INTERNATIONAL RESOURCE

MOVEMENTS AND
MULTINATIONAL CORPORATIONS
CHU MINH HUY
LEARNING GOALS

• Describe the motives for international portfolio and direct investments

• Describe the effects of portfolio and direct investments on investing
and host countries
• Understand the reasons for the existence of multinational corporations
and their effects on the home and host countries
• Understand the motives and effects of international labor migrations
OUTLINES

• Introduction
• Some data on international capital flows
• Motives for International Capital Flows
• Welfare effects of international capital flows
• Multinational corporations
• Motives for international labor migration
• Welfare effects of international labor migration
INTRODUCTION

• International trade and movement of productive resources are

substitutes
• As we trade, the movement of resources between nations tends to
equalize factory returns
• 2 main types of foreign investments:
 Portfolio investments
 Direct investments
PORTFOLIO INVESTMENTS

• Purely financial assets, such as bonds or less than 10% of voting stock,
denominated in a national currency
• Short to medium term in nature, is often motivated by the desire to
earn a financial return (interest, dividends, capital gains) rather than
controlling the enterprise
• Take place primarily through financial institutions such as banks and
investment funds
• Main forms: Equity securities; Debt securities; Mutual funds/Exchange
Traded Funds; Short-term loans and money market instruments
BENEFITS AND RISKS/CHALLENGES

BENEFITS RISKS/CHALLENGES

Inflow of foreign capital Highly volatile – can leave the

country quickly ("hot money") during
crises
Development of financial markets May cause exchange rate instability

Increased liquidity in stock and bond Not associated with job creation or
markets technology transfer

Can boost investor confidence and Speculative flows can inflate asset
economic growth bubbles
DIRECT INVESTMENTS

• Real investments in factories, capital goods, land and inventories

where both capital and management are involved and the investor
retains control over use of invested capital
• Usually takes the form of a firm starting a subsidiary or taking control
of another firm
• Long-term investment
• In international economics, it refers to Foreign Direct Investment (FDI)
– typically defined as ownership of 10% or more of a foreign company’s
voting stock
• Cross-border movement of capital, technology, and expertise
BENEFITS AND RISKS/CHALLENGES

BENEFITS RISKS/CHALLENGES

Capital inflow for development Loss of economic sovereignty or

over-dependence on foreign firms
Job creation and skill development Environmental concerns (if not well-
regulated)
Technology and knowledge transfer Profit repatriation (profits sent back
to investor's home country)
Improved infrastructure and business Transfer pricing / tax avoidance by
practices multinational corporations
DIRECT INVESTMENTS VS. PORTFOLIO
INVESTMENTS
Foreign Direct
Criteria Portfolio Investment
Investment (FDI)
≥ 10% or controlling
Ownership < 10% of voting shares
interest
Involves
Control No managerial control
management/control
Time horizon Short to medium term Long term
Return on assets (passive Business expansion,
Motive
income) strategic interest
Buying government Setting up a factory in
Example
bonds in
QS: Should developing countries Brazil
encourage Brazil
portfolio investments or focus more
on FDI?
SOME DATA ON INTERNATIONAL CAPITAL
FLOWS
• Both US and foreign portfolio investments and direct investments
increased rapidly between 1950 and 2007
SOME DATA ON INTERNATIONAL CAPITAL
FLOWS
• The stock of US direct investments in Europe grew much more rapidly
than in Canada and Latin America, due to the rapid growth of the EU
and the US desire to avoid common external tariffs
SOME DATA ON INTERNATIONAL CAPITAL
FLOWS
• Direct investments in finance and other categories grew much more
rapidly that direct investments in manufacturing since 1985
SOME DATA ON INTERNATIONAL CAPITAL
FLOWS
• Fluctuations in Foreign Direct Investment Flows to the United States
MOTIVES FOR INTERNATIONAL CAPITAL
FLOWS
• International portfolio investments
 The basic motive for international portfolio investment is to earn higher
returns abroad
 Portfolio theory tells us that by investing in securities with yields that
are inversely related (like foreign and domestic securities) overtime, a
given yield can be obtained at a smaller risk, or a higher yield can be
earned with the same level of risk for the portfolio as a whole
 A portfolio including both domestic and foreign securities can have a
higher average yield and/or lower risk than one containing only
domestic securities
MOTIVES FOR INTERNATIONAL CAPITAL
FLOWS
• Direct foreign investments
 The basic motive for Direct foreign investment is to earn higher returns
(possibly from higher growth rates abroad, more favorable tax
treatment or greater availability of infrastructure) and to diversify risks
 Large corporations often have unique product knowledge or managerial
skill that could easily and profitable be used abroad and over which the
corporation wants to retain direct control
MOTIVES FOR INTERNATIONAL CAPITAL
FLOWS
• Direct foreign investments
 Horizontal integration is the production approach of a differentiated product that is
also produced at home
 Vertical integration allows a corporation to obtain control of our needed raw
material and thus ensure uninterrupted supply at the lowest possible cost, or
acquire later stages in the production process, or ownership of sales or distribution
networks abroad
 Also done to avoid tariffs and other restrictions that nations impose on imports or
to take advantage of government subsidies encouraging direct foreign investment
WELFARE EFFECTS OF INTERNATIONAL
CAPITAL FLOWS
Of the total capital stock of OO’, Nation 1 holds OA
and its total output is OFGA, while Nation 2 holds
O’A and its total output is O’JMA. The transfer of
AB of capital from Nation 1 to Nation 2 equalizes
the return on capital in the two nations at BE. This
increases world output by EGM (the shaded area),
of which EGR accrues to Nation 1 and ERM to
Nation 2. Of the increase in total domestic product
of ABEM in Nation 2, ABER goes to foreign
investors, leaving ERM as the net gain in domestic
income in Nation 2
WELFARE EFFECTS OF INTERNATIONAL
CAPITAL FLOWS
• International capital flows increased the efficiency in the allocation of
resources internationally and increase world output and welfare
• In the year the foreign investment occurs, the foreign expenditures of
the investing country increase, causing a balance of payments deficit in
the investing country, and an improvement in the host nation’s balance
of payments
• The investing nation experiences a reduction in tax collections, while
the host nation experiences an increase in tax collections
MULTINATIONAL CORPORATIONS

