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?
– EXXON
– Toyota
– Ikea
– Aldi
— Burger King
— Baskin—Robbins
MNE Motives
•
•
•
•
•
•
EXPAND
Market penetration
Preempt competition
Cost advantages
Skirt restrictions/trade barriers
Hedge
– 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
defaults
exchange rate
stability
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
products
• 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
market
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 &
established
specific quota
from each
country based on
previous
emigration
patterns
o quota formula
modified in 1965
Effects of Migration
o
o
o
o
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.