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Bonus Assignment (3%)
Gravity model analysis of trade integration in ASEAN+3 during 2001-2012

Association of Southeast Asian Nations

1967: Indonesia, Malaysia, the Philippines, Singapore, and Thailand

1984: Brunei Darussalam

1995: Vietnam
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1997: Laos and Myanmar (Burma)
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1999: Cambodia
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Post 1997 Asian financial crisis: ASEAN + 3 (Japan, China, and South Korea)
Bonus Assignment (3%)
Gravity model analysis of trade integration in ASEAN+3 during 2001-2012

Given that this is a relatively large project, I recommend each team to have 8-10 students.
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Measure of trade integration = log(trade) – log(GDP1) – log(GDP of partners) + log(weighted distance)
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Data sources:
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[1] Country-pair trade data: ITC at http://www.intracen.org/ (pick a country, then go to its profile of “trade and investment
data”, under which there is a database on “trade in good statistics” / “trade in services statistics”)
[2] GDP data: World Bank at http://data.worldbank.org/indicator/NY.GDP.MKTP.CD
[3] Weighted geographic distance data: CEPII at http://www.cepii.fr/anglaisgraph/bdd/distances.htm; for simplicity,
weighted geographic distance between country 1 and a group of countries (country 2, country 3, …, country k) is calculated
as the arithmetic average of distance between country 1 and each of the other countries.
Calculate two integration measures for each country (one with other ASEAN members, one with
+3), and provide a short analysis of the ongoing patterns.

A. is this index generally increasing overtime?
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B. is this index generally higher for trade within ASEAN than trade with +3?
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C. which country is the most integrated in the region (ASEAN+3)?
Course structure
Classes 1-4
International business environment
Regional vs. global
Triad and IB activities
Politics, culture, trade and finance
Classes 5-9
Firm-specific advantages and firm management
Organization
Production
Marketing
International HRM
Political risk management
International financial management
Class 10
Country-specific advantages
Classes 11-14
Locational choice and regional management
European Union, North America, Japan, and Emerging Markets
Japan (日本国)
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An archipelago of 6,852 islands in East Asia
The characters 日本 that make up Japan’s name
mean “sun-origin” – “Land of the Rising Sun”
Japan and the US

Close interactions (both competition and cooperation) since
1853

In 1853, a US fleet pressured Japan to open to the West, which ended the country’s long period of
isolation since early 17th century

American “Black Ships” as a symbol of threatening Western technology and colonialism in Japan.
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In WWI, a Victory Allied Power, along with Russia, France, and the British Empire (inc. Canada,
Australia, New Zealand, and South Africa) and the US
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In WWII, lost to the Victory Allies including the US, the Soviet Union, China, UK, and France
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Surprise military strick – The Attack on Pearl Harbor – in 1941
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US’s atomic bombings of Hiroshima and Nagasaki in 1945
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Post-WWII occupation by the Allies, led by the US, until 1952, when Japan became once
again independent and an ally of the US
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Since then, despite occasional military/political tensions on various issues, Japan has been
the most important strategic ally of the US in the Asia Pacific
Japan’s opinion of the US

Source: PEWGlobal.org
Political, social and cultural characteristics
Political and legal system

The branches of the Japanese government are
very similar to those in the United States:
legislative, executive and judicial.
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Except that it is a constitutional monarchy where the power of
the Emperor (currently Akihito) is very limited.
Legislative power is vested in the National Diet,
which consists of a popularly elected House of
Representatives and House of Councilors.
Executive power rests with the Cabinet that is
organized and headed by the prime minister
(currently Shinzo Abe), who is elected by the
Diet.
The judicial power is vested in the Supreme
Court. In addition, there are eight high courts
and a host of district courts throughout the
country.
Ministry of International Trade and Industry (MITI)
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MITI served as the coordinating body of the country’s
powerful commercial machinery between the 1950s and
early 2000s.
MITI encouraged Japanese companies to pursue targeted
opportunities.
 Computer technology, high-tech industrial and agricultural
machinery, optical electronics and world-class auto
manufacturing.
When MITI identified an area where it would like to expand
business efforts, it was able to gain support for three reasons.
 Financial incentives: these are made available to
companies that were prepared to commit resources.
 Personal relationship: most MITI ministers attended the
major universities, and so they have school ties to the
captains of industry.
 Location: MITI offices and those of most corporate and
financial giants were located in the same area of Tokyo.
Ministry of Economy, Trade and Industry (METI)
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In 2001, MITI was replaced by METI (the
Ministry for Economy, Trade and Industry).
The practice of ‘amakudari’ (meaning
“revolving doors”) involved the regular
movement of senior politicians and civil
servants from the public sector into private
sector companies, often as highly paid
consultants.
The early 1990s saw the start of a series
of restructurings in Japanese politics to
decrease government influence of the
economy.
Arguably, Government in Japan continues
to play a more important role in the
economy than in other OECD countries.
Social and cultural characteristics
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Collectivism rather than individualism,
dominates many aspects of Japanese life.
Within companies certain characteristics have
strong religious roots, including honor, respect,
sincerity, loyalty (chu), duty, obligation or
responsibility (giri), ritual and hierarchy.
Parent–child relationships characterise the
hierarchical nature of inter-organizational and
interpersonal links, such as government–industry,
large firm–small firm, manager–employee, etc.
Respect for elders, ritualistic (highly-complex)
language forms and behaviour, group activities
and consensus decision making are all
important elements.
Hai ≠ Yes

