Movement of labor, capital and multinationals Sources: Feenstra Taylor; Mucchielli Mayer
Eleni ILIOPULOS Paris 1
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Aim of this lecture Understand the movement of labor between countries. Understand the short run model— Speci…c Factors Model. Understand the e¤ect of immigration on the wages in Home and Foreign. Understand the e¤ect of immigration on the rentals on capital and land and industry output. Understand the e¤ects of immigration in the long run Understand the gains from labor and capital ‡ows at home and abroad. Understand the gains from foreign direct investment. What about allowing for migration in the Ricardo and HOS frameworK? Understand why multinationals exist References: Feenstra Taylor (2008 + slides), Mucchielli Mayer. E. ILIOPULOS (Paris 1)
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Introduction From May to September 1980, boatloads of refugees from Cuba arrived in Miami. This would lead you to believe that these less-skilled workers would drive down wages. However, this immigration does not appear to have pulled down the wages of other less-skilled workers in Miami. A similar situation occurred with the 1989 emigration of Russian Jews to Israel. The immigrants were more highly skilled than the existing Israeli population. However, the relative wages of high-skilled workers in Israel actually rose during the 1990s. In other large scale immigrations, the wages of domestic workers did fall. (This chapter will use the short-run model,the speci…c factors model,to explain the case where immigration leads to a fall in wages.) E. ILIOPULOS (Paris 1)
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Introduction Next we use a long-run model— the Heckscher-Ohlin model— where an increase in labor will not lower the wages. The long-run model gives industries more time to respond which allows the economy to absorb the new workers. It comes down to the domestic countries’ability to expand exports in areas that use the immigrants’skills. After looking at what happens in the short run and long run when labor moves across countries, we will consider the e¤ects of movement of capital. Foreign Direct Investment (FDI) occurs when a company from one country owns a (a share of) a company in another country. Finally, we will discuss the gains to the host and destination countries, and to the world, from the movement of labor and capital. Btw: why do multinationals exist? E. ILIOPULOS (Paris 1)
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Movement of labor between countries
Migration is the movement of labor from the Foreign country to the Home country. The wages paid to labor and the rentals paid to capital and land are determined by the prices of goods purchased. Prices of goods are determined by the world market for those goods. If prices of goods are …xed, how do the Home wage and rentals paid change as labor moves between countries?
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Movement of labor between countries
E¤ects of immigration in the Short-Run Speci…c-Factors Model: In the short run, only labor is mobile among Home industries: capital and land are …xed. This is the speci…c factors model: some factors can move across industries, some cannot. Determining the Wage: Total labor, L, is the amount used in manufacturing, LM , plus the amount used in agriculture, LA L = LM + LA
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Movement of labor between countries
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Movement of labor between countries Determining the Wage
Labor in manufacturing is measured from the left. Remember: w /p = MPL!! Labor in agriculture is measured from the right. Both PM MPLM and PA MPLA are downward sloping as more labor is used in a speci…c industry, the MPL and therefore the wages fall in that industry. Equilibrium wage is at A where the two curves cross. When wages are equal across industries, there is no reason for labor to move between them.
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Movement of Labor Between Countries Determining the Wage
We assume that the Foreign equilibrium wage, W*, is lower than Home equilibrium wage, W. Foreign workers will want to immigrate to Home and the Home workforce will increase by an amount ∆L, re‡ecting the number of immigrants. E¤ect of Immigration on the Wage in Home We add the ∆L to the …gure above, The PA MPLA shifts right by ∆L.(just a matter of construction. Change the axis and obtain same result) The origin for manufacturing has not changed so the PM MPLM does not change.
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Movement of Labor Between Countries
E¤ect of Immigration on the Wage in Home The new equilibrium Home wage is at B, at a lower wage. The extra workers are shared between both industries since both industries have more workers, but …xed amounts of capital and land!! The wage declines due to the diminishing marginal product of labor.(remember, concave function!) Therefore, the speci…c-factors model predicts that an in‡ow of labor will lower wages in the Home country.
