SEU Trade Agreements and Transborder Flows of Labor Essay
Description
In a critical essay, analyze the role of FDI in the economic development of Saudi Arabia. What are the determinants of FDI? What are the motives and types of FDI? What policies should the government implement to promote the role of FDI in stimulating the economy? What implications does the Saudi Vision 2030 have on FDI?
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INTERNATIONAL
ECONOMICS
SEVENTEENTH EDITION
ROBERT J. CARBAUGH
© 2019 Cengage. All rights reserved.
1
Chapter 9
International
Factor
Movements
and
Multinational
Enterprises
© 2019 Cengage. All rights reserved.
2
Chapter Outline (1 of 2)
The Multinational Enterprise
Motives for Foreign Direct Investment
Supplying Products to Foreign Buyers: Whether
to Produce Domestically or Abroad
Country Risk Analysis
© 2019 Cengage. All rights reserved.
3
Chapter Outline (2 of 2)
International Trade Theory and Multinational
Enterprise
Foreign Auto Assembly Plants in the U.S.
International Joint Ventures
Multinational Enterprises as a Source of Conflict
International Labor Mobility: Migration
© 2019 Cengage. All rights reserved.
4
The Multinational Enterprise
(1 of 6)
The Multinational Enterprise (MNE)
Operate in many host countries
Often conduct research and development
(R&D) activities, in addition to manufacturing,
mining, extraction, and business-service
operations
Often directed from a company planning
center distant from host country
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5
The Multinational Enterprise
(2 of 6) Table 9.1
The Worlds Largest Corporations, 2016
Firm
Headquarters
Revenues ($ billions)
Walmart Stores
United States
482.1
State Grid
China
329.6
China National Petroleum
China
299.3
Sinopec Group
China
294.3
Royal Dutch Shell
Netherlands
272.1
Exxon Mobil
United States
246.2
Volkswagen
Germany
236.6
Toyota Motor
Japan
236.6
Apple
United States
233.7
BP
United Kingdom
226.0
Source: From The 2016 Global 500, Fortune, available at http://www.fortune.com.
© 2019 Cengage. All rights reserved.
6
The Multinational Enterprise
(3 of 6)
The Multinational Enterprise (cont.)
Multinational stock ownership
Multinational company management
High ratio of foreign sales to total sales
Types of integration:
Vertical integration:
Parent MNE establishes foreign subsidiaries to
produce intermediate goods or inputs that go into the
production of a finished good
© 2019 Cengage. All rights reserved.
7
The Multinational Enterprise
(4 of 6)
Types of Integration (cont.)
Horizontal integration
Parent company produces commodity in source
country
Sets up subsidiary to produce identical product in
host country
Conglomerate integration
Diversify into nonrelated markets
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8
The Multinational Enterprise
(5 of 6)
Foreign direct investment by parent
company
Obtains sufficient common stock in a foreign
company to assume voting control
Constructs new plants and acquires
equipment overseas
Shifts funds abroad to finance expansion of its
foreign subsidiaries
Earnings of foreign subsidiaries reinvested in
plant expansion
© 2019 Cengage. All rights reserved.
9
The Multinational Enterprise
(6 of 6) Table 9.2
Direct Investment Position of the United States on a Historical Cost Basis, 2015*
U.S. DIRECT INVESTMENT ABROAD
Country
Amount
(billions of dollars)
Percentage
FOREIGN DIRECT INVESTMENT IN U.S.
Amount
(billions of dollars)
Percentage
Canada
352.9
7.0
269.0
8.6
Europe
2,949.2
58.5
2,162.8
69.0
847.6
16.8
118.8
3.8
Africa
64.0
1.3
0.7
0.0
Middle East
48.5
1.0
18.5
0.1
778.3
15.4
564.4
18.5
5,040.5
100.0
3,134.2
100.0
Latin America
Asia and Pacific
*Historical cost valuation is based on the time the investment occurred, with no adjustment for price changes.
Source: From U.S. Department of Commerce, U.S. Direct Investment Position Abroad and Foreign Direct Investment Position in the
United States on a Historical-Cost Basis, available at http://www.bea.doc.gov/. See also U.S. Department of Commerce, Survey of
Current Business, Washington, DC, Government Printing Office.
© 2019 Cengage. All rights reserved.
10
Motives for Foreign Direct Investment
(1 of 3)
Foreign Direct Investment (FDI)
Motivated by higher rates of return on
investment
Leads to economic growth and job creation
Generates spillovers
Improved management and better technology
Higher average labor productivity
Higher wages
Stimulates exports of capital goods
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11
Motives for Foreign Direct Investment
(2 of 3)
Demand Factors
New markets and sources of demand
Tap foreign markets that cannot be
maintained adequately by export products
(licensing rights)
Parent company ? productive capacity already
sufficient to meet domestic demand
Market competition
Direct exporting
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12
Motives for Foreign Direct Investment
(3 of 3)
Cost Factors
Reductions in production costs
Acquisition of essential raw materials
Lower labor costs
Decreased transportation costs
Government policies
Economies of scale
Direct exporting foreign demand is small
Licensing agreement/FDI demand is large
© 2019 Cengage. All rights reserved.