• Multinational corporations own, control, or manage production and

distribution facilities in several countries
• Today, MNCs accounts for about 25% of the world's output, with intra
firm trade estimated at about 1/3 of Total World trade in manufacturing
• Most international direct investments are undertaken by MNCs
REASONS FOR MNCS

• Integration may increase profits through better control of supply chains

• The larger scale of production may allow the firm to better exploit
economies of scale
• MNCs can better direct production to low-cost nations
• MNCs can artificially change prices to only show profits in low tax
nations (transfer pricing)
PROBLEMS IN HOME COUNTRY

• Loss of domestic jobs to other countries

• MNCs may move technology out of the home country reducing the
technological advantage of the home country
• Transfer pricing may reduce taxable income and tax revenue
• Access to foreign markets allows MNCs to circumvent domestic
monetary and fiscal policy control
PROBLEMS IN HOST COUNTRY

• MNCs Are alleged to dominate their economies

• R&D funds are siphoned off to the MNC's home nation, keeping host
nation technologically dependent
• MNC's may extract from host nations most of the benefits of their
investment, either through text and tariff benefits or tax avoidance
PROBLEMS IN HOST COUNTRY

• MNCs Are alleged to dominate their economies

• R&D funds are siphoned off to the MNC's home nation, keeping host
nation technologically dependent
• MNC's may extract from host nations most of the benefits of their
investment, either through text and tariff benefits or tax avoidance
MOTIVES FOR AND WELFARE EFFECTS OF
INTERNATIONAL LABOUR MIGRATION
Benefits
• the opportunity to earn higher real wages
• greater educational and job opportunities
• escape from political oppression or conflict
MOTIVES FOR AND WELFARE EFFECTS OF
INTERNATIONAL LABOUR MIGRATION
Monetary cost of Labor migration
• expenditures for transportation and fees
• lost wages during relocation and job search
Non-monetary costs of labor migration
• Separation from relatives, friends, and familiar surroundings
• need to learn new customs and/or new language
• risks involved in finding a job, housing,…
MOTIVES FOR AND WELFARE EFFECTS OF
INTERNATIONAL LABOUR MIGRATION
MOTIVES FOR AND WELFARE EFFECTS OF
INTERNATIONAL LABOUR MIGRATION
Effects on recipient country
• Increased ability to produce
 the increase in the labor force increases productive ability by expanding one of the
factors of production
 the workers may possess high levels of skills that enhance the recipient country's
human capital
• Dislocation of native workers competing with the new entrants to the labor force
 increased unemployment
 lower wages
MOTIVES FOR AND WELFARE EFFECTS OF
INTERNATIONAL LABOUR MIGRATION
Effects on source country
• Lost in domestic productive ability
 the decrease in the labor force decreases the nation's ability to produce
 the loss of skilled workers – brain drain – reduces human capital

• Increased domestic wages

 the decline in the number of workers should aid driving up wages in the source
country
 This effect is reduced if the country suffers significant unemployment

• Source of new foreign earnings: repatriated income

SUMMARY

• Effects of international flows of capital, labor and technology: portfolio and direct investment
• US private holdings of foreign long-term securities and foreign private holdings of US long-term
securities increased sharply from 1950-2010
• Basic Motives for international portfolio investments argued maximization and risk diversification
• International capital transfers increased the national income of both the investing and host
countries, but in the investing nation the relative share going to capital rises and the share going
to labor falls, quite the opposite occurs in the host or receiving nation
• Multinational corporations have grown to be the most prominent form of private international
economic organization today
• International labor migration can occur for economic and non-economic reasons