1、International EconomicsBy Robert J. Carbaugh8th EditionChapter 10:International Factor Movements and Multinational EnterprisesFactor movements & multinational enterprisesMultinational enterprisesVarious business operations in numerous host countriesHeadquarters often far from operationsStock ownersh

2、ip and management are multi-nationalFrequently employ vertical integration, horizontal integration, conglomerate structure2Multinational enterprisesForeign direct investmentA foreign or multinational firm can buy a controlling interest in a local firmBuy or build new plants or equipment overseasShif

3、t funds abroad to expand a subsidiaryReinvest the earnings of a foreign subsidiary3Multinational enterprisesReasons for foreign direct investmentDemand factorsServe different local marketsRespond to market competitionCost factorsAccess to key raw materialsLabor costsTransportation costsGovernment po

4、licies4Choice between export and FDIForeign direct investment5Choice between licensing and FDIForeign direct investment6Multinational enterprisesInternational joint venturesTwo companies can operate a venture in a third countryA foreign firm can work with a local companyA foreign firm can form a ven

5、ture with a unit of the local government7Multinational enterprisesReasons for international JVsCost 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 protectionismProbl

6、ems: divided control means success of JV depends on ability of firms to work together8Effects of an international JVMultinational enterprises9Multinational enterprisesControversy over multinationalsEmploymentHost country may not gain many jobs, foreign managers often brought in; source country worri

7、es about losing jobsTechnology transferMNEs are reluctant to share technology with host nations; source country worries about giving away advantage10Multinational enterprisesControversy over multinationals (Contd)National sovereigntyHost country worries about power of MNE to influence affairs; sourc

8、e country worries about ability to regulate MNE activities elsewhereBalance of paymentsMNE investments and profits (internal transfers) have impacts on the payments status of both source and host nations11Multinational enterprisesControversy over multinationals (Contd)TaxationSource countries may ha

9、ve difficulty taxing MNE income stemming from foreign operationsTransfer pricingBoth host and source governments worry that MNEs may illegally manipulate prices paid between subsidiaries to avoid taxes12Transfer pricing illustratedMultinational enterprisesGermany(tax rate 48%)Computer produced by pa

10、rent 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 expansion13International factor movementsMigrationTends to equalize wage rates between countriesShif