International Trade

1
International Trade

• Week 13
• International Factor Movements

2
International Capital Flows

• Foreign Direct Investment (FDI)

3
International Capital Mobility

• Two Types of Capital Movements possible
• Foreign Direct Investment (FDI)
• Movement of capital that involves ownership and
  control.
• Generally involves foreign subsidiary of
  Multi-National corporation (MNC)
• Flow of real capital primarily affects nations
  production or income.
• Foreign Portfolio Investment
• Capital flows that do not involve ownership or
  control.
• Flow of financial capital primarily affects
  nations Balance of payments or exchange rate.

4
FDI Positions By Industry, Dec 31, 1995
Source U.S. Dept. of Commerce, Survey of Current
Business, 1996
5
FDI Positions By Region, Dec 31, 1995
Source U.S. Dept. of Commerce, Survey of Current
Business, 1996
6
Reasons for International Capital Flows

• Considerable international capital mobility
  today.
• Capital should flow to areas where expectation of
  higher return.
• Specific rationales for International Capital
  Flows
• Firms invest as response to large and growing
  international demand for their products.
• Developed country firms invest in countries with
  similar per-capita incomes, and so similar
  demands for products.
• Firms invest to secure access to mineral or raw
  material supplies.
• Firms invest abroad to access markets with high
  tariff or non-tariff barriers. EU Tariff
  factories to get behind the tariff wall.
• Firms invest in countries with low relative
  wages.
• Firms invest abroad as defensive measure to
  protect market share.
• Firms invest abroad as means of risk
  diversification against economic or exchange rate
  fluctuations.

7
International Capital Mobility

• World Capital Market Equilibrium

8
International Capital Mobility
Home MPK
Foreign MPK
O
O
Total World Capital Stock
9
Potential Benefits of FDI to Host

• Increased output.
• Increased wages.
• Increased employment.
• Increased exports.
• Assumes foreign capital produces goods with
  export potential.
• Increased tax revenues.
• Realization of Scale economies.
• Transfer of technical managerial skills to host
  nation.
• Often scarcest resources in LDCs, hence large
  potential benefit.
• Potential to weaken existing domestic monopolies.

10
Potential Disadvantages of FDI

• Adverse impact of hosts Terms of Trade.
• Either through export promotion or transfer
  pricing effects.
• Decreased domestic saving or domestic investment.
• If FDI partly financed in host capital market,
  crowds out domestic investment. If not, allows
  for less domestic saving (public or private).
• Instability in Balance of Payments or Exchange
  rate.
• Loss of control over domestic govt policies.
• Increased unemployment.
• If FDI in capital-intensive industries, then
  possible fall in employment.
• Inadequate attention to development of local
  skills.
• MNCs may reserve skill positions for home
  country head office.

11
International Labor Mobility

• Wages and Migration of Labor

12
International Labor Mobility
Home MPL
Foreign MPL
O
O
Total World Labor Force
13
Home Unemployment Labor Mobility
Home MPL
Foreign MPL
MPL
MPL
O
O
Initial Foreign Labor
Total Home Labor Force