Download Document

Chapter Ten
Growth, Immigration,
and Multinationals
© 2003 South-Western/Thomson Learning
Chapter Ten Outline
1. Introduction
2. Economic Growth I: More Inputs
3. Economic Growth II: More
Productivity
4. What if Factors Can Move?
2
Introduction
• Basic trade model will be extended to consider
issues related to economic growth and factor
mobility.
– Factor flows between countries represent another
way in which countries can use economic
interaction to benefit from their differences.
• Study of economic growth has become a
growth industry within economics.
– Economic growth defined as any shift outward in a
country’s production possibilities frontier.
3
Introduction
• Major sources of economic growth:
1. Increases in quantities of inputs or resources
available to the country; and
2. Technical progress, or improvements in available
production technology.
– Empirical evidence suggests that increases in resources
have accounted for a little less than half of economic
growth in the modern era…technical progress
accounted for the remainder.
• Endogenous growth theory
– New approaches to growth recognize knowledge
and ideas as inputs.
4
Introduction
• Growth rates among countries differ
dramatically.
• Assumption that factors of production move
more freely within than among countries
seems realistic.
– Inter-country factor movement remains small
relative to intra-country movement because:
1. Most governments maintain some restrictions on flows
of both capital and labor across their national
boundaries.
2. Differences in costs would produce a differential rate
of movement.
5
Economic Growth I: More Inputs
• More labor and capital
– Country’s balanced growth: proportional increase
in country's endowments of both capital and labor.
• Figure 10.2 depicts the effects of balanced growth
– Increases production and consumption of each good, imports,
exports, and volume of trade in same proportion as the factor
endowments.
• Subscript p refers to production, c to consumption, 0 to
pre-growth, and 1 to post-growth.
See Figure 10.2
6
Figure 10.2: What Are the Effects of
Balanced Growth?
Y
Slope = – (PX/PY)tt
Y1c
U1
Y0c
U0
1
p
Y
Y0p
0
X0c X1c
X0p
X1p
X
7
Economic Growth I: More Inputs
• More labor and capital (cont.)
– Two components of growth’s effect on welfare:
• Income effect of growth: growth’s effect on per capita
consumption at unchanged terms of trade.
• Terms-of-trade effect: Captures the effect of changes in
relative output prices.
– Equals the price of its exports relative to the price of its
imports.
– Figure 10.3 illustrates the effects of a deterioration in a
country’s terms of trade.
See
Figure 10.3
8
Figure 10.3: What Are the Effects of
Deterioration in a Country’s Terms of Trade?
Y
U1
U2
U0
Slope = – (PX/PY)tt1
Slope = – (PX/PY)tt0
0
X
9
Economic Growth I: More Inputs
• More labor and capital (cont.)
– Net effect of balanced growth on per capita
income in a large country depends on:
1. Source of growth in labor endowment
(population vs. labor-force participation); and
2. Relative magnitudes of income and terms-oftrade effects.
10
Economic Growth I: More Inputs
• Just more labor
– Increase in labor endowment with a constant capital
endowment shifts production possibilities frontier
asymmetrically.
• Figure 10.4: Good X is labor-intensive. Out put of X rises
more than proportionally with the labor endowment and
output of the capital-intensive good falls.
See
Figure
10.4
– Provides example of Rybczynski theorem.
• When terms of trade are constant, an increase in endowment
of one factor with the other factor endowment held constant
increases production of the good intensive in the increased
factor, and decreases production of the good intensive in the
constant factor.
11
Figure 10.4: What Are the Effects of
Labor Endowment Growth?
Y
Slope = – (PX/PY)tt
Y0
Y1
I
0
X0
II
X1
X
12
Economic Growth I: More Inputs
• Just more capital
– Overall effects are ambiguous (as in the case of
labor-based growth).
• Major change is a positive income effect:
– Total consumption rises – because the population does not
change, a rise in per capita consumption follows.
• Small country: growth has no effect on its trading partners.
