international factor movements
DESCRIPTION
International Factor Movements. Factors of Production: Capital. Types of capital foreign investment Foreign Direct Investment (FDI) Foreign Portfolio Investment (FPI) FDI: Can involve individuals but the bulk is done by firms. - PowerPoint PPT PresentationTRANSCRIPT
Copyright © 2010 by The McGraw-Hill Companies, Inc. All rights reserved.McGraw-Hill/Irwin
International Factor
Movements
12-2
Factors of Production: Capital
Types of capital foreign investment• Foreign Direct Investment (FDI) • Foreign Portfolio Investment (FPI)
FDI: Can involve individuals but the bulk is done by firms.• known as: multinational corporations
(MNCs), Multinational Enterprise (MNE), Transnational Corporation (TNC), or Transnational Enterprise (TNE)
Global FDI Flows In 2011, the accumulated stock of
global FDI was over $20 trillion. (UNCTAD data)
This stock is growing each year but the growth has slowd down since 2008 due to the impact of global crisis.
65% of FDI flows is in developed economies and remaining 35% in developing economies.
12-3
U.S. Direct Investment Position Abroad by Industry, 2007
Industry Value ($, billions)
Share
Finance and Insurance $531.9 19.1%
Manufacturing 531.3 19.0%
Wholesale Trade 183.0 6.6%
Mining 147.3 5.3%
Information 111.9 4.0%
Depository Institutions 91.8 3.3%
Other Industries 1,193.8 42.8%
Total 2,791.3 100.0%12-4
U.S. Direct Investment Position Abroad by Region or Country, 2007
Region or Country
Value ($, billions
Share
Europe $1,551.2 55.6%
Latin America 472.0 16.9%
Asia/Pacific 454.0 16.3%
Canada 257.1 9.2%
Middle East 29.4 1.1%
Africa 27.8 1.0%
Total 2,791.3 100.0%
12-5
World’s Largest Corporations, 2008 (billions of $)
Company Home Country Revenues
Wal-Mart U.S. $378.8
Exxon Mobil U.S. $372.8
Royal Dutch Shell Netherlands $355.8
BP U.K. $291.4
Toyota Motor Japan $230.2
Chevron U.S. $210.8
ING Group Netherlands $201.5
Total France $187.3
GM U.S. $182.3
Conoco Phillips U.S. $178.612-6
Reasons for International Movement of Capital
To access growing markets. To secure access to raw materials. To avoid tariffs and NTBs. To take advantage of low wages. Defensive purposes to prevent loss of
market share. Risk diversification. MNC efficiency over local suppliers.
12-7
Capital Market Equilibrium
MPPKI
k10
MPPKII
MPPKI
MPPKII
0'
Initially, suppose Country I has 0k1 as its capital stock. This means Country II will have 0'k1.
12-8
Capital Market Equilibrium
MPPKI
r1
k10
MPPKII
MPPKI
MPPKII
0'
r1'
The price of capital will be r1 in Country I and r1’ in Country II.
12-9
Capital Market Equilibrium
MPPKI
r1
k10
MPPKII
MPPKI
MPPKII
0'
r1'
Output in Country I
12-10
Capital Market Equilibrium
MPPKI
r1
k10
MPPKII
MPPKI
MPPKII
0'
r1'
Payment to Labor
Payment to Capital
12-11
Capital Market Equilibrium
MPPKI
r1
k10
MPPKII
MPPKI
MPPKII
0'
r1'
Output in Country II
12-12
Capital Market Equilibrium
MPPKI
r1
k10
MPPKII
MPPKI
MPPKII
0'
r1'
Payment to Labor
Payment to Capital
12-13
Capital Market Equilibrium
K
MPPKI
r1
k10
MPPKII
MPPKI
MPPKII
0'
r2
k2
r2'r1'
If capital can flow freely across international borders, k2k1 units of capital will flow from II to I because r1 > r1’. Eventually, r will fall in Iand rise in II until r = r2 = r2’ in both countries.
12-14
Capital Market Equilibrium
K
MPPKI
r1
k10
MPPKII
MPPKI
MPPKII
0'
r2
k2
r2'r1'
What happens to output in Country I? It rises due to the capital inflow.
Increase in output
12-15
Capital Market Equilibrium
K
MPPKI
r1
k10
MPPKII
MPPKI
MPPKII
0'
r2
k2
r2'r1'
What happens to output in Country II? It falls because of the loss of capital.
12-16
Capital Market Equilibrium
K
MPPKI
r1
k10
MPPKII
MPPKI
MPPKII
0'
r2
k2
r2'r1'
What happens to output in Country II? It falls because of the loss of capital.
Output after capital outflow
Loss in output
12-17
Capital Market Equilibrium
K
MPPKI
r1
k10
MPPKII
MPPKI
MPPKII
0'
r2
k2
r2'r1'
Overall, world output rises.
12-18
Economic Effects of International Capital Flows
On Incomes Output rises in country I (the country
to which the capital flows), BUT:• Returns fall for capitalists, since their rate
of return decreases.• Returns rise for laborers.
Capitalists are hurt; labor benefits. Therefore, per capita income rises in
Country I.
