Foreign Direct Investment in Saudi Arabia Economics Essay

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In a critical essay, analyze the role of FDI in the economic development of Saudi Arabia. What are the determinants of FDI? What are the motives and types of FDI? What policies should the government implement to promote the role of FDI in stimulating the economy? What implications does the Saudi Vision 2030 have on FDI?

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INTERNATIONAL
ECONOMICS
SEVENTEENTH EDITION
ROBERT J. CARBAUGH
© 2019 Cengage. All rights reserved.
1
Chapter 9
International
Factor
Movements
and
Multinational
Enterprises
© 2019 Cengage. All rights reserved.
2
Chapter Outline (1 of 2)
The Multinational Enterprise
Motives for Foreign Direct Investment
Supplying Products to Foreign Buyers: Whether
to Produce Domestically or Abroad
Country Risk Analysis
© 2019 Cengage. All rights reserved.
3
Chapter Outline (2 of 2)
International Trade Theory and Multinational
Enterprise
Foreign Auto Assembly Plants in the U.S.
International Joint Ventures
Multinational Enterprises as a Source of Conflict
International Labor Mobility: Migration
© 2019 Cengage. All rights reserved.
4
The Multinational Enterprise
(1 of 6)
The Multinational Enterprise (MNE)
• Operate in many host countries
• Often conduct research and development
(R&D) activities, in addition to manufacturing,
mining, extraction, and business-service
operations
• Often directed from a company planning
center distant from host country
© 2019 Cengage. All rights reserved.
5
The Multinational Enterprise
(2 of 6) Table 9.1
The World’s Largest Corporations, 2016
Firm
Headquarters
Revenues ($ billions)
Walmart Stores
United States
482.1
State Grid
China
329.6
China National Petroleum
China
299.3
Sinopec Group
China
294.3
Royal Dutch Shell
Netherlands
272.1
Exxon Mobil
United States
246.2
Volkswagen
Germany
236.6
Toyota Motor
Japan
236.6
Apple
United States
233.7
BP
United Kingdom
226.0
Source: From “The 2016 Global 500,” Fortune, available at http://www.fortune.com.
© 2019 Cengage. All rights reserved.
6
The Multinational Enterprise
(3 of 6)
• The Multinational Enterprise (cont.)
• Multinational stock ownership
• Multinational company management
• High ratio of foreign sales to total sales
• Types of integration:
• Vertical integration:
• Parent MNE establishes foreign subsidiaries to
produce intermediate goods or inputs that go into the
production of a finished good
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7
The Multinational Enterprise
(4 of 6)
• Types of Integration (cont.)
• Horizontal integration
• Parent company produces commodity in source
country
• Sets up subsidiary to produce identical product in
host country
• Conglomerate integration
• Diversify into nonrelated markets
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8
The Multinational Enterprise
(5 of 6)
• Foreign direct investment by parent
company
• Obtains sufficient common stock in a foreign
company to assume voting control
• Constructs new plants and acquires
equipment overseas
• Shifts funds abroad to finance expansion of its
foreign subsidiaries
• Earnings of foreign subsidiaries reinvested in
plant expansion
© 2019 Cengage. All rights reserved.
9
The Multinational Enterprise
(6 of 6) Table 9.2
Direct Investment Position of the United States on a Historical Cost Basis, 2015*
U.S. DIRECT INVESTMENT ABROAD
Country
Amount
(billions of dollars)
Percentage
FOREIGN DIRECT INVESTMENT IN U.S.
Amount
(billions of dollars)
Percentage
Canada
352.9
7.0
269.0
8.6
Europe
2,949.2
58.5
2,162.8
69.0
847.6
16.8
118.8
3.8
Africa
64.0
1.3
0.7
0.0
Middle East
48.5
1.0
18.5
0.1
778.3
15.4
564.4
18.5
5,040.5
100.0
3,134.2
100.0
Latin America
Asia and Pacific
*Historical cost valuation is based on the time the investment occurred, with no adjustment for price changes.
