Ch15_Multinationals & Migration

Ch15_Multinationals & Migration - MULTINATIONALS...

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Unformatted text preview: MULTINATIONALS AND MIGRATION 1 2 3 •1 Agenda • So far we’ve discussed movements of goods and services goods services We found them politically controversial • Now we’ll talk about factor movements factor These are much more controversial • Capital movements • Labor movements • MNEs Agents of evil? 4 Foreign Investment • Purchases of foreign assets by the home country’s private economic actors • Two main types of foreign investment Portfolio investment Basically no managerial control over the enterprise Debt if doesn’t come with equity ownership Government securities Foreign direct investment (FDI) Implies control (>10% ownership) Greenfield or existing entities 6 Examples of FDI and Portfolio Investments 7 •2 Why Foreign Investment? • At the macroeconomic level, net foreign investment occurs when domestic private saving exceeds domestic absorption Private Sav – Private Inv – Gov Def = Foreign Inv Foreign investment > = < 0 R Cap Outflow; CA Surplus Savings Supply RRoW RAut RRoW Cap Inflow; CA Deficit Investment Demand Q 8 Why Foreign Investment? • A country exports capital when it has excess savings: Its savings rate is high China, Asian tigers in general Gov budget is in surplus Investment opportunities are limited • A country imports capital when it has a “shortage” of savings Low savings rate, Gov budget deficit, plenty of investment opportunities U.S. 9 Why Foreign Investment? • BUT! This doesn’t determine WHO does the net investing. For example, in 2004 U.S. foreign investment abroad was $860 billion Foreign investment in the U.S. was $1,045 billion • The remaining net flow to balance the foreign accounts was provided by foreign governments $394 billion! 10 •3 FDI Facts 11 Foreign Direct Investment • Most FDI comes from developed countries and goes to other developed countries • You would maybe expect capital to flow from the rich to the poor? 12 Direct Investment, Major Home Countries (End of 2002, Billions of U.S. Dollars) (End 13 •4 Foreign Direct Investment • Most of the FDI is done by Multinational Enterprises --MNEs • What is a MNE? • Why do MNEs inspire so much hatred and invective in the rest of the world? 14 Multinational Enterprise (MNE) • A firm that owns and controls operations in more than one country • The parent firm of a MNE is located in the home country. The home country is the source country for outbound FDI • A MNE has one or more affiliates located in one or more host countries. The host country is the destination country for inbound FDI 15 General Issues with FDI • The questions about the direction and composition of FDI mirror the issues that are raised about the direction and composition of trade • Substantial FDI between industrialized countries that are economically similar Intra-industry FDI • For a refresher, see Chapter 6! 16 16 •5 Why Intra-Industry FDI? • Economies of Scale Internal economies of scale Pertain to a particular firm Unit costs of the firm decline as it expands External economies of scale Pertain to a particular industry within a geographic area Unit costs of the firm decline as the industry expands • Monopolistic competition 17 Why Do MNEs Exist? • Inherent disadvantages of operating a foreign affiliate competing against local firms • Firm-specific advantages especially intangible assets of the MNE, • Internalization advantages in using these assets Investing versus licensing to local parties 18 Why Do MNEs Exist? • Location factors based on resource costs and availability, customer demand, government policies, and other considerations Comparative advantage Economies of scale Barriers to importing into the foreign country Trade blocs • Oligopolistic rivalry that uses FDI in the firms’ strategies for competing 19 •6 More On MNEs • FDI is financed mostly from local sources Less than 1/3 is foreign equity • Tax treatment differs by organization Branches Subsidiaries • Subs remit income in the form of dividends even if wholly-owned Often they are not Foreign partners 20 Taxation of Foreign Income • Tax avoidance Judicious transfer pricing Collecting taxable profits in low-tax countries Tax havens Policing transfer prices; arm-length transactions Tax on proportion of global income? • Tax competition 21 Effective Tax Rates for Affiliates of U.S. Multinationals Operating in European Countries 22 •7 FDI Outflow; Restrict It? • Effect on workers and others who provide inputs into production in the sending country Maybe lose • Effect on the owners of the MNEs located in the sending country Definitely gain • Effects on government budget, especially revenues, in the sending country Maybe lose 24 FDI Outflow; Restrict It? • External benefits or cost to the sending country associated with FDI Gain? • MNEs lubricate the political process so there is very little government opposition to FDI outflows in developed countries 25 FDI Inflow; Restrict It? • Effect on workers and others who provide inputs into production in the receiving country Gain • Effect on the owners of the companies located in the receiving country They think they lose; almost certainly big gain overall • Effects on government budget in the receiving country Probably gain; depending on the cost of luring MNE FDI! 26 •8 FDI Inflow; Restrict It? • External benefits or cost to the receiving country associated with FDI Technology transfer Human capital externalities Higher incomes make education more desirable They are foreigners! MNE interference in the political process Hawaii, Nicaragua, Honduras (United Fruit), Chile (ITT), Iran (BP), Cuba, Panama/Colombia, and others Insensitive to local sensibilities 27 Human Migration Definition of terms • Migrants (migration) Those who leave their country for another • Emigrants (emigration) Those who leave their country of origin for a new location • Immigrants (immigration) Those who arrive in a new destination country 28 Human Migration • Essential part of all species behavior • Essential part of human history Current version of the human race spread from Africa Small group; the “genetic bottleneck” Defeated or obliterated the Neanderthal Man! Spread everywhere Americas over the Bering Straights? • In search of better living (food before wages now) These were likely economic migrants 29 •9 Human Migration • Migration before the rise of “Nationalism” was not a big deal The Roman Empire had no issue with immigration Their distinctions were slaves, free men, citizens The Americas were colonized, so was Australia and New Zealand 30 Human Migration Even in Europe through the 19th century, immigration was not much of an issue Also, up until that time, per capita incomes were not very different around the world, at least among well-organized countries That changed, because of the Industrial Revolution 31 Gross Immigration Rates Into the U.S. 1820-2004, and Canada, 1852-2004 18201852Picture in total numbers would be a lot different! 32 •10 Net Immigration Rates into the European Union, 1960-2004 1960Note the scale difference between the two graphs (10X) Comparable to current U.S. 33 Human Migration • Nationalism, the arms race preceding WWI, wars (WWI & WWII), and the Great Depression reduced immigration flows • Picks up at the end of WWII (refugees) and after Political refugees Economic refugees 34 Human Migration • Current situation Demand for immigration in Europe Turkish, Greek, Eastern European, Africa (North & subsaharan) workers to Western Europe Demand for immigration in the U.S. (?) Demand for immigration in Canada and Australia Immigration to Israel Iron curtain distintegrates Very large movements of people Illegal immigration U.S. and the E.U. Crime, prejudice, religious issues 35 •11 Population Growth Rates • Population growth rates increase emigration pressures because high population growth rates make standard of living increases harder to achieve • Recent evidence suggests that fertility rates are shrinking precipitously! Children are assets in agrarian societies Children are costs in urban societies 36 Economics of Fertility 37 37 A Population Forecast 38 •12 Labor-Market Effects of Migration LaborSr is net of migration Sn + Smig Receiving Country: Sending Country: Migrants: e + f Labor demanders: a + b Labor demanders: -d - e World: Labor Suppliers: -a Labor Suppliers: d d b+f 39 Why Do Countries Allow Emigration? • Net economic loss See preceding graph • Emigrants probably self-select Troublemakers Difference makers Brain drain? • Political pressure relief Mexico Mariel boatlift? 40 Immigration Issues • Cost or benefit to the host nation? Governments Country as a whole • • • • • Apparent costs of immigrants Apparent benefits of immigrants Social tensions Acculturation Religion and immigration 41 •13 Summary • Global movement of capital FDI MNEs Restrictions • Global movement of people Emigration Immigration Current issues with immigration worldwide 42 THE END 43 •14 ...
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This note was uploaded on 02/15/2011 for the course FBE 462 at USC.

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