ECON5335 - International Economics
Chapter 8
Factor Movements and FDI
Any flow of factors of production between countries is
known as “factor movements”
Separate terminology for each factor flow
Labor – Migration
Capital – FDI
Entrepreneurship – “Brain drain”
• Inflow and outflow of factors of production should
have predictable effects
• What are they?
• What should happen in a “common market”?
2
Economic theory suggests that if migration were zero cost and
also legal to everywhere, then wages across countries would
equalize
So unless there is excess demand for labor in a certain industry,
by increasing labor supply, ceteris paribus, there will be some
downward pressure on wages.
Effect should also increase wages in country of origin
There is some evidence of this happening in certain industries in
the US, but it is not widespread
Also migrant remittances back to the origin country – Mexico is a
particularly large recipient (then India, Philippines, Morocco,
Egypt)
Labor migration can occur within a country, or between countries
International migration can occur for reasons of religious
persecution, political beliefs, war, following other members of
the family, or for economic reasons
When international migration for economic reasons occurs, it is
mostly between developing/transition countries and
developed economies
Some migration occurs legally, and some illegally. In NAFTA and
the EU, migration can occur legally between all member
states, although in NAFTA restricted to degreed workers and
in EU some CEECs have limitations
People migrate for economic & demographic, political and
social and cultural factors
There are both push and pull factors
Often migration occurs to a specific country because of
i) perceived jobs available in that country
ii) family members already resident in that country
iii) wage differentials being large with that country
iv) reasons of language and culture
v) geography
These patterns can be seen by looking at destination countries and
where migrants predominantly come from
Table A.4. Stocks of foreign-born population in OECD countries and the Russian Federation
Thousands and percentages
Estimates are in italic.
2001
2002
2003
2004
2005
2006
2007
2008
2009
2010
2011
Australia
% of total population
Austria
% of total population
4 482.1
23.1
1 112.1
13.8
4 584.9
23.3
1 137.4
14.1
4 694.3
23.6
1 141.2
14.1
4 796.6
23.8
1 154.8
14.1
4 927.1
24.2
1 195.2
14.5
5 090.1
24.6
1 215.7
14.7
5 281.4
25.1
1 246.3
15.0
5 516.9
25.7
1 277.1
15.3
5 760.3
26.2
1 292.9
15.5
5 901.2
26.5
6 029.1
26.7
1 315.5
15.7
1 349.0
16.0
Belgium
1 112.2
1 151.8
1 185.5
1 220.1
1 268.9
1 319.3
1 380.3
1 443.9
1 503.8
1 628.8
% of total population
Canada
% of total population
Chile
% of total population
Czech Republic
% of total population
Denmark
% of total population
Estonia
% of total population
Finland
% of total population
France
% of total population
Germany
% of total population
Greece
% of total population
Hungary
% of total population
Iceland
10.8
11.1
11.4
11.7
12.1
12.5
13.0
13.5
13.9
15.0
1 643.6
14.9
5 448.5
5 600.7
5 735.9
5 872.3
6 026.9
6 187.0
6 331.7
6 471.9
6 617.6
6 777.6
6 933.4
17.6
17.9
18.1
18.4
18.7
19.0
19.2
19.4
19.6
19.9
20.1
..
184.5
223.0
235.5
247.4
258.8
290.9
317.1
352.3
369.4
..
..
..
1.2
1.4
1.5
1.5
1.6
1.8
1.9
2.1
2.2
448.5
471.9
482.2
499.0
523.4
566.3
636.1
679.6
672.0
661.2
668.8
6.4
4.4
4.6
4.7
4.9
5.1
5.5
6.2
6.5
6.4
6.3
321.8
331.5
337.8
343.4
350.4
360.9
378.7
401.8
414.4
428.9
6.0
6.2
6.3
6.4
6.5
6.6
6.9
7.3
7.5
7.7
441.5
7.9
245.3
18.0
242.5
17.8
239.3
17.7
235.5
17.5
228.6
17.0
226.5
16.9
224.3
16.7
221.9
16.6
217.9
16.3
212.7
15.9
210.8
15.7
145.1
152.1
158.9
166.4
176.6
187.9
202.5
218.6
233.2
248.1
2.8
2.9
3.0
3.2
3.4
3.6
3.8
4.1
4.4
4.6
266.1
4.9
6 260.6
10.5
6 421.2
10.7
6 587.6
10.9
6 748.9
11.1
6 910.1
11.3
7 017.2
11.4
7 129.3
11.5
7 202.1
11.6
7 196.5
11.5
7 289.3
11.6
7 358.2
11.6
..
