Introduction to International Business

1
Introduction to International Business

• July 23, 2007
• Discussion Section
• Foreign Direct Investment Political Economy of
  FDI
• Foreign Exchange International Monetary System

2
Agenda

• Chapters 3,4,5,6 in a nutshell
• Review Chapters 7,8
• Discussion 1 Western automobile firms in Russia
  (time permitting)
• Review Chapter 10, 11
• Discussion 2 Chinese Currency Change
• QA regarding the Midterm

3
Chapters 3,4,5,6 in a nutshell

• Chapter 3
• What is culture? What are the determinants of
  culture? How does culture affect business?
• Chapter 4
• What are ethical dilemmas? How do ethical
  dilemmas arise? What are some of the standards
  used to evaluate ethics? Which ones are straw
  men arguments?
• Chapter 5
• What are the theories that explain the observed
  pattern of international trade?
• Chapter 6
• What are some of the instruments that governments
  use to restrict trade? What are some political
  and economic justifications for trade
  intervention? Are these justifications
  justified? How has the world trading system
  developed?

4
Chapter 7 Foreign Direct Investment

• What is FDI?
• FDI in the world economy
• Trends Direction of FDI Source of FDI Shift to
  Services
• Form of FDI
• Greenfield vs. Acquisitions and Mergers
• Types of FDI
• Horizontal FDI
• Why undertake horizontal FDI?
• Transportation costs market imperfections
  (internalization theory impediments to
  exporting, impediments to sale of know how)
  strategic behavior
• Vertical FDI
• Why undertake vertical FDI?
• Strategic behavior market imperfections
  (impediments to the sale of know how investment
  in specialized assets)

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Chapter 7 Critical Thinking Questions

• In 2003, inward FDI accounted for some 78 of
  gross fixed capital formation in Ireland, but
  only 0.6 in Japan. What do you think explains
  this differences in FDI flows into the two
  countries?

6
Chapter 7 Critical Thinking Questions

• Read the Management Focus on recent investments
  by Western automobile firms in Russia. Which
  theory best explains these investments? Why?

7
Chapter 8 Political Economy of FDI

• Political Ideology and FDI
• Radical View
• Free Market View
• Pragmatic Nationalism
• What are the benefits of FDI to host countries?
• Resource-transfer effects (capital, technology,
  know-how) Employment effects Balance-of-payment
  effects Effect on competition and economic
  growth
• What are the costs of FDI to host countries?
• Adverse effect on competition adverse effects on
  the balance of payments national sovereignty and
  autonomy
• What are the costs and benefits to home
  countries?
• Benefits inward cash flow employment effects
  skills learned from abroad
• Costs balance of payments employment effects
  (outsourcing)
• What are some government regarding FDI?
• Home country encourage some outward FDI
  restrict some outward FDI
• Host country encourage some inward FDI
  restrict other inward FDI

8
Chapter 8 Critical Thinking Questions

• Read the Country Focus on FDI in Ireland. How
  important has FDI been to the health of the Irish
  economy?

9
Chapter 8 Critical Thinking Questions

• Inward FDI is bad for (i) a developing economy
  and (ii) a developed economy and should be
  subjected to strict controls. Discuss.

10
Chapter 8 Critical Discussion Questions

• Firms should not be investing abroad when there
  is a need for investment to create jobs at home.
  Discuss.

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Chapter 8 Critical Thinking Questions

• Do you think the successful conclusion of a
  multilateral agreement to liberalize regulations
  governing FDI will benefit the world economy?
  Why?

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Chapter 10 The Foreign Exchange Market

• What is the FOREX market for?
• Currency conversion insuring against foreign
  exchange risk (using spot exchange, forward
  exchange, or currency swaps)
• Arbitrage in FOREX markets
• Theories about how FOREX rates are determined
• Price and exchange rates law of one price
  purchasing power parity money supply and price
  inflation
• Interest rates and exchange rates Fisher Effect
  International Fisher Effect
• Investor psychology and bandwagon effects

