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Introduction. 3460.01 N otes: A.P. Palasvirta, Ph.D. Comparative advantage. David Ricardo Factors of production Labor Fixed assets Buildings Land resources Capital Ability to attract financing Technology Intellectual capital. Production migrates. - PowerPoint PPT Presentation
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3460.01 Notes: A.P. Palasvirta, Ph.D.
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Page 1: Introduction

3460.01

Notes: A.P. Palasvirta, Ph.D.

Page 2: Introduction

David Ricardo Factors of production

LaborFixed assets

Buildings Land resources

Capital Ability to attract financing

Technology Intellectual capital

April 21, 20233460.01 globalization notes: a.p. palasvirta, ph.d. 2

Page 3: Introduction

Seeks lowest relative cost factorsAlberta increases taxes on gas and oil

Production migrates to Saskatchewan (lower cost)

Appendix 1ACountry A

Food cost of textiles = 1.67 in inputs Textile cost of food = 0.6 in inputs Country A specializes in textiles

Country B Food cost of textiles = 3.75 in inputs Textile cost of food = 0.2667 in inputs Country B specializes in food

April 21, 20233460.01 globalization notes: a.p. palasvirta, ph.d. 3

Page 4: Introduction

Globalization International financial system

Exchange markets Banking and money markets Bond and equity markets Derivative markets

Foreign exchange exposure transaction Economic Translation

Financial management of the multinational firm Foreign direct investment Capital structure & capital budgeting Imports, exports

April 21, 20233460.01 globalization notes: a.p. palasvirta, ph.d. 4

Page 5: Introduction

Exchange rates (linear regression)Trend

Slope of trend line of time-series regression Positive- currency depreciating

Volatility Standard error of estimate of time-series

regression Low value - low risk

Affect on real exchange rates Violation of purchasing power parity condition Something real is changing

April 21, 20233460.01 globalization notes: a.p. palasvirta, ph.d. 5

e tt

Page 6: Introduction

Exists as a function of potential change in rules (laws pertaining to business)Expropriation (Venezuela, Hugo Chavez)

Quick compensation at fair market valueWar (Iraq, Afghanistan)Protectionism

Increasing the barriers to trade Tariffs (U.S. import tariffs on Canadian lumber) Quotas (European restrictions on genetically

modify food) Subsidies (export subsidies to produce wheat,

corn) Regulatory (including labor & environmental

standards in treaties)

April 21, 20233460.01 globalization notes: a.p. palasvirta, ph.d. 6

Page 7: Introduction

Those in power make the rules redistribution of wealth and income

Monetary policy Fiscal policy Regulatory policy

Corruption Soft corruption - political contributions Hard corruption - bribes

April 21, 20233460.01 globalization notes: a.p. palasvirta, ph.d. 7

Page 8: Introduction

Inside governanceStockholders

Concerned about value maximizationBoard of directors

Subset of stockholdersHire managersStrategic decision making

Managers Tactical decisions making (strategic)

April 21, 20233460.01 globalization notes: a.p. palasvirta, ph.d. 8

Page 9: Introduction

Many buyers, many sellersNo market power, thick markets

Low or no transactions costs (taxes)Transactions costs and taxes distort

Perfect informationEliminates agency

April 21, 20233460.01 globalization notes: a.p. palasvirta, ph.d. 9

Page 10: Introduction

U.S., Canadian, British Market failures

Enron, etc.Failure of corporate governance structure

Sarbanes Oxley CEO, CFO sign off on financial statements Audit, compensation committees external Corporate officers cannot take loans from firm Test their own financial controls against fraud

April 21, 20233460.01 globalization notes: a.p. palasvirta, ph.d. 10

Page 11: Introduction

Protect shareholder rightsMajority and minority

Protect stakeholder rightsCustomers deserve good products and

reasonable pricesFirms should be good citizens

Disclosure and transparency

April 21, 20233460.01 globalization notes: a.p. palasvirta, ph.d. 11

Page 12: Introduction

other arrangements internationallyGovernment (privatized utilities) Institutions

Banks, hedge funds, insurance companiesFamily enterprises

Family conglomerates (France, South America) Consortiums

Keiretsus (Japan) chaebols (South Korea)

April 21, 20233460.01 globalization notes: a.p. palasvirta, ph.d. 12

Page 13: Introduction

China, Russia, Arab Emirates Increasingly have huge resources to spend

due to trade and/or oil (sovereign wealth funds)

UAE $875,000,000,000Norway $360 billionSingapore (GIC) $330 billionSaudi Arabia $300 billionKuwait $250 billionChina $200 billionSingapore (Temasek) $59.2 billionLibya $50 billionQuatar $50 billionAlgeria $42.6 billion

April 21, 20233460.01 globalization notes: a.p. palasvirta, ph.d. 13

Page 14: Introduction

Governments do not necessarily worry about the bottom line (maximizing profits/value)

Governments have political agenda??How much of what Russia and China do is

politically motivated Chinese exchange rate policy Russian interrupting gas supplies to Europe

