Presentation on theme: "BA 187 – International Trade"— Presentation transcript:
1 BA 187 – International Trade Krugman & Obstfeld, Chapter 7International Factor Movements
2 International Capital Flows Foreign Direct Investment (FDI)
3 International Capital Mobility Two Types of Capital Movements possibleForeign Direct Investment (FDI):Movement of capital that involves ownership and control.Generally involves foreign subsidiary of Multi-National corporation (MNC)Flow of “real capital” primarily affects nation’s production or income.Foreign Portfolio Investment:Capital flows that do not involve ownership or control.Flow of “financial” capital primarily affects nation’s Balance of payments or exchange rate.
4 FDI Positions By Industry, Dec 31, 1995 U.S. Direct Investment AbroadForeign Direct Invest. in U.S.By IndustryValue $ billShareManufacturing$257.636.2%$210.337.5%Finance except banking212.129.847.98.6Wholesale trade71.410.071.712.8Petroleum69.79.835.66.4Banking30.44.341.87.5Services27.83.937.96.8Other42.76.0114.920.5Total$711.6100%560.1Source: U.S. Dept. of Commerce, Survey of Current Business, 1996
5 FDI Positions By Region, Dec 31, 1995 U.S. Direct Investment AbroadForeign Direct Invest. in U.S.By Country or RegionValue $ billShareEurope$363.551.1%$360.864.4%Asia and Pacific126.017.7124.622.2Latin & South America122.817.322.74.1Canada81.411.446.08.2Middle East8.01.15.10.9Africa6.50.2Int’l Organizations3.50.5Total$711.6100%560.1Source: U.S. Dept. of Commerce, Survey of Current Business, 1996
6 Reasons for International Capital Flows Considerable international capital mobility today.Capital should flow to areas where expectation of higher return.Specific rationales for International Capital FlowsFirms invest as response to large and growing international demand for their products.Developed country firms invest in countries with similar per-capita incomes, and so similar demands for products.Firms invest to secure access to mineral or raw material supplies.Firms invest abroad to access markets with high tariff or non-tariff barriers. EU “Tariff factories” to “get behind the tariff wall”.Firms invest in countries with low relative wages.Firms invest abroad as defensive measure to protect market share.Firms invest abroad as means of risk diversification against economic or exchange rate fluctuations.
7 International Capital Mobility World Capital Market Equilibrium
9 International Capital Mobility MPK*Initial Foreign CapitalHome MPKForeign MPK*MPKInitial Home CapitalCapital Flows fromHome to Foreignr0r*0reqFinal Home CapitalFinal Foreign CapitalO*OTotal World Capital Stock
10 Potential Benefits of FDI to Host Increased output.Increased wages.Increased employment.Increased exports.Assumes foreign capital produces goods with export potential.Increased tax revenues.Realization of Scale economies.Transfer of technical & managerial skills to host nation.Often scarcest resources in LDC’s, hence large potential benefit.Potential to weaken existing domestic monopolies.
11 Potential Disadvantages of FDI Adverse impact of host’s Terms of Trade.Either through export promotion or transfer pricing effects.Decreased domestic saving or domestic investment.If FDI partly financed in host capital market, crowds out domestic investment. If not, allows for less domestic saving (public or private).Instability in Balance of Payments or Exchange rate.Loss of control over domestic gov’t policies.Increased unemployment.If FDI in capital-intensive industries, then possible fall in employment.Inadequate attention to development of local skills.MNC’s may reserve skill positions for home country head office.
12 International Labor Mobility Wages and Migration of Labor
18 Home Unemployment & Labor Mobility Home MPLForeign MPL*MPL*MPLMigration fromHome to Foreignw0w*0weqFinal Home LaborFinal Foreign LaborInitial Home EmployedU0HO*OInitial Foreign LaborTotal Home Labor Force