week 9 Flashcards
what does data show about world trade
lots of N-N FDI
little FDi between N and S
inconsistent with the McDougall model
What are the macro facts on FDI (3)?
- Developed countries account for the overwhelming percentage of outward FDI flows AND RECEIEVE the majority
- two way flows of of FDI are comman between pairs of developed countries e.g. US and cananda
- little econometric evidence that FDI flows are related to differences in Captail endownments OR internal differences inn general return to capital
what are the 3 main evaluation points for the MacDougall model
these facts contradict MACDOUGAL predictions
- One way only
- from K-rich to K-poor countries
- highly senstive to international differences in the return to K
what is Stephan Hymer response to the failure of Macdougall
made empirical observations
- model says nothing about firms or multinational
- close analysis might lead to more empirical relvant theory of FDI
how does Robert Lucas respond to the failure of the Macdougall model
what are the assumptions
what are the expected results
examines the role of human capital difference between countries
assume:
N has more advanced technology so MPK curve will be shifted outwards
relationship:
reduce tendency for K to flow from N TO S by raising the return to K in N
What are the micro facts on MNE?
- large differenes exist across industries in the importance of MNE
- MNE tend to be important in industies with intense R&D, techonolgu and advertising
- within those industries, MNE tend to be the firms selling new and technically complex and highly differentiated products
- therefore MNE tend to ahve a high ratio 0of intangible to intangible assets –> intangible assets such as knowledge are more mobile than cpaital
what is the Dunning ‘OLI’ framework stand for
ownership location and internalisation
what does OLI framework do
examines how intangible assets are related to the FDI decision
what are 3 necessary condition for a firm to undetake FDI and become an MNE: according to OLI?
- Must posses an ownership advantage
- host country posses a location advantage
- FDI must posses an internalisation over other methods of foriegn production
what is meant by an ‘Ownership advantage’
selling abroad creates additional cost for the firm –> co-ordinating business activities across boarders can be costly
so potential MNE FIRMS require offsetting source of profits
how can MNE firms profit be offsetted
O advantages must be mobile within the firm so that they can be used abroad
O advantages is foten thought to be intagible assets unlike phisical K
what is mean by Location advantage
-low factor prices
-low corporate taxes or high subsidies
-high quality infrastructure
0international trade cost
what is meant internalisation
firms must choose between managing production abroad itself internally and licensing production to a foreign firm
FDI posses an I advantage over licensing when it is more profitable because of the contract enforcement porblems
–> prevent intangable assets being stolen such as blueprints
examples
weak protection of intellecutal property rights in the foreign country
