SESSION 8
Multinationals and Migration
(Chapter 15)
Key points
1.
2.
3.
4.
5.
6.
7.
Foreign Direct Investment (FDI)
FDI & Multinational Enterprises
Should FDI flows be restricted?
Migration & Labour Markets
Should Emigration be restricted?
Should Immigration be restricted?
Optimal immigration policies
15-2
Part A
15-3
1. Foreign Direct Investment (FDI)

Flows of FDI: New equity investments and loans within
MNEs during a period of time. Flows of funding
provided by investors (usually firms) to establish or
acquire foreign companies or to expand or finance
existing foreign companies that the investors own.
 Key is sufficient ownership to control or influence the
management of the foreign company.

Stocks of FDI: Total value of direct investments
(equity and debt) of foreign companies at a specific
point in time.
15-4
2. FDI & Multinationals (MNE)
 A Multinational Enterprise (MNE) is a firm that owns &
controls operations in more than one country
 The parent firm of an MNE is located in the home
country. The home country is the source country for
outward FDI.
Example: USA’s outward FDI is all MNE funds invested
in all other countries.
 The MNE has one or more affiliates located in one or
more host countries. The host country is the destination
country for inward FDI.
Example: China’s inward FDI is all MNE funds coming to
China from other countries; outward FDI by all other
countries to China
15-5
15-6
15-7
2. FDI & Multinationals (MNE)
Why do MNEs exist?
1. Inherent disadvantages of operating a foreign affiliate
competing against local firms.
2. Firm-specific advantages of the MNE, especially
intangible capital.


Technological knowhow acquired through R&D or learning
by doing, brand image created by advertising
Costs of developing the knowledge or the brand image can
be spread over more customers by selling not only in
domestic markets but in foreign markets as well
15-8
2. FDI & Multinationals (MNE)
3. Location factors make production abroad more
attractive than the home country
 resource costs and availability
 transportation costs
 customer demand
 government policies
15-9
2. FDI & Multinationals (MNE)
4. Internalization advantages in using these assets.
 Licensing the technology risks information leaking out
to others and perhaps provide direct competition to
the MNC
 Reaching and enforcing international licensing
agreement is difficult
5. Oligopolistic rivalry
 MNCs use FDI as a part of their competitive strategy.
15-10
3. Should FDI flows be restricted?
FDI OUTFLOWS:

The effect on home country workers
 Labour receives lower wage
 And experiences (temporary) unemployment with smaller
capital stock at home
 The effects on the owners of MNCs
 Increased returns to their investments
 In the standard analysis, gains to the owners can be greater
than losses to workers
15-11
3. Should FDI flows be restricted?
FDI OUTFLOWS:

The effects on tax revenue
 Generally lower tax revenue.
No tax revenue from the MNCs
profits that become the profits of their foreign affiliates
 MNEs can use transfer pricing to report more of their profits
in low-tax countries, even though profits were actually made in
high-tax countries
 Externalities
 Gains may accrue to others in the location of the firms’
production through training of workers and imitation by other
local producers
 If so, outward FDI takes those external benefits away from the
home country
15-12
3. Should FDI flows be restricted?
FDI INFLOWS:
 Host country labour gains from increased demand for
their services
 Domestic firms that compete with the affiliates lose
 Other local firms can use the proximity to affiliates to
learn about their technological practices (i.e. externalities
argument)
 Government gains from taxes collected on affiliate
profits
15-13
Part B
4. Migration and labour markets
 A International migration is the movement of
people from one country to another on a long
term basis
 See Tables 15.2 and 15.3 for immigration rates
to the US and EU
15-14
Figure 15.2 Gross immigration rates to the US and Canada
15-15
Figure15.3: Net immigration rates into the EU
15-16
4. Migration and labour markets
 To simplify the analysis the world is divided into
a low income “South” and a high income
“North”.
 Initially, assume no migration:
 Northern workers earn $6 an hour and southern
workers $2 an hour
 Then remove the barriers to migration so that
there is free migration between the South and
the North
15-17
4. Migration and labour markets
 The movement of 20 million migrant labour bid
the northern wage rate down to $5 and the
outflow of the same workers raises the southern
wage to $3.20
 More people don’t move (and equalize wages)
because there are costs to migration (i.e.
transportation costs, leaving behind family and
friends, learning a new language , customs etc.)
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4. Migration and labour markets
 Migrants gain area e+f
 Because of the cost of migration, c, those who
migrate earn $5 but it is only worth as much as 3.20
in the South.
 South
 Workers remaining in the south gain area d (because
of the reduction in competition)
 Southern employers loose are (d+e) (because they
have to offer higher wage rates)
 The net loss is area e or (d+e-d)
15-19
4. Migration and labour markets
 North
 Native northern workers loose area a having their
wage rate bid down from $6 to $5.
 Northern employers gain area (a+b) (because they
pay less for labour )
 The net gain is area b
 The world gains area (b+f)
 The freedom to migrate sends labour towards
countries where they make a greater net contribution
to world production
 The world achieves a more efficient allocation of
resources
15-20
Figure 15.3: Labour-Market effects o fmigration
15-21
5. Should emigration be restricted?
 The previous labour market analysis showed that
sending country loses economic wellbeing
because of emigration
 The other important costs and benefits of
emigration are:
 The government loses future tax payments
 But those who emigrate don’t require government
services (i.e. health care, welfare, education etc.) so
that government spending is reduced
 Those who emigrate often send money to relatives
back home
15-22
5. Should emigration be restricted?
 Whether emigration has a net negative or
positive effect depends on the relative strength
of the above factors
 If the effect, on balance, is negative the country
could encourage the return after the emigrant
has gone for while by appealing to national pride
and offering good employment
15-23
6. Should immigration be restricted?
 The previous labour market analysis showed that
receiving country gains from immigration
 There are other important costs and benefits of
immigration.
 1. Effects on the government budget
 Immigrants pay taxes in theirs new country
 Immigrants rely on social services
 There is a consensus that that fiscal effects of
depend on the skill level of the immigrant
15-24
6. Should immigration be restricted?
 2. External costs and benefits
 Knowledge benefits (only part of the economic
benefits of knowledge accrues to the immigrants, part
of it often spills over)
 Congestion costs
 Social friction
 Diversity & Knowledge Growth
"Neurodiversity as a Competitive Advantage” HBR
JAN 2019 https://hbr.org/2017/05/neurodiversityas-a-competitive-advantage
15-25
7. Optimal immigration policies
 The type of immigrant workers admitted will
affect which groups within the population
win/lose.
 For example, if immigrants are unskilled, they
will compete for jobs against unskilled native
workers
 The types of immigrants admitted will affect the
net fiscal benefit or burden of immigration
15-26
7. Optimal immigration policies
 To gain greater fiscal benefits, the country
should admit young adults who have some
university education. This is likely to enhance
external knowledge benefits as well.
 Australian policies draw from these lessons.
 Australia has a points system to screen applicants,
focusing on age and skills that are likely to benefit
the Australian economy
15-27