..
..
..
..
..
.. 10 399.0 10 431.0 10 534.0 10 623.0 10 601.0 10 591.0 10 689.0
13.1
..
12.6
12.7
12.8
12.9
12.9
13.0
1 122.9
10.3
..
..
..
..
..
..
..
..
..
..
..
7.3
6.6
300.1
302.8
307.8
319.0
331.5
344.6
381.8
394.2
407.3
451.4
..
..
..
..
..
828.4
750.7
2.9
3.0
3.0
3.2
3.3
3.4
3.8
3.9
4.1
4.5
473.3
4.7
18.3
19.1
19.5
20.7
24.7
30.4
35.9
37.6
35.1
34.7
34.7
Ireland
% of total population
Israel
% of total population
Italy
% of total population
Luxembourg
% of total population
Mexico
% of total population
Netherlands
% of total population
New Zealand
% of total population
Norw ay
% of total population
Poland
% of total population
Portugal
% of total population
Russian Federation
% of total population
Slovak Republic
% of total population
Slovenia
% of total population
Spain
% of total population
Sw eden
% of total population
Sw itzerland
% of total population
Turkey
% of total population
United Kingdom
% of total population
United States
% of total population
356.0
390.0
426.5
461.8
520.8
601.7
682.0
739.2
766.8
772.5
9.2
9.9
10.7
11.4
12.6
14.2
15.7
16.7
17.2
17.3
1 978.1
1 983.2
1 974.8
1 960.8
1 947.6
1 930.0
1 916.2
1 899.4
1 877.7
1 869.0
31.8
31.3
30.6
29.8
29.1
28.3
27.6
26.9
26.2
24.5
2 240.0
..
..
..
..
..
..
4 375.2
4 798.7
5 350.4
3.9
..
..
..
..
..
..
7.4
8.0
8.9
144.8
147.8
154.9
160.4
168.3
175.4
183.7
194.5
197.2
205.2
32.8
33.1
34.4
35.3
36.5
37.4
38.6
40.2
40.0
40.9
215.3
42.1
..
..
..
..
..
..
..
..
584.5
0.6
610.1
0.6
699.3
0.7
733.7
0.7
850.1
0.8
961.1
0.9
..
..
1 674.6
10.4
1 714.2
10.6
1 731.8
10.7
1 736.1
10.7
1 734.7
10.6
1 732.4
10.6
1 751.0
10.7
1 793.7
10.9
1 832.5
11.1
1 868.7
11.2
1 906.3
11.4
698.6
737.1
770.5
796.7
840.6
879.5
915.0
950.0
981.3
1 013.0
18.0
18.7
19.1
19.5
20.3
21.0
21.6
22.3
22.7
23.2
1 040.7
23.6
315.1
333.9
347.3
361.1
380.4
405.1
445.4
488.8
526.8
569.1
7.0
7.4
7.6
7.9
8.2
8.7
9.5
10.3
10.9
11.6
775.3
776.2
..
..
..
..
..
..
..
..
2.0
2.0
..
..
..
..
..
..
..
..
674.9
1.8
651.5
719.4
745.6
774.8
742.1
753.0
769.6
790.3
834.8
851.5
871.8
6.3
6.9
7.1
7.4
7.0
7.1
7.3
7.4
7.9
8.0
8.3
..
11 976.8
..
..
..
..
..
..
..
11 194.7
..
8.2
..
..
..
..
..
..
..
7.9
..
..
119.1
..
..
207.6
..
..
..
..
..
..
2.2
..
..
3.9
..
..
..
..
..
..
..
170.0
..
..
..
..
..
..
..
228.6
..
8.5
..
..
..
..
..
..
..
