Transcript INTERNATIONAL TRADE

INTERNATIONAL
TRADE
LECTURE 12:
International Factor Movements
Contents

To research the international capital
movements through FDI and MNCs

To investigate the labor movements
between countries
Introduction
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In previous theory, it assumes that factors of
production are mobile within countries and
immobile between countries which seems
patently false in today’s world
Contents of the lecture
 The
causes and consequences of capital and labor
flows
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Current nature of international capital movements
The principal factors that influence international investment
decisions
The various effects of international investments
 The
causes and impacts of labor migration between
countries
International Capital Movements
through FDI and MNCs
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Introduction
 China
experienced rapid economic growth
since 1978
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The grand view of Chinese economics
The Grand view
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30 years of high-speed growth
1978
2008
GDP (2000 USD, in billions) 157.7
2,602.6
Annual growth rate
GDP per capita (2000 USD) 165
Annual growth rate
9.8%
1,965
8.6%
The grand view
The grand view
The Grad view
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Living standard substantially improved
Urban DPI (current RMB)
1981
500.4
2005
10,493
Rural DPI (current RMB)
223.4
3,254.9
Poverty ratio ($1.25/day)
84%
16%
Poverty ratio ($2/day)
98%
36%
The grand view
The grand view
The grand view
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Industrialization1978
and urbanization
in
progress
2008
OECD
GDP
decomposition
Agriculture
28%
11%
2.6%
Industry
48%
49%
27%
Service
24%
40%
70%
Rural
81%
57%
23.3%
Urban
19%
43%
76.7%
Population
The grand view
The grand view
The grand view
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Active participant in international trade and a
2008
major destination of FDI 1978
Exports (2000 USD, in billions)
Annual growth rate
Imports (2000 USD, in billions)
Annual growth rate
FDI (current USD, in billions)
Annual growth rate
Foreign exchange (USD, in
billions)
Annual growth rate
32.6
20.6
0
0.17
905
11.7%
594
11.9%
148
26%
1,946
17%
The grand view
The grand view
The grand view
International Capital Movements
through FDI and MNCs
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Introduction
 China
experienced rapid economic growth
since 1978
The grand view of Chinese economics
 Among causes, the economists emphasized on the
liberalization has been the permitted entry of more
foreign investors into manufacturing, such FDI has
increased dramatically which has been especially
important in the emergence of the strong export
sector (owned or partly owned by foreign investors)
 China way: political economy approach (policies)
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International Capital Movements
through FDI and MNCs
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The nature of international capital flow
 Definitions
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Foreign direct investment: a movement of capital
that involves ownership and control
Foreign subsidiary: the firm whose shares were
purchased by foreigners more than 50%
 Branch plant: the building of a plant in one country which
owned by a foreign company
 FDI is usually discussed in the context of MNC, or MNE
or TNC, or TNE
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International Capital Movements
through FDI and MNCs
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Foreign portfolio investment: it does o t involve
ownership or control but the flow of what
economists call “financial capital” rather than “real
capital”
Deposit in foreign banks
 Purchase of bond of a foreign company or foreign
government
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International Capital Movements
through FDI and MNCs
 Some
data on Foreign Direct Investment and
Multinational corporations
The fast increased stock capital (accumulated FDI)
growth rate in recent years (about 15%-20%)
outstripped the growth rates of international trade
 Table 1: the amount of U.S. FDI to other countries
(total booked value)
 Table 2: the size of FID in U.S.
 Table 3: 10 largest corporations in the world
 Table 4: 10 largest banks in the world
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International Capital Movements
through FDI and MNCs
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Reasons for international movement of
capital
 Centric
view: the mobility of capital across
country borders is because the capital is
moved in response to the expectation of a
higher rate of return in the new location than it
earned in the old location
International Capital Movements
through FDI and MNCs
 Several
hypotheses
Firms will invest abroad in response to large and
rapidly growing markets for their products (positive
correlation between GDP of a recipient country
and the amount of FDI flowing into that country)
 Developed-country firms will invest overseas if the
recipient country has a high per capita income
(China is an exception)
 The foreign firm can secure access to mineral or
raw material deposits in that country
 To “get behind the tariff wall” and built tariff
factories in the host country
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International Capital Movements
through FDI and MNCs
The existence of low wages because of relative
labor abundance in the recipient country is an
attraction when the production process is labor
intensive
 Firms also argue that they need to invest abroad
for defensive purpose to protect market share
 Firms may want to invest abroad as a means of
risk diversification
 Firms may find they have some firm-specific
knowledge (management skills) or assets (patent)
and it enables them to outperform the domestic
firms, thus huge profit
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International Capital Movements
through FDI and MNCs
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Analytical effects of international capital
