LECTURE 6:

INTERNATIONAL
MOVEMENTS OF
RESOURCES
Introduction
Capital-intensive
goods
Nation 1 – Nation 2 –
Capital INTERNATIONAL TRADE Labor
abundant abundant
Labor-intensive goods

Capital
Nation 1 – Nation 2
Capital INTERNATIONAL – Labor
abundant MOVEMENTS OF RESOURCES abundant

Labor

International trade and productive resource movements

- substitutes/complement for each other but different economic effects.
Main contents

INTERNATIONAL INVESTMENT

MNCS

INTERNATIONAL LABOR MIGRATION

INTERNATIONAL INVESTMENT
CONCEPT OF INTERNATIONAL
INVESTMENT
• Investment is the use (by investors) of an amount of assets such
as capital, technology, land, etc. in a specific economic activity to
create one or several products for society in order to gain profit.
• International investment is a cross-border transfer by an investor
of tangible or intangible assets in terms of capital, technology,
management skills, etc. to run business so as to gain high profit
on global scale.
• Investors may be individuals, organizations or state bodies.
 CONCEPT OF INTERNATIONAL
INVESTMENT
• Investment is the use (by investors) of an amount of
assets such as capital, technology, land, etc. in a
specific economic activity to create one or several PROFITABILITY
products for society in order to gain profit.
• International investment is a cross-border transfer
by an investor of tangible or intangible assets in
terms of capital, technology, management skills, etc. RISK
to run business so as to gain high profit on global
scale.
• Investors may be individuals, organizations or state
bodies.
Foreign investment vs. domestic
investment
FOREIGN INVESTMENT DOMESTIC INVESTMENT
•Investors: Foreigners •Investors: Local investment
 Nationality, language, culture, •Capital doesn’t move across
etc. national boundary
•Capital moves across national •Domestic currency
boundary
 Policy, legal system, custom,
transportation, etc.
•Foreign currency
 Foreign exchanges are
involved
Types of international investment

Foreign Direct Investment (FDI)

Foreign Portfolio Investment

(FPI) (or financial investment)

FPI may be changed to FDI, and vice versa when the investors increase/decrease their holding
ratio of voting shares in the relevant firms.
How to distinguish FDI from FPI ???
FPI & FDI
FPI is changeable to FDI, and vice versa when the investors
increase or decrease their ratio of voting shares in the relevant
firms.
According to the US’s law and the IMF
• A purchase of 10% or more of the voting stock of a
corporation-> FDI
• A purchase of less than 10% of the voting stock of a
corporation -> FPI
 EXAMPLE: FPI VS. FDI
John Yamashita - a Japanese citizen, purchases one Hungry Dragon Toys - a Chinese company, is
hundred shares of stock in General Motors (GM). sitting on a lot of cash.
• John now owns part of a U.S. corporation, • The company’s board of directors decides to take
• the shares of which are part of his personal some of that money and purchase Cooperative
Chemical, a plastics company in New Jersey
investment
• Hungry Dragon, a foreign investor, now owns a
• John is eligible to receive dividend payments from
U.S. subsidiary company.
GM, participate in shareholder decisions, or sell the
• Hungry Dragon’s ownership of Cooperative
stock for a profit/loss.
Chemical is substantial and more likely to be
• John’s share of GM is very minor, and his chief
long term.
concern is not the long-term profitability of the
• Hungry Dragon is unlikely to sell if the U.S.
company but the short-term value of his stock.
economy faces a temporary downturn.
• He might therefore sell his share quickly if the share
price goes up or down significantly.
 FPI VS. FDI

Foreign direct investment Portfolio investment involves

(FDI) is an investment by a firm
in a foreign country to acquire
real assets such as plant,
equipment, and real estate or
land with the aim of maintaining
control over the management
the acquisition of foreign
securities such as shares and
bonds by firms without their
acquiring any direct control
over the management of the
foreign entity.
Source: Singh (2007)
 FPI VS. FDI (cont.)
o Similarities
• International Investment
• Promoting investment and other economics activities of the host countries
• Interlink with each other
• Bring about both positive and negative impacts on the host countries
o Differences:
• Investment‘s goal and expectation
• Duration and patterns of investment
• Response to and requirements for local investment environment.
• Potential benefits and risk
Direct/indirect control over the invested capital and operation of the firm.
Foreign Portfolio Investment (FPI)
• Financial assets denominated in a national
currency
– Bonds: The investor 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
– Stocks: The investor purchase equity or
a claim on the net worth of the firm.