Hai can mean one of at least four levels of yes:
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recognition, but not necessarily understanding;
understanding, but not necessarily acceptance and
agreement;
responsibility, understanding, but must consult with
others and secure their agreement before acceptance;
and
agreement, which means understanding, agreement
and acceptance.
The non-verbal signals from the speaker have to be
understood to determine, which yes is being meant.
Rapid growth in the early years

Japan’s rapid growth in the early years stemmed from
factors such as:
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the traditional relationship between government and
business;
its unique capital markets (national finance and investment
systems);
its traditionally strong ‘keiretsu’ groupings of firms;
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Keiretsu: a business group consisting of a host of companies and
banks linked through ownership and/or joint ventures.
the role of the corporation in society, and the role of the
employee in the firm.
Japan’s economy
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Meiji Restoration during 1986 – 1912 was a turning point in
Japan’s economy
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The country expanded with the embrace of the market economy through
various political and economic reforms
Many of today’s enterprises were founded at the time
The country emerged as the most developed nation in Asia
Japanese post-war economic miracle: averaged 7.5% in the
1960s and 70s, and 3.2% in the 80s and early 90s
Markedly slowed in the 1990s and, since then, remains a
sluggish economy
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E.g., 1% decrease in real GDP in 2008, and 5.2% decrease in 2009; exports
shrunk from US$746.5 billion to US$545.3 billion from 2008 to 2009
Trade: Exports
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Fourth largest exporter (US$796 billion) in 2012 following
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China (US$ 2.1 trillion)
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The US (US$1.5 trillion)
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Germany (US$ 1.4 trillion)
Trade: Imports
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Fourth largest importer (US$886 billion) in 2012 following
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The US (US$ 2.3 trillion)
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China (US$1.7 trillion)
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Germany (US$ 1.2 trillion)
Trade: Net exports
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Fifth largest net importer (US$32 billion) in 2012 following
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The US, UK, India, and France
Trade: Exports by product
Outward FDI flows in 2012 (unit: millions)
Top 10 Developed Economies
Top 10 Emerging Economics
United States
328,869 1 China
84,220
Japan
122,551 * China, Hong Kong SAR
83,985
United Kingdom
71,415 2 Russian Federation
51,058
Germany
66,926 3 British Virgin Islands
42,394
Canada
53,939 4 Korea, Republic of
32,978
Switzerland
44,313
5 Mexico
25,597
France
37,197
6 Singapore
23,080
7 Chile
21,090
8 Malaysia
17,115
* China, Taiwan Province of
13,031
9 Thailand
11,911
Sweden
33,428
Italy
30,397
Norway
20,847
10 Cayman Islands
Source: UNCTAD WIR2013.
9,938
Debt-to-GDP ratio
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Most indebted government
240%
Source: IMF 2012
Abenomics
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The economic policies advocated by Shinzō Abe, the current PM of Japan since 26 Dec 2012.
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Monetary policy:
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Aggressive quantitative easing from the Bank of Japan
 2% inflation rate target
 Setting negative interest rates
Fiscal policy:
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A surge in public infrastructure spending (2% of GDP)
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Balancing the national budget by increase the consumption tax rate to 8% in 2014
and 10% in 2015
Export policy:
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The devaluation of the Yen
Abenomics (cont’d)
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Hiroko Tabuchi (2013) “Slowdown in Japanese Raises the
Pressure on Abe”, New York Times, November 14, 2013.
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Both exports and consumer spending displayed signs of weakening after
strong overall growth in H1 of 2013
GDP growth slowed to 1.9% in Q3 (or 0.5% between Q3 and Q2),
down from 3.8% in Q2
Drop in consumption to only 0.1% growth in Q3, down from 0.6% in Q2
Net exports dropped – soaring demand in energy imports (after
Fukushima disaster and close-down; surge in Apple smartphones; etc.)
240% public debt-to-GDP ratio
Innovation
Figure 17.3
Spending on R&D: Japan compared
Innovation (cont’d)
Figure 17.4
International patenting output: Japan compared
Sources: US Patent and Trademark Office, 2002; M. E. Porter and C. H. M. Ketels, UK Competitiveness: Moving to the Next Stage, DTI Economics Paper No. 3, Department of Trade and
Industry, UK Government and the Economic and Social Research Council (ESCR), 2003, at http://www.dti.gov.uk
Trade: Exports by product
Trade: Imports by product
Losing world competitive edge in electronics
Innovation (cont’d)
Keiretsu
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The renowned Japanese corporate groupings or
keiretsu, characterised by cross-shareholdings and
regular meetings between executives, represent more
or less closely tied groups of integrated businesses.
There are broadly two types of keiretsu, the
horizontal (kinyu) type and the vertical,
manufacturing keiretsu.
In the early 1980’s the top six keiretsu alone directly
accounted for about 5% of the Japanese labour
force and 16% of total Japanese corporate sales.
Characteristics of Japanese management

