets?
» Malaysia’s prime minister, Dr. Mahathir Mohamad decided to impose restrictions on
the international purchases and sales of financial assets. What Malaysian authorities
wanted most from the capital controls was autonomy from international market forces.
» Malaysia’s capital controls did indeed in- crease the government’s autonomy from
international financial markets.
» Governments of other developing countries cannot copy Malaysia’s controls to
increase their autonomy. Capital controls tend to be very difficult to implement
unilaterally. Three factors were crucial to Malaysia’s successful implementation:
 – First, Bank Negara had a high level of foreign exchange reserves.
– Second, Malaysia had relatively little external debt.
– Third, and finally, the links between public authorities and the financial system
were deeply institutionalized; that is, Malaysia’s banks were either unable or
unwilling to attempt to circumvent the controls.
» The government’s pursuit of autonomy from markets was to promote a more rapid
recovery from the crisis by reducing the speculative pressure on the currency and
cutting the link between interest rates and the ex- change rate, thereby allowing the
government to pursue an independent monetary policy without being concerned that
the ringgit would continue to depreciate.
» Foreigners who sold shares on the KLSE could not take the money out for a year.
Additionally, Malaysians themselves were prohibited from investing abroad without
prior approval from Bank Negara.
» After imposing these new regulations on short-term capital flows. Bank Negara
aggressively reduced interest rates.
» Takeaway: It is possible for governments to implement capital controls successfully—
in the sense of preventing large capital outflows—when countries are endowed with a
great deal of foreign exchange and unencumbered by debt. That is, governments can
unilaterally control capital when they least need to—when they have all of the things
that developing countries never do, including money, a favorable asset position, and
institutional capacity.
» The systematic and successful regulation of international capital flows is likely to be
accomplished only multilaterally. The combination of rapid technological change and
financial innovation with the openness of capital accounts throughout the developed
world makes unilateral attempts to control capital (of the Malaysian variety)
increasingly unlikely to succeed.

Do borders even matter?

“Global banks are international in life but national in death”-Sir Mervyn King former governor
of the Bank of England

“But you, like an idiot, want to take over the world. And you don't even realize that there is no
world anymore! It's only corporations!” -Number 2

Capital Control
Regulatory restriction on the ability to convert a currency, access foreign currency, send money
into or out of a country, foreign ownership of financial assets.

o Negative perspective for countries when talking about national business

o Easier to regulate the value of your current currency
o Prevent capital flight
o Prevent speculative investment
o Assert national sovereignty
Purpose o Control inflation: for a fixed amount of assets, if there is a lot of demand there will b
inflation
o Amass foreign exchange
Example of negative impact in economy due to free economy: Asian-flue

Speculative Attack
Precipitous selling of untrustworthy assets by previously inactive speculators and the
corresponding acquisition of some valuable assets (currencies, gold).

Prerequisites

o Shortage of foreign exchange

o Over-extended banking system (borrow short and foreign, loan long and domestic)
o Currency exchange rate peg
o Open financial system

Method

o Borrow large sums of local currency as short-term loan(s)

o Exchange local currency for US dollars, depleting reserve
o Government forced to devalue currency
o Exchange necessary hard currency for devalued local currency
o Repay original loan(s)

Globalization in retreat?

Since 2005…
- International travel: up 50%
- Internet users: up 300%
- Internet-connected devices: nearing 21 billion

Speed
- Uber establishes global footprint in 6 years
- Pokémon Go! Earns $1 billion in 150 countries in 6 months

Old Globalization

Dominant “pole” country

o 20-25% of global GDP growth

o First mover in new technologies
o Grows through trade

Global value chains

o Globally sourced materials, labor, production and knowledge

o Led by MNCs
Global governance

o Rules set by WTO

o National interest subordinate to economic integration

Factors undermining old globalization

Rising Protectionism

o New discrimination/ restrictive policies

Weakening global governance

o Bilateral rather than global agreements

o Assertion of particularistic interests

Declining western financial dominance

o Rising China and alternative lending options

Growth of state capitalism (a government that determines where the capital goes)

o State-owned enterprises
o Sovereign wealth funds

Technology factors

Industry 4.0

o Automation
o Decline of labor value-added

Digital Platforms

o Intra-frim systems enabling seamless global integration and sales

Digital Services

o Internet-enabled services immediately target global markets

New Globalization

New economic model

o Multiple poles of growth

o Declining merchandise trade will depress “catch-up” rates
o Technology innovation decreases need for labor-intensive manufacturing
New Business Model

o Decentralized production networks

o Reliance on global digital platforms

New political model

o Regular policy shocks and uncertainty

o Occasional grand collaboration
o No normative rules

New Business model

Key takeaways for business

Borders in Capatilization

1. In what areas do borders still matter?

2. In what areas has the world become – and remains – borderless?
 3. What will be the future of borders in the new stage of globalization?
4. Do borders present an opportunity of a threat to business prosperity?

Unit 2: The Global Integration Debate: World Trade and Investment

Class 31st August: The Case for Free Trade (for this class review the reading)

READING: In defense of “sweatshops”

For many sweatshop workers the alternatives are much, much worse. In one famous
1993 case U.S. senator Tom Harkin proposed banning imports from countries that
employed children in sweatshops. In response a factory in Bangladesh laid off 50,000
children. What was their next best alternative? According to the British charity Oxfam
a large number of them became prostitutes.

Claims of sweatshop exploitation in the third world found 43 specific accusations of

exploitation in 11 countries in Latin America and Asia. We found that sweatshop
workers typically earn much more than the average in these countries. Working in the
apparel industry in any one of these countries results in earning more than the average
income in that country. In half of the countries it results in earning more than three
times the national average.

What determines wages and compensation? A firm must persuade the worker to
accept the job. To do that, the firm must offer him more than his next best available
alternative. Wages are low in the third world because worker productivity is low (upper
bound) and workers’ alternatives are lousy (lower bound). To get sustained
improvements in overall compensation, policies must raise worker productivity and/or
increase alternatives available to workers. Policies that try to raise compensation but
fail to move these two bounds risk raising compensation above a worker’s upper bound
resulting in his losing his job and moving to a less-desirable alternative.

What about non-monetary compensation? Sweatshops often have long hours, few
bathroom breaks, and poor health and safety conditions. How are these determined?
Compensation can be paid in wages or in benefits, which may include health, safety,
comfort, longer breaks, and fewer working hours. In some cases, improved health or
safety can increase worker productivity and firm profits.

Anti-sweatshop proposals Such standards typically include minimum ages for

employment, minimum wages, standards of occupational safety and health, and hours
of work. Such standards do nothing to make workers more productive. Such mandates
risk raising compensation above laborers’ productivity and throwing them into worse
alternatives by eliminating or reducing the U.S. demand for their products.

Conclusion Not only are sweatshops better than current worker alternatives, but
they are also part of the process of development that ultimately raises living standards.
 When companies open sweatshops, they bring technology and physical capital with
them. Better technology and more capital raise worker productivity. Over time this
raises their wages. As more sweatshops open, more alternatives are available to
workers raising the amount a firm must bid to hire them.

Sweatshop

o Low wages
o Bad conditions
o Hard labor

Usually built to avoid regulations that you as employee do not wish to address.
Debate: What is the amount of value per hour of work the worker is able to produce? What
are the arguments and counter-arguments?

What determines wages?

o Upper bound: worker productivity - amount of value that workers generate

o Lower bound: average wage of alternative opportunities

Is this is true, what does it imply about sweatshops?

What does this imply about minimum wages?

“US alternatives are irrelevant. No one is offering these workers green cards”: 43 specific
accusations of exploitation were found in 11 countries in Latin America and Asia

Global interactions and linkages: the travels of a t-shirt

o The United states, in Texas produce cotton, that goes to Shanghai, and then back to
the United Sates, to be resold as a 2nd handed shirt in Tanzania.

Stages of modularized production

Clothes start their lifecycle in cotton bilks, and after all stages of modularized production, they
are shipped back to Tanzania, where they are resold.
Cotton in US: why do it?

o Space available
o Climate
o They avoid their competition: the greatest way to be profitable. The goal is not to be
competitive is to avoid competition
o US back was the bet at producing cotton because of slavery

The global garment trade was one of the first fragmented industries

o 1850s
o US produces raw cotton
o Egyptian and Indian agriculture declines
o Cotton spun in UK
o Garments sold in European and US cities

How does the fragmented garment trade work today?

o Who benefits? Consumers (large offer at lower prices), workers

o Who loses?