• Large country: if growth is import replacing, the terms of
trade improve and effect on welfare is positive; if growth is
export expanding, terms of trade deteriorate and welfare
effect is not clear (see Table 10.3).
13
Economic Growth I: More Inputs
• Extreme Case: Immiserizing Growth
– In some cases, increased production may lower
welfare through its deteriorating effect on the
terms of trade.
• Implication that growth may lower per capita
consumption even if population remains constant.
See
Figure
– Fig. 10.5 shows that with unrestricted trade, growth at
unchanged terms of trade shifts out the production possibilities
curve, allowing the country to reach U1, rather than the pregrowth U0.
• If increased volume of trade significantly worsened the
terms of trade, the country could end up on U2, which lies
below U0.
10.5
14
Figure 10.5: Immiserizing Growth
Y
Slope = – (PX/PY)tt1
Slope = – (PX/PY)tt0
U1
U0
U2
0
X
15
Economic Growth II: More
Productivity
• Increase in productivity is Technical Progress.
– Types of technical progress:
• Neutral technical progress leaves firms’ chosen capitallabor ratio unchanged.
– Fig. 10.6 represents neutral technical progress in production of
good X.
• Shifts the isoquant that represents production level X0 in
toward the origin – firms’ capital-labor ratio is unchanged
at the old relative factor prices.
See Figure 10.6
16
Figure 10.6: Neutral Technical Progress
in the X Industry
KX
(K/L)Xbefore = (K/L)Xafter
Slope = – (w/r)
X0 (before technical progress)
X0 (after technical progress)
0
LX
17
Economic Growth II: More
Productivity
• Capital-saving technical progress raises the
marginal productivity of labor relative to that
of capital.
– Fig. 10.7 indicates that at unchanged factor prices,
firms use a lower capital-labor ratio.
• Along any ray from the origin (for any given K/L), the
new isoquant is steeper than the old one.
See Figure 10.7
18
Figure 10.7: Capital-Saving
Technical Progress
KX
(K/L) Xbefore
(K/L) Xafter
Slope = – (w/r)
X0 (before technical progress)
X0 (after technical progress)
0
LX
19
Economic Growth II: More
Productivity
• Labor-saving technical progress involves an
increase in the marginal product of capital
relative to that of labor.
– The cost-minimizing capital-labor ratio rises.
• How does increased productivity affect
welfare?
– Small country: income effect constitutes only
component of welfare effect, and overall impact is
favorable.
– Large country: Depends on relative strength of
positive income effect and the negative terms-oftrade effect, identical to that in the case of
balanced growth.
20
Economic Growth II: More
Productivity
• Figure 10.8 illustrates the effects of
neutral technical progress in the X
industry in a small country:
– The country reduces production of good Y
and increases production of good X.
See
Figure 10.8
21
Figure 10.8: What Are the Effects of Neutral
Technical Progress in the X Industry?
Y
Slope = – (PX/PY)tt
Y0
Y1
0
X0
X1
X
22
What if Factors Can Move?
• Welfare analysis of factor movements
involves four questions:
1. How does factor movement affect total world
output?
2. How does factor movement affect the division of
welfare between the two countries?
3. How does factor movement affect the distribution
of income within each country?
4. How does the movement affect the factors that
move?
– assuming factor movements occur voluntarily, owners
of the factors must expect to be better off, or they
would not move
23
What if Factors Can Move?
• Inter-country labor mobility
– Labor generally flows less easily than capital
across national boundaries.
– Incentives for labor migration:
• Economic: desire to better themselves and to
improve conditions for their children.
– Text focuses on these motivations and assumes that
an individual moves when the reward paid to
labor is higher in the destination country.
• Noneconomic: desire for religious and political
freedom.
24
What if Factors Can Move?
• Inter-country labor mobility (cont.)
– Fig. 10.9 provides a convenient guide for analyzing
labor mobility’s effects.
• Labor’s ability to move from country B to country A in
response to a wage differential raises total world output
by an amount represented by area of triangle EGJ.
