Factor Flows: Increased Productivity  Increased Return

1. Factor Flows: Increased Productivity  Increased Return Productivity depends on: Factor scarcity COOPERATING factors (including more of same) Agglomeration economies Interactions … Exchange of information Institutional quality Rule of law Protection of property rights Country risks

2. Operating Abroad • Export from home base • License / franchise foreign providers • Foreign Direct Investment (FDI) • Multinational enterprises (MNEs) • Joint ventures • What’s the nationality? • EXXON — Burger King • Toyota — Baskin—Robbins • Ikea • Aldi

3. MNE Motives • EXPAND • Market penetration • Preempt competition • Cost advantages • Skirt restrictions/trade barriers • Hedge • Against currency fluctuations • Against market shifts

4. Reasons for Japanese direct investment in U.S.: • creates jobs and goodwill • political insurance • avoids potential trade barriers • access to expanding U.S. market • hedge against yen-dollar fluctuations Japanese Transplants in U.S. Auto Industry

5. political risk: government stability, corruption, domestic conflict, religious & ethnic tensions Country Risk Analysis • financial risk: debt to GDP ratio, loan defaults exchange rate stability • economics risk: growth of GDP, per capita GDP, inflation rate

6. Flavors of MNEs • Vertical integration • Backward: secure inputs to core business • Forward: secure market position of final good • Horizontal integration • Create and service overlapping demand for core products • Conglomeration • Add international dimension to business portfolio

7. The Joint Venture Alternative • Combine skills • Share costs • Share risks • Gain local acceptance/leverage • Joint venture with foreign government • Forestall protection • Forestall competition Encounter Coordination Problems

8. International Joint Ventures • Reasons for joint ventures: • some costs too large for any one company • government restrictions on foreign ownership of local businesses • means of avoiding protectionism against imports

9. FDI and Its Discontents Host discontents • MNEs purchase existing businesses  No new jobs • Foreign bosses • Loss of sovereignty • Gimmicks like transfer pricing  tax avoidance Source discontents • [Short-term] job loss • Technology transfer • Lose competitive edge • Create own gravediggers • Loss of sovereignty • MNE end runs

10. Labor Immigration Push or Pull? Wage Convergence Winners – Losers Long-run impacts The division of labor is limited by the extent of the market Profits  Investment  Jobs

11. U.S. immigration - initially more Western Europeans – recently more Mexican and Asian • Immigration Act of 1924 – limited overall flow & Labor Mobility - Migration • established specific quota from each country based on previous emigration patterns • quota formula modified in 1965

12. labor migration equalizes wages • increase in output and welfare in the U.S. • decrease in output and welfare in Mexico • net gain in world output due to higher VMP in U.S. Effects of Migration