New World New Policy: What Art Tells Us About the Global Economy

dafen-oil-painting-villageProfessor Michael R. Czinkota

The modern world of art offers fascinating insights into the forces currently shaping world trade and the global economic system. For decades, China has experienced breakneck economic growth and has become a world leader in both the consumption and production of art, which illustrates some intriguing changes in the global economy.

The global market for high-end, rare art pieces is a good example. In recent years, as China grew more prosperous, there has been a sharp uptick in luxury art purchases by Chinese customers. In 2016, according to insider information, Oprah Winfrey sold a 54”x54” painting to a Chinese collector for $150 million. This example indicates how China has grown in its appreciation of originals. This shift perhaps presages an eventual reduction in counterfeit products for which China is still infamous. Chinese auction houses have also risen to prominence. Of the world’s top ten art auction houses, six are Chinese, and many of the largest art houses are state-owned enterprises.

In the art world, China has not only become a dramatic consumer of art, but also a prodigious producer. The southern Chinese city of Dafen, nearby to megacity Shenzhen which borders Hong Kong, has become the center of knock off art masterpieces. Beginning in the 1980’s reform era, Dafen became a hub for starving artists from around the country to work and train, pumping out high-quality knock-offs of famous European and American painters ranging from van Gogh’s Sunflowers to portraits of Western icon John Wayne. Artists produce these works on the cheap and can offer custom alterations, such as changes to the color or size to fit the purchaser’s own décor. Since the works are not signed, they do not count as fakes.

The producers of export knock-off masterpieces will face pressure to adapt, focusing more on creativity and original works. When Chinese artists copy the great masters, they hone their skills and imagination, which over time will allow them to eventually emerge as new artists in their own rights

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International Logistics, Part 4 : Management of International Logistics

The purpose of multinational firm is to benefit from system synergism. Therefore the coordination of international logistics at corporate headquarters is important. Without coordination, subsidiaries tend to optimize their individual efficiency but jeopardize the overall performance of the firm.

Centralized logistics Management

If headquarters exerts control, it must also take the primary responsibility for its decision. To avoid internal problems, both headquarters staff and local logistics management should report to one person. This person can then become the final arbiter to decide the firm’s priorities. Of course, this individual should also be in charge of determining appropriate rewards for manager, both at headquarters and abroad, so that corporate decisions that alter a manager’s performance level will not affect the manager’s appraisal and evaluation. Further, this individual can contribute an objective view when inevitable conflicts arise in international logistics coordination.

Decentralized Logistics Management

If a firm serves many international markets that are diverse in nature, total centralization would leave the firm unresponsive to local adaption need. If each subsidiary is made a profit center in itself, each one carries the full responsibility for its performance, which can lead to greater local management satisfaction and to better adaption to local market conditions. Yet often such decentralization deprives the logistics function of the benefits of coordination.

Contract Logistics

A growing preference among international firms is to outsource, often referred to as contract or third-party logistics (3PL) Most companies have outsourced at least one major logistics function such as customs clearance, transportation management, freight payment, warehouse management, shipment tracking, or other transportation-related functions. The main thrust behind the idea is that individual firms are experts in their industry and should therefore concentrate only on their operations. 3PL providers are experts at logistics, with the knowledge and means to perform efficient and innovative services for those companies in need. The goal is improved service at equal or lower cost.

Logistics providers’ service at equal or lower cost. Logistics providers’ services vary in scope. Some may use their own assets in physical transportation, while others subcontract out portions of the job. Certain other providers are not involved as much with the actual transportation as they are with developing systems and database or consulting on administrative management services. In many instances, the partnership consists of working closely with established transport providers such as the FedEx or UPS.

One of the greatest benefits of contracting out the logistics function in a foreign market is the ability to take advantage of an existing network complete with resources and experience. One of the main arguments leveled against contract logistics does not and should not require the handing over of control. Rather, it offers concentration on one’s specialization – a division of labor.

 

Syllabus for International Business Course – STRT-261-01

For those who are interested, I am teaching a course on International Business at the McDonough School of Business this Spring. The final syllabus for the course is as follows –

 

Updated_ Syllabus IB SPRING 2016

 

View on migrants entering Hungary

Hungary has been the spotlight of the news recently with reports of the maltreatment of migrants entering and passing through the country. While I do not agree with the drastic measures taken, Hungary’s short-term solution is mainly about concern for its own economic stability.

I spoke with CCTV’s Asieh Namdar regarding my thoughts on the issue. You can view the video here: http://youtu.be/A6X4m-aWP-8

Pros and Cons of Foreign Direct Investment

There have been many debates regarding the positive and negative effects of foreign direct investment with the host government caught in a love-hate relationship. On the one hand, the host country has to appreciate the various contributions , especially economic, that foreign direct investment can make. On the other, allowing investments from abroad gives rise to fears of dominance, interference, and dependence.

Pros

  • Improved capital flows
  • Technology transfer
  • Regional development
  • Increased competition that benefits the economy
  • Favorable balance of payments
  • Increased employment opportunities

Capital inflows that result from foreign direct investment benefit all countries by making more resources available, but it particularly benefits those nations with limited domestic sources and restricted opportunities to raise funds in the world’s capital markets. Jobs are often the most obvious reason to cheer about foreign direct investment. For example, U.S. subsidiaries of global companies employ 5.3 million Americans, about 4.7 percent of private sector employment, and support an annual payroll of $408 billion.

The combined effects of all the benefits accruing from foreign direct investment can lead to overall improvements in the standard of living in the host country, as well as increasing its access to and competitiveness in world markets.

Cons 

  • Low levels of research and development
  • Risk of increase capital outflows
  • Stifling of domestic competition and entrepreneurship
  • Erosion of host culture
  • Disruption of domestic business practices
  • Risk of interference by foreign governments

From an economic perspective, capital inflows resulting from foreign direct investment are often accompanied by higher, longer term outflows that do not benefit the host government. For example, when multinational chains built hotels in the Caribbean, the shortage of local suppliers meant that much-needed foreign currency was spent on imported supplies. In other cases, multinationals prefer to use existing suppliers in their own countries rather than develop local supplier networks. Another frequent complaint is that investors fail to follow though on their promises.

Multinational companies are, by definition, change agents. That is, the products and services they generate and market bring about change in the lifestyles of consumers in the host country. For example, the introduction of fast-food restaurants to Taiwan dramatically altered eating patterns, especially of teenagers, who make these outlets extremely popular and profitable. Concern has been expressed about the impact on family life and the higher relative cost of eating in such establishments.

This is an excerpt from the book by: Michael R Czinkota, Ilkka A Ronkainen, and Michael H. Moffett. Fundamentals of International Business (New York: Wessex, 2015), 60.