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

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

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

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

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

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

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

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

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

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

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

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