Lecture 4
INTERNATIONAL FACTOR
MOVEMENTS
By Carlos Llano,
References for the slides:
• Krugman y Obsfeld: International Economics. Pearson. 2006.
• UNCTAD (2011). WORLD INVESTMENT REPORT.
• Paul Antràs: http://ocw.mit.edu/OcwWeb/Economics/14-54Fall2006/DownloadthisCourse/index.htm
Motivación
“The extension and use of railroads,
steamships, telegraphs, break down
nationalities and bring peoples geographically
remote into close connection commercially and
politically. They make the world one, and
capital, like water, tends to a common level.”
David Livingstone, reflecting on his
experiences in Africa in the 1850s.
Index
1. Introduction
2. International Labor Mobility
3. Foreign Direct Investment and Multinational Firms
4. Extensions.
Balance of Payments
1. Introduction
• International Trade: movement of goods and
services.
– The easiest way of economic integration.
• Other ways of integration: mobility of factors of
production:
– Immigration (labor mobility).
– Capital transferences through international lending.
– International Investments with the aim of permanence:
FDI and multinational firms.
2. International Labor Mobility
One-Good Model Without Factor Mobility
• Hypothesis of the model:
– 2 countries (Home, Foreign).
– 2 factors of production: Land (T) and Labor (L).
– Both countries produce only one good.
– Both countries have the same technology but different
overall land-labor endowments (T/L ratios).
– Home is abundant in L, Foreign is abundant in T.
– Perfect competition in all markets.
2. International Labor Mobility
An Economy’s Production Function
Production: Q
Q (T, L)
Labor: L
2. International Labor Mobility
The Marginal Product of Labor (MPL)
MPL
Rents
Real
Wage
Wages
MPL
L
2. International Labor Mobility
www.youtube.com/watch?v=gurlpLOyubA
Rivane Neuenschwander | Contingent - YouTube
In Contingent (2008), a time-lapse film follows a single
meal, as a world map – daubed in honey on blotting
paper – is consumed by ants, the land masses
becoming first emaciated then completely disconnected.
Pitching a rational (and of course stubbornly
Eurocentric) chart against an unpredictable system,
Neuenschwander’s dynamic territories refer back to
when terra incognita spaces – visual representations of
what is not known2– had yet to disappear from maps,
when the distinction between pictorial and cartographic
representation was less certain.
2. International Labor Mobility
http://blip.tv/frieze/rivane-neuenschwander-pangaea-s-diaries-2008-1897430
Rivane Neuenschwander, Pangaea's Diaries (2008)
Pangaea’s Diaries (2008), shown at the 2008 Carnegie International, is a microcosmic account
of massive shift: a stop-motion projection of ants shuffling a beef carpaccio around a white
oval plate, glimpses of a world map occasionally caught amidst the flux. The vertiginous
compression through which a 250 million-year-old supercontinent is collapsed into a twominute projection is matched by the title, which refers to both the vast land mass that preceded
the separation of the continents and the three-month period that the work’s painstaking frameby-frame production required. Time spent simply living – or perhaps just eating carpaccio at a
restaurant – is casually placed alongside the rhythms of vast geological processes, as though
the significances of both weren’t so far apart.
2. International Labor Mobility
• Migration: workers are able to move between the
two countries.
• Nationals will want to move to Foreign until the MPL
(wage) equals the one at Home.
– This movement will reduce the Home’s Labor Force, and
thus raises the real wage in Home.
– This movement rises the labor force and reduces the real
wage in Foreign.
2. International Labor Mobility
Causes and effects of International Labor Mobility
MPL
MPL*
Marginal Product of
Labor
B
A
C
MPL
MPL*
O
Home
Employment
L2
L1
Foreign
O*
Employment
Migration of labor from Home to Foreign
Total world labor force
2. International Labor Mobility
• Effects of the re-distribution of the world labor
force:
– It leads to a convergence of real wage rates.
– It increases the world’s output as a whole …
… but it produces loses in some groups:
• Which groups?
– Those who would originally have worked in Home receive higher real
wages (because of less competition and a higher MPL). Inversely in
Foreign.
– The “land-owners” in Home are hurt since they have to pay higher wages,
while the land-owners in Foreign will benefit from the larger labor supply
(+ competition, - W).
2. International Labor Mobility
• Extension: we could modify the model by adding
some complications:
• We assume that the 2 countries produce 2 goods, 1 is labor
intensive (L) and the other is Land intensive (T).
• In this case, “trade” offers an alternative to factor mobility:
– Home and Foreign could specialize according to its factor endowment (HO)
– Home could export Labor (L) and import land (T), just by exporting the
good “intensive in L” and “importing the good intensive in T.
2. International Labor Mobility
• Doubt: Then, is factor mobility an obstacle for trade?