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Movement of Labor Between Countries
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Immigration to the New World
Between 1870 and 1913, 30 million Europeans left their homes in the “Old World” to emigrate to the “New World.” The U.S. population increased by 17% and absorbed the largest number of people. The New World had higher real wages In 1870, real wages in the New World were nearly 3 times higher than in Europe. Over time capital accumulated, so real wages in both locations grew, but at a slower rate in the New World.
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Immigration to the New World
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Immigration in the new world
Large-scale migration therefore contributed toward a “convergence” of real wages across the continents. Comparing the actual real wages with the no-migration estimates, we see that the growth of wages in the New World was slowed due to immigration. Wages in Europe grew slightly faster due to the emigration.
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Immigration to the US and Europe today
We don’t see large scale migration from Europe to the “New World.” In many cases, the immigration includes a mix of low-skilled workers and high-skilled workers. In the U.S. much of the recent debate focused on the issue of illegal immigration. There are about 12 million illegal immigrants in the U.S. This often obscures the fact that the majority of immigrants are legal. The combination of legal and illegal immigrants in the U.S. creates a U-shaped pattern between the number of immigrants and their educational level.
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Immigration to the US and Europe today
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Immigration to the US and Europe today
The category of workers without a high school degree holds the largest amount of foreign born workers. The group of workers with Ph.D.s holds the next largest group of foreign-born workers. The middle educational levels, which comprise about 80% of the U.S. labor force, have the lowest percent of foreign-born workers.
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EU’s New Track on Immigration
Due to a shrinking workforce, Europe’s leaders are looking for ways to attract talented foreigners, even as some countries on the Continent close their borders. A new EU-wide “green card” would allow skilled workers already in the 25-nation bloc to change countries without extra paperwork. Europe’s work force is expected to shrink by 20 million between now and 2040, according to the European Commission. Business complain regularly about a shortage of highly skilled personnel.
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EU’s New Tack on Immigration
Goal: A North African engineer could go to work in Europe, earn good money, and return regularly to his hometown to start and maintain a business. Immigration policy is still up to individual countries. What about immigration into Spain and the crisis? (see The Economist, October 2012) What about the recent immigration policies in UK? (expected to take place soon)
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Movement of Labor Between Countries
Other E¤ects of Immigration in the Short Run U.S. and Europe have both welcomed foreign workers in speci…c industries: agriculture and high-tech. They do this even though those foreign workers compete with domestic workers in those industries. Therefore there must be bene…ts to the industries. We can measure these potential bene…ts by the payments to capital and land— rentals.
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Movement of Labor Between Countries Rentals on Land and Capital, short run
Two ways to compute rentals: As the earnings left over in the industry after paying labor. As the marginal product of capital or land times the price of the good produced in each industry.
Under either calculation, immigration increases rentals on capital and land. Given this, it should not be surprising that owners of capital and land often support more open borders. The restriction on immigration should be seen as a compromise between: Entrepreneurs and land-owners who might welcome the foreign labor. Local unions and workers who view migrants as a potential source of competition leading to lower wages. The immigrant groups themselves who might also have the ability to in‡uence the political outcome of immigration policy E. ILIOPULOS (Paris 1)
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Movement of Labor Between Countries E¤ect of Immigration on Industry Output We showed before that immigration led to an increased labor force in each industry. With more workers and the same amount of capital and land, output rises in both industries. Immigration leads to an outward shift in the PPF. With constant prices of goods, output rises from point A to point B. This result depends on the short-run nature of the speci…c factors model. If land and capital are not …xed, as in the long run, one industry’s output will rise while the other will fall.
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Movement of Labor Between Countries
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The Ricardian model with immigration
What happens if e substitute goods trade with factor ‡ows? Let’s look into comparative and absolute advantages. Let’s then compare the gains from trade with the ones associated to factors ‡ows.
