International Factor Movements - International Economics - Lecture Slides, Slides of Economics

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What are the causes of international factor movements? • Assume factors of production are mobile between India and the U.S. • Assume the U.S. is capital abundant and India is labor abundant. • Labor earns a higher wage in the U.S. than in India. • Inequality of wages would cause workers from India to migrate to the U.S. Docsity.com What are the effects of international factor movements? • Wages would begin to _____ in the U.S. as supply increases. • Wages would begin to ______ in India as supply decreases. • Migration of labor would stop when wages are equal between countries • – no more gains from migration. fall rise Docsity.com How does the international factor movement compare to international trade? • International trade is sometimes – a substitute for factor movements between countries. – a complement for factor movements between countries Docsity.com Example of substitute • Ireland is capital abundant and has comparative advantage in production of capital intensive goods and return to capital is low. • Two alternatives: 1.Export capital intensive good (machines) & import labor intensive good (shoes), or 2.Capital leaves the nation and labor enters the nation until there is no more comparative advantage or disadvantage; produce machines and shoes domestically. – If factor movements are blocked, trade is pursued. Docsity.com Example of complements • Shoes and machines can be traded, but some goods and services can not be traded. Like what? – Haircuts • Someone who lives in Ireland will not go to Turkey to get a hair cut • But the Turkish hairdresser (labor) can migrate to Ireland Docsity.com FDI: Facts • More than 92% of FDI originated in developed countries. • World’s developed countries received nearly 76% of the world’s FDI. Docsity.com FDI in the world Table 5.2 REGIONAL DISTRIBUTION OF FDI Fuowws, 2000-2002 Region /(lountry FDI Inflows FOOT Chuetilow: Developed COmnnres: 75.7% 92.1% Ew S05 65.1 Japan. O38 4.) LS. 17.0 14.3 (Cee dewelsplieg commie 7a 8.8 Developing countries PLS Fu Africa 13 —O.1 Latin America and the (Caribbean B2 Ll Asia 12.0 ed The Pacific ‘O.0 ‘On Central and Eastern Europe 28 os All developing countries (excluding (China) 16.6 7.0 China 4.9 Od World 100 10000 Source: Adapted From United Nations Gonberence on Trade and Development, Wind! faeermmenr Report, 2003, New York: Uniced Nations, 2003. Docsity.com Question: what does Africa’s negative outflow of FDI mean? • Africa has a negative outflow of FDI which means that Africa has withdrawn its FDI outflow. Docsity.com Sample Question 3 • Why is international trade viewed as a "second best" alternative when compared to the movement of the factors of production? – A) Being able to move the factors of production would increase world output. – B) International trade has too many problems associated with it. – C) Factors of production are cheaper and easier to acquire. – D) Resources are best used with international trade. Docsity.com What are the reasons for FDI? • Higher rate of return on investment because – the receiving nation is capital scarce and labor abundant • Low cost of labor Docsity.com What are the reasons for FDI? • Low cost of transportation of output • Low cost of transportation of inputs • Low cost of paper work (licensing, permits ,..etc.) • Low taxes • High trade barriers in the receiving nation • Low cost of natural resources Docsity.com Question • Why when there is less capital the productivity of labor declines? • Think of me as a labor, in which scenario will I be more productive in class? 1. Give me a chuck and a blackboard 2. Give me a laptop and projector – Note: by “less capital” we mean lower valued (less technologically advanced) capital Docsity.com What are the effects of FDI on the host country? • Host country – The country that receives the factor of production from another country. • Supply of capital increases which ________ the rate of return. – Labor productivity _________ because there is more capital per worker. – Return to labor increases. • Opening of trade increases wages and decreases returns to capital in the labor- abundant country. decreases Increase Docsity.com Preparation for understanding Figure 5.1 • Before we get to the figure let’s prepare ourselves • What is a demand curve for oranges? – A curve that shows the highest price we are wiling and able to pay at each level of quantity of oranges • The highest price represents the value