Source: From U.S. Department of Commerce, U.S. Direct Investment Position Abroad and Foreign Direct Investment Position in the
United States on a Historical-Cost Basis, available at http://www.bea.doc.gov/. See also U.S. Department of Commerce, Survey of
Current Business, Washington, DC, Government Printing Office.
© 2019 Cengage. All rights reserved.
10
Motives for Foreign Direct Investment
(1 of 3)
Foreign Direct Investment (FDI)
• Motivated by higher rates of return on
investment
• Leads to economic growth and job creation
• Generates spillovers
• Improved management and better technology
• Higher average labor productivity
• Higher wages
• Stimulates exports of capital goods
© 2019 Cengage. All rights reserved.
11
Motives for Foreign Direct Investment
(2 of 3)
• Demand Factors
• New markets and sources of demand
• Tap foreign markets that cannot be
maintained adequately by export products
(licensing rights)
• Parent company ? productive capacity already
sufficient to meet domestic demand
• Market competition
• Direct exporting
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12
Motives for Foreign Direct Investment
(3 of 3)
• Cost Factors
•
•
•
•
•
•
Reductions in production costs
Acquisition of essential raw materials
Lower labor costs
Decreased transportation costs
Government policies
Economies of scale
• Direct exporting – foreign demand is small
• Licensing agreement/FDI – demand is large
© 2019 Cengage. All rights reserved.
13
Supplying Products to Foreign Buyers:
Whether to Produce Domestically or Abroad
(1 of 4)
Direct Exporting versus Foreign Direct
Investment/Licensing
•
•
•
•
•
•
•
Economies of Scale (See Fig 9.1)
Small Demand/Output – Direct Exports
Large Demand/Output – FDI/Licensing
Low Transportation Cost – Direct Exports
High Transportation Cost – FDI/Licensing
Low Trade Restrictions – Direct Exports
High Trade Restrictions – FDI/Licensing
© 2019 Cengage. All rights reserved.
14
Supplying Products to Foreign Buyers:
Whether to Produce Domestically or Abroad
(2 of 4) Figure 9.1
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15
Supplying Products to Foreign Buyers:
Whether to Produce Domestically or Abroad
(3 of 4)
• Foreign Direct Investment versus
Licensing
• Decision to establish foreign operations
through Direct Investment or Licensing
depends on (see Fig. 9.2)
• Capital used in production
• Size of foreign market
• Fixed cost of establishing overseas facility
© 2019 Cengage. All rights reserved.
16
Supplying Products to Foreign Buyers:
Whether to Produce Domestically or Abroad
(4 of 4) Figure 9.2
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17
Country Risk Analysis (1 of 4)
Country Risk Analysis
• Political risk analysis
• Assesses political stability of country
• Government stability, corruption, domestic conflict,
religious tensions, and ethnic tensions
• Financial risk analysis
• Investigates country’s ability to finance its debt
obligations
• Foreign debt as percentage of GDP, loan default,
and exchange rate stability
© 2019 Cengage. All rights reserved.
18
Country Risk Analysis (2 of 4)
• Country Risk Analysis (cont.)
• Economic risk analysis
• Determines country’s current economic
strengths and weaknesses
• Rate of growth of GDP, per capita GDP, inflation
rate
• Composite country risk rating
• Overall assessment of risk of doing business
in country
© 2019 Cengage. All rights reserved.
19
Country Risk Analysis (3 of 4)
• Country Risk Analysis (cont.)
• International Country Risk Guide
•
•
•
•
•
Political risk factors – weighting of 50%
Financial and economic risk factors – 25% each
Low risk: 80–100 points
Moderate risk: 50–79 points
High risk: 0–49 points
© 2019 Cengage. All rights reserved.
