This chapter discusses multinational enterprises and international factor movements. It describes how multinational enterprises operate business across multiple countries with headquarters separate from operations. Reasons for foreign direct investment include serving local markets, accessing resources and labor. The chapter also examines international joint ventures between companies. There is controversy over impacts of multinationals on employment, technology transfer, national sovereignty, and taxation. Transfer pricing is discussed as a method for multinationals to avoid taxes between subsidiaries. International migration also shifts income distribution and raises concerns about fiscal impacts and brain drain.

1. International Economics
By Robert J. Carbaugh
8th Edition
Chapter 10:
International Factor Movements and
Multinational Enterprises

2. 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

3. 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

4. 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

5. Choice between export and FDI
Foreign direct investment

6. Choice between licensing and FDI
Foreign direct investment

7. 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

8. 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

9. Effects of an international JV
Multinational enterprises

10. 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

11. 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

12. 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

13. 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

14. 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