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International EconomicsBy Robert J. Carbaugh
8th Edition
Chapter 10:
International Factor Movements and Multinational Enterprises
Factor movements & multinational enterprises
Multinational enterprises
• Various business operations in numerous host countries
• Headquarters often far from operations• Stock ownership and management are
multi-national• Frequently employ vertical integration,
horizontal integration, conglomerate structure
Multinational enterprises
Foreign direct investment
• A foreign or multinational firm can buy a controlling interest in a local firm
• Buy or build new plants or equipment overseas
• Shift funds abroad to expand a subsidiary
• Reinvest the earnings of a foreign subsidiary
Multinational enterprises
Reasons for foreign direct investment
• Demand factors– Serve different local markets– Respond to market competition
• Cost factors– Access to key raw materials– Labor costs– Transportation costs– Government policies
Choice between export and FDIForeign direct investment
Choice between licensing and FDIForeign direct investment
Multinational enterprises
International joint ventures
• Two companies can operate a venture in a third country
• A foreign firm can work with a local company
• A foreign firm can form a venture with a unit of the local government
Multinational enterprises
Reasons for international JVs
• Cost sharing - R&D, capital expenditures (in mining and oil, for example)
• Avoiding restrictions on foreign ownership of local firms (ensuring local participation)
• Forestalling pressure for protectionism• Problems: divided control means success of
JV depends on ability of firms to work together
Effects of an international JVMultinational enterprises
Multinational enterprises
Controversy over multinationals
• Employment– Host country may not gain many jobs, foreign
managers often brought in; source country worries about losing jobs
• Technology transfer– MNEs are reluctant to share technology with
host nations; source country worries about giving away advantage
Multinational enterprises
Controversy over multinationals (Cont’d)
• National sovereignty– Host country worries about power of MNE to
influence affairs; source country worries about ability to regulate MNE activities elsewhere
• Balance of payments– MNE investments and profits (internal
transfers) have impacts on the payments status of both source and host nations
Multinational enterprises
Controversy over multinationals (Cont’d)
• Taxation– Source countries may have difficulty taxing
MNE income stemming from foreign operations
• Transfer pricing– Both host and source governments worry that
MNEs may illegally manipulate prices paid between subsidiaries to avoid taxes
Transfer pricing illustrated
Multinational enterprises
Germany(tax rate 48%)
Computer produced by
parent firm for $2000. Sold to Irish subsidiary
for $2000.
German tax paid: $0.
Ireland(tax rate 4%)
Irish subsidiary resells the same computer to US subsidiary for
$2500, earning $500 profit.
Irish tax paid: $20.
United States(tax rate 34%)
US subsidiary sells computer at cost,
for $2500. No profit is earned.
US tax paid: $0. Irish subsidiary
then lends money to US subsidiary
for expansion
International factor movements
Migration
• Tends to equalize wage rates between countries
• Shifts distribution of income between capital and labor
• Other concerns:– Fiscal drain from immigration– Brain drain from developing countries– Status of temporary guest workers