of oranges to us Docsity.com Figure 5.1: Output and Welfare Effects of International Capital Mobility Return to Capital, U.S. Capital Stock, U.S. Return to Capital, India Capital Stock, India RU S R I DUS DINDI A Sk Sk E E’ US is capital abundant India is capital scarce a b a’ b’ Total output in the US = a + b Total output in India = a’+ b’ Assumption: Supply of capital is fixed (vertical) Docsity.com Figure 5.1: Output and Welfare Effects of International Capital Mobility Return to Capital, U.S. Capital Stock, U.S. Return to Capital, India Capital Stock, India RUS’ RU S RI ’ R I DUS DINDI A Sk’ Sk Sk’ Sk E F E’ F’ a d e c b a’ d’ e’ c’ b’ Capital moves from US to India Out put in US drops by ____________ b+ c Output in India goes up by ________ c’+b’ World out put goes_____ up Docsity.com Figure 5.1: Output and Welfare Effects of International Capital Mobility Return to Capital, U.S. Capital Stock, U.S. Return to Capital, India Capital Stock, India RUS’ RU S RI ’ R I DUS DINDI A Sk’ Sk Sk’ Sk E F E’ F’ a d e c b a’ d’ e’ c’ b’ Total return to capital (capital’s share of total output) in the US changes from a + b to ___________ US capital’s share of Indian output is _____. b’ India’s capital’s share of out put declined from a’+d’ to _____. a + d a’ Docsity.com • Governments restrict the free flow of foreign direct investment in several ways. – Industrial Policy • A government policy designed to stimulate the development and growth of an industry. – It tends to favor local firms at the expense of foreign firms. The role of Government Docsity.com International Movements of Labor • Immigrants – Individuals that permanently change their country of residence to a foreign country. • In 1965, 75 million people lived in a country outside their country of birth. • In 2000, immigrants residing in a new country was greater than 150 million. Docsity.com Who migrates more? Table 5.3 IMMIGRANTS AS A PERCENTAGE OF THE POPULATION AND THE LABOR FORCE, 2000 ‘Country Percen of Population Percentage of Labor Force Europe Austria. 9.196 9.0% Belgium 8.7 5.8 Denmark 4.8 32 France 5.6 6 ‘Germany 8.9 9.1 Tealy 2.1 L? Luxembourg 35.6 S77 Wetherlands 4.2 29 Sereden Sa 5.1 Switeerland. 19.0 173 LEU 3.6 5.9 Japan 12 10 Traditional inamigrant countries Australia 23.4 24.8 Canada 17.4 19.2 U.s. 9.6 il e Seas OBCD, O50 Eaplormenr Ouaook, Paris OECD, June, 2001. Docsity.com What are the effects of international movements of labor? • Assume that India is labor abundant and the U.S. is capital abundant. – Wages in the U.S. higher than India. – Indian labor would migrate to the U.S. Docsity.com What are the effects of international movements of labor on Indians? • Workers in India will benefit from ______ wages with the reduction in supply. • India’s capital-to-labor ratio ________. – Increase in India’s labor productivity. – Indian wages will rise. • India’s total output will fall. – Returns to owners of capital in India fall because of • Higher wages paid • Reduced production higher rises Docsity.com What are the effects of international movements of labor on Americans? • Increase in labor force lowers the amount of capital each worker has available to work with. – Capital to labor ratio falls in the U.S. which decreases labor productivity. – Wages in U.S. fall. • Total output rises. Docsity.com International Movements of Labor • Government must balance welfare of society and welfare of particular groups that immigration affects. • As economic and political factors change over time, so does immigration policy especially in developed countries. • Brain drain – The movement of skilled or professional workers from one country to another. Docsity.com International Movements of Labor – Countries have been able to design policies that allow market forces to allocate labor efficiently on a global basis and compatible with public preferences on immigration. • For example, the guest worker programs of Europe allow workers from developing countries to work there temporarily rather than to immigrate permanently. – These programs can increase social costs: • Unemployment insurance • Education • Housing • Healthcare Docsity.com International Movements of Labor – Offshore assembly provisions • Allow U.S. firms to export materials and parts of a good to foreign countries for final assembly; • When the assembled goods are returned to the U.S., duties are assessed only on the value added in the foreign country. • Final good is imported back to the U.S. with duties assessed only on the value added. • US firms can take advantage of lower foreign labor costs without importing labor. Docsity.com The Multinational Corporation • MNCx exist due to efficiencies from internalizing certain activities instead of contracting them out • Profitable to set up business in other countries with horizontal and vertical integration • How to control investments in foreign countries affect decisions Docsity.com The Multinational Corporation Table 5.4 Value at Current Prices Annual Growth Rate billions of $ percent Trem 1982 1990. D002 1999 2000 2001 2002 Sales of foreign affiliates $1737 $45,675 $17,685 13.3% 19.69 8.2% 7.4% Total assets of forcign affiliates 2091 $899 26,543 MF FA 45 83 Exports of foreign affliares Tad L197? 