20
Country Risk Analysis (4 of 4)
Table 9.3
Selected Country Risks Ranked by Composite Ratings, 2016
Country
Composite Risk Rating
(100 Point Maximum)
Switzerland
88.0
Singapore
86.8
Germany
84.3
United States
79.3
China
71.3
Brazil
63.3
Russia
62.5
Ukraine
55.3
Zimbabwe
54.5
Sudan
48.3
Very Low Risk
Very High Risk
Source: From Political Risk Services, International Country Risk Guide, available at https://www.prsgroup.com/
FreeSamplePage.aspx/.
© 2019 Cengage. All rights reserved.
21
International Trade Theory and
Multinational Enterprise (1 of 2)
Conventional trade model
• Movement of merchandise among nations
• Goods are exchanged between independent
organizations
• On international markets
• At competitively determined prices
© 2019 Cengage. All rights reserved.
22
International Trade Theory and
Multinational Enterprise (2 of 2)
• Multinational-enterprise analysis
• International movement of factor inputs
• Aggregate welfare of both source and host
countries is enhanced
• Vertically diversified companies
• Subsidiaries manufacture intermediate and
finished goods
• Sales can be intrafirm
• Value may be determined by factors other than
competitive pricing system
© 2019 Cengage. All rights reserved.
23
Foreign Auto Assembly Plants
in the United States (1 of 3)
Transplants – direct investment in U.S.based assembly facilities
Benefits to Japan include
• Silencing critics who say autos must be built
in U.S.
• Avoiding import barriers of U.S.
• Gaining access to expanding markets
• Providing hedge against changes in exchange
rates between U.S. dollar and Japanese yen
© 2019 Cengage. All rights reserved.
24
Foreign Auto Assembly Plants
in the United States (2 of 3) Table 9.4
Selected Foreign Auto Assembly Plants in the United States
Plant Name/Parent Company
Location
Honda of America, Inc. (Honda)
Marysville, Ohio; Lincoln, Alabama; East Liberty,
Ohio; Greensburg, Indiana
Toyota Motor Manufacturing, USA, Inc. (Toyota)
Georgetown, Kentucky; Huntsville, Alabama;
Princeton, Indiana; San Antonio, Texas; Buffalo,
West Virginia; Blue Springs, Mississippi
Nissan Motor Manufacturing Corp. (Nissan)
Smyrna, Tennessee; Decherd, Tennessee;
Canton, Mississippi
Mazda Motor Manufacturing, USA, Inc. (Mazda)
Claycomo, Missouri
Volkswagen, USA, Inc. (Volkswagen)
Chattanooga, Tennessee
© 2019 Cengage. All rights reserved.
25
Foreign Auto Assembly Plants
in the United States (3 of 3)
• Expectations of Japanese Transplants in U.S.
•
•
•
•
Would generate jobs
Expand consumer choice
Create demand for auto parts industry in U.S.
Transfer technology from Japan to U.S.
• What actually happened
• Created fewer jobs than expected
• Imported parts from Japan rather than buying locally
• Contributed to U.S. automotive trade deficit
© 2019 Cengage. All rights reserved.
26
International Joint Ventures
(1 of 6)
International joint ventures
• Business organization established by two or
more companies
• Combine their skills and assets
• Limited objective (research or production)
• Short-lived
• Multinational in character
• Several domestic and foreign companies
• Creation of new business firm
© 2019 Cengage. All rights reserved.
27
International Joint Ventures
(2 of 6)
• International joint ventures (cont.)
• Types of International Joint Ventures
• Joint venture by two businesses that conduct
business in third country
• Joint venture with local private interests
• Joint venture with participation by local
government
© 2019 Cengage. All rights reserved.
28
International Joint Ventures
(3 of 6)
• International joint ventures (cont.)
• Justifications for joint ventures
• Some functions too costly for one company to
absorb by itself
• Some governments place restrictions on foreign
ownership of local businesses
• To prevent excessive political influence
• To minimize dividend transfers abroad
• Forestalling protectionism against imports
© 2019 Cengage. All rights reserved.