So, trade matters…

You day in trade

o Ex1.: Pull on your shoes, designed in Oregon and made by a Taiwanese subcontractor
in Vietnam

o Ex2.: Walking out the doctor, check your messages on a phone designed in South Korea
with software from California using chips in Texas and produced in Malaysia

o Ex3.: Toyota - Get in your car, with a Japanese brand name but assembled in the US
with parts from Canada, Mexico and Asia

o Ex4.: Medical and pharmaceutical procedures, everything you use is from several parts
of the world

o Ex5.: Coffee

Fair trade (“fair for yourself”): mercantilism

o Benefit the country and the government not the individuals as all: in order to preserve
sovereignty
o Policies which restrict imports
o Goal: national self-sufficiency and accumulating gold
o Purpose: make the state stronger
Percepts of mercantilism

All competition is zero- Economic growth is

Philosophical realism: Econoics must serve
sum: gains for one are to advance state
Humans are selfish losses for another state interests
power

Mercantilism today?

“The president embarked on his first foreign trip with a clear-eyed outlook that the world is
not a ‘global community’ but an arena where nations, nongovernmental actors and
businesses engage and compete for advantage…Rather than deny this elemental nature of
international affairs, we embrace it”
-National Security Advisor General H.R. McMaster and National Economic Council Director
Gary Cohn, Wall Street Journal, May 30, 2017

A zero-sum game?

o Surplus is winning: tariff in imports, subsidize domestic producers (support exports),

devalue your currency in order to make the exports more competitive, implement
quota. A deficit is losing

Purpose of mercantilist economics

o Pursuit and maintenance of state security

o Security is rooted in the quest for and preservation of sovereignty (authority of a state)
o Security is hard (guns and bombs) and soft (economic)

-Economic security gives the ability to make or buy hard security

-Economic security means the country is free from foreign coercion
-Hard security can enable a country to seek economic security

Balance of trade

Principle: does the Mercantilistics always

amount exported seek a favourable
exceed imports or balance of trade
vice-versa? (surplus)
 o Sell goods abroad for specie (hard currency)
o Accumulate specie (hard currency)
o Use accumulated wealth to finance development and empire-building

David Hume’s criticism

o Mercantilism is unsustainable in the long-run

o Sustained accumulation of specie will result in domestic inflation
o Inflation will increase the price of exports, making them uncompetitive
o Countries with trade deficits will experience deflation and cheaper products
o Balance of trade MUST shift in the long term
Free trade is everywhere

Under a free trade policy, goods and services can be bought and sold across international
borders with little or no government tariffs, quotas, subsidies, or prohibitions to inhibit their
exchange. The concept of free trade is the opposite of trade protectionism or economic
isolationism.

o Adam Smith argues individual, corporate and national wealth all hinge on free trade´
o Specialization will enable greater earnings for all participants
o “Win-win” perspective: world is not “us” versus “them”. Its is always better to open
borders to trade and investment
o Free trade increases the “pie” for everyone: relative shares are immaterial
o Principle of “absolute advantage”

Theory of absolute advantage

Capability of one country to produce more of a product with the same amount of input than
another country.

o Countries should produce goods one when they are most efficient and trade for all
other goods
o Assumes there is a balance in the global economy
o Everyone is best” at something

One small problem…

o What happens if one country has an absolute advantage in both products?

o Should there be no trade?
o Why should the United states trad for anything?

Comparative advantage

“Countries should specialize in goods for which they have a relative advantage, and thus lower
opportunity cost and trade for other goods.” Countries should produce goods and services
they are “relatively” more productive.
 Opportunity cost is an important direct cost: the amount of another good fourgone in
order to produce a good

Ex.: Portuguese wine and UK wool – absolute advantage of the products for each country

Ex2.: Portuguese wine and UK wool – comparative advantage related to opportunity cost

Wine Wool
Portugal 15 50
UK 10 20

Why should a company worry about any of this?

“Make or buy decision”: to make it yourself or to outsource. If you do not have an absolute
advantage, outsource.

Class of 2nd September: The Universal or Human Values Dilemma

READING: Dilemmas of free-trade: universal and human values

o The respect for other

o Value of life and happiness
o Does it happen only in the developing countries? No. Ex.: New York

The distributional dilemma

“Emerges from the propensity of trade to alter the distribution of income and wealth within a
nation. Simply put, some individuals and groups gain from trade while others lose.” No trade
really benefits anyone.

Most visible effects: sectoral, because trade policy often protects or promotes one
industry or sector of the economy at the expense of others. Ex.: tariffs on imported
steel protect the domestic steel industry by making foreign produced steel more
expensive, but also harm domestic automakers who must pay higher prices for the steel
they use
Debate in trade: benefit the owners of large corporations but erode the employment

Wine Wool
Portugal 10 15
UK 60 10
prospects and wages rates of unskilled workers. Ex.: elimination of trade barriers
Trade deficits: excess of imports over exports that can shift economic welfare across
time.
The value dilemma

“Arises because trade generates many outcomes that citizens evaluate on the basis of ethical
principles and social values”. The same economic changes that enable a nation to secure the
benefits of trade may imply a compromise of other societal values.

The ecological values have also taken place in the export area because some areas do
not want to export goods that threats their own natural environment
The respect for human rights
Affects the society, polity and cultures

The state goals dilemma

“Concerns the effect of trade on the ability of states to meet their goals”. Tension between
trade and the unique mission of the state to provide security, independence and peace of the
nation.

Reflect the social values

State actions motivated by power and autonomy of the state as much as growth and
efficiency
National sovereignty
Theorists of interdependence: force nations to recognize both the need to coexist and
the opportunity to “coflourish” through cooperation

Choices for the individual

These dilemmas must challenge individual citizens when contemplating any purchase. =>
consumer behavior

Manufacturing in Bangladesh

o Unlike other processes in textile industry, sewing remains difficult to automate: very
low-skilled work, but must be done by a human
o Wages driving factor in location for textile factories
Rana Plaza: example

o Built on a sand-filled pond

o Designed for 5 stores: had 9
o Designed for shops and apartments: garment factories throughout
o Required reinforced steel: used concrete and cheap rebar

Occupants

o Bank
o Shopping mall
o Offices
o Apartments
o Garment factories

Collapse

o April 23: structural cracks appear

o Building engineer recommends evacuation
o Building official visits Sohel Rana, clears building for continued use
o Bank and shops evacuated
o Garment workers ordered to report to work
o April 24, 2013: 3,122 workers inside the building that collapsed: death toll exceeds
1100

Repeated disasters

o Nov 24, 2012: Tazreen factory fire

o Feb 17, 2013: smart export garments fire
o May 8, 2013: Dhaka factory fire
o April 24, 2013: Rana plaza collapse

Do national organizations hold any responsibility?

“Even in a situation of grave threat, when they saw cracks in the walls, factory managers
thought it was too risky not to work because of the pressure on them from U.S. and European
retailers to deliver their goods on time…the prices Western companies pay are so low that they
are at the root of why these factories are cutting corners on fire safety and building safety.”

-Dara O’Rourke, an expert on workplace monitoring at the University of California, Berkeley

Should consumers care?

o “We as consumers like to be able to buy ever-greater quantities of ever-cheaper goods,

every year…Somebody is bearing the cost of it, and we don’t want to know about it.
The people bearing the cost were in this fire.” – Richard M. Locke, deputy dean of the
M.I.T. Sloan School of Management

o “It bothers me, but a lot of retailers are getting their clothes from these places and I
can’t see how I can change anything. They definitely need to improve, but I’ll still shop
here. It’s so cheap.”

–21-year-old university student Elizabeth McNail, clutching a brown paper bag from clothier
Primark the day after a building collapse in Savar, Bangladesh killed at least 381 people.

The European Plan: the accord on building and safety standards in Bangladesh

Under the accord, each signatory company has committed to a legally-binding arbitration
process to do the following:

o Publicly disclose its supplier factories in Bangladesh to recognized, independent fire

safety experts and require these factories to submit to rigorous fire safety inspections

o Require all its suppliers to implement all repairs and renovations necessary to make
their factories safe, as determined through the inspection process

o Pay suppliers prices sufficient to make it possible for them to afford the necessary
repairs and renovations and to operate in a safe manner

o Require suppliers to allow worker representatives into their factories to educate

workers about workplace safety and worker rights

o Cease doing business with any supplier that fails to comply with any of the above
requirements

The US response: the alliance for Bangladesh worker safety

Major North American retailers, including Wal-Mart, Gap, Target and Macy’s, did not join the
accord but started their own alliance
 o No legally binding agreement subject to arbitration in their own country
o No union involvement
o Financial resources available in the forms of loans
o Firms commit to not conducting business with any Bangladesh company that does not
meet approved safety standards

Early Questions of Sovereignty

o The Accord has frequently forced the temporary closing of garment factories after its
inspectors found dangerous conditions.

o On several occasions, the Bangladeshi government has aligned with a garment

manufacturer opposed to having its factory closed, even temporarily.

o In one of the first closings after an Accord inspection, workers took to the streets in a
raucous demonstration, protesting that their wages might not be paid

o The alliance, worried about libel lawsuits and first getting the go-ahead from
Bangladeshi authorities, has not made any inspection reports public

“Exploited” labor?

o Economic openness and investment create opportunities for women

o Working women gain independence
o Independent women change social norms

Benefits of “Exploitation”

“The misery of being exploited by capitalists is nothing compared to the misery of not being
exploited at all”

-Joan Robinson

Human Progress
Economic development

Industrialization in Asia

o Processed agricultural goods: earns money to invest in…

o Labor intensive manufacturing: earns money to invest in…
o Capital intensive manufacturing: earns money to invest in…
o High technology industries and services

Chinese wage rates (2008-2016)

o Manufacturing wages have nearly tripled since 2008

The values dilemma

Globalization engenders conflicts within and between nations over domestic norms and the
social institutions that embody them.

o As the technology for manufactured goods become standardized and diffused globally,
nations with very different sets of values, norms, institutions and collective preferences
begin to compete head on in markets for similar goods.

o Many residents of advanced industrial countries are uncomfortable with the weakening
of domestic institutions through the forces of trade, as when, for example, standards
for the labor, environment, competition policy and corruption developed at home are
not met abroad.