26,545 a5 4 —3.5 42 Employment of fereiga affiliates (thousands) 19,375 24,262 53,004 15.4 16.5 —-LS5 5.7 World GDP 10,805 21672 32227 a5 26 -0.5 G4 4.300 7,838 3.5 4 -340 642 Source Adapred from United Nations Conference on Trade and Development, World insane Repars, 2005, New York: Unired Marions, 2003. ®@ Docsity.com The Multinational Corporation • Reasons for the Existence of MNCs – Choices for control • The firm can export its product to foreign firm and let the foreign firm handle all aspects of selling it in the foreign market. • MNC can set up wholly-owned subsidiary to serve the foreign market: – The firm has complete control from the production to the ultimate customer. • The firm can establish joint ventures with a firm in a foreign market. – It may need raw materials from foreign market. – It reduces overall production costs by manufacturing sub- components in foreign market. Docsity.com The Multinational Corporation • L is for locational advantages – It may be in the firm’s global interests to locate outside home country. – For example, location of natural resources – Take advantage of cheaper imports – vertical integration – Horizontal integration to more profitably serve foreign market – Natural and legal barriers to trade Docsity.com The Multinational Corporation • I is for internalization – A firms’ propensity to perform functions internally that outside firms could do – Firm derives benefit from internalizing process Docsity.com The Multinational Corporation TA BLE 5.5 Table 5.5 THE WORLD’s 20 LARGEST NONFIMANCLAL MULTINATIONAL CORPORATIONS RANKED BY FOREIGN ASSETS, 2001 (BILLIONS OF DOLLARS AND NUMBER OF EMPLOYEES) — (linear (hill ats a Ranking Corporation Country Inchustry: Foreign Total _Foreign _Total__Foseign Total 1 Vodafone UR ‘Telecommunications $187.8 $207.5 $24.6 $32.7 S64 612 2 ‘General Electric U.S. Ekctrical and electronic equipment 180.0 495.2 39.9 so 152.0 310.0 3 ‘EP UR Tetrokum, M2 1412 1412 90.5 110.2 4 Vivendi Universal France Diversified OL 123.2 290.7 Sle 256.7 BBLS 5 Deuteche Telekom AG Gemany Telecommunications 07 145.8 Lhe 45.3 787 257.1 6 Exxonmobil Corporation Us. Tetrokum a4 143.2 145.8 2004 6L1 79 r Ford Motor Company Us. Motor vehicles a2 276.5 53.0 1624 1.9 dd a ‘General Motors U.S. Motor vehicles TA 324.0 45.3 73 148.0 365.0 , ‘Royal Dutchf Shell Group ‘ULE Netherlands Tetrokum TBS Ws 73.0 135.2 52.1 9.9 lo ‘Total Fina Elf France Tetrokum 70.0 7a.5 74.6 4 69.0 122.0 1 Suet France Ekctricity, gas, and water 695 79.3 29.9 0 se 188.1 12 Toyota Motor Corporation — Japan ‘Motor vehicles bbe 59.9 108 1K KT 13 ‘Fiat Spa, Tealy Motor vehicles 487 5 149 52.0 103.6 198.8 La Telefonica SA. Spain Telecommunications 48.1 77.0 14.3, 27.8 935 16L.5 15 Volkowagen Geoup Germany Motor vehicles 475 ORS STNG BB 16 ‘Chevron Texaco Corp. U.S. Tetrokum, 49 The SRF 144 35.6 67.6 \F ‘Hutchison Whampoa Led Hong Keng, China Diversified 410 53 6.1 14 535° 703 1a ‘News Corporation Australia Media 7 40.0 139 15.1 247 53.8 9 Honda Motor Led. Japan Motor vehicles a 32.1 401 36.0 9.0 120.6 20 E.On Gemany Ekctricity, gag, and water 340 7a 227 Tha 64.5 152.0 Souree: Adapted from United Nations Conference on Trade and Development, Wid Jasamueds 5 orr, POW3, New York: United Nations, 2003, Docsity.com The Multinational Corporation • Generally MNCs must pay taxes on profits of local subsidiaries in foreign countries. • Home country gives tax credit against local tax liability for taxes paid abroad. • If taxes differ significantly, incentive to transfer profit to lower taxed country. Docsity.com The Multinational Corporation • Transfer pricing- the over or under pricing of goods in intra-firm trade of MNC. – Allows firms to use intra-firm pricing to maximize after-tax profits – Was used to transfer profits out of countries with exchange controls • Some transfer pricing will occur until income taxes are uniform across countries. Docsity.com