12-19
Economic Effects of Int’l Capital Flows On Incomes
K
MPPKI
r1
k10
MPPKII
MPPKI
MPPKII
0'
r2
k2
r2'r1'
Loss by capitalists in Country I
12-20
Economic Effects of Int’l Capital Flows On Incomes
K
MPPKI
r1
k10
MPPKII
MPPKI
MPPKII
0'
r2
k2
r2'r1'
Gain by laborers in Country I
12-21
Economic Effects of Int’l Capital Flows On Incomes
K
MPPKI
r1
k10
MPPKII
MPPKI
MPPKII
0'
r2
k2
r2'r1'
Net income gain in Country I
12-22
Economic Effects of Int’l Capital Flows On Incomes
Output falls in country II (the country from which the capital flows), BUT:• Returns rise for capitalists, since their rate
of return increases.• Returns for laborers fall.
Capitalists are better off; labor is worse off.
Because overall incomes rise, per capita income rises.
12-23
Economic Effects of Int’l Capital Flows On Incomes
K
MPPKI
r1
k10
MPPKII
MPPKI
MPPKII
0'
r2
k2
r2'r1'
Income gain by capitalists in Country II
12-24
Economic Effects of Int’l Capital Flows On Incomes
K
MPPKI
r1
k10
MPPKII
MPPKI
MPPKII
0'
r2
k2
r2'r1'
Lost labor income
12-25
Economic Effects of Int’l Capital Flows On Incomes
K
MPPKI
r1
k10
MPPKII
MPPKI
MPPKII
0'
r2
k2
r2'r1'
Overall gain in income in Country II
12-26
International Capital Flows: A Summary
Both countries’ incomes rise as a result of capital flows.
World output rises. Capitalists in inflow country (Country I)
and Laborers in outflow country (Country II).
Capitalists in outflow country (Country II) and Laborers in inflow country (Country I) are better off.
12-27
Potential Benefits of FDI to Host Country
Increased output Increased wages Increased employment Increased exports Increased tax revenues Realization of economies of scale Import of technical and managerial skills Weakening power of domestic monopoly
12-28
Potential Costs of FDI to Host Country
Adverse impact in the country’s commodity terms of trade
Transfer pricing Decrease in domestic savings Decrease in domestic investment Instability in the balance of payments Loss of control over domestic policy
12-29
Potential Costs of FDI to Host Country (cont’d)
Increase in Unemployment Establishment of Local Monopoly Inadequate attention to the
development of local education and skills
Loss of natural resources
12-30
Why Migrate?
Simply put, migration occurs when the expected costs of migrating are less than the expected benefits.
12-31
Economic Effects of Labor Migration
MPPLI
WI
L2
MPPLI
wI MPPLII
MPPLII
WII
0 0'
GDP in Country I is given by the shaded area:
wII wII
wI
Income of capitalists
Income of laborers
12-32
Economic Effects of Labor Migration
MPPLI
WI
L2
MPPLIwI MPPLII
MPPLII
WII
0 0'
GDP in Country II is given by the shaded area:
wII wII
wI
Income of capitalists
Income of laborers
12-33
Economic Effects of Labor Migration
MPPLI
WI
L2
MPPLI
wI MPPLII
MPPLII
WII
0 0'
If migration is possible, 0L1 workers will work in Country I and 0'L1 in Country II. The wage will be the same: Weq.
wII wII
wI
L1
weq weq
12-34
Economic Effects of Labor Migration
MPPLI
WI
L2
MPPLI
wI MPPLII
MPPLII
WII
0 0'
What happens to Country I? GDP falls because of out-migration:
wII wII
wI
L1
weq weq
Lost GDP
12-35
Economic Effects of Labor Migration
GDP falls in country I (the country from which the migrants come), BUT:• Wages rise for remaining workers.• It can be shown that the decrease in the
Country I labor force is greater than the decrease in GDP, so per capita income rises.
Capitalists are hurt; labor benefits.
12-36
Economic Effects of Labor Migration
MPPLI
WI
L2
MPPLIwI MPPLII
MPPLII
WII
0 0'
What happens to Country II? GDP rises because of in-migration:
wII wII
wI
weq weq
Increase in GDPII
12-37
Economic Effects of Labor Migration
GDP rises in country II (the country to which migrants go), BUT:• Wages fall.• It can be shown that the increase in the
Country II labor force is greater than the increase in GDP, so per capita income falls.
Labor is worse off; capitalists are better off.
12-38
Economic Effects of Labor Migration
MPPLI
WI
L2
MPPLIwI MPPLII
MPPLII
WII
0 0'
Country I’s loss in GDP is smaller than Country II’s gain, so world GDP rises.
wII wII
wI
weq weq
Increase in GDPII
12-39
Economic Effects of Labor Migration
MPPLI
WI
L2
MPPLIwI MPPLII
MPPLII
WII
0 0'
Country I’s loss in GDP is smaller than Country II’s gain, so world GDP rises.
wII wII
wI
weq weq
Decrease in GDPI
12-40
Economic Effects of Labor Migration
MPPLI
WI
L2
MPPLIwI MPPLII
MPPLII
WII
0 0'
Country I’s loss in GDP is smaller than Country II’s gain, so world GDP rises.
wII wII
wI
weq weq
Increase in Total GDP
12-41
International Migration: Other Considerations
Migrants now in Country II may send remittances back to Country I• So I’s per capita income rises by even
more, and• II’s per capita income falls by even more.
If the migrants are “guest workers” and they can be paid a lower wage, it may be possible for capitalists in Country II to be better off without domestic labor being worse off.
12-42
International Migration: Other Considerations
If the immigrants are low-skill workers, the host country may experience rising social costs.
If the immigrants are high-skill workers, the host country may benefit, and the migrants’ home countries may suffer. This is called the “brain drain.”
12-43