INTERNATIONAL TRADE LECTURE 12: International Factor Movements

INTERNATIONAL TRADE

LECTURE 12:

International Factor Movements

Contents To research the international capital move

ments through FDI and MNCs

To investigate the labor movements between countries

Introduction 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 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

Introduction China experienced rapid economic growth

since 1978 The grand view of Chinese economics

The Grand view

30 years of high-speed growth

1978 2008

GDP (2000 USD, in billions) 157.7 2,602.6

Annual growth rate 9.8%

GDP per capita (2000 USD) 165 1,965


The grand view

The grand view

The Grad view

Living standard substantially improved

1981 2005

Urban DPI (current RMB) 500.4 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

Industrialization and urbanization in progress1978 2008 OECD

GDP decomposition

Agriculture 28% 11% 2.6%

Industry 48% 49% 27%

Service 24% 40% 70%

Population

Rural 81% 57% 23.3%

Urban 19% 43% 76.7%

The grand view

The grand view

The grand view

Active participant in international trade and a major destination of FDI 1978 2008

Exports (2000 USD, in billions) 32.6 905


Imports (2000 USD, in billions) 20.6 594


FDI (current USD, in billions) 0 148

Annual growth rate 26%

Foreign exchange (USD, in billions)

0.17 1,946

Annual growth rate 17%

The grand view

The grand view

The grand view


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)


The nature of international capital flowDefinitions

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


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 govern

ment


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


Reasons for international movement of capitalCentric 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


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


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


Analytical effects of international capital movementsAssume: two country, two factor of production,

one homogeneous goodMarginal 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


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?


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


Potential benefits and costs of Foreign Direct Investment to a host country Potential 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


Potential 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


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


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

Labor Movements Between Countries

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


Economic effects of labor movementsAssume: 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


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


Overall 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


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.


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


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 move

ments through FDI and MNCs

To investigate the labor movements between countries

Documents

INTERNATIONAL TRADE LECTURE 12: International Factor Movements