29
International Joint Ventures
(4 of 6)
• Welfare Effects
• Advantages of joint ventures
• Productivity and welfare gains
• Increased productive capacity and additional
competition
• Entrance into new markets that neither parent
could have entered individually
• Cost reductions that would have been
unavailable if each parent performed same
function separately
© 2019 Cengage. All rights reserved.
30
International Joint Ventures
(5 of 6)
• Welfare Effects (cont.)
• Disadvantages of joint ventures
• Cumbersome organization
• Divided control
• Different objectives, corporate cultures, and ways of
doing things
• Deadlocks in decision making
• Negotiations involve hierarchical command
• Can lead to welfare losses (market-power effect)
© 2019 Cengage. All rights reserved.
31
International Joint Ventures
(6 of 6) Figure 9.3
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32
Multinational Enterprises
as a Source of Conflict (1 of 5)
Employment
• Effects on employment
• Recipient country
• Employment increases
• Source country
• Employment declines in short term
• Other industries – foreign sales rise over time
Caterpillar Bulldozes Canadian Locomotive
Workers
-Lower worker pay; non-unionized
© 2019 Cengage. All rights reserved.
33
Multinational Enterprises
as a Source of Conflict (2 of 5)
• Technology Transfer
• Technology transfer facilitated through
demonstration effect and competition effect
• Increases productivity and competitiveness of
recipient nations
• Donor nations may view it negatively because it
may decrease export potential and cause job loss
• General Electric’s trade-off for entry into the
Chinese market: short-term sales for longterm competition
• Boeing Transfers Technology to China
© 2019 Cengage. All rights reserved.
34
Multinational Enterprises
as a Source of Conflict (3 of 5)
• National Sovereignty
• Many nations fear presence of MNEs results
in loss of national sovereignty
• MNEs may affect economic and other policies of
host and source governments
• May be able to shift profits overseas and evade
taxes of host country
• Political influence of MNEs problematic
• Example: Chile and MNEs’ influence on election of
president
• Foreign subsidiary of MNE may trade with nation
against which home country has embargo
© 2019 Cengage. All rights reserved.
35
Multinational Enterprises
as a Source of Conflict (4 of 5)
• Balance of payments
• Positive contribution
• MNE typically purchases capital and other
equipment from home country
• Inflow of income generated by overseas operations
• Earnings of overseas affiliates, interest and dividends,
and fees and royalties
• Negative contribution
• Short-term outflow of capital
© 2019 Cengage. All rights reserved.
36
Multinational Enterprises
as a Source of Conflict (5 of 5)
• Transfer Pricing
• Pricing of goods within MNE
• May be arbitrary and unrelated to costs incurred or
to operations carried out
• Choice of transfer prices affects division of total
profit among parts of company and thus influences
overall tax burden
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37
International Labor Mobility:
Migration (1 of 12)
United States
• Favorite target for international migration
• Described as melting pot of the world
• Western Europe the major source of immigrants for
U.S.?1820–2012
• Germany, Italy, United Kingdom
• In recent years, large number of Mexican and Asian
immigrants
Migrants–motivated by
• Better economic opportunities
• Noneconomic factors: politics, war, religion
© 2019 Cengage. All rights reserved.
38
International Labor Mobility:
Migration (2 of 12) Table 9.5
U.S. Immigration 1820–2015
Period
Number (thousands)
1820–1840
743
1841–1860
4,311
1861–1880
5,127
1881–1900
8,934
1901–1920
14,531
1921–1940
4,636
1941–1960
3,551
1961–1980
7,815
1981–2000
16,433
2001–2015
15,652
Source: From U.S. Department of Homeland Security, Office of Immigration Statistics, Yearbook of Immigration Statistics, 2012,
available at http://www.uscis.gov/graphics/shared/statistics/yearbook/. See also U.S. Department of Commerce, Bureau of the
Census, Statistical Abstracts of the United States, Washington, DC, Government Printing Office, available at www.census.gov\statab\.