XYZ: what is fair in free trade? The case of outsourcing

1. XYZ Corp. is an American mid-sized firm that manufactures refrigerators in

Pleasantville, Ohio. Under increasing pressures from encroaching imports, the firm
 decides to lay off 300 of its workers in Pleasantville and to subcontract the more labor-
intensive parts of its operation to a local firm in Honduras. Outsourcing reduces XYZ
Corp.’s costs substantially, and profit margins recover

Should the government or community try to “block” XYZ from outsourcing?

2. Suppose that sometime after XYZ has returned to profitability thanks to outsourcing, a
journalist from Pleasantville visits the subcontracting plant in Honduras. He reports that
the plant is a sweatshop, where 12-year-old children work under unsanitary and
hazardous conditions. The news shocks the community, and picket lines are organized
around the headquarters of the firm.

Does this change the situation? What is the difference between this scenario and the previous
one?
Who is us?

3. Suppose that, instead of outsourcing, the company closes its Pleasantville plant, opens
up a domestic sweatshop near the Mexican border, and brings in 12-year-old children
from Honduras as temporary migrants.

Does this differ from the other scenarios? Is there a difference in the economics of the
situation? In the legality of the situation? In the morality of the situation?

Political trilemma of the world economy

Deep economic
integration

“Bretton Woods
System”
Sovereign
Democracy
nation-state

Change is coming…

o The “sewbot”: advanced, automated sewing technology that could help regrow the
cut-and-sew industry in the United States.

Taiyuan Garments

o 400 jobs
o $0.3 per shirt
Class 7th September: The National Security Dilemma

READING: Who is us?

Two kinds of corporations:

1. Corporation A: headquartered in the USA, most corporation’s employees are non-

Americans, although top managers are. The company undertakes much of its R&D and
product design, and most of its complex manufacturing, outside the borders of the
United States.

2. Corporation B: headquartered abroad, but most employees are American citizens.

undertakes much of its R&D and new product design in the United States.

Who is us? The answer is, the American work force, the American people, but not
particularly the American corporation. we must invest in people, not in nationally
defined corporations.

A fully integrated operation = when product design, manufacturing, process

engineering, and vendor management take place in the same country.

Examples of fully integrated operations in the United States include the consumer
electronics businesses of Philips and Thomson and, increasingly, Honda’s automobile
business

When foreign-owned companies come only to win local market share, they add little
to the host country’s competitiveness. When they come to build a platform to compete
in global markets, then they contribute to national competitiveness.

The New American corporation:

In an economy of increasing global investment, foreign-owned Corporation B, with its R&D and
manufacturing presence in the United States and its reliance on American workers, is far more
important to America’s economic future than American-owned Corporation A, with its
platoons of foreign workers. Corporation A may fly the American flag, but Corporation B invests
in Americans

» Ownership is less important: The return depends on the total amount of American
savings invested in global portfolios comprising both American and foreign-owned
companies—and on the care and wisdom with which American investors select such
portfolios.
» Control is less important. In fact, there is every reason to believe that a foreign-owned
company would be even more eager to demonstrate to the American public its good
citizenship in America than would the average American company. American-owned
businesses operating abroad feel a similar compulsion to act as good citizens in their
host countries. They cannot afford to be seen as promoting American interests;
 otherwise they would jeopardize their relationships with foreign workers, consumers,
and governments. The typical argument suggests that a foreign-owned company might
withdraw for either profit or foreign policy motives. But either way, the bricks and
mortar would still be here. So would the equipment. So too would be the accumulated
learning among American workers. And most important, the American work force
would remain, with the critical skills and capabilities, ready to go back to work.
» Workforce skills are critical. As every advanced economy becomes global, a nation’s
most important competitive asset becomes the skills and cumulative learning of its
work force. The company is a good “American” corporation if it equips its American
work force to compete in the global economy. The relationship forms a virtuous circle:
well-trained workers attract global corporations, which invest and give the workers
good jobs; the good jobs, in turn, generate additional training and experience. As skills
move upward and experience accumulates, a nation’s citizens add greater and greater
value to the world—and command greater and greater compensation from the world,
improving the country’s standard of living.
» Foreign-owned corporations help American workers add value. When foreign-owned
companies come to the United States, they frequently bring with them approaches to
doing business that improve American productivity and allow American workers to add
more value to the world economy. Moreover, the two leading foreign investors in the
United States are the British and the Dutch.

Now who is us?

American competitiveness can best be defined as the capacity of Americans to add value
to the world economy and thereby gain a higher standard of living in the future without
going into ever deeper debt.
The interests of American-owned corporations may or may not coincide with those of
the American people.
Does this mean that we should simply entrust our national competitiveness to any
corporation that employs Americans, regardless of the nationality of corporate
ownership? Not entirely.
The only practical answer lies in developing national policies that reward any global
corporation that invests in the American work force. the overriding goal should be to
induce global corporations to build human capital in America.

READING: They Are Not Us

Last reading argues: which of the two corporations is more important to the economic future
of the US?

But is this question fair?

Have a significant number of American companies really globalized to such extent that
most of their economic activities are located abroad?
And have foreign companies increased their investment in the US so much that they
now contribute as much or more to national economic competitiveness than American
companies?
The state interest/ National Security Dilemma

A rich country is able to support a strong military, and therefore be independent.

Goal: preserve and sustain Sovereignty

The right to independent determination of actions, policies and laws within the recognize
borders of a country
o Freedom from external coercion? In order to be truly “sover”, you have to be free of
external coercion.
o Freedom of international coercion?

Free trade and sovereignty

Question 1: How does economic interdependence improve/increase sovereignty? Idea that

you can control a good is increasing your sovereignty, because no one gets in a way.

Question 2: How does economic interdependence undermine sovereignty?

First, because the foreign country’ policy, wherever foreign-owned companies go, they have
to be a good citizen everywhere?

For example, a foreign-owned company might leave the United States by suddenly giving up
its U.S. operation. After all, the American government keep political control over assets within
the United States.

Second, if a company join in a alliance, they have to follow the rules make for group benefits.
Hence, the can do whatever they want to do and even lost the sovereignty.

We are us?

The answer is, the American work force, the American people, but not particularly the
American corporation.”

o Do global identities superclade local or national ones? (Do I want to work in a foreign
firm in my country, or a firm from my country, in my country?)

o The lack of domestic ownership can be a reason to worry.

o Does foreign ownership matter? According to the reading, no, but we cannot forget
about a country’s reputation – working for a company of your own country that has
developed a new product will give your country a good reputation, globally.
o Does foreign government ownership matter?
o Does which of foreign or foreign government ownership matter?

USA vs NOT USA

Arguments in “They are Not Us”

For purposes of national security, foreign companies may not be interchangeable with
American companies

o In terms of security, foreign cannot replace domestic

o Not transferring activities
o Political regulations force countries to be nice
o Even if they are doing good things, in the long run that may not be the case

Arguments in “Who is us?”

if we hope to revitalize the competitive performance of the United States economy, we must
invest in people, not in nationally defined corporations.

Who do you agree with, why?

What does it mean to be an “American Company”?

o Company A: Headquartered north of NY. Majority of shares owned by Americans, but

most of employees are non-Americans. The company undertakes much of its R&D and
product design, and much of its complex manufacturing, outside the borders of the US
in Asia, Latin America and Europe.
o Company B - Headquartered in another industrialized nation. Majority of shares are
held by citizens of that nation. But most employees are Americans, and much of its
R&D, new product design and manufacturing in the US.

What do you notice?

Most Japanese cars are made in America, Japanese automobiles hires a lot of American people,
for example.

IBM Employment - 2017

 o Americans employed more people outside
o Significant portions in a country: is it an American brand really an American brand?
o Companies often find ways to incorporate overseas
o Is google still a good American company, with the boarding in California, but paying
taxes overseas?