13
Example of a currency swap

• For example, consider the US-based company ("Acme
  Tool Die") that has raised money by issuing a
  Swiss Franc-denominated Eurobond with fixed
  semi-annual coupon payments of 6 on 100 million
  Swiss Francs. Upfront, the company receives 100
  million Swiss Francs from the proceeds of the
  Eurobond issue (ignoring any transaction fees,
  etc.). They are using the Swiss Francs to fund
  their US operations.
• Why issue bonds in Swiss Francs? The only
  rationale for doing this is because there are
  investors with Swiss Franc funds who are looking
  to diversify their portfolios with US credits
  such as Acme's. They are willing to buy Acme's
  Eurobonds at a lower yield than Acme can issue
  bonds in the US. A Eurobond is any bond issued
  outside of the country in whose currency the bond
  is denominated.
• Because this issue is funding US-based
  operations, we know two things straightaway. Acme
  is going to have to convert the 100 million Swiss
  Francs into US dollars. And Acme would prefer to
  pay its liability for the coupon payments in US
  dollars every six months.
• Acme can convert this Swiss Franc-denominated
  debt into a US dollar-like debt by entering into
  a currency swap with the First London Bank.
• Acme agrees to exchange the 100 million Swiss
  Francs at inception into US dollars, receive the
  Swiss Franc coupon payments on the same dates as
  the coupon payments are due to Acme's Eurobond
  investors, pay US dollar coupon payments tied to
  a pre-set index and re-exchange the US dollar
  notional into Swiss Francs at maturity.
• Acme's US operations generate US dollar cash
  flows that pay the US-dollar index payments.
• First London Bank make Swiss-Franc denominated
  payments.
• In essence, Acme and First London Bank have
  swapped currencies

14
Chapter 10 Critical Thinking Questions

• The interest rate on South Korean government
  securities with one-year maturity is 4 and the
  expected inflation rate is 2. The interest rate
  on U.S. government securities with one-year
  maturity is 7, and the expected rate of
  inflation is 5. The current spot exchange rate
  for Korean won is 1 W1,200. Forecast the spot
  exchange rate one year from today. Explain the
  logic of your answer

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Chapter 10 Critical Thinking Questions

• Two countries, Great Britain and the United
  States, produce just one good beef. Suppose the
  price of beef in the United States is 2.80 per
  pound and in Britain it is 3.70 per pound.
• According to PPP theory, what should the
  dollar/pound spot exchange rate be?
• Suppose the price of beef is expected to rise to
  3.10 in the United States and to 4.65 in
  Britain. What should the one-year forward
  dollar/pound exchange rate be?
• Given your answers to parts a and b, and given
  that the current interest rate in the United
  States is 10, what would you expect the current
  interest rate to be in Britain?

16
Chapter 10 Critical Thinking Questions

• You manufacture wine goblets. In mid-June you
  receive an order for 10,000 goblets from Japan.
  Payment of 400,000 is due in December. You
  expect the yen to rise from the present rate of
  1 130 to 1 100 by December. You can
  borrow yen at 6 a year. What should you do?

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Discussion Questions Chinese Currency Change

• 1. China, which has been under strong political
  pressure for some time to revalue its currency,
  has finally agreed to do just that, only in a
  very small way. Is this move by China a win for
  the U.S. or a win for China? What are the
  political implications of this action?

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Discussion Questions Chinese Currency Change

• 2. Until now, Chinas currency valuation has
  represented a significant subsidy to Chinese
  exporters, a situation that is seen in a negative
  light by American exporters. However, as a
  beneficiary of cheap goods made in China, how do
  you feel about the U.S. efforts to force China
  to raise its currency?

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Discussion Questions Chinese Currency Change

• 3. After more than a decade, the value of the
  yuan has risen relative to the dollar. While the
  revaluation amounts to just a two percent
  difference at the moment, there is speculation
  that the Chinese will continue to allow the yuan
  to rise. What effect will this initial movement
  have on Chinese workers and consumers? What are
  the effects if the yuan continues is ascent?
  

20
Discussion Questions Chinese Currency Change

• 4. Chinas revaluation of the yuan was echoed in
  other parts of Asia. For example, in India, the
  rupee appreciated, as did the Japanese yen.
  Consider the implications of further currency
  revaluations for the Asian region.

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Chapter 11 The International Monetary System

• Different exchange rate regimes
• Fixed
• Floating pegged dirty float
• Fixed versus Floating Exchange Rates
• Why choose floating exchange rates?
• Monetary policy autonomy
• Trade balance adjustments
• Why choose fixed exchange rates?
• Monetary discipline
• Speculation
• Uncertainty
• Trade Balance Adjustment
• Who is right?

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Chapter 11 Critical Thinking Questions

• Debate the relative merits of fixed and floating
  exchange rate regimes. From the perspective of
  an international business, what are the most
  important criteria in a choice between the
  systems? Which system is the more desirable for
  an international business?

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Chapter 11 Critical Thinking Questions

• Imagine that Canada, the United States, and
  Mexico decide to adopt a fixed exchange rate
  system. What would be the likely consequences of
  such a system for (a) international businesses
  and (b) the flow of trade and investment among
  the three countries?