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Foreign direct investment

Introduction
• Factor movements as substitute or complement of trade in goods. By factors trade economists mean capital (long term, not speculative capital flows) and labor • Industrial relocations • Consequences of industrial relocations in origin and destination countries

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Lecture outline
• Factor movements as substitute or complement of trade in goods •Globalization and complementarities between capital flows and trade • Analysis of industrial relocations • Impact on country of origin • Impact on host countries • Conclusion

Factor movements as substitute or complement to trade in goods

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Substitution between factor movements and international trade
• The traditional substitution thesis (Mundell, 1957) • Mundell’s approach is based onthe standard comparative advantage theory, which assumes that: – Factors are immobile across countries – Factor endowments determine international trade (via comparative advantages), and are their sole determinants (no technology differences, no specific advantages related to relative size or geographical externalities)

Globalization and complementarities between capital flows and trade
• • •Capital flows and international trade grow simultaneously in the phase of globalization. First explanation: increased mobility of factors (both capital and labor) Second explanation: the (factorial) comparative advantages are not the sole determinants of international trade and factor movements. (argument developed by Markusen, Journal of Intl Economics, 1983). If the home economy has a Ricardiancomparative advantage in good 1 and that this good is capital intensive, capital movement liberalisation will attract capital in the home country (where it has the highest productivity). Production of good 1 increases in the home economy and production of good 2 decreases (Rybczynski theorem). Then we have simultaneously more trade and more capital flows. The role of multinational companies.

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Industrial relocations

FDI and industrial relocation
• FDI growth :
10000 1000

Evolution of FDI stocks (US$ billion, log scale)

world developing countries 1980 1984 1988 1992 1996 2000 2004

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• FDI figures provide only an approximate picture of industrial relocation:
– Part of it is organized through sub-contracting ; – FDI figures do not measure the total investment inforeign affiliates (partly financed using the local capital market); – FDI may imply relocation of other activities than industrial production itself.

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Analysis of industrial relocations
• Vertical relocation: International decomposition of the value chain and sector specialization. • Horizontal relocation: duplication of production facilities to access foreign markets • Functionalspecialization: - the share of production itself in the value chain is diminishing (e.g. Nike); - the concept of enterprise without factory (e.g. Alcatel); - functional geographical externalities (functional specialization of cities).

International decomposition of the value chain
• Example : pattern of foreign direct investment in the European Union by function
Origin region Europe NAFTA JapanOther Total Headquarters 211 515 58 76 859 R&D 354 525 99 24 1 002 Production 2 883 1 646 451 236 5 216 Logistics marketing branches 562 1 144 273 1 708 64 123 59 173 958 3 148 Total 5 154 4 667 794 566 11 182

Function Hearquarters R&D Production Logistics marketing branches Total

EU 15 840 946 3912 816 2849 9363

EU new members 19 56 1304 142 299 1820

total 859 1002 5216 958 3148 11183•

Source: Defever and Mucchielli, Revue Economique, 2005

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Geographical pattern of new foreign investments in Europe
Number of investments by function as a proportion of population size (1997-2002 - Manuf and non manuf sectors – creations)

Headquarters

R&D

Production

Logistics

Marketing branches

Determinants of FDI from non-European countries to Europe, by function...
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