US vs Them

Do American firms really think of themselves as “American”?

o What does this even mean? Over time American employers hire people from different
parts of the world, and exist physically in other places. What changes? Are companies
like Apple American, even if they pay taxes in Ireland?
o I BP British? Is it American? Does it matter?

Are “they” really “us”?

o Increasing indigenization of foreign firms

o Increasing internalization of US firms
o Contributions within the USA versus in foreign markets

And yet…

o Iceland only agreed to bail out ICELANDIC citizens who lost money in the 2008 Financial
Crisis.

o Bank of America and Wachovia ran to Congress, not overseas governments when they
faced bankruptcy

o Apple and Google heavily lobby the US government for protection, promotion and
subsidies, but arrange to have their profits only reported abroad.

So, the fact remains that nationality and government still matters

By definition, a government is the body with the monopoly on the use of legitimate violence

Clash of civilizations

“Civilization identity will be increasingly important in the future, and the world will be shaped
in large measure by the interactions among seven or eight major civilizations. These include
Western, Confucian, Japanese, Islamic, Hindu, Slavic Orthodox, Latin American and possibly
African civilizations.

The most important conflicts of the future will occur among the cultural fault lines separating
these civilizations from one another.”

-Huntington: “The Clash of Civilizations and the Remaking of the World Order”
Reasons for crash of civilization:

1) Differences among civilizations

2) The world becoming a smaller place: “civilization consciousness” of the differences
3) People are separated from longstanding local identities: role of religion, economy and
social change
4) On the one hand, the West is at a peak of power. At the same time, a return-to-the-
roots phenomenon is occurring among non-Western civilizations. A West at the peak
of its power confronts non-Western countries that increasingly have the desire, the
will and the resources to shape the world in non-Western ways.
5) Cultural characteristics and differences are less mutable
6) Economic regionalism is increasing

Huntington’s World

Civilizations are differentiated from each other by history, language, culture, tradition and,
most important, religion.

Is Huntington, right?

o Support/oppose his theory

o How does his theory relate to globalization?
o How does his theory relate to free trade?

The Thucydides Trap and Sino-US relations?

“What made war inevitable was the rising power of Athens and the fear this sparked in Sparta”

o Historical analog: German Empire vs British Empire: 1878-1914

Graham Allison’s Perspective

o Both sides have legitimate interests

o Lack of trust and communication makes conflict more likely
o Potential tripwires due to overlapping spheres of interest
Chinese power: actual and potential

China as Number 1:

o 2009: Engine of global economic growth; auto market

o 2011: manufacturer
o 2012: trading nation
o 2014: economy by PPP
o 2015: largest middle class (although the definition of middle class in emerging
economies is very different)
o 2016: Number of billionaires, AI research investment, Installed solar capacity
o Doubles the income of its middle class would be significantly larger than the US
o Military investment and upgrading

The state interest’s dilemma of free trade

Sovereignty vs Interdependence:

o Trade can build national wealth and power

o Trade also builds dependency (one-way and mutual)

If trade is positive-sum, then rivals benefits as well, if trade is zero-sum, then there are winners
and losers

Tariffs Debate

Should the US government equate economic security with national security? Are tariffs the
best means of securing both/either?

Class 9th- 14th September: The Distributional Dilemma

READING: The Downside of Integrating Markets

Globalization as the process by which markets integrate worldwide, and responsible

for a lot of the developed and developing countries, like China for example. Now, the
emerging economies impact on the global economy and the advanced economies is
rising rapidly. Imported goods became cheaper as emerging markets engaged with the
global economy

Comparative advantage in developing countries: they moved up to the value-chain

The globalization has changed the structure of individual economies in ways that affect
different groups within those countries

Growth and employment in the US are starting to diverge. Jobs are shifting away from
the sectors that are experience the most growth (tradable sectors), like health,
 manufacturing companies. If the non-tradable sector continues to lose its capacity to
absorb labor, the US should brace itself for a long period of high unemployment

One way to measure the size of a company, industry, or economy it is trough output,
but a better way the from the value added (comes from the capital and labor that turn
the inputs into outputs) => as increased, unlike employment. Value added did not rise
that much in the non-tradable sector, so the income did not rise much. With this,
salaries became more uneven because most jobs were created in this sector, but the
wages were raising more in the tradable one. Overall, the employment opportunities
and incomes are high, for the highly educated (enjoying more job opportunities and
higher incomes), but diminishing at the lower end.

Changes in global economy are creating growing disparities in income and employment
across the US economy, lie information processing technology. MNCs play a central
role in managing the evolution of global company, moving services and goods around
the world in response to supply-chain and market opportunities that are constantly
changing.

READING: 40 Years of Data Suggest 3 Myths About Globalization

1st) Globalization leads to a reduction in global inequality.

2nd) High income growth among the richest will lift the incomes of the poorest.
3rd) No alternative to rising inequality without turning our backs o trade and technology.

Globalization has led to a rise in global income inequality, not a reduction: this happens
because of two competing forces – inequality between countries and inequality within
countries. Ex.: China and India contributed to a significant global income growth, and
decrease inequality between countries. Lack of data given my government about this
issue.
Income does not trickle down: belief that is necessary a high growth at the top to
achieve a high growth at the bottom, in other words, rising inequality is necessary to
elevate the standards of living of the poor. “When we compare Europe to the US, or
China with India, it is clear that countries that experienced a higher rise in inequality
were not better at lifting the incomes of their poorest citizens”. Growth at the bottom
continues to be used to justify tax reduction for the richest.
Policy – not trade or technology – is most responsible for inequality: rather than
openness to trade or digitalization, it is policy choices and institutional changes that
explain divergences in inequality. Key policies concerning education, health and taxes,
and how is different in the US and in Europe.
First step is to using new data from the World Inequality report when it comes to do a
systematic change

READING: Piketty’s “Capital” in a lot less than 696 pages

The argument: capital, that is perceived as wealth by the author, has tended over time
to grow faster than the overall economy. Income from capital is invariably much less
evenly distributed than labor income. Real beef with the mainstream economic
 teachings: more capital and lower taxes on capital bring faster growth and higher
wages. In this era, after decades of peace, slowing growth and declining tax rates,
capital and inequality are on the rise all over the developed world, and it is not clear
what if anything will alter the trajectory.
The method: theory first approach of modern economics is a dead-end. The evidence-
first approach is the great strength of the author’s book. However, Piketty just isn’t
really sure how economically useful capital is, or what is the right level of inequality, or
how high taxes ought to be.
The evidence: European countries show a similar trajectory, although Britain income
inequality has made a much stronger comeback. France as a rich source of data and
recovering from the inequality after World War II.
The prognosis: the message of the author that the ravages of the WWs and the high
taxes that followed put a big damper of wealth and inheritance that has now been
lifted, seems irrefutable. The bigger the fortune, the faster it will grow in the future –
the performance of the university endowments in the S, where the largest
endowments have earned a higher percentage returns that the rest.
Inequality in the US: sine the 70s, the US has seen a sharp and unparalleled increase in
the percentage of income going to the top 1% and especially 0.1% => rise of
“supermanagers”. Population growth that helps economy growth.
The solution: progressive global wealth tax as the best response to the current
dynamics of inequality. He describes is as an “utopia”, but less likely to disrupt, related
to capitalism and other remedies. Ex.: European tax on wealth are simpler and fairer
and growth friendly

The distributional dilemma: Cui bono? (Who is profiting?)

o If: increases the supply of capital causes growth

AND
o If: capital’s value increases faster than the growth it engenders
Then… those who already have capital will gain and benefit more than anyone else

Globalization will increase all of the following:

o Mobility of goods and services

o Mobility of capital
o Mobility of labor (argumentative) (increasing, there is only one place where it is free -
EU)

This will result in decreased international inequality and increased domestic inequality.

Example.: unstable country: equatorial guine. A very small segment is very wealthy, and the
rest really poor.

All trade policy involves trade-offs

o A tariff protects the steel industry but raises costs for the auto industry and consumers
 o Free trade means lower prices and more choice for consumers but devastates specific
regions. Ex.: global access to more knowledge. The professor worries about his job and
it has damage, however the cost to implement robotic knowledge would be cheaper,
for example

“The benefits of free trade are broad and small; the costs are narrow and highly visible”.

o Save $0.1 on all cotton garments

o Close last factories in Lancaster, SC

“Recession is when your neighbor loses his job. Depression is when you lose yours”. Two sides
in one situation, the ones who benefits, and the ones who loses.
-Ronald Reagan

The changing distribution of wealth

Up until the 80s, the poorest people actually had the highest rates on income growth, and the
very wealthiest people had a slow income growth. In the other of free trade, most people
benefit, the wealthiest benefited the most, and some get actually hurt. Tax rates were much
higher, and capital grow slower. People who are rich, mostly get their money from dividends

Consider Flint, Michigan

o Foreign imports stress General Motors

o General Motors responds by laying off workers and moving some production to Mexico
o Free trade makes production more mobile
o Economic base of Flint collapses in 10 years
o How can a city recover from loss of its primary industry in 10 years?