Central bank holdingsU.S. Dollar denominate t-bills

China approximately $1 trillion

April 21, 20233460.01 globalization notes: a.p. palasvirta, ph.d. 14

Page 15: Introduction

Family owned conglomeratesSouth America, Asia, FranceFamilies own a diversified portfolio of real

assets Bank ownership of equity stakes

Germany, Korea Government ownership of equity stakes

Canada, China, Russia

April 21, 20233460.01 globalization notes: a.p. palasvirta, ph.d. 15

Page 16: Introduction

Concentration of powerMarkets for equities and debt are thin

Few buyers, few sellers Stock price manipulation

Lack of transparency Highly asymmetric information

Government often complicit with firmsGoods and service markets manipulated

April 21, 20233460.01 globalization notes: a.p. palasvirta, ph.d. 16

Page 17: Introduction

Equity markets ( concern Value)Analysis and trading (information)

Stock price moves on informationUp means excess demand at current priceDown means excess supply at current price

Debt markets (concern risk)Analysis and trading (information)

Debt prices move on Inflationary pressures, exchange rate

movements, central bank mutteringsRisk

April 21, 20233460.01 globalization notes: a.p. palasvirta, ph.d. 17

Page 18: Introduction

Hired gunsAccountantsLawyers

Regulators Stakeholders - Agency problems

Customers/managementManagement/laborStock holders/managementGovernment/management

April 21, 20233460.01 globalization notes: a.p. palasvirta, ph.d. 18

Page 19: Introduction

Cultural differencesCorporate governanceLegal environmentRegulatory environment

Different currenciesExchange rate riskHedging behavior

Forwards, futures, options, swaps

April 21, 20233460.01 globalization notes: a.p. palasvirta, ph.d. 19

Page 20: Introduction

Simple ratioCanadian dollar (cd) price usd

usd price of cd

http://fx.sauder.ubc.ca/etc/CADpages.pdf

April 21, 20233460.01 globalization notes: a.p. palasvirta, ph.d. 20

ecd

usdcd usd,

.

1 1371

1

eusd

cdusd cd,

.

0 8794

1

Page 21: Introduction

Complex concept Equilibrium price at which supply equals

demand

Demand for USD (by Canadians) Canadians buying American

Importing goodsBuying U.S. securities

Supply of USD (by Canadians) Canadians selling to Americans

Exporting goods Attracting U.S. based investors

April 21, 20233460.01 globalization notes: a.p. palasvirta, ph.d. 21

Page 22: Introduction

DeregulationElimination of fixed brokerage fees

U.S. 1975 England 1986

Benefits Lower transactions costs Cross border listings International financial market integration More innovation

Disadvantages More innovation

More opacity (lack of information)

04/21/233460.01 globalization notes: a.p. palasvirta, ph.d. 22

Page 23: Introduction

DisintegrationMortgage backed securities

Tranches of mortgages bundled for sale in secondaryh markets

Housing bubbleViral effects

BankingLack of proper capital adequacy relative to riskLack of oversight of new financial instruments

Other sectorsLack of liquidity led to failures

04/21/233460.01 globalization notes: a.p. palasvirta, ph.d. 23

Page 24: Introduction

ReregulationCapital adequacyErection of walls to reduce conflicts of

interest Commercial banking

Deposits insured by government Investment banking

Reporting requirements Insurance Mutual funds

Increasing oversight (Madoff)

04/21/233460.01 globalization notes: a.p. palasvirta, ph.d. 24

Page 25: Introduction

1999Austria,Belgium, Finland,France, Germany,

Greece, Ireland, Italy, Luxembourg, Netherlands, Portugal, Spains

BenefitsReduce exposureFinancial market convergence

Lower costs of borrowing More depth, more liquidity

Disadvantages12 different fiscal policies

04/21/233460.01 globalization notes: a.p. palasvirta, ph.d. 25

Page 26: Introduction

ImplosionPIIGS (Portugal, Italy, Ireland, Greece,

Spain) Running large deficits (more than 10% of GDP) Increasing large government debtt (around

100% of GDP)No exchange rate depreciation to bail them

out to make their products cheaper Retrenchment

Germany & France bailing out the PIIGSNew regulations and enforcement

04/21/233460.01 globalization notes: a.p. palasvirta, ph.d. 26

Page 27: Introduction

Trade treatiesThe European UnionNorth American Free Trade Association

(NAFTA)World Trade Organization (WTO)

Doho round trying to liberalize agricultural trade and intellectual property

RetrenchmentProtectionism

Labor regulations Environmental regulations

04/21/233460.01 globalization notes: a.p. palasvirta, ph.d. 27

Page 28: Introduction

Business firms operating in multiple countries Inputs (raw materials, intermediate goods

(engines)Financing alternativesLabor & capital (outsourcing)Product markets

AdvantagesEconomics of scale & scopePurchasing power with suppliersResearch & development

04/21/233460.01 globalization notes: a.p. palasvirta, ph.d. 28

Page 29: Introduction

DisadvantagesLoss of control

Different culturesCountry & corporate

DistanceHarder to supervise

Cost control Quality control

Transportation costsDifferent regulatory, political environmentsExpropriation

04/21/233460.01 globalization notes: a.p. palasvirta, ph.d. 29


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