11.2
230.1
11.2
2 594.1
6.4
3 302.4
8.0
3 693.8
8.8
4 391.5
10.3
4 837.6
11.1
5 250.0
11.9
6 044.5
13.5
6 466.3
14.2
6 604.2
14.4
6 677.8
14.5
6 737.9
14.6
1 028.0
11.6
1 053.5
11.8
1 078.1
12.0
1 100.3
12.2
1 125.8
12.5
1 175.2
12.9
1 227.8
13.4
1 281.6
13.9
1 338.0
14.4
1 384.9
14.8
1 427.3
15.1
1 613.8
1 658.7
1 697.8
1 737.7
1 772.8
1 811.2
1 882.6
1 974.2
2 037.5
2 075.2
22.3
22.8
23.1
23.5
23.8
24.2
24.9
25.8
26.3
26.6
2 158.4
27.3
..
..
..
..
..
..
..
..
..
..
..
..
..
..
..
..
..
..
..
..
4 865.0
5 000.0
5 143.0
5 338.0
5 557.0
5 757.0
6 192.0
6 633.0
6 899.0
7 056.0
8.2
8.4
8.6
8.9
9.4
9.6
10.3
11.0
11.3
11.5
31 548.1 33 096.2 33 667.7 34 257.7 35 769.6 37 469.4 38 048.5 38 016.1
38 452.8
39 916.9
12.5
12.9
11.1
11.5
11.6
11.7
12.1
12.6
12.6
12.5
752.5
16.8
1 855.0
23.9
5 457.8
9.0
616.3
12.4
..
..
..
..
7 430.0
12.0
40 381.6
13.0
Who gains from labor migration, and who loses?
Do immigrants add to destination country economic fortunes?
What is the impact on the origin country of the migrant?
Are diaspora effects significant?
So, as of 2000, US had the largest stock of international migrants,
but…
…it didn’t even register on the list of countries with the largest %
of migrants
Migration is desirable, particularly if it brings certain skills to the
work force of the recipient country.
So it is important to know the skill set that migrants have…
Migrants are on
average more
educated and
less educated
than the
resident
population
Presumably, legal immigration is desirable as long as the migrants
can find/get gainful employment….
This is a complex issue, particularly in the US and EU.
Governments try to curb illegals
FDI = Foreign direct investment
It appears in the financial account of the balance of
payments
Increasingly important in terms of the size of flows
from the 1980s onwards
Most FDI is between developed countries
FDI can be:
i) “greenfield” FDI – new plants
ii) taking over control of existing plants
 Main reason is that domestic savings do not support much
investment in developing countries
 Therefore FDI represents an important source of investment
 But FDI also leads to:
i) technology transfer – new technologies are
introduced
ii) higher pay – usually foreign firms hire best workers
so payhigher wages than domestic firms – tends to put
upward pressure on wages
iii) more FDI if seen as a “signalling” that country is
welcoming for foreign companies
 FDI can also lead to higher exports if the foreign subsidiary
services the region rather than the specific country
Most FDI is done by MNEs (85%)
MNE = Multinational enterprise
Most MNEs expand their operations into other
countries by acquiring existing companies or
establishing a new subsidiary.
This also leads to trade in intermediate goods (parts
etc) from the home country to the subsidiary (e.g.
Volkswagen producing vehicles in Mexico for NAFTA)
Big debate in economics as to whether trade and
FDI are compliments or substitutes
i) If complimentary, FDI will increase the amount
of trade in the host country (e.g. Mexico)
ii) If a substitute, FDI will reduce the amount of
trade for the host country (e.g. Japanese car
plants in the US)
Clearly answer depends on type of FDI, the country,
and whether the FDI creates a plant which
produces for domestic or regional market
FDI differs from other capital flows as it is not easily
reversible. “Money” capital flows can easily be reversed
so inflows can easily turn into outflows.
 FDI inflows rarely turn into outflows within a 5 year period
 Inward FDI is usually a commitment to the country for a
specific period of time while production is ramped up and
new clients/markets established
 In some countries certain industries are protected from
foreign ownership (e.g. Canadian media companies and
Banks), so inward FDI in these sectors limited
Forum for multilateral cooperation on trade is clearly
WTO
No obvious place for negotiating any multilateral
agreement on FDI
In 1996 OECD tried to take the initiative here by
proposing a “Multilateral agreement on investment” (MAI)
Main objective was to have reciprocal agreement on how
to treat FDI and to limit government ability to “nationalize”
foreign assets
Agreement was put aside in 1998 after deluge of
criticisms from anti-globalization protesters
More
restrictions/regulations
on outflows
More international
investment
agreements