13
Supplying Products to Foreign Buyers:
Whether to Produce Domestically or Abroad
(1 of 4)
Direct Exporting versus Foreign Direct
Investment/Licensing
Economies of Scale (See Fig 9.1)
Small Demand/Output Direct Exports
Large Demand/Output FDI/Licensing
Low Transportation Cost Direct Exports
High Transportation Cost FDI/Licensing
Low Trade Restrictions Direct Exports
High Trade Restrictions FDI/Licensing
© 2019 Cengage. All rights reserved.
14
Supplying Products to Foreign Buyers:
Whether to Produce Domestically or Abroad
(2 of 4) Figure 9.1
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15
Supplying Products to Foreign Buyers:
Whether to Produce Domestically or Abroad
(3 of 4)
Foreign Direct Investment versus
Licensing
Decision to establish foreign operations
through Direct Investment or Licensing
depends on (see Fig. 9.2)
Capital used in production
Size of foreign market
Fixed cost of establishing overseas facility
© 2019 Cengage. All rights reserved.
16
Supplying Products to Foreign Buyers:
Whether to Produce Domestically or Abroad
(4 of 4) Figure 9.2
© 2019 Cengage. All rights reserved.
17
Country Risk Analysis (1 of 4)
Country Risk Analysis
Political risk analysis
Assesses political stability of country
Government stability, corruption, domestic conflict,
religious tensions, and ethnic tensions
Financial risk analysis
Investigates countrys ability to finance its debt
obligations
Foreign debt as percentage of GDP, loan default,
and exchange rate stability
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18
Country Risk Analysis (2 of 4)
Country Risk Analysis (cont.)
Economic risk analysis
Determines countrys current economic
strengths and weaknesses
Rate of growth of GDP, per capita GDP, inflation
rate
Composite country risk rating
Overall assessment of risk of doing business
in country
© 2019 Cengage. All rights reserved.
19
Country Risk Analysis (3 of 4)
Country Risk Analysis (cont.)
International Country Risk Guide
Political risk factors weighting of 50%
Financial and economic risk factors 25% each
Low risk: 80100 points
Moderate risk: 5079 points
High risk: 049 points
© 2019 Cengage. All rights reserved.
20
Country Risk Analysis (4 of 4)
Table 9.3
Selected Country Risks Ranked by Composite Ratings, 2016
Country
Composite Risk Rating
(100 Point Maximum)
Switzerland
88.0
Singapore
86.8
Germany
84.3
United States
79.3
China
71.3
Brazil
63.3
Russia
62.5
Ukraine
55.3
Zimbabwe
54.5
Sudan
48.3
Very Low Risk
Very High Risk
Source: From Political Risk Services, International Country Risk Guide, available at https://www.prsgroup.com/
FreeSamplePage.aspx/.
© 2019 Cengage. All rights reserved.
21
International Trade Theory and
Multinational Enterprise (1 of 2)
Conventional trade model
Movement of merchandise among nations
Goods are exchanged between independent
organizations
On international markets
At competitively determined prices
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22
International Trade Theory and
Multinational Enterprise (2 of 2)
Multinational-enterprise analysis
International movement of factor inputs
Aggregate welfare of both source and host
countries is enhanced
Vertically diversified companies
Subsidiaries manufacture intermediate and
finished goods
Sales can be intrafirm
Value may be determined by factors other than
competitive pricing system
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23
Foreign Auto Assembly Plants
in the United States (1 of 3)
Transplants direct investment in U.S.based assembly facilities
Benefits to Japan include
Silencing critics who say autos must be built
in U.S.
Avoiding import barriers of U.S.
Gaining access to expanding markets
Providing hedge against changes in exchange
rates between U.S. dollar and Japanese yen
© 2019 Cengage. All rights reserved.
24
Foreign Auto Assembly Plants
in the United States (2 of 3) Table 9.4
Selected Foreign Auto Assembly Plants in the United States
Plant Name/Parent Company
Location
Honda of America, Inc. (Honda)
Marysville, Ohio; Lincoln, Alabama; East Liberty,
Ohio; Greensburg, Indiana
Toyota Motor Manufacturing, USA, Inc. (Toyota)
Georgetown, Kentucky; Huntsville, Alabama;
Princeton, Indiana; San Antonio, Texas; Buffalo,
West Virginia; Blue Springs, Mississippi
Nissan Motor Manufacturing Corp. (Nissan)
Smyrna, Tennessee; Decherd, Tennessee;
Canton, Mississippi
Mazda Motor Manufacturing, USA, Inc. (Mazda)
Claycomo, Missouri
Volkswagen, USA, Inc. (Volkswagen)
Chattanooga, Tennessee
© 2019 Cengage. All rights reserved.