We can distil some of the main characteristics of the
generic Japanese management style as:
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Effective communications internally and with outside
firms, and the use of cross-disciplinary, cross-business
and cross-functional workshops.
Less separation of R&D, design, manufacturing and
marketing functions.
Life-time employment, low labour mobility and
substantial investments in training. There is also a
strong emphasis on training on-the-job and jobrotation within the firm.
Characteristics of Japanese management (Continued)
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Managers as problem definers, not firefighters and as
educators and mentors, not disciplinarians. This is
underpinned by the weak links between performance
and pay and the low wage differentials between
workers and managers in the age-related hierarchy.
Strong group/team ethic, loyalty and motivation
combined with competitiveness between teams.
Characteristics of Japanese management (Continued)
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Strict formal hierarchy combined with strong underlying
informal networks and a tendency towards consensusbased decision making (‘horizontal promotion’ for highfliers and a lack of outsiders entering the firm at senior
levels).
General “long-termism” with a focus on growth and
employment stability and market share rather than
profits and shareholder dividends.
China, P.R. (中华人民共和国)
The Chinese name of China, 中国, means the Middle Kingdom
China
Brief background
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The world’s most populous country (1.35 billion)
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Second largest country by land area after Russia
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Second largest economy by GDP (both nominal and PPP) after the U.S.
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Largest trading nation with US$3.9 trillion in 2012
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By far the largest foreign exchange reserves, owning about $1.6 trillion of US securities
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One of the five recognized nuclear weapons state
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The world’s largest standing army and the second largest defense budget after the U.S.
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22 provinces
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Five ethnic autonomous regions
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Four direct-controlled (provincial-level) municipalities (Beijing, Tianjin, Shanghai and Chongqing)
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Two mostly self-governing special administrative regions (SARs): Hong Kong SAR and Macau SAR
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Taiwan, controlled by the Republic of China, is claimed by Beijing as the 23 rd province.
Unprecedented scale, scope and speed of growth

China is the second largest economy in GDP (both
nominal and PPP) and the largest trader.
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It has over three trillion dollars in foreign reserves (a little
below half of the world total).
It accounts for over 12% of the world’s luxury goods and
manufactures, 70% of the world’s toys, 60% of the world's
bicycles, 50% of the world’s motorcycles, 40% of the
world’s mobile phones, and 35% of the world’s coal.
A particular boost came in 2001 when China joined the
World Trade Organization (WTO) and began to attract
record levels of FDI.

But, the country is still classed as ‘‘lower-middle income.’’
Brief background (cont’d)
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In 2012, for the first time, China
became the third largest outward
investor after the U.S. and Japan
In 2012, Industrial and Commercial
Bank of China (ICBC), a Chinese
state-owned commercial bank,
unseated JPMorgan Chase, GE, and
Exxon Mobile to become the world’s
largest company

Three more Chinese state-owned firms were
among the top10: China Construction Bank
(2nd), Agricultural Bank of China (8th), and
PetroChina (9th)
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In addition, 136 members from mainland
China (excluding HK, Macau, and Taiwan)
were among the top 2000 list – the third
largest source country after the US (543)
and Japan (251).
The role of government