© 2019 Cengage. All rights reserved.
39
International Labor Mobility:
Migration (3 of 12)
• The Effects of Migration
• Mexican immigration to U.S.
• Workers migrate from uses of lower productivity to
higher productivity
• World output expands
• U.S. as whole benefits from immigration
• Income gain is sum of losses of native U.S. workers,
gains by Mexican immigrants, and gains by U.S. capital
owners
• Mexican labor supply decreases, increasing wages
• U.S. labor supply increases, decreasing wages
© 2019 Cengage. All rights reserved.
40
International Labor Mobility:
Migration (4 of 12)
• The Effects of Migration (cont.)
• Mexican workers immigrate to the U.S. (cont.)
• Effect of Labor Mobility is to equalize wages
• Redistribute income from labor to capital in the
United States
• Redistribute income from capital to labor in Mexico
© 2019 Cengage. All rights reserved.
41
International Labor Mobility:
Migration (5 of 12) Figure 9.4
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42
International Labor Mobility:
Migration (6 of 12)
• Immigration as an Issue
• Domestic labor groups prefer restrictions on
immigration
• Domestic manufacturers favor unrestricted
immigration as source of cheap labor
• Drain on government resources
• Long-term calculations: immigrants make a netpositive contribution to public coffers
© 2019 Cengage. All rights reserved.
43
International Labor Mobility:
Migration (7 of 12)
• Immigration as an Issue (cont.)
• Developing nations fear brain drain
• Emigration of highly educated and skilled people
from developing nations to industrial nations
• Limiting the growth potential of developing nations
• Guest workers
• Temporary migration, as workers are needed
• Illegal migration
© 2019 Cengage. All rights reserved.
44
International Labor Mobility:
Migration (8 of 12)
• Immigration as an Issue (cont.)
• Immigrants make net-positive contribution
•
•
•
•
•
Diversify economy
Contribute to economic growth
Lower prices for consumers
Domestically produce a wider variety of goods
Increase supply of labor in economy
• Similar skills – lower wage
• Complementing skills – higher wage
• Human capital formation costs – native country
• Contribution to social security
© 2019 Cengage. All rights reserved.
45
International Labor Mobility:
Migration (9 of 12)
• Does Canada’s Immigration Policy Provide a
Model for the U.S.?
• Goal of Canadian immigration system to
encourage youthful, bilingual, high-skill
immigration in order to build human capital within
Canada’s aging labor force
• Canada treats foreign workers not as foes but
friends whose labor & skills are essential
• Canada currently solicits immigrants from more
than 200 countries of origin, especially China,
India, and the Philippines
© 2019 Cengage. All rights reserved.
46
International Labor Mobility:
Migration (10 of 12)
• Does Canada’s Immigration Policy Provide a
Model for the U.S.? (cont.)
• Canada needs immigrants for economic
development
• Immigration program run by provincial & federal
governments
• A province can select whomever it wants; federal
government’s role limited to security, criminal, and
health check of foreigners
• Canada – 2/3 of permanent visas granted to fill
economic needs
• In U.S., by contrast, 2/3 granted for family reunions
© 2019 Cengage. All rights reserved.
47
International Labor Mobility:
Migration (11 of 12)
• Does Canada’s Immigration Policy Provide a
Model for the U.S.? (cont.)
• Multiculturalism is key ingredient of Canadian
national identity
• Canadians see immigration as adding to social fabric
of country
• Canada has become immigrant country
• Foreign-born population of 20%
• U.S. foreign-born population is 13%
• Immigration program revised to place more emphasis
on job skills and fluency in French or English
© 2019 Cengage. All rights reserved.
48
International Labor Mobility:
Migration (12 of 12)
• Does Canada’s Immigration Policy Provide
a Model for the U.S.? (cont.)