Free trade tens to benefit others

o Saving from moving production offshore can protect remaining domestic jobs (think
Carrier AC in Indiana). Benefit for keeping their jobs
o Savings from efficient trade and location decisions increase profits and shareholder
returns. Benefit for more dividends
 o Efficiency and savings mean greater resources are available for investment in new
products

And then there is the question of labor

From the mid 19th century to 1920, the world had nearly complete free movement of labor
– If you could get on a ship, you could emigrate

o How is the free trade in labor distinct from the free trade in goods? Trade in labor is an
outgoing transaction. More friction => all of your swilled workers lived for example (≠
that do not happen with goods): brain-drain, like in India, in East Europe

o How is the free trade in labor similar to the free trade in goods? Movement of labor
affects crisis, in the same way as the movement of goods.

o What happened in the late 19th and early 20th centuries as a result of the free
movement of labor?

Labor in “long 19th century”

Globalization 1.0 had history’s most fluid global labor market

o “The Mexicans descended from the Aztecs, the Peruvians from the Incas – and
Argentinians descended from ships, mostly from Italy.”

In context of rapidly expanding economies, free labor was highly beneficial. If there were no
free trade in labor, the price of labor will go up domestically. The importance of machines to
make the labor more valuable.

Impact of the free trade in labor

o Irish immigration drove down wages for manual labor (Irish labor was cheaper than
slave labor)
o Immigration increased industrial and agricultural output
o Policy responses gradually limited and then shut down immigration

Toward new “free trade” in labor?

1965: Immigration and Naturalization Act

o Removes regional (racial) quotas for immigration

o Prioritizes family reunions
o Creates pathway for high-skilled immigration
- H-1B => visa for workers

European integration and free movement of labor.

ASEAN integration and “free” movement of labor? Not quite free yet
Back to the future?

Distributional impact of labor and goods mobility

High and lows skilled jobs are available, according to the first graph (15.8%). Healthcare => the
highest paid professions with a high demand. Mid skilled careers are the most unsuccessful
ex.: teaching

The uneven distribution of increasing inequality

The 80% through 90%: why are they not earning any wealth? Subject to income taxes, not
earning for capital gains. Still salary earning, not capital earning. Ex.: “college degree” job.
The three myths of globalization

o What are the 3 myths of globalization?

1) We are more equal
2) Technology and trade are responsible for inequality
3) Income will trickle down

If you are very wealthy, you earn dividends, and the taxes are way lower => policy decision.
Wealthy people have more influence in these decisions.

o What are the actual results of 40 years of economic integration?

Capital in the 21st Century

o What is Thomas Picketty’s main thesis? Capital growths faster in comparison to

economy

o What was responsible for the decline of “capital” and inequality from 1914 to 1970?
Wars, during this period, you had high taxes, so the growth are faster, but the taxes
suppress the capital

o What “laws” drive Picketty’s thesis? Unequal distribution of income

o Why does capital “always” grow faster than the economy or wage derived wealth?
Demand for capital assets => as you gain more capital, people invest in other financial
assets, driving up their price, and do not help the economy growth.

o Does capital bring growth?

Risk and inequality: Guiné-Equatorial

1) Monopoly power
2) Existing wealth will block markets. If I open a restaurant no one is capable to pay for it

Unit 3: Resolving these dilemmas: Regulating the global economy

Class 16th September: Global Regulation - The World Trade Organization

READING: “The WTO’s First Ruling on National Security: What Does It Mean for the United
States?”

World Trade Organization (WTO) dispute settlement panel issued a landmark ruling in
a dispute between Russia and Ukraine, so called “national security exception”. WTO
allows member of the WTO to make exceptions when it comes to trade, in order to
 protect the security of the nation. Russia invoked that exception to block the trade with
Ukraine, Kazakhstan and the Kyrgyz Republic.
Why does this dispute matter for the US and the WTO overall? The United States has
invoked the WTO national security exception, to justify its tariffs on steel and
aluminum. That was not well taken by Europe, Norway, Russia, Canada, India, among
others, since they say there is no a legitimate reason to do so. The outcome of the
Russia-Ukraine dispute offers a glimpse into how future WTO panels could handle other
disputes involving the Article XX, national security exception, including the U.S. steel
and aluminum tariffs. Observers of the WTO have long seen a dispute over Article XXI
as a lose-lose proposition. Fear of imposition of protectionist measures by other
countries, due to national security, and could be seen as an unacceptable breach of
national sovereignty.
What does the Article XXI of the GATT state? b) to prevent any contracting party from
taking any action which it considers necessary for the protection of its essential security
interests, iii) taken in time of war or other emergency in international relations. United
States and Russia argue that once a member has invoked the national security
exception, the measure justified by it cannot be subject to review by a WTO panel.
Section b) makes clear that idea.
What did the WTO panel rule? Rejected the Russian and American argument. The panel
found that it can review a measure a WTO member claims “it considers necessary” to
protect its own security interest. In the context of the Russia-Ukraine case, the panel
decided that the state of affairs between Russia and Ukraine rose to the level of “war
or other emergency in international relations,” therefore meeting section (b)(iii) =>
plausible. The panel, importantly, defined an “emergency in international relations” to
be “a situation of armed conflict. And this will be in constant review.
What does the decision mean for the United States? May spell trouble for the U.S.
defense of its steel and aluminum tariffs at the WTO. WTO says that the social and
economic difference is not enough for an exception. A different dispute settlement
panel may approach the national security issue in a different manner that may or may
not be more favorable to the United States (US vs Russia-Ukraine and vs Qatar and the
United Arab Emirates). Perhaps what is most clear is that the WTO is not done
deliberating on the national security question.

READING: “Trade in Hormone Treated Beef.”

Hormone produced in a laboratory to accelerate the growth rate of animals banned in

the EU due to consumer safety. Countries such as the US, Canada, among others did
not. As a result of this ban, meat exports to the EU dropped. But later, after evidence
that ensured consumer welfare, the US pressured the EU to drop the ban, but to no
avail. The WfO ruled that the EU ban on hormone-treated beef was illegal because it
had no scientific justification.

Decision to ban or not to ban => consumer backlash expected. Instead the EU did
nothing, so in February 1999 the United States asked the WTO for permission to impose
punitive sanctions on the EU.
READING: “Shrimps, Turtles and WTO.”

It is estimated that 150,000 sea turtles are trapped and drowned in the nets of shrimp
fishing boats every year. Turtle netting: this is a simple grid that fits over the mouth of
shrimp trawl nets and prevents sea turtles from getting trapped
United States placed an embargo on shrimp imports from countries that had not
mandated the use of turtle exclusion devices (pressured by protests)
In the face of the complaints, and in their defense, the United States claimed that there
are provisions in the WTO rules to take restrictive measures if they are "related to the
conservation of exhaustible natural resources and if such measures are rendered
ephemeral in conjunction with restrictions on domestic production or consumption."
=> supported by the environmentally friendly companies.
According to these countries, the United States was violating WTO rules by applying
domestic legislation outside its borders and applying it in a non-criminal manner.
Hypocrisy: concern for turtles, but zero concern for the environment.

READING: “Define Precautionary Principle to Avoid Biotechnology Clashes Under World Trade
Rules.”

When can a nation's interpretation and invocation of the "precautionary principle"

misrepresent trade protectionism in disguise? And which party should bear the burden
of scientific proof when a product's safety disagrees?
Causing an increasing number of international trade disputes over the perceived safety
of products derived from cutting-edge biotechnology and other sciences
How 'precautionary' regulations should be - underpins much of the possible future
disagreement over the legitimacy of rules on genetically modified products in the
context of WTO dispute settlement"
The WTO will increasingly find itself passing judgment on which regulations are
'legitimate' and which are 'unnecessary barriers to trade.

