Chapter 9
International Resource Movements and
Multinational Corporations
赵有广 安徽财经大学国际经济贸易学院
Key terms of chapter 9
1. Portfolio investments (资产组合投资)
2. Vertical integration (纵向一体化)
3. Direct investment (直接投资)
4. Multinational corporation (MNCs, 跨国公司)
5. Portfolio theory (资产组合理论)
6. Transfer pricing (转移定价)
7. Risk diversification (风险分散化)
8. Brain drain (人才外流)
9. Horizontal integration (横向一体化)
赵有广 安徽财经大学国际经济贸易学院
9.1 Introduction
Up to this point we have concerned ourselves
entirely with international trade. That is, we have
focused exclusively on the causes and effects of
international exchanges of commodities, and assumed
no international resources movement. Factors of
production, including capital, labor and technology,
however, do move across national boundaries. This
chapter is devoted to the movement of factors of
production, or factor movements.
赵有广 安徽财经大学国际经济贸易学院
Continued: 9.1 Introduction
In some ways, international trade and factor
movements can be regarded as substitutes for one
another, in the sense that with the international trade
in commodities comes the indirect trade in factors of
production.
赵有广 安徽财经大学国际经济贸易学院
Continued: 9.1 Introduction
For example, a relatively capital-abundant and laborscarce country has two alternatives/options at its
disposal: It could either export capital-intensive
commodities or export capital itself. At the same time it
could either import labor-intensive commodities or
import labor itself, that is, allow the immigration of
workers from countries with plentiful labor supplies.
赵有广 安徽财经大学国际经济贸易学院
9.2 Types of foreign investments
There are two main types of foreign investments: portfolio
investments and direct investments.
1. Portfolio investments are purely financial assets, such as
bonds denominated in a national currency. With bonds, the
investors simply lends capital to get fixed payouts or a return at
regular intervals and then receives the face value of the bond at a
pre-specified date.
With stocks, the investor purchases equity, or a claim on the net
worth of the firm. Portfolio or financial investments takes place
primarily through financial institutions such as banks and
investment funds.
赵有广 安徽财经大学国际经济贸易学院
Continued:
9.2 Types of foreign investments
2. Direct investments are real investments in factories, capital
goods, land, and inventories where both capital and managements
are involved and the investor retains control over the use of the
capital invested. Direct investment usually takes the form of firm
starting a subsidiary or taking control of another firm. Any purchase
of 10 percent or more of the stock of a firm, is defined as direct
investment by the U.S. government. In the international context,
direct investments are usually undertaken by multinational
corporations.
赵有广 安徽财经大学国际经济贸易学院
9.4 Motives for international portfolio investments
1. Portfolio investment takes advantage of the
higher returns available in some nations
The basic motive for international portfolio
investments is the quest for higher returns on
capital abroad. For instance, the capital will flow
from low interest-rate nation to high interest-rate
nation
赵有广 安徽财经大学国际经济贸易学院
Continued:
9.4 Motives for international portfolio investments
2. Risk diversification
But this explanation leaves one important fact unexplained― it can
not explain the observed two-way capital flows.
To account for this, the element of risk must be introduced. This
brings us to the portfolio theory which tells us that by investing in
securities with yields that are inversely related over time, a given
yield can be obtained at a smaller risk or a higher yield can be
obtained for the same level of risk, for the portfolio as a whole.
The ideas underlying the theory is to diversify your investment,
thus to ward off risks. As a proverb puts it: not to put all your eggs in
one basket
赵有广 安徽财经大学国际经济贸易学院
Continued:
9.4 Motives for international portfolio investments
Risk diversification investments in securities with
yields that are inversely, or negatively, correlated or
investments in different lines of products in order to spread
and thus reduce the overall risks of the total investments
赵有广 安徽财经大学国际经济贸易学院
Continued:
9.4 Motives for international portfolio investments
3. Portfolio theory maintains that by investing in securities
with yields that are inversely related over time, a given yield
can be obtained at a smaller risk or a higher yield can be
obtained for the same level of risk for the portfolio as a whole.
Since yields on foreign securities (depending primarily on the
different economic conditions abroad) are more likely to be
inversely related to yields on domestic securities, a portfolio
including both domestic and foreign securities can have a
higher average yield and/or lower risk than a portfolio
containing only domestic securities.
赵有广 安徽财经大学国际经济贸易学院
9.5 Motives for direct foreign investments
1. The motives for direct investment abroad are
generally the same as for portfolio investments, that is,
the pursuit of higher returns on capital abroad,
possibly resulting from higher growth rates abroad,
more favorable tax treatments, or greater availability of
infrastructures, and risk diversification.
赵有广 安徽财经大学国际经济贸易学院
Continued:
9.5 Motives for direct foreign investments
2. Several possible reasons for FDI
(1) The most important reason is that many large
corporations often have some unique production
knowledge or managerial know-how that could easily and
profitably be utilized abroad and over which the
corporation wants to retain direct control (not to be
disclosed). In such a situation, the firm may prefer to make
a direct investments abroad.