movements
 Assume:
two country, two factor of production,
one homogeneous good
 Marginal physical product of capital to
production: the additions to output that result
from adding one more unit of capital to
production when all others inputs are held
constant
International Capital Movements
through FDI and MNCs
 AB->MPPKI, A’B’->MPPKII, 00’->total capital
 Initial situation: K1, r1 and r2, GDP, capital and
labor’s
return
 After capital is permitted to move between countries,
what happened?
International Capital Movements
through FDI and MNCs
 The
effect of capital flow K2K1 from country II
to country I on output
Output of country I increase
 Output of country II decrease
 World output and thus efficiency of world resource
use has increased
 Free movement of factors can equalize return to
factors in the two country
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International Capital Movements
through FDI and MNCs
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Potential benefits and costs of Foreign Direct
Investment to a host country
 Potential
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benefits of FDI
Increased output
Increased wages
Increased employment
Increased exports
Increased tax revenues
Realization of scale of economies
Provision of technical and managerial skills and of new
technology
Weakening of power of domestic monopoly
International Capital Movements
through FDI and MNCs
 Potential
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costs of FDI
Adverse impact on the host country’s commodity TOT
Transfer pricing
Decreased domestic saving
Decreased domestic investment
Instability in the balance of payments and the exchange rate
Loss of control over domestic policy
Increased unemployment
Establishment of local monopoly
Inadequate attention to the development of local education
and skills
International Capital Movements
through FDI and MNCs
 Overview
of benefits and costs of foreign
direct investment
No general assessment can be made regarding
whether the benefits outweigh the costs
 Developed and developing countries often try to
institute policies that will improve the ratio of
benefits to costs connected with a foreign capital
inflow—performance requirements
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International Capital Movements
through FDI and MNCs
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There are impacts of FDI on the sending or home
country of the investment as well as on the
receiving or host country
The sending country experiences a reduction in its GDP,
a reduction in total wages, and an increase in the total
return to its investors.
 International trade could also be affected
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Labor Movements Between Countries
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Labor movements in the world
 In
both America and Europe, immigration has been
the main driver of population growth
 Technically, the desire to migrate on the part of an
individual depends on the expected costs and
benefits of the move, among them, expected wage or
income differences are an important factor
 In the same time, the movement of labor can
influence the average wage in both the old and the
new locations, thus has welfare implications
Labor Movements Between Countries
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Economic effects of labor movements
 Assume:
homogeneous labor, two country,
 Labor should move from areas of abundance
and lower wages to areas of scarcity and
higher wages and causes the wage rate to
rise in the old area and to fall in the new area,
until the wage rate is equalized between the
two regions
Labor Movements Between Countries
 Demand
curve DI, DII. Point A, Point B. output.
Welfare and productivity of the other factors
 Labor loss BDFG, immigrants earn L1ADL2, other
factors earn ABFGD
Labor Movements Between Countries
 Overall
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well-being in both countries and the world
For country I, output (GDP) falls at a slower rate than the
decrease in the labor force, leading to an increase in per
capita output
For country II, output grows more slowly than the increase in
the labor force, leading to a decrease in per capita output
The world gains from this migration since the fall in total
output in country I is more than offset by the increase in
output in country II by the shaded area ABC
Labor Movements Between Countries
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Immigration and the United States—recent
perspectives
 Up
through the 1970s, based on the stylized facts
regarding immigration in the first half of the century, it
was widely accepted that although immigrants as a
group were initially in an economically disadvantaged
position, their earnings soon caught up with the
earnings of those domestic workers with similar
socioeconomic backgrounds and eventually
surpassed them within 10 to 20 years on average,
and appeared to have little or no adverse impact on
the domestic labor market.
Labor Movements Between Countries
 Later
analyze indicates that there is a marked
increase in the proportion coming from developing
countries and a decline in the immigrants’ skill levels.
Thus, it is not likely that the more recent wave of
immigrants will continue to obtain wage parity with
domestic workers of similar socioeconomic
backgrounds
 It suggests not only the new immigrants will likely
have a heavier participation rate in U.S. welfare
programs but also that this differential will carry over
into second-generation wage and skill differences,
which will be reflected in widening ethnic income
differences within the overall labor market
Labor Movements Between Countries
 There
is also weak evidence that the
increasing numbers and declining skill levels
of immigrants may have contributed to the
relative decline of domestic unskilled wages in
the 1980s
 Countries which are able to effectively control
the skill characteristics of the new migrants
will be able to negate some of the
aforementioned negative effects
Summary

To research the international capital
movements through FDI and MNCs

To investigate the labor movements
between countries