Multinationals and Migration: International Factor Movements Chapter 15: Multinationals and Migration: International Factor Movements

Foreign Direct Investment (FDI) Funding provided by investors (usually firms) to establish or acquire foreign companies or to expand or finance existing foreign companies that the investors own. Key is sufficient ownership to control or influence the management of the foreign company. The agreed international standard is at least 10 percent ownership. © 2016 McGraw-Hill Education. All Rights Reserved.

Foreign Direct Investments and Portfolio Investments © 2016 McGraw-Hill Education. All Rights Reserved.

Multinational Enterprises (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. © 2016 McGraw-Hill Education. All Rights Reserved.

FDI: Flows and Stocks Flows of FDI measure new equity investments and loans within MNEs during a period of time Stocks of FDI measure the total amount of direct investments that exist at a point in time © 2016 McGraw-Hill Education. All Rights Reserved.

Major Home Countries’ Direct Investment Stocks, End of 2011 (Billions of Dollars) © 2016 McGraw-Hill Education. All Rights Reserved.

Why Do Multinational Enterprises (MNEs) Exist? Inherent disadvantages of operating a foreign affiliate competing against local firms. Firm-specific advantages of the MNE, especially intangible assets. Location factors based on resource costs and availability, customer demand, government policies, and other considerations. Internalization advantages in using these assets. Oligopolistic rivalry that uses FDI in the firms’ strategies for competing. © 2016 McGraw-Hill Education. All Rights Reserved.

Taxation of MNEs’ Profits The profits of MNE’s come from the operations of the parent firms and their foreign affiliates National governments impose taxes on business profits Many tax details. Here is broadly the outcome for most countries. The host-country governments tax the profits of the local affiliates of the MNEs, and the home-country government taxes the parent company’s “local” profits earned on its own activities. © 2016 McGraw-Hill Education. All Rights Reserved.

Taxation of MNEs’ Profits Because tax rates vary across host countries, and because global MNEs try to minimize the total taxes that they pay, two important issues arise: MNEs can shop around among countries and locate its affiliates in the jurisdictions with governments offering lower tax rates. MNEs can use transfer pricing to report more of their profits in low-tax countries, even though profits were actually made in high-tax countries. © 2016 McGraw-Hill Education. All Rights Reserved.

Transfer Pricing and After-Tax Global Profit: A Numerical Example © 2016 McGraw-Hill Education. All Rights Reserved.

MNEs and International Trade MNEs are heavily involved in international trade About one-third of the world’s international trade in goods occurs as intrafirm trade between units of the MNEs located in different countries. Another one-third of the world’s international trade involves an MNE as the seller (exporter) or buyer (importer), trading with other firms. © 2016 McGraw-Hill Education. All Rights Reserved.

MNEs and International Trade In many industries a firm must find reasonable trade-off between: Centralizing production in one or a few locations and exporting to many other countries, to achieve economies of scale. Spreading production to many host countries where the buyers are, to reduce transport costs, to avoid actual or threatened barriers to importing into these countries, or to gain local marketing advantages. There are good reasons to think that FDI and trade could be substitutes or complements. Most studies conclude that FDI, on average, is somewhat complementary to international trade. © 2016 McGraw-Hill Education. All Rights Reserved.

Should the Home Country Restrict FDI Outflows? We can identify several key effects: The effect on workers and others who provide inputs into production in the home country. The effects on the owners of the MNEs based on this home country The effects on the government budget, especially on government tax revenues Any external benefits or costs associated with direct investment out of the country © 2016 McGraw-Hill Education. All Rights Reserved.

Should the Host Country Restrict FDI Inflows? Standard static analysis of FDI finds Workers in the host country gain from increased demand for their services, as do other suppliers of inputs to the affiliates of foreign multinationals The host country government gains from taxes collected on affiliate profits, as long as these exceed the extra costs of any additional government services provided to the affiliates. Domestic firms that must compete with the affiliates lose. Overall there is a presumption that the host country gains well-being in this standard analysis 2. The host country must also weigh indirect economic effects with respect to incoming FDI, including any positive externalities from FDI MNEs bring technology, marketing capabilities, and managerial skills to the host country. While MNE attempts to keep these intangible assets to itself, some of them do spillover to local firms. © 2016 McGraw-Hill Education. All Rights Reserved.

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 period of time. International migration has played an enormous role in the past expansion of receiving countries. © 2016 McGraw-Hill Education. All Rights Reserved.

Gross Immigration Rates into the U. S Gross Immigration Rates into the U.S., 1820-2012, and Canada, 1852-2012 © 2016 McGraw-Hill Education. All Rights Reserved.

Net Immigration Rates into the European Union, 1960-2012 © 2016 McGraw-Hill Education. All Rights Reserved.

How Migration Affects Labor Markets Freer migration makes wage rates in the migrant-related occupations more equal between countries Directly competing workers in the receiving countries have their pay lowered, relative to less immigrant-threatened occupations and relative to such nonlabor incomes as land rents Immigrants’ earnings catch up partly, within their own lifetimes World output is raised by allowing more immigration © 2016 McGraw-Hill Education. All Rights Reserved.

Labor-Market Effects of Migration © 2016 McGraw-Hill Education. All Rights Reserved.

Should the Sending Country Restrict Emigration? The standard economic analysis shows that the sending country loses national well-being. The effects on the sending-country government budget: The sending-country government loses the future tax payments that the emigrants would have made Those who emigrate no longer require government goods, services, and public assistance, so government spending goes down The sending country benefits from remittances sent home by emigrants. © 2016 McGraw-Hill Education. All Rights Reserved.

Should the Receiving Country Restrict Immigration? The standard economic analysis shows that the receiving country gains national well-being Effects on the government budget Government tax and other revenues Government spending External costs and benefits Knowledge benefits Congestion costs Social friction A net benefit is more likely if the immigrant is a young adult, better educated, in better health. © 2016 McGraw-Hill Education. All Rights Reserved.