Factor Flows: Increased Productivity Increased Return

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Factor Flows: Increased Productivity Increased Return Productivity depends on: •Factor scarcity •COOPERATING factors (including more of same) •Agglomeration economies Interactions … Exchange of information •Institutional quality •Rule of law •Protection of property rights •Country risks

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Factor Flows: Increased Productivity  Increased Return. Productivity depends on: Factor scarcity COOPERATING factors (including more of same) Agglomeration economies Interactions … Exchange of information Institutional quality Rule of law Protection of property rights Country risks. - PowerPoint PPT Presentation

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Page 1: Factor Flows:  Increased Productivity   Increased Return

Factor Flows: Increased Productivity Increased Return

Productivity depends on:•Factor scarcity•COOPERATING factors (including more of same)•Agglomeration economies

Interactions … Exchange of information

•Institutional quality•Rule of law•Protection of property rights•Country risks

Page 2: Factor Flows:  Increased Productivity   Increased Return

Operating Abroad• Export from home base• License / franchise foreign providers• Foreign Direct Investment (FDI)– Multinational enterprises (MNEs)– Joint ventures

• What’s the nationality?– EXXON — Burger King– Toyota — Baskin—Robbins – Ikea– Aldi

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MNE Motives

• EXPAND• Market penetration• Preempt competition• Cost advantages• Skirt restrictions/trade barriers• Hedge– Against currency fluctuations– Against market shifts

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Japanese Transplants in U.S. Auto IndustryReasons for Japanese direct investment in U.S.:o creates jobs and goodwillo political insuranceo avoids potential trade barrierso access to expanding U.S. marketo hedge against yen-dollar fluctuations

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Country Risk Analysiso political risk: government stability, corruption,

domestic conflict, religious & ethnic tensionso financial risk:

debt to GDP ratio, loan defaults exchange rate stability

o economics risk: growth of GDP, per capita GDP, inflation rate

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Flavors of MNEs

• Vertical integration– Backward: secure inputs to core business– Forward: secure market position of final good

• Horizontal integration– Create and service overlapping demand for core

products

• Conglomeration– Add international dimension to business portfolio

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The Joint Venture Alternative

• Combine skills• Share costs• Share risks• Gain local acceptance/leverage– Joint venture with foreign government

• Forestall protection• Forestall competition

Encounter Coordination Problems

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International Joint Ventures

Reasons for joint ventures:o some costs too large for any one company o government restrictions on foreign ownership of

local businesseso means of avoiding protectionism against imports

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FDI and Its DiscontentsHost discontents• MNEs purchase existing businesses No new jobs• Foreign bosses• Loss of sovereignty– Gimmicks like transfer pricing tax avoidance

Source discontents• [Short-term] job loss• Technology transfer– Lose competitive edge– Create own gravediggers

• Loss of sovereignty– MNE end runs

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Labor Immigration

Push or Pull?

Wage ConvergenceWinners – Losers

Long-run impactsThe division of labor is limited by the extent of the

market

Profits Investment Jobs

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Labor Mobility - Migrationo U.S. immigration - initially more Western Europeans

– recently more Mexican and Asiano Immigration Act of 1924 – limited overall flow &

established specific quota from each country based on previous emigration patterns

o quota formula modified in 1965

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Effects of Migrationo labor migration equalizes wageso increase in output and welfare in the U.S.o decrease in output and welfare in Mexicoo net gain in world output due to higher VMP in U.S.