2 Multinational Enterprises MNE Characteristics:R&D in addition to manufacturing, mining, extractions, and business serviceoperations across bordersmultinational ownershiphigh ratio of foreign sales to total salesmassive size
3 Multinational Enterprises (cont.) vertical integration – parent company establishes foreign subsidiary for production of intermediate goods or inputs used in the production of final goodshorizontal integration – parent company establishes subsidiary for production of good identical to that produced in the host countryconglomerate integration – parent company established foreign subsidiary for production of unrelated goodsforeign direct investment – acquisition of controlling interest in foreign company or facility
4 Motives for Foreign Direct Investment demand factorstap into foreign marketsexpand demand beyond domesticpreemptive measures to prevent foreign competitioncost factorsaccess to raw materialslower labor coststransportation costs especially when representing high percentage of total costsgovernment policies that grant tax breaks or subsidies for establishing facilities that generate additional domestic employment
5 Exporting or Foreign Direct Investment If demand in one country is less than 300 but the combined demand is more than 300, the firm could benefit by producing in one location and exporting.However, if the demand in each country is more than 300, the firm could operate two separate facilities without increasing costs.
6 Foreign Direct Investment or Licensing establishing a subsidiary entails additional fixed coststherefore production of 400 units of fewer wouldface lower costs per unit by licensing to a foreign firmproduction of 400 of more units would achieve lower costs by establishing a subsidiary
7 Country Risk Analysispolitical risk: government stability, corruption, domestic conflict, religious & ethnic tensionsfinancial risk: debt to GDP ratio, loan defaults exchange rate stabilityeconomics risk: growth of GDP, per capita GDP, inflation rate
8 Japanese Transplants in U.S. Auto Industry Reasons for Japanese direct investment in U.S.:creates jobs and goodwillpolitical insuranceavoids potential trade barriersaccess to expanding U.S. markethedge against yen-dollar fluctuations
9 International Joint Ventures Reasons for joint ventures:some costs too large for any one companygovernment restrictions on foreign ownership of local businessesmeans of avoiding protectionism against imports
10 Welfare Effects of Joint Ventures Before Joint Ventureprice is $10,000 because the two firms arecompeting with each other$10,000 ATC because firms cannot achieve economies of scaleonly welfare is CS in red
11 Welfare Effects of Joint Ventures (Cont.) with joint venture costs fall because of economies of scale but prices rise because of monopolyCS decreasesPS increaseswelfare loss due to fewer salesif area ‘d’ is greater than area ‘a’ total welfare increases
12 MNEs as Source of Conflict employmentproduction facilities create jobssome cases businesses were pre-existingforeign managers maintain executive positionsshort term job loss in host countrytechnology transferdemonstration effect – firm shows how products operatecompetition effect – firm creates superior productcould decrease exports if donor nation loses competitivenessnational sovereigntyimpede government attempts to redistribute incomeevade taxes through pricing strategies
13 MNEs as Source of Conflict (cont.) balance of paymentspurchase of MNE represents outflow of capitalMNE requires capital and equipment from hostreturn inflow of interest, dividends, fees & royaltiestaxationforeign tax credits – U.S. tax on MNE reduced by the amount of foreign tax by the MNEtax deferrals – tax not paid until income is repatriatedtransfer pricinggoods sold from one division to another within MNEchoice of prices impact division of profits and taxes in each area
14 Labor Mobility - Migration U.S. immigration - initially more Western Europeans – recently more Mexican and AsianImmigration Act of 1924 – limited overall flow &established specific quota from each country based on previous emigration patternsquota formula modified in 1965
15 Effects of Migration labor migration equalizes wages increase in output and welfare in the U.S.decrease in output and welfare in Mexiconet gain in world output due to higher VMP in U.S.
16 Immigration Issuesdecreased wages for domestic workers assuming similar skills and productivitydrain on government resources – however within two generations immigrant families assimilate making fiscal burden equal to nativesbrain drain – emigration of highly educated limiting growth potential of developing nationguest workers – granted temporary work permits only – protection against labor shortage or surplus associated with business cyclesillegal immigration concernsincreased contribution to social security
17 Do Immigrants Hurt U.S. Workers short run: immigration lowered wages due to increased supplylong run: increased supply lead to more investment in capital increasing demand for labor offsetting initial impact on wages