赵有广 安徽财经大学国际经济贸易学院
Continued:
9.5 Motives for direct foreign investments
(2) Another underlying reason for FDI is to obtain
control of a needed raw material and thus ensure an
uninterrupted supply for cost-reducing purpose.
This is particularly true of the extractive and mining
industries. (take China as a example, at the lowest
possible cost as it can, establish oil-extracting facilities in
the Middle-east and set up mining operations in the pursuit
of iron ores in Brazil.).
赵有广 安徽财经大学国际经济贸易学院
Continued:
9.5 Motives for direct foreign investments
(3) Still other reasons for FDI are to circumvent/avoid
tariff barriers and other trade restrictions, or to take
advantage of various government subsidies to encourage
FDI.
Then two-way FDI can be explained by some
industries being more advanced in one nation, while other
industries are more efficient in other nations.
赵有广 安徽财经大学国际经济贸易学院
Continued:
9.5 Motives for direct foreign investments
3. Horizontal and vertical integration
Horizontal integration is that the production abroad
of a differentiated product that is also produced at home.
Vertical integration is the expansion of a firm
backward to supply its own raw materials and
intermediate products and/or forward to provide its
own sales or distribution networks.
赵有广 安徽财经大学国际经济贸易学院
9.6 Effects of international capital flows on
investing and host countries
1. If capital is free to move internationally, it will flow
from the nation of lower returns to the nation of higher
returns until returns have been equalized in the two
countries. It leads to greater efficiency in the use of capital
internationally and higher world output and welfare.
赵有广 安徽财经大学国际经济贸易学院
Continued: 9.6 Effects of international capital
flows on investing and host countries
This is similar to the export of capital-intensive
commodities from relatively capital-abundant countries.
The capital-rich nation is now exporting capital instead of
capital-intensive commodities and importing labor instead
of labor-intensive commodities. Just as trade based on
comparative advantage increases the efficiency in the use
of world resources and increases world welfare, so does
the export of capital by capital-rich countries to capitalpoor countries.
赵有广 安徽财经大学国际经济贸易学院
Continued: 9.6 Effects of international capital
flows on investing and host countries
2. The investing country will experience an increase in
the average return on capital but a decrease in the average
return to labor decreases (because each unit of labor will
now have less capital to work with). Thus, while the
investing country as a whole gains from investing abroad,
there is a redistribution of domestic income from labor to
capital. It is for this reason that organized labor in the
United States is opposed to U.S. investments abroad.
赵有广 安徽财经大学国际经济贸易学院
Continued: 9.6 Effects of international capital
flows on investing and host countries
3. On the other hand, while the host country also gains
from receiving foreign investments, these investments
lead to a redistribution of domestic income from capital to
labor.
赵有广 安徽财经大学国际经济贸易学院
Continued: 9.6 Effects of international capital
flows on investing and host countries
4. International capital transfers also affect the balance of
payments of the investing and host countries. In the year in
which the foreign investment takes places, the foreign
expenditures increase and cause a balance-payments deficit
(an excess of expenditures abroad over foreign receipts).
of course, the counterpart to the worsening in the
investing nation’s balance of payments is the improvement
in the host nation’s balance of payments in the year in
which it receives the foreign investment.
赵有广 安徽财经大学国际经济贸易学院
Continued: 9.6 Effects of international capital
flows on investing and host countries
5. In the long run, whether foreign investments will
lead to the replacement of the investing country’s exports
and even to imports of commodities previously exported.
Thus, while the immediate effect on the balance of
payments is negative in the investing country and positive
in the host country, the long-run effects are less certain.
赵有广 安徽财经大学国际经济贸易学院
Continued: 9.6 Effects of international capital
flows on investing and host countries
6. Another important welfare effect of foreign
investments on both the investing and host countries
results from different rates of taxation and foreign
earnings in various countries. Thus, if corporate taxes are
30% percent of earnings in the United States but only 20
percent in England, it is only natural for U.S. firms to
invest in England or reroute foreign sales through
subsidiaries there in order to pay the lower tax rate.
赵有广 安徽财经大学国际经济贸易学院
r1
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r2
Nation 1
Nation 2
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VMPK2
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VMPK1
B
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Total capital stocks of national 1 and 2 combined
赵有广 安徽财经大学国际经济贸易学院
O'
9.7 Reasons for the existence of multinational
corporations
1. Definition of the multinational corporations (MNCs)
It is firms that own, control, or manage production and
distribution facilities in several countries.
Today MNCs account for about 25 percent of world
output, and intrafirm trade (i.e., trade among the parent firm
and its foreign affiliates) is estimated to be about one-third
of total world trade in manufacturing.
赵有广 安徽财经大学国际经济贸易学院
Continued: 9.7 Reasons for the existence of
multinational corporations
2. The basic reason for the existence of MNCs is the
competitive advantage of a global network of production
and distribution.
