1. International Economics Mordecai E. Kreinin Copyright ©2002 South-Western/Thomson Learning. All rights reserved. Copyright ©2002 South-Western/Thomson Learning. All rights reserved. Part I International Trade Relations Part I International Trade Relations

2. C9-2 CHAPTER 9 International Mobility of Productive Factors

3. C9-3 OVERVIEW Motives For Direct Investments Abroad Foreign Investment and Economic Welfare (Real Income) International Trade Theory and the Multinational Corporation International Migration of Labor Global Economic Integration Motives For Direct Investments Abroad Foreign Investment and Economic Welfare (Real Income) International Trade Theory and the Multinational Corporation International Migration of Labor Global Economic Integration

4. C9-4 Important Concepts Direct foreign investment (DFI) Multinational corporation (MNC) Host country Source country Tax credit Arm’s-length prices Direct foreign investment (DFI) Multinational corporation (MNC) Host country Source country Tax credit Arm’s-length prices Transfer prices Mobile factors Immobile factors Labor migration Brain drain Global integration

5. DFI Stock Among Triad Members and Their Clusters, 1997 (Billion Dollars) FIGURE 9.1 C9-5

6. C9-6 Motives for Direct Investments Abroad Profit expectations Cost Considerations Need to obtain raw materials from abroad Labor costs Circumvention of tariffs Marketing Considerations Profit expectations Cost Considerations Need to obtain raw materials from abroad Labor costs Circumvention of tariffs Marketing Considerations

7. C9-7 Foreign Investment and Economic Welfare (Real Income) World Welfare Host Country Welfare effect of DFI Performance standards Economic charges against foreign investors Source (Investing) Country Risk of unfavorable public relations Revenue loss to government Loss to domestic economy (labor productivity, quality, methods, techniques) World Welfare Host Country Welfare effect of DFI Performance standards Economic charges against foreign investors Source (Investing) Country Risk of unfavorable public relations Revenue loss to government Loss to domestic economy (labor productivity, quality, methods, techniques)

8. C9-8 Additional Insights: Taxing the Multinational Corporation DFI tax treatment, discriminatory; induces investment abroad Foreign tax credit Tax deferral Tax preferences to Western Hemisphere trade corporation, developing countries, U.S. possessions DFI tax treatment, discriminatory; induces investment abroad Foreign tax credit Tax deferral Tax preferences to Western Hemisphere trade corporation, developing countries, U.S. possessions

9. C9-9 International Trade Theory and the Multinational Corporation Phenomenon of Transfer Pricing Arm’s-length prices Transfer prices Commodity Composition of Trade Mobile factors Immobile factors Phenomenon of Transfer Pricing Arm’s-length prices Transfer prices Commodity Composition of Trade Mobile factors Immobile factors

10. C9-10 International Migration of Labor Consequences of labor migration parallel those of capital movements Brain drain World income Diverse taxation (wage control) Externality Consequences of labor migration parallel those of capital movements Brain drain World income Diverse taxation (wage control) Externality

11. C9-11 Global Economic Integration Increases living standard for world Protesters decry low wages, sub-standard working conditions of MNC laborers in LDCs Indicators of shortfall of integrated global marketplace Home bias in equity holdings Local investment of domestic investments International price discrepancies between industrial countries Price discrimination between countries Significant international trade costs reduce between- country trade Advanced technology unequally shared Unequal income distribution Increases living standard for world Protesters decry low wages, sub-standard working conditions of MNC laborers in LDCs Indicators of shortfall of integrated global marketplace Home bias in equity holdings Local investment of domestic investments International price discrepancies between industrial countries Price discrimination between countries Significant international trade costs reduce between- country trade Advanced technology unequally shared Unequal income distribution

12. C9-12 Summary Causes and effects of international factor movement, mainly DFI Free flow of capital maximizes world welfare Host country effects Source country effects Intracompany trade, transfer prices MNCs affect trade conduct, not theory, policy International migration of labor Causes and effects of international factor movement, mainly DFI Free flow of capital maximizes world welfare Host country effects Source country effects Intracompany trade, transfer prices MNCs affect trade conduct, not theory, policy International migration of labor