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The Ricardian model with immigration Productivity levels
Ensemble Electronique Chimie
USA 100 100 100
Japon 100 236 119
France 65 47 79
France is desadvantaged in both sectors with respect to Japan France has a smaller absolute desadvantage in chemicals wrt Japan Japan has in average catched up with the US technology level but it’s more e¢ cient in electronics France can trade with Japan and specialize in chemicals because of the lower opportunity cost associated to it.
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The Ricardian model: productivity levels vs labor costs
The structure of absolute costs is the inverse of labor productivity levels (with only labor as production factor) Here in the following you …nd the corresponding production costs The relative cost of good 1 (chemicals) is lower in France Japan has a greater advantage in electronics.
1 Chimie 2 Electronique
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The Ricardian model: calculating costs of trade/factors mobility Solution A: Trade in goods France reduces production of electronics by 1 unit; Japan increases it by 1 unit. Japan reduces as a consequence his chemicsls production by 0,4/0,8=0,5 units, so as to free the required workers; France uses the unemployed workers to produce 2,1/1,3=1,615 units of chemicals; Countries trade goods. Solution B: migration of workers France reduces production of electronics by 1 unit Unemployed workers migrate to Japan; Japan employs immigrants so as to produce electronics with the domestic productivity levels. E. ILIOPULOS (Paris 1)
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The Ricardian model: calculating costs of trade/factors mobility France frees 2,1 workers so that Japan uses it to produce 1 unit of electronics (cost in Japan: 0,4 workers). The remaining 1,7 units (ie: 2.1-0.4) are used in Japan to produce chemicals (1,7/0,8) = 2,125 units of chemicals.
France Japon Monde
solution A 1 Chimie 1.615 -0.500 1.115
2 Electronique -1 1 0
solution B 1 Chimie 2 Electronique 0.000 -1 2.125 1 2.125 0
! Workers mobility entail more gains than trade in goods!! (for the world..not for France..)
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E¤ects of Immigration in the Long Run
In the long run, all factors are free to move between industries. We will ignore land to simplify. As before, only capital and labor are used to produce shoes and computers. This is similar to the Heckscher-Ohlin model from before except that labor can move between countries. Total capital: K = KC + KS earning rental R. Total labor: L = LC + LS earning wage W.
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E¤ects of Immigration in the Long Run
Computers are capital intensive and shoes are labor intensive. As before, LS /KS > LC /KC and KC /LC > KS /LS Again we can see the PPF and show the equilibrium output at point A. The tangency between the PPF and the world relative price line. How is equilibrium a¤ected by the in‡ow of labor into Home due to migration?
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E¤ects of Immigration in the Long Run
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Immigration e¤ects in the long run
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Immigration in the long run
Length is total amount of labor at Home, L. The vertical axes measure the total amount of capital, K, at home, in each industry. OS A shows the amount of labor and capital used in shoes and OC A in computers. The capital-labor ratio in each industry is the slope of the respective industry line. OS A is ‡atter, so capital-labor ratio in shoes is less than in computers.
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E¤ects of immigration in the long run
Determination of the Real Wage and Real Rental The wages and rentals are determined by the marginal products of labor and capital. The marginal products are determined by the capital-labor ratio in each industry. If there is a higher capital-labor ratio, then by the law of diminishing returns, the marginal product and real rental must be lower and vice versa. Because each line in the box diagram is a particular capital-labor ratio, it is also a particular wage and rental.
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E¤ects of immigration in the long run
Increase in the Amount of Home Labor Immigration leads to increase in the amount of Home labor to L’= L + ∆L. The axes in box diagram expand Instead of allocating the extra labor to both industries, we allocate it all to shoes— the labor intensive industry. This leads to some capital being withdrawn from computers and allocated to shoes. To maintain the capital-labor ratio, some labor will also leave computers to shoes.