赵有广 安徽财经大学国际经济贸易学院
Continued: 9.7 Reasons for the existence of
multinational corporations
3. The competitive advantage of MNCs is also based on
economies of scale in production, financing, research and
development (R&D), and the gathering of market
information.
赵有广 安徽财经大学国际经济贸易学院
Continued: 9.7 Reasons for the existence of
multinational corporations
4. The large corporation invests abroad when expected
profits on additional investments in its industry are higher
abroad.
赵有广 安徽财经大学国际经济贸易学院
Continued: 9.7 Reasons for the existence of
multinational corporations
5. MNCs are also in a much better position to control
or change to their advantage the environment in which
they operate than are purely national firms.
赵有广 安徽财经大学国际经济贸易学院
Continued: 9.7 Reasons for the existence of
multinational corporations
6. By artificially overpricing components shipped to an
affiliate in a higher-tax nation and underpricing products
shipped from the affiliate in the high-tax nation, an MNC
can minimize its tax bill. This is called transfer pricing
and can arise in intrafirm trade as opposed to trade among
independent firms or conducted at “arms’s length”.
赵有广 安徽财经大学国际经济贸易学院
Continued: 9.7 Reasons for the existence of
multinational corporations
7. It is a combination of all or more of these factors
that gives MNCs their competitive advantage vis-à-vis
purely national and explains the proliferation and great
importance of MNCs today.
赵有广 安徽财经大学国际经济贸易学院
9.8 Problems created by multinational corporations
in the home country
For all the good that MNCs bring about, such as an increase in the
world output and welfare, they can equally create major serious
problems in both the home and host nation.
1. The most controversial of alleged harmful effects of MNCs on
the home nation is the loss of domestic jobs resulting from FDI.
These are likely to be unskilled or semiskilled production jobs in
which the home nation has a comparative disadvantage..
赵有广 安徽财经大学国际经济贸易学院
Continued: 9.8 Problems created by multinational
corporations in the home country
2. A related problem is the export of advanced
technology to be combined with other cheaper foreign
factors to maximized corporate profits. It is claimed that
this may undermine the technological superiority and
future of the home nation.
赵有广 安徽财经大学国际经济贸易学院
Continued: 9.8 Problems created by multinational
corporations in the home country
3. Another possible harmful effect of MNCs on the
home nation can result from transfer pricing and similar
practices, and from shifting their operations to lower-tax
nations, which reduce tax revenues and erode the tax
base of the home nation.
赵有广 安徽财经大学国际经济贸易学院
Continued: 9.8 Problems created by multinational
corporations in the home country
4. Because of their access to international capital
markets, MNCs can circumvent domestic monetary
policies and make government control over the
economy in the home nation more difficult.
赵有广 安徽财经大学国际经济贸易学院
9.9 Problems created by multinational corporations
in the host country
1. The allegation that MNCs dominate host nation’s
economies.
2. Another alleged harmful effect of MNCs on the
host country is the siphoning off of R&D funds to the
home nation. While this may be more efficient for the
MNC and the world as a whole, it also keeps the host
country technologically dependent.
赵有广 安徽财经大学国际经济贸易学院
Continued: 9.9 Problems created by multinational
corporations in the host country
赵有广 安徽财经大学国际经济贸易学院
9.10 Motives and welfare effects of international
labor migration
International labor migration can take place for
economic as well as non-economic reasons. However,
most international labor migration has been motivated by
the prospect of better economic opportunities such as
higher real wages and income abroad.
In this section we analyze the effects that international
labor migration has on the welfare nations of emigration
and immigration with exactly the same diagrammatic
technique.
赵有广 安徽财经大学国际经济贸易学院
w1
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Nation 1
Nation 2
M
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VMPL2
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w2
B
A
VMPL1
Total supply of labor of Nation 1 and 2 combined
O'
Output and Welfare Effects of International Labor Migration
赵有广 安徽财经大学国际经济贸易学院
赵有广 安徽财经大学国际经济贸易学院
Continued: 9.10 Motives and welfare effects of
international labor migration
Other Effects of International Labor Migration
The welfare effects of the migration of highly skilled
workers on the nations of migration and immigration are
likely to be significantly different from those arising from
the migration of unskilled workers. The problem of the
migration of highly skilled workers is vividly conveyed by
the term brain drain: the migration of highly skilled and
trained people from developing to developed nations and
from other industrial nations to the United States.
赵有广 安徽财经大学国际经济贸易学院
Continued: 9.10 Motives and welfare effects of
international labor migration
Important Differences Between Capital Movement and Labor
Mobility
Although we analyze the international movements of capital in a
way parallel to our analysis of labor mobility, there are some
important differences. When we speak of international labor
mobility,it is clear that workers are physically moving from one
country to another. International capital movements are not so
simple and straightforward. When we speak of capital inflow or
outflow, we are instead talking of a financial transaction —
international borrowing and lending which is the subject of Part
three of this book.
赵有广 安徽财经大学国际经济贸易学院