• Not involve in management/ control of the firm

• Short term
• Most foreign investments prior to World War I were of this type and
flowed primarily from the UK. FPI collapsed after WWII and have only
revived since the 1960s.
Foreign Direct Investment (FDI)
•Real investment in factories, capital goods, land and inventories
• Both capital and management are involved
• The investors retains control over use of invested capital
• Medium and long term
• Usually undertaken by multinational corporations
Motives for international investment
Motives for FPI
• To earn higher returns abroad
• The returns on bonds are higher in the other country
• Expectation of higher future profitability of the foreign corporation
-> Explain capital flows from a country with lower return to a country with (expectedly)
higher return
-> Cannot explain two – way capital flows
• To reduce/ diversify risks
• Explain two – way capital flows
Illustration of risk diversification
Return (%) Stock A Stock B
Lowest 20 10
Highest 40 50
Average Rate 30 30

Risk differences between stocks, but the same average rate of return.
- Change in stock yields are inversely correlated overtime
 holding both stocks can give investors an average yield of 30% at lower risk.
The same as the case of domestic and foreign portfolio investment (FPI) : Investors
hold both domestic and foreign stock to diverse risk.
This explains two-way flow of capital.
Motives for FDI
• Similar to FPI’s motives
• To gain higher returns abroad (higher growth rate, more favorable tax treatment,
greater availability of infrastructures)
• To diversify risk
• Other motives
• To seek for market: Retain direct control to protect and exploit monopoly power
(involve horizontal integration)
• To seek for resources: Obtain control of a needed raw material and thus ensure
an uninterrupted supply at the lowest possible cost (involve vertical integration)
• Avoid tariff and other restrictions that nations impose on imports or to take
advantage of various government subsidiaries to encourage FDI.
• Two – way FDI may be explained by different growth levels of various industries
in a nation (facilitated by advanced transportation, communication).
 FORMS OF FDI
The investment HI
goal-base VI
GI
Investment
strategy-base M&A
FDI 100% foreign own enter.

Ownership-base Joint venture

Business coop. contract BOT,
BTO, BT…
Import Substitution
Industrial approach of
Export expansion
the Host country
Government- initiated
 VERTICAL AND HORIZONTAL
FDI
• Vertical FDI implies that an MNE/TNC owns facilities that fit into different
stages of a supply chain.
• VI’s goals: to take production specialization on an international scale;
each production stage to be carried out in certain
destinations/countries with the highest comparative advantage.
• Horizontal FDI, on the other hand, consists of MNE/TNC investments that
duplicate facilities and operations in several countries.
• HI’s goals: to avoid tariff barriers, reduce production cost, gain market
share, prolong product-life cycle
VERTICAL AND HORIZONTAL FDI
(cont.)
VERTICAL AND HORIZONTAL FDI (cont.)
HI and VI Host countries

SUBSIDIARY 1
Investing country STAGE 0

VI

PARENT COMPANY SUBSIDIARY 2

STAGE 1 STAGE 1
HI
VI

SUBSIDIARY 3
STAGE 2
Horizontal integration FDI
• Investment in the same industry as a firm operates at home country.
• E.g. Starbucks and Mc. Donald in Vietnam and other countries.
• Relates to international production
• Goals:
• To gain market share while protecting unique production knowledge
or managerial skill (e.g. recipes of Coca Cola; computer technology of
IBM, etc. )
• To avoid tariff barriers
• To take advantage of host country’s policy to attract FDI
 Vertical integration FDI
• Whereby firms locate different stages of production in different countries. Each production stage to
be carried out in certain countries with the highest comparative advantage.
• E.g. MacBook Pro: processors factory in California; body factory in Taiwan, and assembly in China
• Two forms of vertical FDI
• Backward vertical FDI: investments in industry that provides inputs for the firm’s domestic
production (typically extractive industries)
• Forward vertical FDI: investment in an industry that utilizes the outputs from a firm’s domestic
production (typically sales and distribution).
• Relates to supply chains and deepens international specialization of production.
• Goals:
• To obtain control of a needed raw material
• To lower the cost
VERTICAL AND HORIZONTAL FDI (cont.)
VI and HI Other host countries

