Chapter 6: international resource movement and

multinational corporations
I. International capital flow
 Capital flow: Capital flows are cross-border movements of financial
resources
 Classification:
- Portfolio invesment (security without control): purely financial assets, such as bonds,
denominated in a national currency
- FDI (ownership with control): real investment in factories, capital goods, land and
inventories where both capital and management are involed and the investor retains
control over use of the invested capital
- Other flows (loans, deposits)
- Think of capital as talent with a passport: it goes where it earns the best risk-adjusted
return
1. Motives for international capital flow

 Motives fo international portfolio investment

- The basic motive is higher returns; add risk and we get two-way flows
 - Diversification frontier (đường cong màu đen) :Tập hợp các danh mục đầu tư tối ưu,
cho lợi suất cao nhất với mỗi mức rủi ro (hoặc rủi ro thấp nhất cho mỗi mức lợi suất)

 Motives for FDI

Motives = portfolio (returns + diversification) + control, scale, and strategy
- Market-seeking: produce inside the market to save trade costs, meet local tastes, or jump
tariff
- Efficiency-seeking: fragment value chains to the most cost-efficient location
- Resource-seeking: access inputs (mineral, agri, low-cost labor, specific skill)
- Strategic-asset seeking: acquire brands, tech, data, or distribition networks
IF LOCAL FIRMS CAN BORROW MONEY… WHY DO WE NEED FOREIGN
INVESTORS?
Because FDI brings more than money it brings: capabilities, credibilities and resilience
2. Welflare effect of international flow
 3. Effect on the investing and host country
 Investing (home country):
- Short run:
+ BOP: outflow on the financial account, often offset by exports of capital goods and
services (egineering, spare parts)
+ Employment: potential decline in some production jobs, offset by head office (HQ),
R&D, and sevices roles
- Long run:
+ export replacement risk: once the plant is local, previous exports form the home
country can be substituted by local production
+ profit repatriation (hồi hương lợi nhuận): future outflow via dividents (cổ tức) and
interest -> affect BOP in the future
+ tax interaction and transfer pricing (tương tác thuế và định giá chuyển nhượng):
placement of profits across jurisductions (khu vực pháp lý) changes who captures the
surplus In the long run, multinational firms use transfer pricing to shift profits toward low-tax
jurisdictions. This reduces the tax base of host countries despite substantial real investment, and
intensifies tax competition across countries, altering the distribution of surplus generated by FDI
+ Spillovers (hiệu ứng lan tỏa): technology transfer, supplier upgrading, management
practices, and competition effects
 Host country:
- BOP: inflow on the financial account, often paired with import of machinery (current
account)
- Employment: rises in capital intensive sectors and upstream/downstream suppliers

-
  Risks, contraints and Policy

- Macro risks: sudden stops, currency mismatches, and rollover risk (rủi ro tái cấu trúc)
(for debt flows) Vốn nước ngoài chảy vào nhanh Nhưng khi:

o Khủng hoảng
o Lãi suất Mỹ tăng
o Mất niềm tin
👉 vốn rút ra hàng loạt

→ tỷ giá sụp, khủng hoảng tài chính

- Micro risks: expropriation (tịch thu tài sản), contract risk (unclear law, weak contract
enforcement), weak IP (easily copied, tech loss), policy reversals
- Policy toolkit (host ): bộ công cụ lọc chính sách: invesment screening (sàng lọc đầu tư),
tax treaties (hiệp định thuế), performance requirements (require tech transfer,…), special
economic zones, local-content/skills provisions
- Policy toolkit (home – home biased puzzle): outward FDI support (guarantee, policital
risk insurance, support bussinessed to expand overseas) anti-avoidance rules (quy tắc
chống trốn thuế), CFC regimes, minimum taxes
-
II. Multinational corporations (MNCs)
1. Reasons for the existence of MNCs
 Concept:
- Firms that own, control, manage production facilities in several countries. They
have offices, branches or manufacturing plants in one or more countries other than
home country
 one of the most significant international economic development of post war period;
important vehicle of the international flow of captital (25% of world output, 1/3 of total
world trade)
 Reason for existance:
- Basic reason: competitive advantage of a global network of production and
distribution result partly from horizontal and vertical intergration with foreign
affiliates
+Vertical integration (hội nhập dọc – kiểm soát đầu vào): fragmentation of production
process, expand multiple stages of supply chain, from raw materials to
distributions, reduce reliance on outside supplier, cutting cost, increase control
Ensure suplly of foreign raw materials and intermediate products
Provide better distribition and service network
+Horizontal integration: bussiness strategy, expands by accquiring or merging with
competitors at the same level of the supply chain, increase market share, reduce
competition,
 Better protect and exploit their monopoly power, adapt their products to local conditions
and tastes, and ensure the consistent product quality
+Economies of scale in production, financing, R&D and gathering of market
information:
Large ouput odd MNCs allows them to carry division of labor and specialization
in production much further than smaller national firms
MNCs have greater access to international capital markets than do purely national
firms -> better provision to finance large projects
MNCs can concentrate R&D in some advanced countries
Foreign affiliates funnel information form around the world to mother firm
- MNCs can minimize tax bill and maximize profit through transfer pricing (chuyển giá)
process

