1. International Economics By Robert J. Carbaugh 9th Edition
Chapter 10:
International Factor Movements and Multinational Enterprises

2. Factor movements & multinational enterprises
International movement of factors of production (capital, labor) is a substitute for international trade in goods
International capital flows (investment) can substitute for trade in capital-intensive goods
Labor mobility can substitute for trade in labor-intensive goods
Carbaugh, Chap. 10

3. Multinational enterprises
Factor movements & multinational enterprises
Multinational enterprises
Various business operations in numerous host countries
Headquarters often far from operations
Stock ownership and management are usually multi-national
Frequently employ vertical integration, horizontal integration, conglomerate structure
Carbaugh, Chap. 10

4. Foreign direct investment
Multinational enterprises
Foreign direct investment
A foreign or multinational firm can buy a controlling interest in a local firm
Buy or build new plants or equipment overseas
Shift funds abroad to expand a subsidiary
Reinvest the earnings of a foreign subsidiary
Carbaugh, Chap. 10

5. Reasons for foreign direct investment
Multinational enterprises
Reasons for foreign direct investment
Demand factors
Serve different local markets
Respond to market competition
Cost factors
Access to key raw materials
Labor costs
Transportation costs
Government policies
Carbaugh, Chap. 10

6. Choice between export and FDI
Foreign direct investment
Choice between export and FDI
Carbaugh, Chap. 10

7. Choice between licensing and FDI
Foreign direct investment
Choice between licensing and FDI
Carbaugh, Chap. 10

8. International joint ventures
Multinational enterprises
International joint ventures
Two companies can operate a venture in a third country
A foreign firm can work with a local company
A foreign firm can form a venture with a unit of the local government
Carbaugh, Chap. 10

9. Reasons for international JVs
Multinational enterprises
Reasons for international JVs
Cost sharing - R&D, capital expenditures (in mining and oil, for example)
Avoiding restrictions on foreign ownership of local firms (ensuring local participation)
Forestalling pressure for protectionism
Problems: divided control means success of JV depends on ability of firms to work together
Carbaugh, Chap. 10

10. Effects of an international JV
Multinational enterprises
Effects of an international JV
Carbaugh, Chap. 10

11. Controversy over multinationals
Multinational enterprises
Controversy over multinationals
Employment
Host country may not gain many jobs, foreign managers often brought in; source country worries about losing jobs
Technology transfer
MNEs are reluctant to share technology with host nations; source country worries about giving away advantage
Carbaugh, Chap. 10

12. Controversy over multinationals (Cont’d)
Multinational enterprises
Controversy over multinationals (Cont’d)
National sovereignty
Host country worries about power of MNE to influence affairs; source country worries about ability to regulate MNE activities elsewhere
Balance of payments
MNE investments and profits (internal transfers) have impacts on the payments status of both source and host nations
Carbaugh, Chap. 10

13. Controversy over multinationals (Cont’d)
Multinational enterprises
Controversy over multinationals (Cont’d)
Taxation
Source countries may have difficulty taxing MNE income stemming from foreign operations
Tax rate differences may discourage investment at home
Transfer pricing
Both host and source governments worry that MNEs may illegally manipulate prices paid between subsidiaries to avoid taxes
Carbaugh, Chap. 10

14. Transfer pricing illustrated
Multinational enterprises
Transfer pricing illustrated
Germany
(tax rate 48%)
Computer produced by parent firm for $2000. Sold to Irish subsidiary for $2000.
German tax paid: $0.
Ireland
(tax rate 4%)
Irish subsidiary resells the same computer to US subsidiary for $2500, earning $500 profit.
Irish tax paid: $20.
United States
(tax rate 34%)
US subsidiary sells computer at cost, for $2500. No profit is earned.
US tax paid: $0. Irish subsidiary then lends money to US subsidiary for expansion
Carbaugh, Chap. 10

15. Migration Tends to equalize wage rates between countries
International factor movements
Migration
Tends to equalize wage rates between countries
Shifts distribution of income between capital and labor
Other concerns:
Fiscal drain from immigration
Brain drain from developing countries
Impact of illegal migration
Wider gulf between skilled and unskilled workers
Carbaugh, Chap. 10

16. Effects of labor migration
International factor movements
Effects of labor migration
United States
Mexico
Carbaugh, Chap. 10