SUBSIDIARY 2
Host country 1 STAGE 0

VI

SUBSIDIARY 1 SUBSIDIARY 3
STAGE 1 STAGE 1
HI
VI

SUBSIDIARY 4
STAGE 2
Forms Of FDI Classified By Mode Of
Entry
• Merger and Acquisition (M&A)
• Acquisition: Purchase of an existing local company.
• Merger with existing local company.
• Quick entry, local market know-how, local financing may be possible,
eliminate competitor, buying problems.
• Greenfield investment (GI)
• The establishment of a wholly new operation in a foreign country
• No local entity exists or is available for sale, local financial incentives may
encourage, no inherited problems, long lead time to generation of sales or
other desired outcome.
Forms Of FDI Classified By Mode Of Entry
EFFECTS OF INTERNATIONAL
INVESTMENT

Home country vs. host country

Capital

HOME/ HOST/
INVESTING RECEIVING
COUNTRY COUNTRY
 Nation 1 Nation 2
F J
EFFE M
CTS E R
H

OF N
G
T

INTE C
VMPK1
RNAT VMPK2

IONA O B A O’
L Total capital stock of N1 and N2
INVE
• 2 countries: Nation 1 & Nation 2
STME • The total capital stock: OO’; N1 holds OA, N2 holds O’A.
NT • VMPK1, VMPK2 represents the value of the marginal product of capital in N1 & N2
• The return on capital in N1 = OC < The return on capital in N2 = O’H
-> Capital flows from N1 to N2 until the returns on capital equalize in 2 nations = BE
 Nation 1 Nation 2
F J
M
H
EFFE N
E R
T
CTS C
G
OF VMPK2
VMPK1

INTE O B A O’
RNAT Total capital stock of N1 and N2
IONA
L
INVE
STME
NT
Other effects on home and host
countries
• Income redistribution between capital and noncapital owners
• Affecting the balance of payments of home and host countries
• Affecting the terms of trade by influencing the output and the volume of trade
of both home and host countries
• Affecting tax revenue in home and host countries because of different tax
rates
• Technology transfer
• Affecting home country’s technological lead and the host country’s control
over its economy and ability to conduct its own independent economic policy
 Calculating Investment

• Calculations of FDI and FPI are

typically measured as either a "flow,"
or as "stock,“
• Flow refers to the amount of
investment made in a specific period
(one year)
• Stock measures the total accumulated
investment at the end of a given point
of time (at end of that year).
 APPLICATION
FDI DATA SOURCES

Investment statistics and trends:

