Course Overview

This course addresses the opportunities created by the emergence of a global economy and proposes strategies for managing the risks associated with globalization. The course focuses on the opportunities and threats created by the flow of goods, services, and international capital across countries. International trade and capital flows can significantly affect the countries’ development efforts and provide clear investment opportunities for businesses. This course examines the determinants of competitiveness and economic development and challenges students to understand the role of micro and macro policies.

During the 1990s and early 2000s, the world witnessed an explosion in trade and capital flows at the global level. This explosive growth, especially in emerging markets, has been fueled by changes in world politics (e.g., the end of the Cold War, the collapse of the Soviet Union, the shifting political climate in China, and political changes in Latin America and Asia) falling restrictions and advances in technology. The resulting ability to retain or outsource various subsets of production stages within firm and country boundaries fueled the fragmentation of production and the emergence of global value chains. A key driver of this phenomenon is the cross-border production, investment, and trade in final and intermediate goods led by Multinational Corporations (MNCs). Foreign direct investment (FDI) became the dominant source of foreign private capital for many emerging markets, promising additional productivity gains for recipient countries.

Gains from globalization and technology, more generally, can have different allocations and distributive effects. Indeed, rising inequality, the weak labor market performance for workers at the lower end of the skill spectrum, the Global Financial Crisis of 2008-2009, the COVID pandemic, wars, terrorist’ attacks, and security concerns have come together to foster growing concern against globalization in certain segments of the population in various countries. After decades of increasing global economic integration, the world faces the risk of fragmentation. The reevaluation of global value chains intertwines deeply with a broader backlash against globalization in numerous developed nations. Recent policies, including tariffs, trade restrictions, and domestic subsidies, have been justified as a way to reduce risks by reshoring and “friendshoring” supply chains. The cases in the module study how changes in the economic, social, and political environments can challenge previously institutional structures creating new opportunities and risks. More generally, gains from globalization and technology can have different allocations and distributive effects. The cases in the module study how changes in the economic, social, and political environments can challenge previously institutional structures, creating new opportunities and risks.

The course emphasizes both the economic consequences of policies and the political and institutional context in which they are established and implemented. The material thus bridges a gap between firm- and household-level behavior, which is typically well understood by a managerial audience, and aggregate phenomena, which are often less understood by this audience.

Career Focus: The course is intended for students who expect to have careers influenced by international trends.

Educational Objectives

The course has been designed to give students an appreciation of the critical role of institutions and policies in affecting patterns of international trade, services, and capital flows and the government's abilities to manage them effectively. The course is tied together by two broad themes: (1) the determinants and effects of globalization and (2) policy-makers management of the effects of globalization. The cases approach these themes by exposing students to key recent events that have shaped how economists think about these subjects. The events covered have a clear global perspective as the cases are set worldwide.

The course also covers events from the last three decades, as they affect today’s business environment and reveal the cyclical nature of international capital flows.

The course pushes students to critically examine whether the main challenges for the future of globalization are institutional and political in nature or technology by studying the process of globalization in recent decades. The strategies of firms, the vitality of clusters, and the quality of the business environment in which competition occurs are important to determine a nation’s or region’s productivity. The course encourages students to consider fundamental characteristics of international trade and financial system: effects of trade, capital flows, why cycles in international capital flows recur, and how sovereign debt and domestic debt differ from each other in their contracts, explicit and implicit, and their enforcement.

The course also teaches students key insights from the field of international economics. First, economists have conventionally viewed trade policy preferences as being driven by whether openness to trade aligns with one’s economic self-interest, by concerns about the impact of trade on broader society, or by one’s socio-political identity. Second, trade in goods differs from trade in financial assets: a financial transaction inherently involves a commitment to pay at a later date. Financial transactions are, therefore, fundamentally affected by problems of asymmetric information and the risk that the contract will not be enforced, and both problems are exacerbated at the international level. Third, International financial flows are affected by two additional macroeconomic risks that are absent within countries: sovereign risk and the use of different currencies. International capital flows imply additional policy challenges for countries as policy-makers face a difficult trade-off among three objectives: monetary policy autonomy, and stable fixed makers face a difficult trade-off among three objectives: monetary policy autonomy, a stable fixed exchange rate, and free capital mobility. Research has demonstrated that local conditions- political objectives, financial markets, firms, and institutions for effective- decisively influence the operation of these basic macroeconomic logics in actual practice. As a whole, the course emphasizes the importance of domestic institutions for effective macroeconomic policy-making, capacious regulations, credible policy commitment, and attracting and using foreign direct investment efficiently.

In modern international competition, the roles of key stakeholders, including companies, governments, NGOs, and multilateral agencies, have shifted and expanded, and the traditional separation between them works against successful economic development. Additionally, the ability to mount and sustain a competitive strategy for a nation or region is a daunting challenge. The cases pay particular attention to the role of globalization, trade, and capital flows in shaping economic outcomes. The course will explore not only theory and policy but also the practical implications for all stakeholders.

Course Content and Organization

Global Trade, Capital, and National Institutions focuses on the costs and benefits of international capital and the policies utilized to make it work. The course is composed of three intellectual segments.

• The module Determinants and Effects of Globalization studies both potentially positive and negative effects in host economies of opening up. In particular, the cases analyze the effects of trade and capital flows in the development efforts of countries, with an emphasis on global value chains and FDI (which has become the main source of private flows to emerging markets) and the policies to attract and maximize FDI’s benefits. In addition, the cases in this first segment explore the effects of international capital flows in the context of financial crises.
• The second segment of the course, Policies and Strategies for Harnessing the Benefits of Financial Globalization, focuses on strategies to harness the benefits of financial globalization and minimize potential risks. The cases cover policies regarding the management of trade using trade agreements and capital inflows using capital controls, the choice of exchange rate regimes, and policies associated with the management of sovereign defaults. The module ends with a discussion of the effects of transfers of capital and debt relief between rich and poor countries.
• The last segment of the course, Global Challenges Ahead, studies the cases of the largest economies in the world. Because of their economic importance and political power, the policy options available to these countries and their effects are in many ways different from the standard “small open economy” cases analyzed in the course.

Administration

Grading: based on class participation (50%) and a final (50%).

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