• In 2013, Canada began overhaul of immigration
program, to address increasing economic division
between locals and immigrants
• New system considers
• whether immigrants have employment arranged in Canada
• whether they have skills in demand
• immigrants’ adaptability, e.g., time spent previously in
Canada, fluency in English or French
• Remains to be seen how revised system will play out
© 2019 Cengage. All rights reserved.
49
ECN500
Critical Thinking Writing Rubric – Module 9
Exceeds
Expectation
Content, Research, and Analysis
21-25 Points
Requirements
Exceeds
Expectation Includes all of the
required
components, as
specified in the
assignment.
21-25 Points
Content
Exceeds
Expectation Demonstrates
substantial and
extensive
knowledge of the
materials, with no
errors or major
omissions.
25-30 Points
Analysis
Exceeds
Expectation Provides strong
thought, insight,
and analysis of
concepts and
applications
regarding labor
mobility in
regional free trade
agreements.
13-15 Points
Sources
Exceeds
Expectation Sources go above
and beyond
required criteria,
and are well
chosen to provide
effective
substance and
perspectives on
the issue under
examination.
Meets Expectation
Below Expectation
Limited Evidence
16-20 Points
Meets Expectation
– Includes most of
the required
components, as
specified in the
assignment.
11-15 Points
Below Expectation
– Includes some of
the required
components, as
specified in the
assignment.
6-10 Points
Limited Evidence Includes few of the
required
components, as
specified in the
assignment.
16-20 Points
Meets Expectation
– Demonstrates
adequate
knowledge of the
materials; may
include some
minor errors or
omissions.
11-15 Points
Below Expectation
– Demonstrates fair
knowledge of the
materials and/or
includes some
major errors or
omissions.
6-10 Points
Limited Evidence Fails to
demonstrate
knowledge of the
materials and/or
includes many
major errors or
omissions.
19-24 Points
Meets Expectation
– Provides
adequate thought,
insight, and
analysis of
concepts and
applications
regarding labor
mobility in regional
free trade
agreements.
10-12 Points
Meets Expectation
– Sources meet
required criteria
and are adequately
chosen to provide
substance and
perspectives on the
issue under
examination.
13-18 Points
Below Expectation
– Provides poor
thought, insight,
and analysis of
concepts and
applications
regarding labor
mobility in regional
free trade
agreements.
7-12 Points
Limited Evidence Provides little or no
thought, insight,
and analysis of
concepts and
applications
regarding labor
mobility in regional
free trade
agreements.
7-9 Points
Below Expectation
– Sources meet
required criteria,
but are poorly
chosen to provide
substance and
perspectives on the
issue under
examination.
4-6 Points
Limited Evidence Source selection
and integration of
knowledge from
the course is
clearly deficient.
ECN500
Critical Thinking Writing Rubric – Module 9
Mechanics and Writing
Demonstrates
college-level
proficiency in
organization,
grammar and
style.
5 Points
Exceeds
Expectation Project is clearly
organized, well
written, and in
proper format as
outlined in the
assignment. Strong
sentence and
paragraph
structure; contains
no errors in
grammar, spelling,
APA style, or APA
citations and
references.
Total points possible = 100
4 Points
Meets Expectation
– Project is fairly
well organized and
written, and is in
proper format as
outlined in the
assignment.
Reasonably good
sentence and
paragraph
structure; may
include a few
minor errors in
grammar, spelling,
APA style, or APA
citations and
references.
3 Points
Below Expectation
– Project is poorly
organized and
written, and may
not follow proper
format as outlined
in the assignment.
Inconsistent to
inadequate
sentence and
paragraph
development,
and/or includes
numerous or major
errors in grammar,
spelling, APA style,
or APA citations
and references.
1-2 Points
Limited Evidence Project is not
organized or well
written, and is not
in proper format as
outlined in the
assignment. Poor
quality work;
unacceptable in
terms of grammar,
spelling, APA style,
and APA citations
and references.

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