UNCTAD addresses countries’ data needs through its analysis and dissemination of
foreign direct investment (FDI) statistics, and by enhancing the capacity of government
agencies to collect and report FDI and TNC data.
The organization maintains the largest global databases on FDI and TNC activities,
containing information on more than 200 economies covering a period of 40 years, and has
acquired a reputation as the most authoritative international source on FDI/TNC data.
https://unctad.org/topic/investment/investment-statistics-and-trends
MULTINATIONAL CORPORATIONS
 Definition
• Multinational
corporations (MNCs) are
firms that own, control, or
manage production
facilities in several
countries.
• MNC has a headquarter
company in one country
and its branches or
subsidiaries are spread
across many countries.
Characteristics
• Today MNCs account for about 25% of world output
• Intrafirm trade (trade among the parent firm and its foreign
affiliates) is estimated to be about 1/3 of total world trade in
manufacturing.
• Many MNCs are truly giants.
• Most international direct investments are undertaken by MNCs.
Reasons for existence of MNCs
• The basic reason is the competitive advantage of a global network of
production and distribution
• Competitive advantage arises from vertical integration (VI) and horizontal
integration (HI)
• By VI, MNCs can ensure their supply of foreign raw materials and
intermediate products and circumvent foreign market imperfection with
more intra-firm trade.
• By HI, MNCs can better protect and exploit their monopoly power, adapt
their products to local conditions and tastes, and ensure consistent
product quality.
Reasons for existence of MNCs (Cont.)
• Competitive advantage of MNCs also comes from economies of scale in
production, financing, R&D, and the gathering of market information.
• Large output of MNCs allows them to carry division of labor and
specialization in production much further than smaller national firms.
• They can concentrate R&D in one or a few advanced nations; produce
unskilled labor requiring product components in low-wage nations and
shipped elsewhere for assembly.
• MNCs have greater access to international capital market -> have better
position to finance large projects.
• Foreign affiliates funnel information from around the world to the parent
firm, placing MNCs a better position to evaluate, anticipate and take
advantage of changes in comparative costs, consumers’ tastes and market
conditions.
Reasons for existence of MNCs (Cont.)
• MNCs are big enough to influence the policies of local governments (e.g. tax
incentive, subsidies, and other tax and trade benefits) and extract benefits.
• Transfer pricing in intra-firm trade can minimize MNCs’ tax bill and maximize
MNCs’ profit.
• Overpricing components shipped to an affiliate in a higher tax nation
• Underpricing products shipped from the affiliate in the high tax nation.
Theory of MNCs (OLI paradigm)
• Why are MNCs created? And why can they undertake direct foreign
investment?
• We rephrase these questions into those dealing with
1. Location: why is a good produced in two countries rather than in one
country and then exported to the second country?
2. Ownership: Conditions based on which the firm can successfully
compete with local firms
3. Internalization: Why is production in different locations done by one
firm rather than by separate firms?
Theory of MNCs (OLI paradigm)
1. Location of production is often determined by
• The location abundant in necessary factors of productions:
- Mining occurs where minerals are;
- Labor intensive production occurs where relatively large pools of labor
live
• Transportation costs and other barriers to trade.
2. Ownership: Some firms have a firm specific capital known as knowledge
capital: Human capital (managers), patents, technologies, brand, reputation.
Theory of MNCs (OLI paradigm)
3. Internalization: it is more profitable to conduct transactions and
production within a single organization than in separate organizations.
Reasons:
- Technology transfers: transfer of knowledge or another form of technology
may be easier within a single organization than through a market transaction
between separate organizations
- Patent or property rights may be weak or non-existent.
- Knowledge may not be easily packaged and sold.
-Vertical integration involves consolidation of different stages of a production
process. -> more efficient than having production operated by separate firms.
E.g. farms and flour mills consolidate into one organization to make flour
maybe more efficient.
Problems in Home Country
• The loss of domestic jobs resulting from FDI. But they also can create some
better jobs.
• FDI may undermine the technological superiority and future of the home
nation. But the tendency of MNCs to concentrate their R&D in the home
nation, thus allowing it to maintain technological lead.
• 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 country.
• MNCs can circumvent domestic monetary policies and make government
control over the economy in the home nation more difficult.
Problems in Home Country
E.g of MNC’s effect on home’s tax base and tax revenue

Home Host Total

country country (%)
Corporate profit tax rate ( %) 50 40
Before tax risk- adjusted 16 20
In case the MNC earns 20% profit abroad
Taxed abroad (%) 8
Repatriated profit 12%; tax
rate at Home is (50%-40%) 1.2
MNC's Total paid tax (%) 9.2
MNC's Total profit after 10.8
In case the MNC earns 16% profit at home
Taxed at 50% 8 8
MNC's Total profit after 8
Problems in Host Country
• MNCs dominate the economies in host countries including:
• Unwillingness of a local affiliate to export to a nation which is friendly to
the host nation but unfriendly to the home nation;
• Borrowing of funds abroad to circumvent tight domestic credit conditions
and the lending of funds abroad when interest rates are low at home
• Effect on national tastes of large scale advertising for such products as
Coca Cola, jeans, and so on.
• 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.
Problems in Host Country
• Absorb local savings and entrepreneurial talent, thus preventing the
establishment of domestic enterprises that might be more important for
national growth and developments.
• MNCs extract most of the benefits either through tax and tariff benefits or
through tax avoidance.
• Foreign exploitation
• Low prices paid to host nations
• The use of highly capital – intensive production techniques inappropriate
for labor abundant developing nations
• Lack of training of local labor
• Overexploiting of natural resources
INTERNATIONAL
LABOR MIGRATION
Definition
• International labor migration is the movement of persons from
one country to another for the purpose of employment.

