Globalization - Week 9

INTBUS 201
Key learning outcomes:

1)What is globalisation?

- What does it have to do with policy choices - including the Washington Consensus?
2) Why did (much of) the world open up to trade and FDI from the 1980s?

3) Differentiate the variety of motivations for FDI

- Know how this affects what is a good location for FDI

4) Globalisation is good or bad? For whom?

-Know the main lines of debate about effects of globalisation

5) Who is calling the shots?

- Know the main lines of debate about MNE vs state power

Globalisation

Is talking about the world becoming more internationalised, borders becoming less of a
barrier and trade and investment flows becoming bigger and more important.

- Another aspect of globalisation that people are talking about is not just trade
becoming more important but trade becoming more complex and interdependent.

- Its the idea that whole production of stuff that we consume is getting spread out over
lots of different locations and Multinational firms are a major reason for that spreading
out of production. The fragmentation of production in these global production
networks. Bits of the product being produced in different countries.

The general idea here is that political borders are becoming less of a barrier and less
important for flows of commerce, people and ideas.

The policy choices of the past opened the door for this thing to come about!

Major shifts from the 1970s

- Wanted world trade invest rules to exclude some outside investors and foreign traders

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- Developing countries, the great majority of nation-states demanded: Great autonomy
(self control), control over their resources, exceptional treatment with respect to market
access.

Why the change?

- Bigger changes in the developed world in the 80s I.e from keysianmism to
monetarism

- Developing Country debt crisis of the 1980s. The crisis gave the developed world
leverage to push for liberalisation.

Debt Crisis and structural adjustment lending

This was a huge factor behind the developing world opening up to FDI. The developing
countries over extend themselves on debt. When the money dried and they realised they
couldnt pay there was a huge stand still which caused major problems because the
could no longer pay for imports and therefore had to look towards the IMF.

- Developing countries over extend itself on debt

- nearly 1000 individual loan were made to organisations like the IMF to help out
developing countries in debt.

- Welfare spending was cut and people struggled! The IMF structural adjustment
lending had devastating effects on the poor.

The neo-liberal revolution

Major policy changes in developed world in 1980s.

It was a huge period of change in the world

- Took place in the english speaking countries more predominately

- Privatisation become a policy in many other countries. Started off in the UK. The
selling off of state owned enterprises and making them more efficient, more
competitive like commercial firms.

- Deregulation - Lot of financial deregulation and trade deregulation

- Changes in tax policy
- Perceived failure of Keynsianism, rise of monetarism

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- The government shouldnt be spending but restricting and controlling inflation
- Free the government from all these government controls and rules
- maintaining the price stability

The Washington Consensus

- In the developing world there was a rise of new ideas about what was an appropriate
development strategy.

- It was called the Washington because that is where the IMF, World bank and US
treasury all are

- Developing country analog of the Neo Liberal revolution so it also favoured more of a
role for market forces and less of a role for governments.

- (1)Why would you prioritise microeconomic stability: low inflation, reduce fiscal deficits
- (2) Open economy to the rest of the world - through trade and capital account
liberalisation, allow you currency to set by the market (also known as devaluing your
currency)

- (3) Liberalise domestic product (things you buy and sell) and factor (labour market,
land market) markets through privatisation and deregulation. These should be set to
fewer regulations.

If countries follow these steps it will lead to a rise of globalisation!

Openness to trade

- Trade was liberalised in terms of policy. and as a result became much more important

Restrictions on FDI

Intra-firm trade

- Trade becoming much more complicated but also much more integrated

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- The most restrictive country is China, which also happens to be the biggest host
country for FDI. Despite the fact there are a lot of regulations that companies must
meet in order to invest in China.

- The threat to place big tariffs on imports from China you would think oh all the
Chinese producers would be hit hard but actually a lot of those Chinese producers
are actually American producers, they are American companies that have gone to
China to take their product manufacturing off-shore and then bring back in to the US.
So, it makes this trade retaliation a lot more complex and complicated than it actually
seems.

Most FDI still goes to developed countries.

Motives for FDI - location choices

These are three motives for doing FDI:

1) Efficiency seeking = If you are efficiency seeking (you are looking to gain
efficiency) you are looking to lower your costs and or basically increase your
productivity. Therefore you are looking for locations where for a given amount of
input you can have a higher amount of output, whether that is through lower costs or
higher productivity you can be more efficient in that location

2) Resource seeking = Think of resources in terms of natural resources, Resource

seeking basically refers to natural resources like coal, oil, land etc. If you are looking
for those sorts of resources either because they are not available in your home
country or you have run out then you need to go off-shore to find these resources.

3) Market seeking = This is all about sales, wanting to increase your sales in to a
particular market and if for some reason you cant do this through exports it may
mean to have a local presence in form of an FDI.

- Reasons for not just exporting, Consumers may be weary of foreign products and
want locally produced products!

- Tariffs to trade - usually would make exporting very difficult (Government policies)
Quotas can affects how much sales you can make.

- Lowering wages would be an example of Efficiency seeking

Motivations and location Decisions ( What kind of a location matches each of the
3 main motivations for FDI?)

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- Firms vary from one another, and therefore they have different motives for investing
- What led to globalisation? - What were some of the policy choices that led to this sort
of openness?

- FDI is a major part of globalisation

- What were the motives of conducting FDI (what were the different reasons for going
overseas for example)

- Whos in charge? There are many polarised opinions about whether corporations rule
the world

- Globalisation - the world becoming more internalised, trade and investment flows
becoming bigger and more important

- Another aspect of Globalisation is not just trade becoming more important but more
complex and interdependent

- Its the idea that whole production of stuff is going straight out to different locations. In
this global production networks.

- Its one of the important elements people talk about when they refer to globalisation
- technology is also an important part of globalisation in terms of connectivity.
- The general idea political borders are becoming less important and less of a barrier.
- Policy choices of governments of the past were coming about