2. Problems created by MNCs in the Home country

 While multinational corporations bring important gains to their home countries, they also create
several economic and social problems. First, the international operations of MNCs may dominate the
home country’s economy. By shifting production and financing abroad, MNCs can circumvent tight
domestic credit conditions, borrowing funds overseas and lending them back at lower interest rates,
which may weaken domestic financial markets.

Second, large MNCs can influence national tastes and consumption patterns through massive global
advertising of standardized products such as Coca-Cola, fast food, or branded clothing, potentially
eroding local culture and consumer preferences.

Third, the relocation of production activities abroad often leads to job losses for low-skilled workers
in the home country, contributing to unemployment and income inequality.

In addition, profit shifting and tax avoidance strategies reduce the domestic tax base, limiting
government revenue.

Finally, although headquarters usually retain core R&D activities, the global reallocation of resources
may still create social and political tensions, as the benefits of globalization are unevenly distributed
within the home country. As a result, MNCs can increase national income while simultaneously
generating structural, fiscal, and distributional challenges for their home economies.

 Problems MNCs create – Host country

Multinational corporations (MNCs) create a fundamental dilemma for host countries. On the one hand,
they bring important benefits such as job creation, technology transfer, and increased tax revenue. By
investing in production facilities, MNCs generate employment opportunities and help raise labor
productivity through the introduction of advanced technologies and managerial practices. In addition,
their presence can expand the tax base and support economic growth.

On the other hand, these benefits come with significant costs. MNCs may crowd out local firms that
cannot compete with their superior capital, technology, and global brands. A large share of profits may
be repatriated to the home country rather than reinvested locally, limiting the host country’s long-term
gains. Moreover, powerful MNCs can influence government policies through regulatory capture, leading
to excessive tax incentives or weakened environmental and labor standards. Therefore, the key challenge
for host countries is to balance the short-term gains from attracting foreign investment with the long-
term goal of sustainable and independent economic development.
III. International labor movement
1. Motives for international labor migration

2. Welflare effect of international labor migration

The welfare effects of international labor migration on the nations of emigration and
immigration can be analyzed with the same diagrammatic technique used to analyze
the welfare effects of international capital movements.
In the beside Figure, the supply of labor is OA in Nation 1 and OA in Nation 2. The
VMPL1 and VMPL2 curves give the value of the marginal revenue product of labor
in Nation 1 and Nation 2, respectively. Under competitive conditions, VMPL
represents the real wages of labor. Before migration, the wage rate is OC and total
product is OFGA in Nation 1. In Nation 2, the wage rate is OH and total product is
OJMA
Now let us assume free international labor migration. Since wages are higher in
Nation 2 (OH ) than in Nation 1 (OC), AB of labor migrates from Nation 1 to Nation
2 so as to equalize wages in the two nations at BE (= ON = OT). Thus, wages rise in
 Nation 1 and fall in Nation 2 (and for that reason immigration is generally opposed by
organized labor).
On the other hand, total product falls from OFGA to OFEB in Nation 1 and rises
from OJMA to OJEB in Nation 2, for a net gain in world output of EGM (the
shaded area in the figure)
Note that there is a redistribution of national income toward labor in Nation 1 (the
nation of emigration) and toward nonlabor resources in Nation 2. Nation 1 may also
receive some remittances from its migrant workers. Note also that if AB of labor had
been unemployed in Nation 1 before migration, the wage rate would have been ON
and the total product OFEB in Nation 1 with and without migration, and the net
increase in world output with migration would have been ABEM (all accruing to
Nation 2)
3. Other welflare effects of international labor migration
- Assumption of the model: all labor are unskilled but in reality, migration happens to both
unskilled and skilled labor -> welflare effects of them are different
 Brain drain
 Brain drain:
- The emigration of highly-skilled and educated individuals from developing to
developed nations

 Welflare implication
- Sending nations:
Loss of human capital investment (education costs).
Reduction in innovation capacity and institutional leadership.
“Youth and talent drain” — more dynamic, risk-taking workers leave.
- For receiving nations:
Receive human capital without paying for education and training
Gains in innovation, research, and competitiveness.
Stronger science and tech sectors, particularly in high-tech industries
Negative: reduce wage rate, loss job to immigrants
 How to reconcile – policy proposals
- Exit or earnings tax: home country recoups cost of training skilled emigrants.
- Receiving country compensation: developed nations fund education aid to sending
nations.
- Temporary or circular migration: skilled migrants return home after gaining experience
abroad