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E¤ects of immigration in the long run
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E¤ects of immigration in the long run
Because both labor and capital increase, the capital-labor ratio is unchanged. Due to this, the additional labor in the economy is fully employed. In the box diagram, we show the new origin for shoes OS due to the increase in labor, ∆L. At point B, we have a new possible equilibrium. Remember we said the slopes of the lines showed the capital-labor ratio. Notice the slopes of the lines have not changed.
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E¤ects of immigration in the long run
Increase in the Amount of Home Labor What has happened to wage and rentals? Since the capital-labor ratios are unchanged, so are the marginal products. Therefore the wages and rentals are unchanged. This is a very di¤erent result from the short-run model. When capital can move freely between industries, immigration in the long run has no impact on the wage and rental rates.
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E¤ects of immigration in the long run E¤ect of Immigration on Industry Outputs Since the factors of production both increase or decrease, it makes sense that output will follow the same trend. Since labor and capital moved to shoes, shoe output expands and capital production contracts. On our PPF: due to the increase in labor, the PPF shifts out more in the direction of shoes. Since prices are unchanged, the economy moves to equilibrium at point B. More shoe production and less computer production This only holds in the long run.
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E¤ects of immigration in the long run
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E¤ects of immigration in the long run
The long run result we just showed is (see class on H-O): Rybczynski Theorem: In the Heckscher-Ohlin model with two goods and two factors, an increase in the amount of a factor found in an economy will increase the output of the industry using that factor intensively and decrease the output of the other industry.
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Long-run e¤ect of Immigration on Factor Prices
Notice that the change in outputs in the Rybczynski Theorem goes hand-in-hand with the …nding that wage and rental will not change due to the increase in labor (or capital). That is because the economy can absorb the extra amount of labor by changing output. Factor Price Insensitivity: In the Heckscher-Ohlin model with two goods and two factors, an increase in the amount of a factor found in an economy can be absorbed by changing the outputs of the industries, without any change in the factor prices.
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Movement of capital between countries: FDIs.
We can now look at how capital moves from one country to another through foreign direct investment (FDI). When a …rm from one country owns a company in another country. U.S. Department of commerce uses a 10% rule to determine FDI. If a foreign country acquires 10% or more of a U.S. …rm, that is FDI in‡ow to the U.S. If a U.S. company acquires 10% or more of a foreign …rm then that is FDI out‡ow from the U.S.
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Movement of capital between countries: FDIs.
Green…eld FDI— when a company builds a plant in a foreign country. Acquisition FDI (or Brown…eld FDI)— when a …rm buys an existing foreign plant. E.g. in‡ow of investment into eastern Europe due to privatization. Having capital move from high-wage to low-wage countries to earn a higher rental is the traditional view of FDI and one we will use here.
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Movement of capital between countries: FDIs.
Green…eld Investment Our focus here will be on Green…eld investment— the building of new plants abroad. We model FDI as the movement of capital between countries just as we did with labor. How does the movement of capital into a country a¤ect the earnings of labor and capital there?
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Movement of capital between countries: FDIs.
FDI in the Short Run: Speci…c Factors Model Manufacturing uses capital and labor. Agriculture uses land and labor. As capital moves into the economy, it will be used in manufacturing. Additional capital will raise the marginal product of labor in manufacturing.
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Movement of capital between countries: FDIs.
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Movement of capital between countries: FDIs. E¤ect of FDI on the Wage The equilibrium wage increases to W’ More workers are drawn in to manufacturing. The labor in agriculture shrinks since the labor is pulled from there. E¤ect of FDI on the Industry Outputs Since land has not changed, output of agriculture must fall. Since labor and capital increase in manufacturing, output must increase. No change in prices of goods. As PPF increases, equilibrium shifts to B.
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Movement of capital between countries: FDIs. E¤ect of FDI on the Rentals Fewer workers are employed in agriculture, as each acre of land cannot be used as intensively. Marginal product of land must fall. Rental on land, RT = PA MPTA If MPTA falls and PA is unchanged, RT must fall. More capital and labor are used in manufacturing RK = PM MPKM MPKM falls due to diminishing returns— reduces RK . As labor increases MPKM rises— raises RK Unknown which e¤ect is greater.