25
Foreign Auto Assembly Plants
in the United States (3 of 3)
Expectations of Japanese Transplants in U.S.
Would generate jobs
Expand consumer choice
Create demand for auto parts industry in U.S.
Transfer technology from Japan to U.S.
What actually happened
Created fewer jobs than expected
Imported parts from Japan rather than buying locally
Contributed to U.S. automotive trade deficit
© 2019 Cengage. All rights reserved.
26
International Joint Ventures
(1 of 6)
International joint ventures
Business organization established by two or
more companies
Combine their skills and assets
Limited objective (research or production)
Short-lived
Multinational in character
Several domestic and foreign companies
Creation of new business firm
© 2019 Cengage. All rights reserved.
27
International Joint Ventures
(2 of 6)
International joint ventures (cont.)
Types of International Joint Ventures
Joint venture by two businesses that conduct
business in third country
Joint venture with local private interests
Joint venture with participation by local
government
© 2019 Cengage. All rights reserved.
28
International Joint Ventures
(3 of 6)
International joint ventures (cont.)
Justifications for joint ventures
Some functions too costly for one company to
absorb by itself
Some governments place restrictions on foreign
ownership of local businesses
To prevent excessive political influence
To minimize dividend transfers abroad
Forestalling protectionism against imports
© 2019 Cengage. All rights reserved.
29
International Joint Ventures
(4 of 6)
Welfare Effects
Advantages of joint ventures
Productivity and welfare gains
Increased productive capacity and additional
competition
Entrance into new markets that neither parent
could have entered individually
Cost reductions that would have been
unavailable if each parent performed same
function separately
© 2019 Cengage. All rights reserved.
30
International Joint Ventures
(5 of 6)
Welfare Effects (cont.)
Disadvantages of joint ventures
Cumbersome organization
Divided control
Different objectives, corporate cultures, and ways of
doing things
Deadlocks in decision making
Negotiations involve hierarchical command
Can lead to welfare losses (market-power effect)
© 2019 Cengage. All rights reserved.
31
International Joint Ventures
(6 of 6) Figure 9.3
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32
Multinational Enterprises
as a Source of Conflict (1 of 5)
Employment
Effects on employment
Recipient country
Employment increases
Source country
Employment declines in short term
Other industries foreign sales rise over time
Caterpillar Bulldozes Canadian Locomotive
Workers
-Lower worker pay; non-unionized
© 2019 Cengage. All rights reserved.
33
Multinational Enterprises
as a Source of Conflict (2 of 5)
Technology Transfer
Technology transfer facilitated through
demonstration effect and competition effect
Increases productivity and competitiveness of
recipient nations
Donor nations may view it negatively because it
may decrease export potential and cause job loss
General Electrics trade-off for entry into the
Chinese market: short-term sales for longterm competition
Boeing Transfers Technology to China
© 2019 Cengage. All rights reserved.
34
Multinational Enterprises
as a Source of Conflict (3 of 5)
National Sovereignty
Many nations fear presence of MNEs results
in loss of national sovereignty
MNEs may affect economic and other policies of
host and source governments
May be able to shift profits overseas and evade
taxes of host country
Political influence of MNEs problematic
Example: Chile and MNEs influence on election of
president
Foreign subsidiary of MNE may trade with nation
against which home country has embargo
© 2019 Cengage. All rights reserved.
35
Multinational Enterprises
as a Source of Conflict (4 of 5)
Balance of payments
Positive contribution
MNE typically purchases capital and other
equipment from home country
Inflow of income generated by overseas operations
Earnings of overseas affiliates, interest and dividends,
and fees and royalties
Negative contribution
Short-term outflow of capital
© 2019 Cengage. All rights reserved.
36
Multinational Enterprises
as a Source of Conflict (5 of 5)
Transfer Pricing
Pricing of goods within MNE
May be arbitrary and unrelated to costs incurred or
to operations carried out
Choice of transfer prices affects division of total
profit among parts of company and thus influences
overall tax burden
© 2019 Cengage. All rights reserved.
37
International Labor Mobility:
Migration (1 of 12)
United States
Favorite target for international migration
Described as melting pot of the world
Western Europe the major source of immigrants for
U.S.?18202012
Germany, Italy, United Kingdom
In recent years, large number of Mexican and Asian
immigrants
Migrantsmotivated by
Better economic opportunities
Noneconomic factors: politics, war, religion
© 2019 Cengage. All rights reserved.
