Multinational Firms: International Trade and Investment

Winter 2000, Econ 2942612, Economics of International Investment

Part II: Professor Gander (eco595rd.200)

List of readings:

1. Going out of business sale, by Michael Lewis. He is author of Liars Poker, about the way investment houses behaved in the bond market. He writes now about the value-system foundation of Asia financial crisis, focusing on Thailand and Korea.

2. The end of the Asian myth: why were the experts fooled? by Baer, Miles and Moran. Examines the reasons (too much deductive theorizing and not enough facts) behind the over-optimism of a large part of the economics profession (academics and professionals) concerning the expected continued growth of the Asian economies. Challenges the key hypothesis: The Asian economies' growth is driven by the free market (for exports) and openness in business dealings. Ignored the principal roles the governments played in these economies.

3. Japan's real crisis, by Brian Bremmer of Business Week. Looks at the financial and economic crisis in Japan. Consumers are not spending, they are worried about their retirement fund. The banks have over $600 billion in bad loans. The public debt as result of spending on infra structure is $4.5 trillion (like the US's), could even be near $11 trillion when you add unfunded public-pension liabilities. Debt exceeds equity by 4 to 1 for corporations. Real estate behind the debts is overvalued at $17.5 trillion. Private homes have lost 70% of their value, yet the mortgaged value must be paid. What needs to be done? Fix the banks, change accounting rules to get true value of assets and profits, rewrite tax code on corporations, audit the government for off-book liabilities, and stop the market rigging, using postal savings and pensions to prop up the stock market and property markets.

4. Policy approaches, key issues, and fora, by UN, WIR 1996. Discusses policies to expand world investment via foreign direct investment. Addresses international arrangements and liberalization programs among countries and how these can be improved to increase world investment. Policies should promote the objectives of government and encourage the objectives sought by firms, namely, increased efficiency and competitiveness for the sake of profit. The globalization of business, the increased volume of FDI, the extent to which FDI and trade are intertwined, and the emergence of an integrated international production system all suggest the need for a global policy framework (designed by the UN).

5. John Dunning, International Production and MNE, 1981, Chapter 3, Trade, Location of Economic Activity and the MNE, Some empirical tests of his eclectic model (LOI). Test (Table 3.2) two hypotheses:

H1: Competitive advantage of a country's firms in foreign markets is determined by O advantages relative to that of other nations' firms and L advantages relative to other countries.

H2: The form of the foreign involvement will depend on the relative attractiveness and/or production of endowments of the home and host countries. Has various regression models with the dependent variable the ratio of US affiliate sales plus US exports to total industry sales in the foreign country. In other words, what is the role of US MNE in the various outputs of various countries? H2 has the ratio of exports to affiliate sales by a US MNE for a given industry in a given country.

6. Dunning's eclectic model (LOI) in details, Table 3.1 in his above book has types of international production. Table 3.3 identifies the main O and L advantages in details relating to the firm, market, product, transfer costs, and other criteria.

7. Chapter IV, WIR 1997 (UN), Foreign direct investment, market structure and competition. Discusses I/O paradigm and contestable market theory and how these relate to the effect of FDI on the competitive structure of industries.

8. The determinants of foreign direct investment, a survey of empirical models and results by the UN, 1992. Covers outward FDI and inward FDI and various determinants such as R&D, advertisement, skill of workers, scale economies, concentration, capital requirements, and other factors. The foreign intensity, given by the ratio of foreign production to total production for a given firm is regressed on the above factors.

9. Examining Asia's Tigers, Nine economies challenging common structural problems, July 1997, edited by Kayoko Kitamura and Tsuneo Tanaka, Institute of Developing Economies, Tokyo. Economic current history, trends in the economy, performance, liberalization policies, industry development and FDI, export driven growth, and vulnerability of the economy to China are among the factors discussed for each country.

10. Thailand gets the bill, The Economist, August 9, 1997. Right after the currency crisis of June 1997 and the IMF requirements for aid.

11. Global roulette, Harper's, June 1998. What ever one is thinking about, will the Asian crisis affect the US economy. Three experts give their opinion, a business-school dean, Gartern argues we will be affected by the Asian crisis but just how and when is not clear; Fishman a former currency trader sees less of a problem and argues with a positive spin that volatility creates opportunity; and Greider, the editor of Rolling Stones, questions the whole capitalistic underpinning of the world economies and argues we are in the midst of a new industrial revolution and our standard economic models are no good. He thinks the sky is falling! Also, the crisis is not Asian but global. The market lead us to the crisis, but the market cannot pull us out of it, the government has to come to the rescue. Will American workers and taxpayers accept this?

12. Shepherd, Basic Concepts, the S-C-P paradigm and contestable market theory.

13. Martin, Chp 13, Industrial Economics and International Trade, export trade between two firms vs FDI, Cournot oligopoly model.

14. Knickerbocker, Oligopolistic Reaction and Multinational Enterprise, 1973, ch1 on product-life cycle and oligopoly structure, chp2 on ECI measurement, and chp3 on oligopoly reactions.

15. Martin, Chp 8, Firm Structure, Coase to Williamson developments of transaction costs theory. Other discussion is optional.

16. Foreign Portfolio Equity Investment (FPEI), Chp III, WIR 1997 covers the distinction between FDI and FPEI, a matter of management control, the linkage between the two, and the need for a well developed securities market.

17. "The World as a Single Machine," The Economists, June 20, 1998. The multinational firms determine what is best done where. Physical products are moving out of the US, but services and those connected with the physical products (like design) are taking their place in the US.