– Country A gains, and country B loses.
– In A, capital owners gain relative to labor; and
– In B, workers gain relative to capital owners.
See
Figure 10.9
25
Figure 10.9: What Are the Effects
of Labor Mobility?
wA
wB
E
w A0
w
G
F
A
1
J
wB1
wB0
H
VMPBL
VMPAL
0A
L0
L1
0B
Native labor in A
Migration
from B to A
26
What if Factors Can Move?
• Inter-country labor mobility (cont.)
– Labor migration’s effects: Gains are not
divided equally among all countries.
– Country A as a whole gains from immigration.
• Net gain is sum of gains by capital owners in A,
losses by native country-A workers, and gains by
the immigrants themselves.
– Country B as a whole loses from its emigration.
• But workers in B gain relative to owners of
capital.
27
What if Factors Can Move?
• Inter-country labor mobility (cont.)
– Opposition to immigration policies:
• Open immigration can lower wages of domestic workers
(including earlier immigrants) who compete with new
immigrants in labor markets.
• Many countries have adopted strong social laws
guaranteeing residents minimal levels of food, housing,
medical care, education, and income; they fear influx of
immigrants who will not work and produce.
• Fear of a Brain Drain: tendency of most highly skilled,
trained, and educated individuals from developing
countries to migrate to industrialized countries.
28
What if Factors Can Move?
• Inter-country labor mobility (cont.)
– Theory, evidence, and politics: an important
caveat…
• Assume that country produces at least two goods, a
labor-intensive one and a capital-intensive one, and that
these goods can be traded internationally.
– An inflow of labor makes a country more labor
abundant and causes it to shift toward more laborintensive goods and away from capital-intensive
ones.
• Result is an increase in the demand for labor to match the
increased supply.
29
What if Factors Can Move?
• Inter-country labor mobility (cont.)
– Labor mobility without immigration?
•
Recently firms have begun to use several
arrangements that amount to labor mobility without
immigration:
1. Outsourcing: offshore assembly in which a firm performs
each step in a manufacturing process in a country with a
comparative advantage in that particular stage.
2. Use of electronic means to allow work like software
programming to be outsourced to places like India and Russia
– finished work retransmitted back to U.S.
– No brain drain and earnings remain in developing
country.
30
What if Factors Can Move?
• Inter-country capital mobility
– Two major classes of capital mobility:
1. International portfolio investment: flow across
national boundaries of funds for financing investments
in which the lender does not gain operating control
over the borrower.
•
U.S. firm issues bonds (borrows) and sells some to German
resident (makes loan to U.S. firm).
• From German perspective: equals capital outflow
(international purchase of assets).
• From U.S. perspective: equals capital inflow
(international sale of assets):
2. Direct investment: gives the lender operating
ownership of and control over the borrower.
31
What if Factors Can Move?
• Inter-country capital mobility (cont.)
– Recent patterns of international capital mobility.
•
Two main trends:
1. Rapid and erratic growth.
2. Diversification of source and host countries.
•
•
Figure 10.10 illustrates the top 20 host countries for
cumulative foreign direct investment during the 198595 period.
Figure 10.11 indicates the regional allocation of U.S.
outward and inward direct foreign investment for
1996.
See Figures
10.10 and 10.11
32
Figure 10.10: Top Source and Host Countries
for Foreign Direct Investment, 1999
33
Figure 10.11a, b: Destination and Sources of
U.S. Outward and Inward FDI, 1999 (% of Total)
34
What if Factors Can Move?
• Inter-country capital mobility (cont.)
– Incentives for international capital movements:
1. Opportunity to earn higher rate of return or reward.
2. Desire to diversify assets to reduce risk.
•
Diversification refers to holding a variety of assets, chosen
such that when some perform poorly, others are likely to
perform well.
3. Mobility is a way of trading goods across time, called
intemporal trade.
•
Intemporal exchange in assets can be mutually beneficial in
much the same way as ordinary trade in goods and services.
35
What if Factors Can Move?
• Inter-country capital mobility (cont.)