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E¤ect of FDI on the Rentals We can use another method for rental on capital. Revenue earned in manufacturing and subtract the payments to labor. If wages are higher, and all else is the same, there must be a reduced amount of funds left over as earnings of capital, so rental is lower. We start at original equilibrium point A. Assume capital stock expands from FDI. Wages are held constant. Labor used in manufacturing expands up to point C. The only way MPL can be constant is if each worker has the same amount of capital to work with.
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E¤ect of FDI on the Rentals
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E¤ect of FDI on the Rentals The capital-labor ratio for manufacturing is identical at A and C— therefore MPKM must also be equal This means the rental on capital is also equal at A and C What about if the manufacturing wage increases while holding capital constant in that sector? We move from C to B. As wage rises, less labor is used in manufacturing. With less labor on each machine, the MPK and RK must fall. Because the rental on capital is the same at A and C but lower at B than C, the overall e¤ect of the FDI in‡ow is to reduce the rental on capital. Since FDI in‡ow also reduces rental on land, then both rentals fall.
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FDI in the long run
We continue with the same assumptions as before. There are two industries, computers and shoes, with two factors, labor and capital. Computers are capital intensive and shoes are labor intensive. We obtain a box, wich is similar to the long term one used for immigration. Same considerations for the PPF
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FDI in the long run
E¤ect of FDI on Outputs and Factor Prices Capital increase due to FDI. Box panel sides expand with new origin at (higher capital) Less labor and less capital are used in the production of shoes and output falls. More labor and more capital are used and the output of computers rises.
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FDI in the long run
E¤ect of FDI on Outputs and Factor Prices Change in output from point A to B. As Rybczynski Theorem states, the increase in capital through FDI has increased the output of the capital-intensive industry and reduced the output of the labor-intensive industry. This change in output is achieved with no change in the capital labor ratios in either industries OC ’B and OS B have same slopes as OC A and OS A.
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FDI in the long run
E¤ect of FDI on Outputs and Factor Prices Because capital-labor ratios are unchanged, the wage and the rental on capital are also unchanged. In the long run model, an in‡ow of either factor of production will leave factor prices unchanged. In immigration, we found cases where wages were reduced (short run) and where wages were constant (long run). There are fewer studies for FDI.
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HOS without trade
What happens if we substitute goods trade with factors mobility in the HOS framework? Hyp: good 1 intensive in K et 2 intensive in L. By exporting 1 an importing 2 the Home country exports more capital than what it imports.(HOV) But sometimes capital endowments among countries may be too di¤erent to allow for diversi…cation (see cone of specialization). Factors mobility is thus a complement to good int trade allowing factor price equalization.
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HOS, trade and factor mobility
Let country F introduce a tari¤ on the imported good 1 ! P1/P2 goes up in F. Isoquant goes back towards origin (P1 goes up and you need less L and K to produce 1 euro of 1 in F). w/r decreases in F (Stolper-Samuelson) ’cause good 1 is intensive in K. no more factor price equalization : w/r > w*/r* BUT let now workers migrations to take place
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HOS, trade and factor mobility
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Allowing migration in HOS and specialization
Workers will migrate towards H because of higher wages. Ratios K/L will get closer in both countries! Wages decrease in H and rentals increase ( increasing demand for capital to employ with new workers) . When FACTORS trade allows factor prices to equalize, good prices will be equalized as well. Once in equlibrium, eliminating trade barriers will not get goods trade back: factors mobility calcels out comparative advantages. Theoem (Mundell, 1957): Factor mobility is a perfect substitute for goods trade.
