ECON International Economics Chapter 8 Factor Movements and FDI

Any flow of factors of production between countries is known as “factor movements” Separate terminology for each factor flow Labor – Migration Capital – FDI Entrepreneurship – “Brain drain” Inflow and outflow of factors of production should have predictable effects What are they? What should happen in a “common market”? 2

Economic theory suggests that if migration were zero cost and also legal to everywhere, then wages across countries would equalize So unless there is excess demand for labor in a certain industry, by increasing labor supply, ceteris paribus, there will be some downward pressure on wages. Effect should also increase wages in country of origin There is some evidence of this happening in certain industries in the US, but it is not widespread Also migrant remittances back to the origin country – Mexico is a particularly large recipient (then India, Philippines, Morocco, Egypt)

Labor migration can occur within a country, or between countries International migration can occur for reasons of religious persecution, political beliefs, war, following other members of the family, or for economic reasons When international migration for economic reasons occurs, it is mostly between developing/transition countries and developed economies Some migration occurs legally, and some illegally. In NAFTA and the EU, migration can occur legally between all member states, although in NAFTA restricted to degreed workers and in EU some CEECs have limitations

People migrate for economic & demographic, political and social and cultural factors There are both push and pull factors

Often migration occurs to a specific country because of i) perceived jobs available in that country ii) family members already resident in that country iii) wage differentials being large with that country iv) reasons of language and culture v) geography These patterns can be seen by looking at destination countries and where migrants predominantly come from

Who gains from labor migration, and who loses? Do immigrants add to destination country economic fortunes? What is the impact on the origin country of the migrant? Are diaspora effects significant?

So, as of 2000, US had the largest stock of international migrants, but…

…it didn’t even register on the list of countries with the largest % of migrants

Migration is desirable, particularly if it brings certain skills to the work force of the recipient country. So it is important to know the skill set that migrants have…

Migrants are on average more educated and less educated than the resident population

Presumably, legal immigration is desirable as long as the migrants can find/get gainful employment….

This is a complex issue, particularly in the US and EU. Governments try to curb illegals

FDI = Foreign direct investment It appears in the financial account of the balance of payments Increasingly important in terms of the size of flows from the 1980s onwards Most FDI is between developed countries FDI can be: i) “greenfield” FDI – new plants ii) taking over control of existing plants

 Main reason is that domestic savings do not support much investment in developing countries  Therefore FDI represents an important source of investment  But FDI also leads to: i) technology transfer – new technologies are introduced ii) higher pay – usually foreign firms hire best workers so payhigher wages than domestic firms – tends to put upward pressure on wages iii) more FDI if seen as a “signalling” that country is welcoming for foreign companies  FDI can also lead to higher exports if the foreign subsidiary services the region rather than the specific country

Most FDI is done by MNEs (85%) MNE = Multinational enterprise Most MNEs expand their operations into other countries by acquiring existing companies or establishing a new subsidiary. This also leads to trade in intermediate goods (parts etc) from the home country to the subsidiary (e.g. Volkswagen producing vehicles in Mexico for NAFTA)

Big debate in economics as to whether trade and FDI are compliments or substitutes i)If complimentary, FDI will increase the amount of trade in the host country (e.g. Mexico) ii)If a substitute, FDI will reduce the amount of trade for the host country (e.g. Japanese car plants in the US) Clearly answer depends on type of FDI, the country, and whether the FDI creates a plant which produces for domestic or regional market

FDI differs from other capital flows as it is not easily reversible. “Money” capital flows can easily be reversed so inflows can easily turn into outflows.  FDI inflows rarely turn into outflows within a 5 year period  Inward FDI is usually a commitment to the country for a specific period of time while production is ramped up and new clients/markets established  In some countries certain industries are protected from foreign ownership (e.g. Canadian media companies and Banks), so inward FDI in these sectors limited

Forum for multilateral cooperation on trade is clearly WTO No obvious place for negotiating any multilateral agreement on FDI In 1996 OECD tried to take the initiative here by proposing a “Multilateral agreement on investment” (MAI) Main objective was to have reciprocal agreement on how to treat FDI and to limit government ability to “nationalize” foreign assets Agreement was put aside in 1998 after deluge of criticisms from anti-globalization protesters

More restrictions/regulations on outflows More international investment agreements