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The Dynamics of International Factor Flows and Multinational Enterprises

This overview explores how increased productivity links to factor scarcity and cooperation while examining the critical role of multinational enterprises (MNEs) in global markets. Factors such as agglomeration economies, information exchange, and institutional quality play vital roles in shaping operational strategies. The text delves into motivations for foreign direct investment (FDI), the significance of joint ventures, and country risk analysis. Additionally, it addresses the impacts of labor migration on wages and economic welfare, emphasizing the interconnected nature of global economies.

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The Dynamics of International Factor Flows and Multinational Enterprises

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  1. 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

  2. Operating Abroad • Export from home base • License / franchise foreign providers • Foreign Direct Investment (FDI) • Multinational enterprises (MNEs) • Joint ventures • What’s the nationality? • EXXON — Burger King • Toyota — Baskin—Robbins • Ikea • Aldi

  3. MNE Motives • EXPAND • Market penetration • Preempt competition • Cost advantages • Skirt restrictions/trade barriers • Hedge • Against currency fluctuations • Against market shifts

  4. Reasons for Japanese direct investment in U.S.: • creates jobs and goodwill • political insurance • avoids potential trade barriers • access to expanding U.S. market • hedge against yen-dollar fluctuations Japanese Transplants in U.S. Auto Industry

  5. political risk: government stability, corruption, domestic conflict, religious & ethnic tensions Country Risk Analysis • financial risk: debt to GDP ratio, loan defaults exchange rate stability • economics risk: growth of GDP, per capita GDP, inflation rate

  6. 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

  7. 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

  8. International Joint Ventures • Reasons for joint ventures: • some costs too large for any one company • government restrictions on foreign ownership of local businesses • means of avoiding protectionism against imports

  9. 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

  10. 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

  11. U.S. immigration - initially more Western Europeans – recently more Mexican and Asian • Immigration Act of 1924 – limited overall flow & Labor Mobility - Migration • established specific quota from each country based on previous emigration patterns • quota formula modified in 1965

  12. 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. Effects of Migration

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