– Capital mobility’s effects:
•
•
Analysis of the effects of capital mobility is very
similar to that for labor mobility.
Fig. 10.12 points out that beginning at point E, capital
flows, in response to the higher rate of return in
country A, improve efficiency and increase output by
EGJ.
–
–
Both countries gain because ownership of the migrant capital
remains with country B.
In A, workers gain relative to capital owners, and in B capital
owners gain relative to workers.
See Figure 10.12
36
Figure 10.12: What Are the
Effects of Capital Mobility?
rA
rB
E
rA0
rA1
F
G
rB1
J
rB0
H
VMPAK
VMPBK
0A
K0 K1
0B
37
What if Factors Can Move?
• Taxation and factor mobility
– Rates of taxation vary widely from country to
country.
• Hong Kong corporate rate: 16%; Germany: 56%.
– Factor mobility increases world efficiency by
drawing resources to those locations where they
can be most productive.
• This conclusion does not apply to mobility motivated
solely by countries’ differing tax rates and rules.
– Such mobility clearly benefits migrant labor or capital, but
does not increase efficiency of the world economy.
38
What if Factors Can Move?
• Taxation and factor mobility (cont.)
– Taxation of wages and capital income have similar
effects.
– Figure 10.13 examines the effects of wage taxation
by Country A:
• Beginning with an efficient allocation of labor between A
and B, taxation of wages by A reduces total output by
EGJ.
See
Figure
10.13
– Workers between L1 and L0 migrate to B in response to a
differential in wages net of taxes. Immigration harms workers
in B. Workers in A are better off than they would be in the
presence of the tax and with no labor mobility.
39
Figure 10.13: What Are the Effects of Wage
Taxation by Country A?
wA
wB
E
wA1
wA0
wA1(1 – tA)
wA0(1 – tA)
G
H
J
M
VMPAL
VMP AL (1 – tA)
VMPBL
0A
w B0
w B1
L1
L0
0B
40
What if Factors Can Move?
• Taxation and factor mobility (cont.)
– Double taxation, or taxation on the same income
by two governments, creates a strong disincentive
for factor mobility.
• Most governments agree, through tax treaties, to reduce,
if not eliminate, double taxation by granting either tax
credits or tax reduction for taxes paid to foreign
governments.
41
Multinational Enterprises and the
World Economy
•
One of the major economic trends of the postwar
period has been the growth of firms across
national boundaries.
– Definition of Multinational Enterprises (MNEs):
•
Firms that manage facilities in at least 2 countries.
– Classified into three groups:
1. Horizontally integrated MNEs: Produce basically the same
or identical goods in several countries.
2. Vertically integrated MNEs: Produce inputs in one country
that they use to produce another good in another country.
3. Diversified or Conglomerate MNEs: Production of different
goods in various countries.
42
Multinational Enterprises and the
World Economy
• Why go multinational?
– Capital arbitrage theory of multinationals:
perspective of analysts who view MNEs as
vehicles for spreading capital from one country to
another.
•
Capital arbitrage view appears inconsistent with at
least 3 aspects of observed MNE behavior:
1. MNE capital does not necessarily flow from capital-abundant
to capital-scarce countries.
2. In many countries, inflows and outflows of MNE capital
occur simultaneously.
3. Although MNEs often do move capital form one country to
another, such movements are not necessary because MNEs
can borrow funds locally for their subsidiaries.
43
Multinational Enterprises and the
World Economy
• Why go multinational?
– Studies have confirmed that trade barriers
encourage MNE development.
•
Tactic by host country involves imposing import
restrictions high enough to force foreign firms that
want to sell in the market to establish local production
facilities.
–
Called tariff-jumping foreign direct investment.
– Foreign direct investment can also defuse
political sentiment in the host country.
•
Called quid pro quo investment.
44
Multinational Enterprises and the
World Economy
• Why go multinational?
– Deliberate use of high trade barriers to attract
inward FDI can work, but has some negative
consequences:
• Investment attracted tends to be simply production
units to service the domestic market – not technology
transfer or export-oriented production.