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Gains from immigration and capital ‡ows
Foreign investment and immigration are both controversial policy issues. Most countries have at some point controlled FDI but later became open to foreign investment. However, almost all countries impose limits on immigration. U.S. immigration controls were established by the Quota Law of 1921. Allows a limited number of persons arriving annually from each country of origin
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Gains from immigration and capital ‡ows
The Immigration and Nationality Act Amendments of 1965. Revised the country-speci…c limits and allowed immigration on a …rst-come …rst-served basis up to a limit. Subsequent revisions to the immigration laws in the U.S. have changed policies. Penalties for employers hiring illegal immigrants. Allowed some illegal immigrants to gain citizenship. Tightened border controls. Deported other illegal immigrants.
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Gains from immigration and capital ‡ows
Why is immigration so controversial? Some groups oppose the spending of public funds on immigration. Other groups fear the competition for jobs created by an in‡ow of workers. Does immigration provide an overall gain to the host country, not including the gains to the immigrants themselves? Are there overall gains to the destination country, in the same way as we have found overall gain from trade?
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Gains from immigration and capital ‡ows
Immigration bene…ts the host country in the speci…c factors model. If immigrant earnings with Foreign income are included then emigration bene…ts the Foreign country, too. Also, an in‡ow of capital bene…ts the host country not including the extra earning of foreign capital. If we count those extra earnings then FDI also bene…ts the source country for the capital. We will discuss the overall gains from immigration or FDI.
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Gains from immigration
To measure gains from immigration we will use the speci…c-factors model. We look at the total world labor with the Home and Foreign labor together: L + L*. Home workers are measured from the left and Foreign workers are measured from the right— on the horizontal axis. We can see how many workers are located in each country.
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Gains from immigration
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Gains from immigration
Wages at Home and Abroad As immigrants enter the Home country, the wage is reduced. The downward-sloping line— Home wage: W at point A. Foreign workers enter and labor force grows— Home wage reduced to W’at C. Labor demand curve for economy as a whole The same holds for Foreign: wage at W* at point A*. Labor force in Foreign shrinks and wage rises: W*’at point C*.
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Gains from immigration
Wages at Home and Abroad Point C is equilibrium with full migration. Wages are equalized at W’. Equilibrium with full migration is reached only in the very long run. Has this migration bene…ted the workers (not including the immigrants) in the Home country? Has migration bene…ted the Foreign country, including the migrants?
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Gains from immigration
Gains for the Home Country We need to measure the contribution of each Foreign worker to the output of one good or the other in that country. Home Wage = MPL*P The …rst Foreign worker to migrate has a marginal product equal to the Home wage (W at point A). As more Foreign workers migrate, the MPL falls due to diminishing returns. The immigrants’marginal product is measured by the wage which falls from W to W’.
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Gains from immigration Gains for the Home country At equilibrium at point C, all Foreign immigrants are paid the Home wage of W’. Even though all workers are paid the same wage, the …rst worker had an MPL equal to W. Each additional worker had the MPL equal to some point between W and W’. The last worker has an MPL = W’. So there has been a gain in production for every worker up to the very last worker. The output of goods in the Home economy exceeds the wage that they are paid.
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Gains from immigration
Gains for the Home country The di¤erence between the marginal products of the workers and the wage paid is the gain for the Home economy. Adding up all the gains from the Foreign workers, we get triangle ABC. Home gains due to full immigration.
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Gains from immigration
Gains for the Foreign Country We need to include the wages received by the migrants who left when calculating Foreign income. These wages are often returned to their families. Even if the wages are not sent back, we still incorporate them in the measure of Foreign income since that is where the migrants originally came from. Foreign Wage W* = MPL * P. As foreign workers emigrate, MPL in Foreign rises, Foreign wages rise from W* to W’.
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Gains from immigration Gains for the Foreign Country Each of these higher marginal products or wages, between W* and W’, equals the drop in foreign output from workers leaving. The wage Foreign workers earn in Home is much higher than their Foreign marginal products of labor: between W* and W’. The di¤erence between the wage earned by the migrants and their Foreign marginal products is the gain to Foreign. Adding up all the gains to foreign immigrants we obtain the triangle A*BC. This gain represents the earnings of the emigrants over and above the drop in output that occurs when they leave Foreign.
