Copyright ©2002, South-Western College Publishing

International EconomicsBy Robert J. Carbaugh8th Edition

Chapter 10:

International Factor Movements and Multinational Enterprises

Carbaugh, Chap. 10 2

Factor movements & multinational enterprises

Multinational enterprises Various business operations in numerous

host countries Headquarters often far from operations Stock ownership and management are

multi-national Frequently employ vertical integration,

horizontal integration, conglomerate structure

Carbaugh, Chap. 10 3

Multinational enterprises

Foreign direct investment A foreign or multinational firm can buy a

controlling interest in a local firm Buy or build new plants or equipment

overseas Shift funds abroad to expand a subsidiary Reinvest the earnings of a foreign

subsidiary

Carbaugh, Chap. 10 4

Multinational enterprises

Reasons for foreign direct investment Demand factors

Serve different local markets Respond to market competition

Cost factors Access to key raw materials Labor costs Transportation costs Government policies

Carbaugh, Chap. 10 5

Choice between export and FDI

Foreign direct investment

Carbaugh, Chap. 10 6

Choice between licensing and FDI

Foreign direct investment

Carbaugh, Chap. 10 7

Multinational enterprises

International joint ventures Two companies can operate a venture in a

third country A foreign firm can work with a local

company A foreign firm can form a venture with a unit

of the local government

Carbaugh, Chap. 10 8

Multinational enterprises

Reasons for international JVs Cost sharing - R&D, capital expenditures

(in mining and oil, for example) Avoiding restrictions on foreign ownership

of local firms (ensuring local participation) Forestalling pressure for protectionism Problems: divided control means success

of JV depends on ability of firms to work together

Carbaugh, Chap. 10 9

Effects of an international JV

Multinational enterprises

Carbaugh, Chap. 10 10

Multinational enterprises

Controversy over multinationals Employment

Host country may not gain many jobs, foreign managers often brought in; source country worries about losing jobs

Technology transfer MNEs are reluctant to share technology with

host nations; source country worries about giving away advantage

Carbaugh, Chap. 10 11

Multinational enterprises

Controversy over multinationals (Cont’d)

National sovereignty Host country worries about power of MNE to

influence affairs; source country worries about ability to regulate MNE activities elsewhere

Balance of payments MNE investments and profits (internal

transfers) have impacts on the payments status of both source and host nations

Carbaugh, Chap. 10 12

Multinational enterprises

Controversy over multinationals (Cont’d)

Taxation Source countries may have difficulty taxing

MNE income stemming from foreign operations

Transfer pricing Both host and source governments worry that

MNEs may illegally manipulate prices paid between subsidiaries to avoid taxes

Carbaugh, Chap. 10 13

Transfer pricing illustrated

Multinational enterprises

Germany(tax rate 48%)

Computer produced by

parent firm for $2000. Sold to Irish subsidiary

for $2000.

German tax paid: $0.

Ireland(tax rate 4%)

Irish subsidiary resells the same computer to US subsidiary for

$2500, earning $500 profit.

Irish tax paid: $20.

United States(tax rate 34%)

US subsidiary sells computer at cost,

for $2500. No profit is earned.

US tax paid: $0. Irish subsidiary

then lends money to US subsidiary

for expansion

Carbaugh, Chap. 10 14

International factor movements

Migration Tends to equalize wage rates between

countries Shifts distribution of income between

capital and labor Other concerns:

Fiscal drain from immigration Brain drain from developing countries Status of temporary guest workers