38
International Labor Mobility:
Migration (2 of 12) Table 9.5
U.S. Immigration 18202015
Period
Number (thousands)
18201840
743
18411860
4,311
18611880
5,127
18811900
8,934
19011920
14,531
19211940
4,636
19411960
3,551
19611980
7,815
19812000
16,433
20012015
15,652
Source: From U.S. Department of Homeland Security, Office of Immigration Statistics, Yearbook of Immigration Statistics, 2012,
available at http://www.uscis.gov/graphics/shared/statistics/yearbook/. See also U.S. Department of Commerce, Bureau of the
Census, Statistical Abstracts of the United States, Washington, DC, Government Printing Office, available at www.census.gov\statab\.
© 2019 Cengage. All rights reserved.
39
International Labor Mobility:
Migration (3 of 12)
The Effects of Migration
Mexican immigration to U.S.
Workers migrate from uses of lower productivity to
higher productivity
World output expands
U.S. as whole benefits from immigration
Income gain is sum of losses of native U.S. workers,
gains by Mexican immigrants, and gains by U.S. capital
owners
Mexican labor supply decreases, increasing wages
U.S. labor supply increases, decreasing wages
© 2019 Cengage. All rights reserved.
40
International Labor Mobility:
Migration (4 of 12)
The Effects of Migration (cont.)
Mexican workers immigrate to the U.S. (cont.)
Effect of Labor Mobility is to equalize wages
Redistribute income from labor to capital in the
United States
Redistribute income from capital to labor in Mexico
© 2019 Cengage. All rights reserved.
41
International Labor Mobility:
Migration (5 of 12) Figure 9.4
© 2019 Cengage. All rights reserved.
42
International Labor Mobility:
Migration (6 of 12)
Immigration as an Issue
Domestic labor groups prefer restrictions on
immigration
Domestic manufacturers favor unrestricted
immigration as source of cheap labor
Drain on government resources
Long-term calculations: immigrants make a netpositive contribution to public coffers
© 2019 Cengage. All rights reserved.
43
International Labor Mobility:
Migration (7 of 12)
Immigration as an Issue (cont.)
Developing nations fear brain drain
Emigration of highly educated and skilled people
from developing nations to industrial nations
Limiting the growth potential of developing nations
Guest workers
Temporary migration, as workers are needed
Illegal migration
© 2019 Cengage. All rights reserved.
44
International Labor Mobility:
Migration (8 of 12)
Immigration as an Issue (cont.)
Immigrants make net-positive contribution
Diversify economy
Contribute to economic growth
Lower prices for consumers
Domestically produce a wider variety of goods
Increase supply of labor in economy
Similar skills lower wage
Complementing skills higher wage
Human capital formation costs native country
Contribution to social security
© 2019 Cengage. All rights reserved.
45
International Labor Mobility:
Migration (9 of 12)
Does Canadas Immigration Policy Provide a
Model for the U.S.?
Goal of Canadian immigration system to
encourage youthful, bilingual, high-skill
immigration in order to build human capital within
Canadas aging labor force
Canada treats foreign workers not as foes but
friends whose labor & skills are essential
Canada currently solicits immigrants from more
than 200 countries of origin, especially China,
India, and the Philippines
© 2019 Cengage. All rights reserved.
46
International Labor Mobility:
Migration (10 of 12)
Does Canadas Immigration Policy Provide a
Model for the U.S.? (cont.)
Canada needs immigrants for economic
development
Immigration program run by provincial & federal
governments
A province can select whomever it wants; federal
governments role limited to security, criminal, and
health check of foreigners
Canada 2/3 of permanent visas granted to fill
economic needs
In U.S., by contrast, 2/3 granted for family reunions
© 2019 Cengage. All rights reserved.
47
International Labor Mobility:
Migration (11 of 12)
Does Canadas Immigration Policy Provide a
Model for the U.S.? (cont.)
Multiculturalism is key ingredient of Canadian
national identity
Canadians see immigration as adding to social fabric
of country
Canada has become immigrant country
Foreign-born population of 20%
U.S. foreign-born population is 13%
Immigration program revised to place more emphasis
on job skills and fluency in French or English
© 2019 Cengage. All rights reserved.
48
International Labor Mobility:
Migration (12 of 12)
Does Canadas Immigration Policy Provide
a Model for the U.S.? (cont.)
In 2013, Canada began overhaul of immigration
program, to address increasing economic division
between locals and immigrants
New system considers
whether immigrants have employment arranged in Canada
whether they have skills in demand
immigrants adaptability, e.g., time spent previously in
Canada, fluency in English or French
Remains to be seen how revised system will play out
© 2019 Cengage. All rights reserved.
49
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