Session 15 Multinationals and Migration: International Factor Movements

Foreign Direct Investment (FDI) Foreign Direct Investment Foreign Direct Investment (FDI) is the flow of funding provided by an investor or lender (usually a firm) to establish or acquire a foreign company or to expand or finance an existing foreign company that the investor owns and controls. International Portfolio Investment International portfolio investment is used for all foreign investments that do not involve management control.

Multi-national Enterprise (MNE) A firm that owns and controls operations in more than one country. The parent firm of the MNE is located in the home country. The home country is the source country for outward FDI. The MNE has one or more affiliates located in one or more host countries. The host country is the destination country for inward FDI.

FDI Measurement Flow Definition Flows of FDI measure new equity investments and loads with MNEs during a period of times. Stock Definition Stocks of FDI measure the total amount of direct investments that exist at a point in time.

Why Do MNEs Exist?  Inherent disadvantages of operating a foreign affiliate competing against local firms.  Firm-specific advantages of the MNE, especially intangible assets.  Internalization advantages in using these assets.  Location factors based on resource costs and availability, customer demand, government policies, and other considerations.  Oligopolistic rivalry that uses FDI in the firms’ strategies for competing.

Taxation of Multinational Enterprise’s Profits Two types of taxation 1) The host country-country governments tax the profit of the local affiliates of the multinational. 2) The home country government taxes the parent company’s “local” profits earned on its own activities. This happens in some countries; but such home country governments only collects few taxes on the profits of foreign affiliates For MNEs, This is less likely to be avoided.

International Intra-firm Trade Complement Components MNEs locate based on absolute advantages of each country. Two Alternatives 1) One country 2) Many countries To achieve “economies of scale” To reduce “risk”

Should the Home Country Restrict FDI Outflows ? Should the Host Country Restrict FDI Inflows ?  The effect on workers  The effect on owners  The effect on the government revenues  The external benefit and costs

International Migration International migration is the movement of people from one country (the sending country) to another country (the receiving country) in which they plan to reside for some noticeable of time.

How Migration Affects Labor Markets D1 Sr Sr -Smig Sn Dn Sn + Smig Employers Lose Workers Remaining Gain Employers Gain Native Worker Lose

Should The Sending Country Restrict Emigration ?  Government Budget Considered Issues  Brain Drain

Should The Receiving Country Restrict Immigration ?  Knowledge Benefit Considered Issues  Congestion Costs  Social Friction