Dealing with dilemmas

o Values dilemma
o State value dilemma
o Distribution dilemma

Trans-national regulation

o WTO (world trade organization)

WTO Debate: beef hormones and genetically engineered crops

WTO Arbitration Panel

o Health, safety, extreme economy dislocation, national security and national interests
are exceptions in order
 o Free trade always
o We need evidence in order to see
o The only exceptions that are made have to meet the specifications in the first topic

Industry is not unbiased

Global, Multilateral Organizations: in search of common rules

Bretton Woods Organizations

o In 1944, at the height of WWII, representatives from 44 countries met at Bretton

Woods, New Hampshire to design a new international monetary system.
o The International Monetary Fund (IMF) was established to maintain order in
international monetary system
o The World Bank was established to promote general economic development: end
poverty

World Trade Organization

o General Agreement on Tariffs and Trade (GATT) was established in 1947 to liberalize
trade barriers.
o In 1995, the GATT evolved into the World Trade Organization

USA, at the time, due to sovereignty did not like the idea of free trade

From GATT to the WTO

Limit imports (Not trade barriers)

Tariffs continue to fall
Import quotas
Capital control
Taxes
Make your exports artificially cheap
GATT Enforcement Power

o If a government thought another one had violated the rules, it could ask a GATT panel
to adjudicate

o If the panel ruled for the plaintiff and the panel’s report was approved by GATT’s
membership, the guilt party had to change the offending policy or else the plaintiff was
entitled to compensation

o Cath: approval of the panel report required a unanimous decision

-Every single ember of GATT, including the government that had been in violation of
the rules, had to sign off of it

The Uruguay Round

Cause: need to block protectionist and “Fair Trade” surge in the 80s

New rules

o Limits on export subsidies

o Ban on “dumping”
o Trade Related Aspects of Intellectual Property Rights (TRIPS)
o Trade-Related Investment Measures (TRIMS)
o “Gradually” scale back agricultural subsidies
o Create WTO

WTO (World Trade Organization)

Responsible for setting international trade standards and settling trade disputes.

What is a “fair” standard and what is a “trade barrier” to protect the companies of an individual
country?

o Disputed cases: beef hormones; genetically engineered crops; meat inspection; eco-
labeling; fuel economy standards; technology standards; excolonial preferences; drug
inspection; protection of wildlife; cultural property; intellectual property.

Universality – regarding environmental issues, Europe has a politic concerning cars, saying that
EVERY car has to be environmental friendly This differs from the beef situation because is an
universal rule.

WTO principles

Most Favored Nation

Any preferential treatment offered to one-member country must be extended to all other
members (nondiscrimination)
Exceptions

o Developed countries can give preference to developing countries

o Countries in regional free trade agreements do not need to extend preferences to non-
members
o Countries can invoke temporary “safeguard” protections suffering serious injury from
imports or in case of a “national emergency”. Ex: war, pandemic (…). A government
will try to make everything a national emergency in order to make exceptions
o Quantitative restrictions can be invoked when there is serious balance of payment
problems

WTO’s Dispute Settlement Mechanism

o The Dispute Settlement Body (DSB), which involves all representatives of WTO member
governments, decides the outcome of a trade dispute on the recommendation of a
Dispute Panel.

o The DSB uses a special decision procedure known as 'reverse consensus' that makes it
almost certain that the Panel recommendations in a dispute will be accepted.

o The process requires that the recommendations of the Panel (as amended by the
Appellate Body) should be adopted unless "there is a full consensus of the members
against adoption.”

Idea: “punish the free-trade cheaters”

Retaliatory Sanctions

o Once it has decided on the case, the DSB directs the 'losing' member to act to bring its
laws, regulations or policies into conformity with the WTO Agreements.

o If the losing party fails to restore the conformity of its laws within a reasonable period
of time, the DSB can authorize a successful complainant to take retaliatory measures
to induce action on the part of the losing party.

The Doha Round

Cause “3rd World” feels Uruguay Round promises not fulfilled

o Broad G20 (the developing world one) opposition to Washington Consensus => lead by
BRIC, created because people say that WTO is biased when it comes to the rich
countries
o Fury at Western “hypocrisy” over agriculture
o Anger over US support for TRIPS
o Anger over “cultural property”. Ex.: patents

Still ongoing and stuck

Challenges of Global Integration

o The Doha round of WTO negotiations were originally to be the Seattle Round until riots
in Seattle forced the talks to move to Doha, Qatar
o Intent of the round was to make rules fairer for developing countries
o Opponents claimed that the rules would interfere with countries’ domestic policies
o Talks have stalled over rifts between developing nations (US, EU, etc.) and developing
countries

Dilemmas addressed?

Values: try for people be together

Sovereignty: this violates sovereignty
Distribution: work in order to have free trade, but it is arguably

Conclusion: stuck

Class 21st September: Regional Regulation - The Trans-Pacific Partnership and

Regional Trade Blocs

READING: The TPP and the management of globalization

» Intro: countries for all over the world joined. TPP was an ambitious deal, it covered a
number of policies including trade, international investment, intellectual property and
even labor standards. Obama emphasized that China should not make the rules, the US
should.
» Trade and international investment before WW II: England, in order to weaver to come
there, imposed a very large tax on the export of raw wool and discourage the imports
on woolen cloth. The UK’s response to rising cotton imports from India and China in
17th century was to raise tariffs to prohibit those imports. And that actually protected
the cotton manufacturing in England and helped the Industrial Revolution.
» David Ricardo: free trade is beneficial to all nations – even for the ones with low
productivity on ever sector because they would have lower wages to assure full
employment => able to export the goods in which the productivity is higher given them
competitive advantage.
» 19th century: British lower tariffs and US raised theirs with the goal to collect
government revenue and fostering domestic manufacturing. “Gold standard”
(governments promised to exchange currency for a fixed amount of gold): free
convertibility, using the gold standard => countries ho used this had lower interest
rates. In consequent, there was massive flows of foreign investment.
» 1929: slowdown in economic activity => not favorable to the free flow of good and
capital. Some countries devalued, and there was a need to create several institutions
as IMF, to prevent competitive devaluations.
» GATT process: reduction in trade barriers. Members are developed and non-developed
countries.
» Bilateral negotiations: lower their tariffs in exchange for tariff reduction of the other
part. After the negotiation they can change this.
 » MFN (most favored nation): assured that all countries that exported a good would have
the same tariff. Then it became subject to an exception FTA (free trade area). Countries
that join this, did not have to extend the privilege of zero tariffs to other GATT members
» Uruguay round: remarkably comprehensive, covering such difficult topics as
agriculture, intellectual property, textiles, phytosanitary measures, and dispute
resolution.
» TRIPS: all members agreed to grant patents for inventions that would stay in force for
20 years after the patent application was filed
» (…) complete when reading international business

Dealing with Dilemmas: Regional Agreements

Agreements that do not work at a globally level, but that are more sensitivity to national needs
and problems. Countries that are closer, may be easier to negotiate, since historic and culture
factors.

Trans-Pacific Partnership

Views on TPP

“This TPP sets the gold standard in trade agreements to open free, transparent, fair trade, the
kind of environment that has the rule of law and a level playing field. And when negotiated,
this agreement will cover 40 percent of the world's total trade and build in strong protections
for workers and the environment. “– Hillary Clinton, 2012

"I oppose it now, I’ll oppose it after the election, and I'll oppose it as president” – Hillary Clinton,
2015
GATT and WTO Notifications of regional integration agreements

Bilateral trade agreements

It is good because we know that the other will commit to the rules. However, it is not fair,
usually.

o Trade agreements between two countries

o Can include trade of goods, services, investment liberalization, intellectual property
and dispute settlement mechanisms – Some also include language for environmental
and labor standards
o Developing countries are usually in a weaker bargaining position
o Developed countries can require rules that are not included in the WTO
o More flexibility in interpreting rules than in WTO negotiation

Regional Trade Blocks

The Trans-Pacific Partnership (TPP)

o (Defunct) Trade Agreement between Australia, Brunei, Canada, Chile, Japan, Malaysia,
Mexico, New Zealand, Peru, Singapore, the US and Vietnam
 o Did NOT include China. WHY?

Chinese participation in the US-designed TPP was always considered a long shot. TPP
requirements conflict with current Chinese practice; China would have to embrace
unprecedented domestic reforms to meet disciplines on state-owned enterprises, data flows
and localization restrictions, labor obligations, and subsidies.

Potential TPP Impact

Illustration: Beef Trade

Developing Pan-Asian Trade

“Asian” Approach to Integration

“Respecting the fundamental importance of amity and cooperation, and the principles of
sovereignty, equality, territorial integrity, non-interference, consensus and unity in diversity.”

- ASEAN Charter

o Asian approach and sovereignty

Alternate: Regional Comprehensive Economic Partnership

RCEP

India is not in RECP because of china

o Initiated by ASEAN
o Led by China? China has taken the lead, and gains several benefits form the agreement
and enhance its geopolitical influence
o Terms
– Lower and standardize tariffs
– Increase mutual investment access
– Labor, Environmental, Subsidy and other policies left up to sovereign states
o Increase Intra-Regional Trade to offset declining US demand

TPP vs. RCEP

TPP RCEP
Trans - Pacific Pan - Asian

National
Norms and rules
Sovereignty

Undercuts "race "Beggar thy

to the bottom" neighbour"

Resolves:
Resolves: values
Sovereignty
dillema
dillema

Aggravates: Aggravates:
sovereignty and Values and
distributional distributional
dillema dillema

NOTE: “beggar by neighbor”: use policies that will benefit you, and hurt your neighbor

Class 23rd September: Market Regulation - Private Certification and the Fair-Trade
Movement

Dealing with Dilemmas – Private certification Fair Trade®

2 terms of Fair trade

1) Fair trade®: original principles

2) Fair trade: protectionism
The Fair Trade® Movement

What is the fundamental problem in agricultural commodities markets?

o In bad years, farmers costs exceed the market price. The more you grow, the less you
make

o Solution for the volubility of prices and not enough: stand standards/ a price floor,
either because consumers cannot afford it or because consumers could not make a
profit. Setting prices have benefits.

o Criticism: fair trade prices artificially inflate prices above the market value without
doing anything to address real problems, like oversupply.

