Econ 340 Lecture 11 Multinationals and International Capital Movements Outline Multinationals and International Capital Movements Terminology FDI DFI MNEs MNCs Real Versus Financial Capital History Purposes Served by FDI Local Market versus Export Reasons for FDI Who Gains and Who Loses Effects that are Similar to Trade Effects that are Similar to Migration Other Effects Econ 340 Deardorff Lecture 11 FDI 2 Terminology International Capital Movement or Capital Flow Acquisition of assets in another country Takes two forms Real Physical assets land Ownership of companies stocks 10 or more FDI Financial Bonds loans bank deposits currency Stocks if less than 10 ownership Econ 340 Deardorff Lecture 11 FDI 3 1 Terminology FDI Foreign Direct Investment DFI Direct Foreign Investment Acquisition of real assets abroad Results in a firm owning assets in more than one country MNC Multinational Corporation MNE Multinational Enterprise TNC Transnational Corporation Firm that operates and usually owns assets in more than one country Econ 340 Deardorff Lecture 11 FDI 4 Terminology FDI does not necessarily involve a net capital flow Reason acquisition of assets abroad can also be financed locally Thus Net capital flows Are due to unequal savings and investment FDI and MNCs Are due to business opportunities Econ 340 Deardorff Lecture 11 FDI 5 Terminology When FDI happens from Country A into Country B That is when a firm based in Country A acquires assets perhaps a subsidiary in Country B Source Country Country A Host Country Country B Econ 340 Deardorff Lecture 11 FDI 6 2 Terminology FDI HOST Country SOURCE Country Ownership Econ 340 Deardorff Lecture 11 FDI 7 Outline Multinationals and International Capital Movements Terminology FDI DFI MNEs MNCs Real Versus Financial Capital History Purposes Served by FDI Local Market versus Export Reasons for FDI Who Gains and Who Loses Effects that are Similar to Trade Effects that are Similar to Migration Other Effects Econ 340 Deardorff Lecture 11 FDI 8 History FDI was very important in US industrialization E g British firms built the railroads in the 19th century Not just in U S Also in South America In 20th century until the 1980s FDI was small and resisted by both source and host countries Governments restricted capital movements and exchange of currencies Developing countries equated FDI with colonialism and imperialism Countries blamed MNCs for interfering in domestic political and military matters Econ 340 Deardorff Lecture 11 FDI 9 3 History Starting in 1980s attitudes began to change Developing countries saw FDI as helping them grow Host countries saw FDI as providing employment Started using policies to attract FDI IMF and World Bank encouraged reforms that would be friendly to FDI US negotiated Bilateral Investment Treaties BITs Econ 340 Deardorff Lecture 11 FDI 10 Who Does FDI US Japan Europe Oth Asia Lat Amer Source Lipsey 2000 Data for 1996 Econ 340 Deardorff Lecture 11 FDI 11 Who Gets FDI US Japan Europe Oth Asia No Lat Amer ha te th s dis alm at J ap ap o a s pe n are t dh ere Source Lipsey 2000 Data for 1996 Econ 340 Deardorff Lecture 11 FDI 12 4 History Sources and Destinations of FDI 1996 billions Other US Japan Europe Asia Source 87 8 23 4 172 1 48 0 Host 77 0 0 2 120 1 78 0 Latin Amer 3 8 40 1 Source Lipsey 2000 Data for 1996 Econ 340 Deardorff Lecture 11 FDI 13 Who Does FDI in 2010 11 6 25 United States Europe Japan 13 China Other Asia Latin America 5 Other 4 36 Source UNCTAD World Investment Report 2011 Econ 340 Deardorff Lecture 11 FDI 14 Who Gets FDI in 2010 15 18 United States Europe Japan 13 China 25 Other Asia Latin America Other 20 9 0 Source UNCTAD World Investment Report 2011 Econ 340 Deardorff Lecture 11 FDI 15 5 China s Shares of World FDI 0 14 0 12 0 10 0 08 Inflows 0 06 Outflows 0 04 0 02 10 08 20 06 20 04 20 02 20 00 20 98 20 96 19 94 19 92 19 19 19 90 0 00 Source UNCTAD World Investment Report 2011 Econ 340 Deardorff Lecture 11 FDI 16 Source Economist Jan 28 2012 Econ 340 Deardorff Lecture 11 FDI 17 History Conclusions about who sends and receives FDI US and Europe are both huge sources and huge hosts But lots of Europe s FDI is from one to another Japan is a major source of FDI and hardly hosts any at all Developing Asia and especially Latin America are mainly hosts of FDI China has been a large host of FDI especially in the 90s and is now growing rapidly also as a source Africa does not appear significantly as either source or host Econ 340 Deardorff Lecture 11 FDI 18 6 History US has received almost as much FDI as it has sent out That means lots of US assets are foreignowned What are they Econ 340 Deardorff Lecture 11 FDI 19 History Some perhaps obvious foreign owned companies and products in the US Econ 340 Deardorff Lecture 11 FDI 20 History Some not so obvious foreign owned companies and products in the US Econ 340 Deardorff Lecture 11 FDI 21 7 Outline Multinationals and International Capital Movements Terminology FDI DFI MNEs MNCs Real Versus Financial Capital History Purposes Served by FDI Local Market versus Export Reasons for FDI Who Gains and Who Loses Effects that are Similar to Trade Effects that are Similar to Migration Other Effects Econ 340 Deardorff Lecture 11 FDI 22 Why Do Firms Invest Abroad Purposes of FDI 1 To sell to the Host Country 2 To export from the Host country Back to the Source Country To third countries Host Export Platform 3 To obtain inputs for production elsewhere Really a special case of 2 Econ 340 Deardorff Lecture 11 FDI 23 Why Do Firms Invest Abroad Alternatives to FDI Trade To sell to Host Export instead of producing there Instead of exporting from Host Import from independent firms there Licensing Subcontracting Have an independent firm in Host do production for you Econ 340 Deardorff Lecture 11 FDI 24 8 Why Do Firms Invest Abroad Prerequisites for FDI Reason for an activity in a foreign country Something to sell to Host country market Or something to buy raw material or factor services Both require price or cost differences similar to trade Likely to require that host have comparative advantage Reason to produce abroad own the facility rather than export license or subcontract Econ 340 Deardorff Lecture 11 FDI 25 Why Do Firms Invest Abroad Reasons for FDI to Sell to Host Tariff Jumping Common reason for FDI instead of exporting Trade Barriers Tariffs quotas VERs etc An import tariff can induce inward FDI as exporters produce inside the host country to avoid paying the tariff Worth