• High trade barriers can make the domestic MNE
affiliate less competitive by raising the cost of imported
inputs.
45
Multinational Enterprises and the
World Economy
• Why go multinational? (cont.)
– Due to lack of adequate intellectual property
protection in developing countries, firms in
technologically innovative or R&D-intensive
industries tend to choose multinationalism over
licensing.
• By forming an MNE, the firm can maintain control over
its technology while using it to serve foreign markets.
See
Figure
10.14
– Fig. 10.14 reveals that U.S. FDI tends to be higher in industries
that involve high levels of R&D.
46
Figure 10.14: U.S. FDI and R&D,
1994 ($ Billions)
Foreign direct investment
60
Chemicals
50
Other
manufactures
40
30
Food
Services
Electronic
equipment
20
10
0
Transportation
Industrial
machinery
Primary and
fabricated
metals
5
R&D expenditures
10
15
20
25
30
47
MNEs’ Effects
• As MNEs help move production to least-cost
locations and contribute to the spread of
technological improvements, total world output
increases.
– Makes possible increases in total world welfare.
• MNEs facilitate achievement of economies of
scale by handling some functions centrally while
continuing to adapt to local conditions in
relevant areas of operation.
48
MNEs’ Effects
• Claims by labor that shifting production to
other countries constitutes the export of jobs
that rightfully belong to U.S.
1. Once short-term adjustment and relocation costs are
overcome, movement of production maximizes total
world output and income.
2. Often, firm faces a choice between moving abroad or
stopping production completely.
3. If foreign production makes inputs cheaper for U.S.
producers, their competitive positions improve.
4. More foreign production raises foreign incomes, demand
for U.S. exports increase, and employment in exportoriented industries increases.
49
MNEs’ Effects
•
•
MNEs tend to spread the technology developed
in parent countries to the rest of the world.
Developing countries sometimes charge that the
sheer size and economic strength of MNEs allow
them to exploit their host countries.
1. Bargaining with host government for excessive tax
concessions;
2. Paying unfairly low prices for raw materials removed
from the host country.
3. Issuing deceptive financial statements to repatriate all the
benefits from the operation to the parent country.
4. MNE’s general domination of host’s economy and culture
– causes loss of indigenous values and damage to local
companies.
50
Note for Case Three: Saving, Investment, and
Intertemporal Trade
• Figure 10.15 shows that despite increased
capital mobility, countries with low (high)
rates of saving tend to also have low (high)
rates of investment expenditure.
See
Figure
10.15
51
Figure 10.15: Saving and Investment Rates,
1970–1992 Averages
35
Gross
Saving
as
Percent
of GDP
1
2
30
4
25
20
15
15
7
10 9 8
6
12 11
15 14 13
18 17
16
20 19
21
20
3
5
1
2
3
4
5
6
7
8
9
10
11
12
13
14
15
16
17
18
19
20
21
Japan
Switzerland
Norway
Austria
Portugal
Finland
Holland
Italy & Spain
France
Germany
Greece
Australia
Iceland &
New Zealand
Canada
Belgium
Ireland
Turkey
Sweden
Denmark
United States
Britain
25
30
35
Gross Investment as Percent of GDP
52
Key Terms in Chapter 10
• Economic growth
• Endogenous growth theory
• Balanced growth
• Income effect
• Terms-of-trade effect
• Rybczynski theorem
• Immiserizing growth
53
Key Terms in Chapter 10
• Technical progress
• Neutral technical progress
• Capital-saving technical progress
• Labor-saving technical progress
• Brain drain
• Outsourcing
• Portfolio investment
• Capital outflow
54
Key Terms in Chapter 10
• International purchase of assets
• Capital inflow
• International sale of assets
• Direct investment
• Diversification
• Intertemporal trade
• Multinational enterprise (MNE)
55
Key Terms in Chapter 10
• Capital arbitrage theory of multinationals
• Total factor productivity
56