International Business Environment Strategy 571

1. International Business EnvironmentStrategy 571 Dennis Quinn & James Vreeland

2. Larry Summers on the U.S. economy – 16 July 2009http://www.youtube.com/watch?v=RdLKipJM6Gohttp://www.youtube.com/watch?v=RdLKipJM6Go Questions: Given the current state: should investors pull out of the US? or continue to invest in the US? or, invest somewhere else?

3. Chinese Leader Firmly Defends Currency and Trade Policies • Premier Wen Jiabao sharply defended China’s currency and trade policies on Sunday against what he called foreign “finger-pointing,” charging instead that the developed world seeks to force unfair changes in those policies “just for the purposes of increasing their own exports.” • In a more than two hour news conference at the close of China’s annual legislative session, Mr. Wen repeated that China will keep its currency, the renminbi, “basically stable” despite calls by the United States and other developed nations to let its value increase. • He also repeated the concerns he voiced a year ago, at China’s last legislative session, that the United States is failing to rebuild its own economy and maintain the value of the dollar. Protecting the dollar, which dropped sharply since the global crisis began in late 2008, is a matter of “national credibility” for the United States, he said.

4. Today’s NYTimes • Will China Listen? China’s Currency Manipulation • Japan Eases Monetary Policy to Fight Deflation • E.U. Warns Euro Zone Heavyweights on Deficits • Ailing Euro Seen as a Signal of Deeper Woes on Continent • Schumer-Graham (s. 1254) currency manipulation • Jobs Bill Passes in Senate With 11 Votes From Republicans • Led by Energy, U.S. Wholesale Prices Fall

10. 2008 California Struggles to Close a Projected $41 Billion Deficit • California: $143 Billion budget; $41 Billion deficit!

11. Source: http://en.wikipedia.org/wiki/Impossible_trinity

12. Post-Bretton Woods (1973 (±) to present) Capital mobility (open flows to FDI, e.g.)  Exchange Rates Domestic Fixed/Floating Monetary & Fiscal Policy Management

13. Background notes – open economy macroeconomics • If a country chooses to forgo capital controls, that country can predictably only achieve EITHER a stable exchange rate or domestic monetary and fiscal autonomy BUT NOT BOTH. A) A country that wants to have open capital markets and monetary policy autonomy has to be willing to let its exchange rate float. B) A country that wants to have open capital markets and stable exchange rates has to be willing to let its interest rates and its fiscal deficit used to defend the exchange rate (as with the Gold Standard) C) A country that wants to have a stable exchange rate AND independent fiscal and monetary policies will have to impose some capital controls (see figure on capital controls) • For example, the U.S. has maintained open capital accounts with few controls since the 1940s, the U.S. has a strong independent bank that sets monetary policies, and a strong legislature that likes to spend more than it taxes. Hence, the U.S. sacrifices a stable exchange rate and allows the dollar to float • Smaller EU countries, Hong Kong, Singapore, and Panama (e.g.) want the benefits of open capital markets (low cost of capital, high FDI, being a financial center, e.g.) AND a stable exchange rate (pricing of imports and exports). These countries give up fiscal and monetary policy autonomy. Countries in the Gold Standard era did this. • Thailand (1990s), Indonesia (1990s), and Argentina (1990s to 2001) are famous failures of countries seeking to maintain fiscal and monetary policy autonomy, manage or fix an exchange rate, and maintain open capital accounts • Many emerging market countries maintain fiscal and monetary autonomy and practice either fixed or “dirty float” exchange rate policies. They impose capital controls to a greater or less extent. China, India, Argentina, Brazil, Malaysia, Ukraine, and Russia are contemporary examples of such countries.

14. International Economic Variables as a Percentage of US GDP - 1952-2006

25. Investment projects – 10-15 page text3000~ words -only 6 weekends to do the work • “Nollen” questions: what, why, where, how, when; choose a firm and look abroad for FDI • http://www.library.georgetown.edu/guides/foreigninvest/ • http://resources.library.georgetown.edu/libdata/page.phtml?page_id=52 • http://www.export.gov/mrktresearch/index.asp (you have to register as a student) • IMF’s Annual Report on Exchange Arrangements and Exchange Restrictions (capital rules – copy relevant country section)

27. Examples from EP-10s • Netflix-India • Cheesecake London • Harley Davidson-India • Best Buy-India • Sunpower-Brazil • Dell-Costa Rica • Zipcar-Hong Kong • Marriot-Sri Lanka • China National Petro-Iraq • Vail-Honduras • GE-Hungary • Dreamworks-India • Acciona Energia-Algeria

28. Policy Forecasting rationally ignorant votersin contestable markets Goals→ Strategies → Institutions →Public policy available and actors outcomes voters party elites

30. R  R D  D R  R R  R D  R R  D R  D D R

35. FIGURE 2The U.S. Senate: Four Standardized Indicators of Policy Liberalism, 1956-1990

36. FIGURE 3The House of Representatives: Four Standardized Indicators of Policy Liberalism, 1956-1990

37. FIGURE 4The Presidency: Three Indicators of Policy Liberalism, 1956-1990 1956 196O 1964 1968 1972 1976 198O 1984 1988

38. Public Opinion and Public Policy Liberalism, 1956-1990─public opinion …Senate ... Presidency─House 1956 196O 1964 1968 1972 1976 198O 1984 1988

40. Voting turn out – 1992-2008 sources: Federal Election Commission; www.infoplease.com

44. US public sentiment – Mood from Stimson; Consumer Sentiment from U. Mich/Fed Reserve St.L.

50. Volatility index