Labor

Emigration Immigration
Motives for International Labor
Migration
• Benefits:
• Higher real wages and income
• Greater educational and job opportunities for the migrants’ children
• Better living standard

• Costs:
• Expenditures for transportation and the loss of wages;
• Other less quantifiable cost:
• Separation from relatives, friends, and familiar surroundings;
• Need to learn new customs and often a new language;
• Risks involved in finding a job, housing, and so on in a new land.
Welfare Effects of International Labor Migration

Total output and welfare effect of international Labor Migration.

N1 with a supply of labor of OA, and N2 with a supply of labor of O’A; N1 has a real wage rate
of OC and total output of OFGA; N2 has a real wage rate of O’H and total output of O’JMA. The
migration of AB of labor from N1 to N2 equalizes real wage rate in the two countries at EB .
Welfare Effects of International Labor
Migration (cont.)
Assumption of the model: all labor are unskilled
In reality: 2 forms
 migration of unskilled labor
 migration of skilled labor (specialists)
Migration of unskilled labor
For labor importing countries:
1) Countries with small population but abundant in natural resources.
Ex: Middle Eastern countries: lack of labor in construction industry,
services, …
2) Developed countries: shift in economic structure => move of industries
(unskilled) labor intensive abroad (FDI). Increase demand on labor in
construction industry, services, in some countries => labor in agriculture
3) In NIEs, Malaysia,… the large demand for unskilled labor
Migration of unskilled labor
Unskilled labor of importing countries:
• Unskilled labor in developed countries: high wage  tendency to hire
foreign labor to decrease the cost
• Labor in these countries have the tendency to avoid certain jobs (3D:
Dangerous, Dirty, Difficult)
For labor exporting countries:
• Less developed countries (developing countries)
• The largest labor exporting countries (by quantity and by the ratio of labor
– emigrant to total population): Lebanon, El Salvador, Columbia, Pakistan
and the Philippines.
 Migration of unskilled labor (cont.)
• Unskilled labor exported to developed countries and NIEs: difficult working
environment; labor rights easily violated
 Labor export has to be organized carefully with commitments of the enterprises using
labor and supervision of local authority)
• Unskilled labor often with low educational and cultural level -> difficult to adapt with
local social and cultural conditions -> disappointed; broke the laws; be heavily
exploited,…
• Most of labor exporting countries haven’t succeeded in strategies of economic
development.
• In many labor exporting countries the issues concerning labor export were not
included in the general strategy of economic development (E.g. labor training;
effectiveness of using remittances; technological transfer,etc. and plan to cease export of
labor in the future, etc.)
Migration of skilled labor
For country of origin
• The danger of losing of skilled and professional labor, of whom the
countries are already scarce, and the loss of investment on education
and training
• Temporary migration: Country lose skilled labor but they get the
experience and can apply it when they return home
• The danger of “brain drain”, and its negative effects on the development
Issue: Effectiveness of using labor in the country of origin
“Brain drain”
“Brain drain”: Highly skilled workers move to work abroad in order to gain
higher income, to compensate educational cost paid by themselves or by their
government
• During 1961 - 1983, 700.000 highly skilled labor from developing countries
moved to USA, Canada and England -> many countries lose high skilled
labors.
• Sub-Saharan Africa lose 30% highly skilled labor from 1960 to 1987,
mainly to EC
• About 20-40% university graduates in Central American and Carribean
chose to work abroad
“Brain drain” (cont.)
• “Brain drain” caused a substantial damage though difficult to calculate
• Center of study of US Congress estimated: in 1971-1972, developing
country invested 20,000 USD for each skilled labor migrant
• “Brain drain” may occur in some countries as skilled labor supply is more
than labor market demand
• In Somali: it is estimated that the graduates were 5 times over demand
• in 1985: 40% graduates in main cities of Cô te d’Ivoire were
unemployed
• In 1988: 1,350 South Korean with PhD degree working in the US
Migration of skilled labor (cont.)
For receiving country
• Economic effects of migration is difficult to estimate (many factors: time,
profession, type of labor, etc.)
• Issue: welfare effects of specialization and negative impacts from
concentration into one certain factor of production?
• E.g. whether migration of typist from country X into the US encourages US
citizen working as typists to seek another better job in other fields?
• Whether immigrants as major suppliers of the typists lead to the decrease
of wage and to overuse of other services related to this work?
• From the view point of the local workers, foreign immigrants are substitutes
or complements?
Hết phần 6!