It is customary to distinguish two types of foreign investment (ownership of assets that are held in a country other than that of the owner):

• foreign direct investment (FDI), which gives the foreign owner a controlling interest in the asset (typically, the asset is an operating enterprise) and
• foreign portfolio investment, in which the foreign owner has a stake but not controlling interest in the asset (which could be a bond, shares of stock, etc.).

GLOBALIZATION?
One theme in this course questions the nature and extent of globalization, for which students offered several definitions in class:

• global sourcing of goods and services (by businesses and consumers, and sometimes even by governments);
• one world (in terms of the economy and of dominant culture).
  

I'll offer the definition:

• the extent to which supra- or international institutions (e.g., firms, agreements, and organizations) and markets are key drivers of economic (and many non-economic) relationships.

Two concepts that I will invoke in discussing globalization are:

fordism:  the macroeconomic interdependence between mass production and mass consumption, via the mechanism of domestically oriented manufacturing with high wages, in a moderately closed economy, supported by (1) oligopolistic corporations and (2) labor unions as well as (3) government that uses corporate and other taxes to underwrite human and physical investment and to support demand in key sectors

commodification:  tendency for increasing numbers of relationships to become explicit exchange relationships.

Over the past 30 years international trade has grown much faster than the global economy overall (see, for example, the linked graph).  The Economist notes that international trade was also a very large proportion of the global economy during the heyday at the end of the 19th century, when global empires existed to provide raw materials for manufacturing in the imperial centers.  World War I and later, the Great Depression, vastly reduced the volume of international trade and its proportion in the world economy.  [See this section and Table 1 of the World Trade Organization 2008 annual report, tracing eras of rapid growth of international trade.]
 

MORE ON FORDISM

Rather than emphasizing only the mass-production implications of fordism, I will focus our attention on the broadest definition of fordism (see above), which is a mutually reinforcing macroeconomic system of mass production and mass consumption.  I say “mutually reinforcing” because the high labor productivity of mechanized mass production allows the payment of relatively high wages, which in turn allow the mass consumption that provides sufficient demand to sustain mass production.

Among the institutional arrangements that supported this system in the "postwar era" (1950-73) of US, Canada, Germany, France, and the UK (and some other countries):

• large, oligopolistic corporations that could engage in large-scale mass production, and could pass on cost increases to their markets;
• strong labor unions that primarily focused on wages;
• widespread consumer credit that increased consumers' purchasing power and tied them to their jobs;
• an "international division of labor" (i.e., trade patterns) in which wealthy industrialized countries imported raw materials from poorer, non-industrialized countries and exported manufactured goods -- so that in the wealthy countries, the relatively high-wage manufacturing workers and managers were the mass consumers.

 The very name "post-fordism" implies that this is less of a coherent concept and system, and more the mix of things that have followed the heyday of fordism.  For corporations, this includes less mass production of standardized products and more flexible, small-batch production of a wide variety of products.  It also includes vertical AND GEOGRAPHIC disintegration, so that much manufacturing is conducted by different firms and IN DIFFERENT COUNTRIES at different stages in the value chain (design, component production, assembly, distribution...).  We consumers in wealthy countries are no longer the producers of many of the physical products we consume.  More of us are involved in the production of services, which have a notoriously bi-modal wage structure -- lots of very low-paid workers, and lots of moderately well-paid workers.

Also see:
* A several-year-old description of Nike's production system, viewed through the lens of post-fordism.

MACROECONOMIC  PERSPECTIVES  ON  INTERNATIONAL  TRADE

C = personal consumption expenditures, as a percent of GDP
I = private domestic investment, as a percent of GDP
G = expenditures and investment by Federal, state, and local governments, as a percent of GDP
X = exports as a percent of GDP
M = imports as a percent of GDP

 With this macroeconomic context, let's look at U.S. trade  flows, their trends, and their components.  We'll define these terms in class:

What's key to note is that the balance on current account equals exports minus imports, and that it equals the net change in US assets abroad and foreign assets in the US.  In other words, a trade deficit equals a net capital inflow, and a trade surplus equals a net capital outflow.  This relationship is probably the most important single arithmetic relationship, and one of the most important conceptual relationships, in this course.

Related to this, understand the ostensible self-correcting nature of trade deficits or surpluses, as we will discuss in class.

Study the BEA time-series graphs of the net annual international transactions of the US:

1. Describe the recent trends in the US current account balance.
2. How have the balances (money flowing in minus money flowing out) on service trade, goods trade, income on assets, and unilateral transfers contributed to the US current account balance?
3. Which was larger in 2012:  net additions to US direct investment abroad, or net additions to foreign direct investment in the US?  In what years was this relationship reversed?
4. In what year did foreign entities buy the greatest amount of US securities (stocks, bonds, government debt)?
5. How would you describe the trend in the net foreign investment position of the US?  What are the implications of this?

MICROECONOMIC  PERSPECTIVES  ON  INTERNATIONAL  BUSINESS
Why do companies engage in international business (importing, exporting, foreign licensing, foreign direct investment)?

REVENUE  ENHANCEMENT

• to gain greater benefit from scale economies (declining marginal costs) by spreading costs of technology, management, or information over greater sales

• to achieve lower factor costs (for land, labor, technology, or capital) through importing or foreign operations.

• to smooth the flow of revenues by spreading across national markets (in the hopes that the market cycles will vary)
• to reduce chance of supply disruption due to shortages or labor disruptions
• to increase the power of the company over specific labor, finance, product, or input markets, or national regulatory regimes

How can international business be regulated?

BILATERAL  AND  MULTILATERAL  TREATIES

• which bind the signatory countries to open trade and foreign investment in particular items, and to regulate (or not regulate) domestic economic activities

• for the treatment of labor, intellectual property, environmental impacts

• ISO (International Organization for Standardization) assesses establishments' production processes for quality assurance (ISO 9000), environmental protection (ISO 14000), etc.
• international assessment of production conditions, providing information to concerned purchasers