The Fair Trade® Assumptions

The Challenge

o Commodity prices are low

o Individual producers cannot move prices
o Individual producers sell through middlemen
o In bumper years, commodity wholesale prices fall below individual producers’ costs

Solution

o Collectives and Above Market Premia

o Fair Trade organizations certify commodity products
o Produced in environmentally sustainable ways
o Ensure no labor exploitation
o Guarantee a price floor ($1.40 per pound)
o Charge consumers a premium for the certified product

Impact on Trade

o What does this say about WTO rules for trade?

o What is the free market critique of Fair Trade® movements and concepts?
o Who benefits from Fair Trade®?

Impact on Different Actors

o What is the impact of Fair Trade® on individual coffee producers?

o What is the impact of Fair Trade® on coffee companies?
o What is the impact of Fair Trade® on coffee consumers?

How does Fair Trade ® impact the 3 dilemmas?

o What is the difference between fair trade and Fair Trade®

Class 28th September: Institutional Differences and Distances

READING: “Distance Still Matters.” The hard reality of global expansion

» “Idea in brief/practice: start TV lose millions because it assumed, wrongly that Asian
views wanted English-language programming. How to avoid and set targets? Look at
the sales potential and analyze the probable impact of distance
» 4 dimensions of distance: cultural, administrative and economic, not only geographical.
The more two countries differ across these, the riskier the target foreign market => by
considering these factors and the potential impact you may identify promising global-
investment opportunities and avoid expensive mistakes. Cultural and administrative
have a larger effect.

- Cultural distance: a country cultural attributes determine how people interact

with one another and with companies, for example, trade between countries
with the same language will be times greater than between countries without
a common language. Other example is social norms. Affects consumer’s
product preferences, like color taste, since ca be associated with a particular
community. Ignoring this was on the Start TV biggest mistakes => language.
- Administrative or political distance: historical and political associations shared
y countries greatly affect trade between them. Colony-colonizer links boost
trade by 900%. Preferential trading arrangements, common currency and
political union can also increase trade by 300%. Example: EU. Other barrier is
trade, tariffs and quotas and others that restrict direct investment and
preferences for domestic competitors => protect the domestic industry is more
likely when it is a large employer, it is seen as a national champion, it is vital to
national security, it produces staples and an entitlement good service, it
exploits natural resources and involves sun-costs commitments. Finally,
companies are shy away from doing business in countries know for corruption
or social conflict. Star TV big mistake => ignoring administrative and political
sensitives.
- Geographic distance: the farther you are from a country, the harder it will be to
conduct business there. Other attributes like physical size of the country,
average within-country distances to borders, access to ocean and topography,
as well as transportation and communications infrastructures. Cross-borders
equity flows between two countries fall of significantly as the geographic
distance between them rises (capital). Companies that find geography a barrier
to trade are often expected to switch to direct investment in local plant and
equipment as an alternative way to access target markets.
- Economic distance: wealth or income of consumers is the most important
economic factor => creates more distance. Rich countries trade more with rich
countries, but poor countries trade more with rich countries as well. Countries
tend to rely on economies of experience, scale and standardization focus on
another who have the same economic profile. => explore competitive
advantage. I other countries this comes from economic arbitrage (explores
costs and prices between markets).
 » Companies like Start TV overestimate the attractiveness of foreign markets, when
pursuing global investments.
» CPA: county portfolio analysis – technique for deciding where a company should
compete. Focus on national GDP levels of consumer wealth, and people’s propensity
to consume. Emphasize on potential sales, but ignores the risk
» Risk and costs: results from barriers crate by distance, considering all the 4 dimensions.
» Smaller world: global communications, technology and others are shrinking the world
and make it homogenous, but distance still matters
» Measuring the impact of distance: gravity theory of trade flows, which says there is a
positive relationship between economic size and trade and negative relationship
between distance and trade
» A case study in distance: Tricon restaurant that wrestles global expansion. CPA analysis
suggests that the company’s top markets in terms of size of opportunity would be the
larger bubbles to the center and right of the chart.

The Business Implications of “Distance”

Analytical Frameworks for Sense-Making at individual level

o CAGE distance (4 dimensions of distance)

o Cultural frameworks
o Comparative institutional models
– “Institutional Voids” framework
– Varieties of capitalism: “liberal market capitalism”, “coordinated capitalism,”
“state capitalism”
o An integrative, ethnographically-informed model
Mental maps became less refined with distance

The way we view the world is constrained. “We are like a frog in a well”. Beyond the familiar
we get to abstract, the more we get away for the common the more we make those
assumptions.

» The mental constructs cut both ways

The way that we define distance terms differs.

It is not just a factor of cultural influence

The CAGE Distance Framework

1) Cultural distance
2) Administrative Distance
3) Geographic Distance
4) Economic Distance

Most of the ways that conduct business are non-systematic, so there was this proposition. by
considering these factors and the potential impact you may identify promising global-
investment opportunities and avoid expensive mistakes. Cultural and administrative have a
larger effect.

Cultural distance

o Language
o Ethnicity
o Religion
o Values (influence our behavior)
o Norms (socially expected standard of behavior, and differs from cultural to cultural)

Administrative Distance

o Legal Rules (actual laws places in a country)

o Political risk (ex.: are there risk of expropriation of your asset?)
o Political instability
o Government policies
o Colonial/ Historical Ties
o Corruption

Geographic Distance

o Physical remoteness (actual miles apart)

o Lack of a common border
o Landlocked versus coastal
o Comparative size of country
 o Degree of direct transportation or communication links
o Climate

Economic Distance

o Consumer incomes
o Production costs
o Living costs
o Human resource endowment
o Natural resource endowment

Administrative Distance Variables

Voice and Political Government Rule of Law Control of

Accountabilty Stability Effectiveness •The extent to Corruption
•Ability to citizens •Perception of the •Quality of public which agents have •The extent to
to participate in likehood that the and civil services confidence in and which public power
selecting their govvernment will abide by the rules is exercised for
government be destabilized or of society private gain
overthrown by
unconsitutional or
violent means

Rule of Law
When apply aspect of CAGE

Cultural distance

o Products have high linguistic content (TV programs)

o Products matter to cultural or national identity (foods)
o Product features vary in terms of size (cars)
o Products carry country-specific quality associations (wines)

Administrative distance

o Producers of staple goods (electricity)

o Producers of other "entitlements" based on government social contract
(pharmaceuticals)
o Large employers (manufacturing)
o National champions (aerospace)
o Exploiters of natural resources
o Large suppliers to government (mass transportation)
o Vital to national security (telecom)
o Subject to high sunk costs (infrastructure)

Geographic distance

o Products have a low value to weight ratio (cement/ carpet)

o Products are fragile or perishable (fruit)
o Local supervision and operational requirements are high (services)

Economic distance

o The nature of demand varies with income levels (cars)

o The economics of standardization or scale are limited (cement)
o Labor and other factor cost differences are salient (garments)
o Distribution or business systems are different (insurance)
o Companies need to be responsive and agile (home appliances)

The “Central Tendency” of Country Level Indexes and Scores

Central Tendency Scores may miss the unfamiliar

Countries may not be analyzable within the lens of home-country models, i.e. unfamiliar
differences may be missed by counting along familiar dimensions

o Before you begin to count, you need to know what you are counting

The challenge is that individuals make sense of the world by developing general categories
(schemas) and then interpreting new experience through these pre-existing categories

o We do not rethink of what a “cat” or “dog” is every time we see one

o But do the same categories work when you go abroad? What are the dangers of
measuring according to familiar categories when working abroad?
o What is a “bank”, “the state”, a “contract”, a “friend”, a “car” in a foreign context? How
do you know?

