Factor Flows: Increased Productivity Increased Return
Productivity depends on:•Factor scarcity•COOPERATING factors (including more of same)•Agglomeration economies
Interactions … Exchange of information
•Institutional quality•Rule of law•Protection of property rights•Country risks
Operating Abroad• Export from home base• License / franchise foreign providers• Foreign Direct Investment (FDI)– Multinational enterprises (MNEs)– Joint ventures
• What’s the nationality?– EXXON — Burger King– Toyota — Baskin—Robbins – Ikea– Aldi
MNE Motives
• EXPAND• Market penetration• Preempt competition• Cost advantages• Skirt restrictions/trade barriers• Hedge– Against currency fluctuations– Against market shifts
Japanese Transplants in U.S. Auto IndustryReasons for Japanese direct investment in U.S.:o creates jobs and goodwillo political insuranceo avoids potential trade barrierso access to expanding U.S. marketo hedge against yen-dollar fluctuations
Country Risk Analysiso political risk: government stability, corruption,
domestic conflict, religious & ethnic tensionso financial risk:
debt to GDP ratio, loan defaults exchange rate stability
o economics risk: growth of GDP, per capita GDP, inflation rate
Flavors of MNEs
• Vertical integration– Backward: secure inputs to core business– Forward: secure market position of final good
• Horizontal integration– Create and service overlapping demand for core
products
• Conglomeration– Add international dimension to business portfolio
The Joint Venture Alternative
• Combine skills• Share costs• Share risks• Gain local acceptance/leverage– Joint venture with foreign government
• Forestall protection• Forestall competition
Encounter Coordination Problems
International Joint Ventures
Reasons for joint ventures:o some costs too large for any one company o government restrictions on foreign ownership of
local businesseso means of avoiding protectionism against imports
FDI and Its DiscontentsHost discontents• MNEs purchase existing businesses No new jobs• Foreign bosses• Loss of sovereignty– Gimmicks like transfer pricing tax avoidance
Source discontents• [Short-term] job loss• Technology transfer– Lose competitive edge– Create own gravediggers
• Loss of sovereignty– MNE end runs
Labor Immigration
Push or Pull?
Wage ConvergenceWinners – Losers
Long-run impactsThe division of labor is limited by the extent of the
market
Profits Investment Jobs
Labor Mobility - Migrationo U.S. immigration - initially more Western Europeans
– recently more Mexican and Asiano Immigration Act of 1924 – limited overall flow &
established specific quota from each country based on previous emigration patterns
o quota formula modified in 1965
Effects of Migrationo labor migration equalizes wageso increase in output and welfare in the U.S.o decrease in output and welfare in Mexicoo net gain in world output due to higher VMP in U.S.
Top Related