Understanding Multinationals, FDI, and International Migration

1. Session 15 Multinationals and Migration: International Factor Movements

2. Foreign Direct Investment (FDI) Foreign Direct Investment Foreign Direct Investment (FDI) is the flow of funding provided byan investor or lender (usually a firm) to establish or acquire a foreigncompany or to expand or finance an existing foreign company thatthe investor owns and controls. International Portfolio Investment International portfolio investment is used for all foreign investmentsthat do not involve management control.

4. Multi-national Enterprise (MNE) • A firm that owns and controls operations in more than one country. • The parent firm of the MNE is located in the home country. The home country is the source country for outward FDI. • The MNE has one or more affiliates located in one or more host countries. The host country is the destination country for inward FDI.

5. FDI Measurement Flow Definition Flows of FDI measure new equity investments and loads with MNEs during a period of times. Stock Definition Stocks of FDI measure the total amount of direct investments that exist at a point in time.

7. Why Do MNEs Exist? • Inherent disadvantages of operating a foreign affiliate competing against local firms. • Firm-specific advantages of the MNE, especially intangible assets. • Internalization advantages in using these assets. • Location factors based on resource costs and availability, customer demand, government policies, and other considerations. • Oligopolistic rivalry that uses FDI in the firms’ strategies for competing.

8. Taxation of Multinational Enterprise’s Profits Two types of taxation 1) The host country-country governments tax the profit of the local affiliates of the multinational. For MNEs, This is less likely to be avoided. 2) The home country government taxes the parent company’s “local” profits earned on its own activities. This happens in some countries; but such home country governments only collects few taxes on the profits of foreign affiliates

9. International Intra-firm Trade Complement Components MNEs locate based on absolute advantages of each country. Two Alternatives To achieve “economies of scale” 1) One country 2) Many countries To reduce “risk”

11. Should the Home Country Restrict FDI Outflows ? Should the Host Country Restrict FDI Inflows ? • The effect on workers • The effect on owners • The effect on the government revenues • The external benefit and costs

12. International Migration International migration is the movement of people from one country (the sending country) to another country (the receiving country) in which they plan to reside for some noticeable of time.

13. How Migration Affects Labor Markets Sn + Smig Sn Sr -Smig Sr D1 Dn Employers Lose Native Worker Lose Workers Remaining Gain Employers Gain

14. Should The Sending Country Restrict Immigration ? Considered Issues • Government Budget • Brain Drain

15. Should The Receiving Country Restrict Immigration ? Considered Issues • Knowledge Benefit • Congestion Costs • Social Friction