A “Central Tendency” Mindset May miss innovation and change

Taleb (2010) argues that “central tendency” analytical models contributed to analysts missing
the signs that predicted the recent financial crisis:

“There is too much focus upon what we do know, and too little consideration given to impacts
from what we do not know”

Others have noted that the financial crisis was predictable if you interpreted the right signs at
the edges of the markets: (See: The Big Short)
Studying tails and variation may be able to bring back real-time information into the
organization about emerging risks and opportunities (even if the information is qualitative)

A “Central Tendency” Mindset May miss internal variation

Does a “One China” strategy make sense? Can you run Chinese operations out of Shanghai or
Beijing?

o Some 400 million Chinese do not speak Mandarin natively

o Tastes in food, fashion and much else vary between provinces and mega-cities that
have populations as large as European countries. “家常豆腐” – what is “Homestyle
Tofu”?
o Does a “One India” or a “One Indonesia” policy also make sense?
o How might the concept of an “emerging market” obscure decision making?

The Map Paradox

o The hardening of commitments over time locks individuals and organization into a map,
which is fine as long as the environment continues to reward progress along the
established trajectory.
 o Problems arise however when shifts in the external context render the map outmoded
or obsolete
o Established maps often make it difficult for managers to discover, interpret and act on
new information
o Organizational and institutional structures often provide incentives for conformity to
existing maps rather than for creating new ones
– Most organizations punish failure and are hesitant to pay for exploratory
activity with uncertain payoffs

Hofstede’s Cultural Dimensions for work

Power Distance
The extent to which the less powerful members of organizations and institutions (like the
family) accept and expect that power is distributed unequally.

Individualism/Collectivism
The degree to which individuals are integrated into groups

Masculinity/ Femininity
The distribution of roles between the genders (assertive vs. caring)

Uncertainty Avoidance
A society's tolerance for uncertainty and ambiguity
Long/Short Term Orientation (2005)
A society’s tendency to plan and act with certain timelines in mind. If you have a short-term
orientation, you value tradition, the current social hierarchy and fulfilling your social
obligations. Long-term orientation is the tendency to prioritize the long-range implications and
impact of decisions and actions that come to fruition after an extended time period

Indulgence/Restraint (2010)
A society’s tendency to resist or give in to temptations or pleasure seeking. Does the culture
like to enjoy life now, or save it for the future? This will affect consumptions habits

Confucian Dynamism?

“To put the world in order, we must first put the nation in order; to put the nation in order, we
must first put the family in order; to put the family in order; we must first cultivate our
personal life; we must first set our hearts right.”

Confucian Order

o Relationships in society
- Husband to Wife
- Father to Son
- Elder Brother to Younger Brother
- Ruler to Subject
- Friend to Friend
o Respect for tradition
- “I am not one born in possession of knowledge. I am one fond of antiquity and
earnest in seeking it there”
o Emphasis on benevolence, morality, and honesty
Unit 4: Analyzing Differences and Distances

Class 30th September: Institutional Differences and Distances: China

READING: “Why Western Digital Firms Have Failed in China.”

Many digital firms that are really successful in other countries failed in China. Digital
companies are trying to expand the services in China, such as Google, Amazon, etc.
Reason: censorship by the Chinese government and cultural differences between China
and the West. But here are deeper reasons, since these factors did not stop western
multinationals from succeeding in China in car manufacturing, fast-moving consumer
goods and even sectors where culture plays a role.
Question: What companies can do different?
Death by a thousand cuts”: identifies the inside (digital companies survey) and outside
view (China survey) of the phenomenon. This inside view reflect that these failures
occur because of lack of strategic domination and patience when it comes to the
Chinese markets. Chinese people tell that firms failed to “keep their feet firmly on the
ground”
Factors converged to this: "(1) poor understanding of the business environment, (2)
ineffective strategy making and communication, and (3) underperformance in
operation and execution."

Institutional Differences and Distances: considering China

Conceptions of Distance

o Bank Loans are associated with debt and poverty in Brazil, the USA and South Korea
o Venture Capital is a game for the rich in Brazil and Hong Kong
o Law is seen as formalistic (courts and lawyers) in Indonesia • Law is seen as unbending
in Hong Kong
o Contracts are most often seen as “binding” in the USA
o VC is all about startups in Germany, less so in the USA
o Everyone agrees contracts are long and boring!

How would differences in these concepts complicate IB?

o How distance creates a barrier?

The perception of China – Boundless Opportunity

“Britain has the most advanced industry in the world, and China has the biggest market. If
every Chinese were to lengthen the lower hem of his shirt by one inch, all the British factories
would be kept in business for thirty years.”

- British MP on the necessity of war with Qing China

The reality of opportunity in China

62% of foreign firms overestimate demand for their products. Pepsi has never made
any money in China
54% said performance was worse than expected
50% of foreign expatriates fail to complete their assignments

1978-2000: China’s consumer market was extremely constrained

o 1978 GDP per capita: $229
o 1990 GDP per capita: $348
o 2000 GDP per capita: $959

1994-2004: Real average wages didn’t change

o 1994: 100 RMB/month ($12.50)
o 2004: 380 RMB/month ($47.50)

How do you make profit in a country with no money? If you can’t sell to them, make prices
cheap, and make bottles in Chinese materials, like plastic, glass.

Rampant Intellectual Property infringement and theft

Successful firms used China as an export platform

o Insulated from weak domestic market: China wanted exports => stabilize their own
economies. China needs gas, oil, capital goods to make these exports (to export as
much as possible you need to generate as much as possible)
o Less susceptible to capricious institutions
o Able to locate in “best” jurisdictions
o Extensive outsourcing limited exposure: helps to deal with the failure of one company,
since it does not affect others (diversification).

2000-2010: Massive consumer boom

o Extreme demand for luxury foreign goods

o What happened? Why did you shift for being export to market-oriented? You might
need to move your factories, deal with paper-work that can complicate your practice,
marketing for domestic market. What did Chinese people want?

Applying Institutional Distance

“The only difference between a success and failure in my experience is that people who are
successful are more willing to talk and learn about how things work on the ground.”

–Shawn Mahoney, EP China consulting group

How do you gain market knowledge?

o Hire local people and promote them

o Acquire local firm
o Partnership (venture)

Institutional in China

o Guanxi
o Firm classifications
o Intellectual Property
o De-Facto Federalism
o Rule By Law

Guanxi

Based on a common background and from that build a relationship: business fails to
understand this a lot

Literally: “relationship”: but far more nuanced

o To pull “relationships”
o To have “relationships”
o To need “relationships”

Guanxi vs corruption – Building guanxi

o Why foreigners fail at this

o Why this is a source of competitive advantage for overseas Chinese

- Based on a common background and from that build a relationship: business

fails to understand this a lot. To avoid that we can hire “local” and ex-officials’
Chinese people and hire their children (very effective but can be corruption)

Firm Classifications

Classifications have different tax, incentive, and permitting structures. Way of controlling
behavior.

o Foreign Invested Enterprises (外 资企业): can affect taxes, can tell if can sell
domestically
o Sino-Foreign Joint Venture (合资 企业)
o State-Owned Enterprise (国有企 业)
o Private Enterprise (私营企业)
 o “Minying” Enterprise (民营企业): run by private citizens. How does it differ from a
private enterprise? There is a good question with no answer. Private enterprise does
not work that well under communism, so this sounded better.
o Sole Proprietorship (个体户)
o Collective enterprise (集体企业): every employee is also an owner, employee-owned
and operator (Chinese most famous company). Ex.: Huawei
o Township and Village Enterprise (乡镇企业)

Intellectual Property

China’s IP system is (currently) based on laws adopted in the 2000s

o Patents, Copyrights, Trademarks

o Dedicated Intellectual Property Courts
o Guilty until proven innocent: hire lawyer, first register and then maintain records
o Approval for copyright
o Ease of trademark registry
o Limited damages
o Jurisdictional inconsistency

De-Facto Federalism

山高皇帝远

1980s/90s
o Tax and revenue sharing
o Local devolution
o Local corporatism
o Provincial protectionism

Post-2000
o Fragmented telecommunications
o Local registry requirements
o Hukou restrictions and variation
o Local government levies and interference

Rule “by” law

“Rule of law” (law is there and it is enforced) vs “Rule by men” (empire/dictator) vs “Rule by
Law” (somewhere between the two. It is law, but the way it applies differs. You never know
when the law will come for you. “you break the law but no one cares”. How do you balance it?
When the government comes for you, it is because you broke the law, not because is a rule my
men country)

o What does this mean for contracts?

 o What does this mean for government plans?
o What does this mean for long-term predictions?

Questions

Why does Oscar Ramos, director at Chinacelorator say “Ninety-nine percent of companies who
want to access China as a foreign company, shouldn’t?”

1) Lack of knowledge
2) Domestic preference for domestic firms: as a foreign you should do a joint venture

For business, why does it matter that Facebook and Google are blocked in China? Censor.

Why did Home Depot fail in China? What could it have done differently? A huge offer.

Why did Barbie fail in China? Is this a unique China story? They assume that had a brand
identity, it was too expensive and they misunderstood the market. A loss of identity.

Why did eBay fail in China? Did it really fail?

Why did Google fail in China? What could it have done differently?