– In theory it is, but in practice there is space for both of them.
– Trade is not a perfect substitutive of factor mobility.
– Why? The HOV Model does not work perfectly:
• The equalization of factor prices is not produced in the real world: countries are
very different and they tend to specialize.
• There are barriers to trade: natural and artificial.
• There are many differences in technology as long as in natural resources.
• Many “services” can’t move and/or be commercialized.
• Trade produced by “economies of scale” implies factor mobility “between
regions” or “between industries”.
3. Foreign Direct Investment (FDI) and Multinationals
Foreign Direct Investment (FDI):
• It refers to international capital flows in which a firm in
one country expands or creates a subsidiary in another.
• It involves not only a transfer of resources but also the
acquisition of control.
• The subsidiary does not simply have a financial obligation to
the “related” company (Ex: interests) but a “political”
relationship of being part of the same organizational
structure.
3. Foreign Direct Investment (FDI) and Multinationals
Multinational Firms:
• They are a vehicle for international borrowing and lending.
Differences between FDI and multinationals (Lipsey, 2003)
• MNE borrow in local markets.
• FDI does not always involves taking the control.
Why choosing FDI vs. other ways of internationalization?
Two theories:
– Location theory
– Internalization theory
3. Foreign Direct Investment (FDI) and Multinationals
Location theory
• A good can be produced in more than a country because of
different factors:
– Natural resources; transportation cost (metallurgy; refinery); trade
barriers (pharmaceuticals).
Internalization theory
• The same good is produced in different locations by the
same firm instead of different firms, making use of intra-firm
technology transfer, management and finance ( and taxes).
– Technology transfer;
– Vertical Integration.
3. Foreign Direct Investment (FDI) and Multinationals
What is the relative importance of the
multinationals?
• They play an important role in world trade and
investment.
10% of the world GDP is produced by foreign subsidiaries
½ of the U.S. imports are transactions between “related
parties” (intra-firm flow)
24% of U.S. Assets abroad consists of the value of foreign
subsidiaries of U.S. firms.
FDI UNCTAD’S REPORT 2011.
International production is expanding, with foreign sales, employment and
assets of transnational corporations (TNCs) all increasing.
• TNCs’ production
generated valueadded = $16
trillion in 2010,
(1/4 of global
GDP.
• Foreign affiliates
of TNCs:
• > 10% of global
GDP.
• 1/3 world
exports.
• Global FDI flows rose moderately to $1.24 trillion in 2010, but were still
15% below their pre-crisis average. In contrast, global industrial output
and trade, are back to pre-crisis levels. (FDI is more volatile than trade)
• UNCTAD estimates that global FDI will recover to its pre-crisis level in
2011, increasing to $1.4–1.6 trillion, and approach its 2007 peak in 2013.
FDI TRENDS AND PROSPECTS
(UNCTAD’S WORLD INVESTMENT REPORT 2011.
• In 2010, developing and transition economies together
attracted more than half of global FDI flows.
• Outward FDI from those economies also reached record highs,
with most of their investment directed towards other countries
in the South (South-South FDI).
• FDI inflows to developed countries continued to decline.
• The poorest regions continued to see declines in FDI flows:
Flows to Africa, least developed countries, landlocked
developing countries and small island developing States fell,
as did flows to South Asia.
• Major emerging regions, such as East and South-East Asia
and Latin America experienced strong growth in FDI inflows.
FDI TRENDS AND PROSPECTS (UNCTAD’S WORLD
INVESTMENT REPORT 2011)
Fragmentation the production chain: an example
FDI TRENDS AND PROSPECTS (UNCTAD’S WORLD
INVESTMENT REPORT 2011).
• State-owned TNCs are an important emerging source of FDI.
– There are at least 650 State-owned TNCs, with 8,500
foreign affiliates across the globe.
– While they represent less than 1 % of TNCs, their outward
investment accounted for 11 % of global FDI in 2010.
– The ownership and governance of State-owned TNCs have
raised concerns in some host countries.
The relevance of Sovereign
wealth funds (SWFs)
4. Extensions
• Trade, productivity and foreign market entry
decisions:
– Export vs. FDI: (Head and Ries, 2003, Helpman, 2004,
Girma and Kneller, 2003)
– Export vs. FDI with symmetric countries: Markusen
and Venables (2000)
– Export vs. FDI with heterogeneous firms: (Melitz,
2003; Helpman, Melitz y Yeaple, 2004)
4. Extensions
Vertical vs Horizontal FDI:
• Horizontal FDI:
– Trade and FDI are substitutive.
– References: (Brainard, 1997…).
• Vertical FDI:
– Trade and FDI are complementary.
– References: (Helpman, 1984; Antràs, 2003;
Hanson et al, 2003; Yeaple, 2003).