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Gains from immigration
World Gains from Migration Combining the gains to the Home and Foreign countries we obtain the triangular region ACA*, the world gains due to immigration. We can measure the area of this triangle but we need to know the di¤erence in wages before any migration and the number of people who would emigrate. One way to think about world gains from migration is that it equals the increase in world GDP due to immigration. We can then say the di¤erence between the Home and Foreign wages therefore equals the net increase in world GDP due to migration.
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Gains from immigration
World Gains from Migration Adding this up across all migrants, we get the triangle ACA*, the increase in world GDP and the world gains due to migration. In practice, however, there are other costs that immigrants bear which would make the gains from immigration less than the increase in world GDP. Moving costs, payments to tra¢ ckers of illegal immigrants. These costs must be subtracted from the increase in GDP in order to obtain the net gains.
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Gains from FDIs
We can show these gains as we did with immigration. The following …gure shows the world amount of capital on the horizontal axis: K + K*. Rental earned in each country is on the vertical axis. Home rental is R, at point A. Foreign rental is R* at point A*. Foreign rental is higher than Home so capital will ‡ow from Home to Foreign.
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Gains from FDIs
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Gains from FDIs
As capital enters Foreign, the marginal product of capital will fall as will its rental. As capital leaves Home, the marginal product will rise as will the rental. Equilibrium with full capital ‡ows is at B, where rentals are equal at R’. Gains to Home from capital out‡ow is the triangle ABC. Gains to Foreign is the triangle A*BC. World gains are A* BA.
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Gains from FDIs and immigration Immigration potentially a¤ects the wages in the host country where the workers arrive. In the short-run speci…c-factor model, a larger supply of workers due to immigration will lower wages. The arrival of immigrants is bene…cial to owners of capital and land in the speci…c factors model. As wages are reduced in the short run the rental on capital and land will rise. In the long run, when capital can move between industries, the fall in wage will not occur. Industries that use labor intensively can expand, and other industries contract, so that the immigrants become employed without any fall in wages (Rybczynski Theorem) Movement of capital is foreign direct investment (FDI) and have similar e¤ects to immigration. E. ILIOPULOS (Paris 1)
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Gains from FDIs and immigration
In the short run, the entry of foreign capital into a country will lower the rental on capital, raise wages, and lower the rental on land. In the long run, when capital and land can move between industries, change in the wage and rental need not occur. Industry outputs can adjust according to the Rybczynski Theorem so that the extra capital is fully employed without any change in the wage or rentals. Both immigration and FDI create world gains as labor and capital move from countries with low marginal products to countries with high marginal products.
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What about multinational …rms?
Why should a …rm gain from being governed by a foreign entity? (coordination, communication costs..) It should have then some speci…c advantages. Sectors with a large share of multinationals have high costs of R&D, marketing: speci…c assets based on knowledge. These assets are easy to move from among countries They represent "public goods" within the multinational.
!economies: costs decrease in the number of plants of the company
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Multinationals
Horizontal multinationals: it is convenient to be located close to consumers (same good in di¤erent locations) Vertical multinationals: to bene…t from di¤erent comparative advantages BUT There are scale conomies linked to …xed capital. If they’re signi…cant, you’d better export instead of moving!
!Trade o¤ between i) costs linked to the …rm (knowledge) and ii) to the plant (…xed capital) Empirical evidence: sector with high R&D and marketing! FDI . Sectors with strong scale economies!exports.
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Multinationals
Firms’heterogeneity. CostFDI >CostX >CostdomesticY Marginal productivities will determine who will do what
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Multinationals: OLI paradigm
Ownership advantages: speci…c assets to the …rm; you can share it within plants Location advantages: local comparative advantage Internalization advantages: organization determines whether to internalize all processes FDI if OLI Exports if O and I If only O, then …rms sells patents abroad.
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