CHAPTER 12
INTERNATIONAL FACTOR MOVEMENTS
Learning Objectives:
■ Identify the different types of foreign investment and the potential determinants of such
investment.
■ Indicate the costs and benefits associated with foreign direct investment.
■ Explain the motivation for labor migration and its effects on participating countries, as
well as the size and importance of international remittances.
I. Outline
Introduction
International Capital Movements through Foreign Direct Investment and Multinational
Corporations
– Foreign Investors in China: “Good” or “Bad” from the Chinese Perspective?
– Definitions
– Permanent Migration: A Greek in Germany
– Economic Effects of Labor Movements
– Additional Considerations Pertaining to International Migration
– Immigration and the United States – Recent Perspectives
Summary
II. Special Chapter Features
In the Real World: Determinants of Foreign Direct Investment
In the Real World: Host-Country Determinants of Foreign Direct Investment Inflows
III. Purpose of Chapter
In the theoretical analysis to this point it has been assumed that factors are immobile
IV. Teaching Tips
A. With the current attention being paid to foreign investment and migrant workers, students
should find the issues covered in this chapter contemporary and interesting. The discussion of
B. It is important to make certain that the students understand the capital market equilibrium
concept that is developed early in the chapter and presented graphically in Figure 1. Once the
analytics have been grasped, then summarizing the overall costs and benefits of foreign
investment logically follows.
C. Note that the labor market equilibrium paradigm in Figure 2 (page 245), which is
analogous to the capital market paradigm developed earlier in Figure 1, is expanded in Figure 3
D. In teaching this chapter, it is important that class time be devoted to presenting the
analytics of the chapter and any new information on current or “hot button” issues. Much of the
descriptive material can be left to the students to read on their own.
V. Answers to End-of-Chapter Questions and Problems
1. At the end of December 2014, the direct investment position of the United States was a
positive $2,019.6 billion, as foreign direct investment in the United States was $2,901.1 billion
and U.S. direct investment abroad was $4,920.7 billion. Countries in Europe (especially) were
2. In 2015, three of the top ten industrial corporations by revenue were Chinese firms and
3. Foreign direct investment takes place to earn a higher rate of return. This can result from
4. Assuming that capital is the scarce factor, foreign investment would lead to expansion of
the capital-intensive import-competing good and contraction of the labor-intensive export good.
5. The capital stock in the capital-abundant country would be larger and the capital stock in
the capital-scarce country would be smaller. Consequently, output in the capital-abundant
6. Assuming that the developing country is a labor-abundant country and that the United
States is the capital-abundant country, the movement of unskilled labor should tend to have an
7. Voters would see the immigration of these skilled workers as increasing the availability
of the goods or services which they produce and perhaps lowering the price. Skilled workers see
8. If both factors of production and goods are free to move, it is difficult to predict the
ultimate pattern of production and trade because factor movements substitute for goods
9. With high Mexican tariffs in place, potential U.S. exporters (presumably of capital-
intensive goods) found it difficult to compete price-wise with similar Mexican products. As
10. Many U.S. citizens have expressed concern over U.S. immigration policy because of their
belief that large numbers of current migrants are contributing both to the presence of low wages
and to the increased cost of public expenditures, particularly for social programs and education.
VI. Sample Exam Questions
A.
E
Es
ss
sa
ay
y
Q
Qu
ue
es
st
ti
io
on
ns
s
1. Explain the underlying basis for foreign direct investment, and discuss several factors
that may contribute to it. What factors have likely contributed to the current U.S. net direct
investment position?
2. Direct investment inflows by foreigners into the United States have been sizeable in
recent years. How might this net inward movement of capital affect the level and pattern of U.S.
trade according to the Heckscher-Ohlin model? The level of world output?
5. Many industrialized countries such as the United States attempt to seriously restrict
immigration of production workers, but are more open to immigrants who are highly-skilled.
Why might this be the case? Why is this a problem for developing countries and how might they
deal with the problem?
6. The impact of labor migration on patterns of international trade depends on the
characteristics of the labor migrants. In which cases might migration expand trade? World
income? In which cases might it reduce trade and world income?