Factor Flows: Increased Productivity Increased Return

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?
– Toyota
– Ikea
– Aldi
— Burger King
— Baskin—Robbins
MNE Motives
Market penetration
Preempt competition
Cost advantages
Skirt restrictions/trade barriers
– Against currency fluctuations
– Against market shifts
Japanese Transplants in U.S. Auto Industry
Reasons for Japanese direct investment in U.S.:
o creates jobs and goodwill
o political insurance
o avoids potential trade barriers
o access to expanding U.S. market
o hedge against yen-dollar fluctuations
Country Risk Analysis
o political risk: government stability, corruption,
domestic conflict, religious & ethnic tensions
o financial risk:
debt to GDP
ratio, loan
exchange rate
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
• 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 businesses
o means of avoiding protectionism against imports
FDI and Its Discontents
Host 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 Convergence
Winners – Losers
Long-run impacts
The division of labor is limited by the extent of the
Profits  Investment  Jobs
Labor Mobility - Migration
o U.S. immigration - initially more Western Europeans
– recently more Mexican and Asian
o Immigration Act of 1924 – limited overall flow &
specific quota
from each
country based on
o quota formula
modified in 1965
Effects of Migration
labor migration equalizes wages
increase in output and welfare in the U.S.
decrease in output and welfare in Mexico
net gain in world output due to higher VMP in U.S.