Deck 6: International Factor Movements

Question 1

Suppose that the corporate income tax rate is 60 percent in Germany and 35 percent in the U.S. If a German firm had a wholly owned subsidiary in the U.S., then which of the following statements would be true?

A) The firm would charge the American subsidiary high prices on anything purchased from the parent firm in Germany.
B) The firm would charge the American subsidiary as low a price as it could
Justify to the German tax authorities.
C) The firm would never sell anything to the American subsidiary because of tax complications involved in these types of transactions.
D) The firm would allocate as much as possible of the firm's activities such as research and development to the American subsidiary.

Answer 1

The firm would charge the American subsidiary as low a price as it could
Justify to the German tax authorities.

Question 2

What is foreign direct investment? List and discuss the reasons that firms may engage in foreign direct investment.

Answer 2

Foreign direct investment (FDI) represents real investments in land, nonresidential structures and producers' durable equipment. The investor is not furnishing financial capital but is directly investing in the firm's plant and equipment and actively managing that investment. This investment usually is in the form of a domestic corporation opening a foreign subsidiary or buying control of an existing foreign firm. Firms pursue FDI to earn a higher expected rate of return. That's one rationale for the flow of foreign direct investment. There are other general reasons for firms in particular industries to engage in foreign direct investment. For example, the extraction of natural resources may entail foreign direct investment. Another motive for foreign direct investment is when a multinational corporation attempts to enter a closed or highly restricted foreign market. High transportation costs can also induce foreign direct investment. In addition, multinational corporations engaged in selling a differentiated product globally may find it more profitable to set up production facilities or subsidiaries to serve foreign markets. Finally, multinational corporations in which production is separated into several distinct stages may find it profitable to set up production facilities in foreign markets to take advantage of lower operating costs.

Question 3

Suppose that Brazil is a capital-abundant country and Paraguay is a labor-abundant country. Describe the potential migration of the factors of production between the two countries. Explain the potential effects on the returns to capital and labor in each country.

Answer 3

Labor would tend to flow from Paraguay, where labor is relatively cheap, to Brazil. Capital would tend to flow from Brazil, where capital is relatively cheap, to Paraguay. The international movement of labor would stop at the point where the return to labor in the two countries equalized. A similar process would occur with respect to capital.

Question 4

Briefly describe the flows of FDI between developed and developing countries.

Question 5

List and explain the reasons for the international movements of capital.

Question 6

Describe the effects of FDI on the return to capital in the source and host countries. Next describe the effects on the labor force in both countries.

Question 7

Many government entities are in the business of recruiting investment. Explain why the public sector is interested in attracting capital investment.

Question 8

Briefly describe the movements of labor in the world economy.

Question 9

Describe the reasons for the international movement of labor.

Question 10

A former President of Mexico once said that the U.S. could either import Mexican products or import Mexican workers. Explain why this statement is essentially true.

Question 11

Discuss the effects of immigration on the incomes of the various factors of production.

Question 12

Why do MNCs exist?

Question 13

Describe the OLI approach to FDI.