Government reforms and the maintenance of the critical balance between
liberalization and continued government control are major factors
responsible for the economic success experienced by China.
 ‘Three-step development strategy’: Regional development initiatives,
controlling growth in the East of the country and subsidizing growth
inland.
 ‘Key national projects’: Infrastructure development on a massive scale
and the targeting of strategic industries, assets and technological
capabilities.
 These kinds of government-directed initiatives have become
increasingly international, as part of the ‘Going out’ strategy.
The role of government (Continued)

Another major policy objective in China is to boost
high technology industry sectors.
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Information technology, biotechnology, aerospace,
new materials, high-tech services, new energies and
marine science and technology.
The Government is also facilitating both local
technology-based start-up firms and encouraging
high-tech FDI by upgrading the R&D infrastructure to
develop innovative, patentable technologies.
Current topics on China’s economy
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Trade profile and Shanghai free trade zone
Outward FDI profile and its unique driver – Beijing’s
“going out” policy (走出去政策) since 2001
President Xi Jinping’s massive 2013 reform plan
Left: Pres. Xi Jinping and Chinese first lady Liyuan Peng greets Pres. Obama in June 2013 in Beijing.
Right: then-Vice Pres. Xi Jinping visits LA in Feb 2012.
China’s trade profile
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The world’s largest trading nation
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Largest exporter (US$2 trillion or 11% of world total in 2012), followed
by the U.S. (US$1.5 trillion) and Germany (US$1.4 trillion)
Second largest importer (US$1.7 trillion in 2012), following the U.S.
(US$2.3 trillion)
Largest net exporter (US$296 billion in 2012, compared to a total of US$212 billion in the world), followed by Germany (US$243 billion)
and Saudi Arabia (US$234 billion)
China’s trade profile (cont’d)
China’s trade profile (cont’d)
China’s trade profile (cont’d)
China’s trade profile (cont’d)
China-US Trade
Rank
Product label
China's Trade Balance with the United States of
America (US$ thousand)
2010
All products
2011
2012
181,046,138
201,886,978
223,178,119
1
Automatic data processing machines;optical reader, etc
41,658,092
47,738,605
49,328,934
2
Electric app for line telephony, incl curr line system
12,989,250
17,126,101
25,599,690
3
Television receivers (incl video monitors & video projectors)
10,884,428
9,547,538
9,471,357
4
Other furniture and parts thereof
5,833,051
6,198,745
7,173,640
5
Seat (o/t dentists' & barbers' chairs, etc), &part thereof
5,113,111
5,535,669
6,335,503
China launches its first FTZ
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Not involved in the Transatlantic
Partnership (EU and US) and the
Trans-Pacific Partnership (US,
Canada, Mexico, Australia, New
Zealand, Japan, Singapore, etc.),
the largest two trade agreements
under negotiation, China risks of
being the secondary entrance to the
World.
In response, China launches its firstever Free Trade Zone, officially
named China (Shanghai) Pilot Free
Trade Zone, on Sept 29, 2013,
covering 29 km2 (>11 miles2).
China launches its first FTZ (cont’d)

In the zone
Freeing the service sectors from the regulations, particularly
finance (e.g., oil futures; market-determined interest rates;
full convertibility of RMB) and high-tech firms
 No tarrift/tax for imports of immediate products/equipment
and for exports
 Offshore banking settlement
 No restrictions on foreign investment excepted 100 items
listed in a Negative List[1]


[1] http://en.shftz.gov.cn/Negative%20List.pdf
China launches its first FTZ (cont’d)

American-invested firms are
among the first 36 firms in the
FTZ
 E-Home
Entertainment
Development, 49% owned by
Microsoft
 Citibank
China’s grand “Going out” strategy

Dr. Karl P. Sauvant (Columbia University; formerly UNCTAD) gave a keynote speech of our new study
Sauvant and Chen (2013) China’s regulatory framework on outward FDI, forthcoming in China Economic
Journal, at 2012 Harvard Annual Conference on China Goes Global (and later at Australian National Univ).
China’s grand “Going out” strategy (cont’d)

A summary of Karl P. Sauvant and Victor Zitian
Chen (2013) China’s regulatory framework on
outward FDI. China Economic Journal,
forthcoming, previously presented at
Keynote at 2012 Harvard Annual Conference on China Goes
Global
 2012 and 2013 Panels on China’s outward direct investment
at Australian National University
 2013 Academy of International Business Meeting at Istanbul,
Turkey

China’s grand “Going out” strategy (cont’d)
China’s grand “Going out” strategy (cont’d)
China’s grand “Going out” strategy (cont’d)
China’s grand “Going out” strategy (cont’d)

To be continued …