EC1111 Lecture 4 Globalisation · A process of integration across borders, with interchange of knowledge, ideas, culture and of products · Four basic aspects o Trade o Migration of people o Capital movements o Dissemination of knowledge . Fairly recent, facilitated by technological advances . It also has its discontents · Environmental challenges: e.g., global warming, deforestation, water pollution, air pollution and over-fishing . Exploitation of women and children in the labour market in poor countries Terminology . The movement of another factor of production: capital . Flows can occur in the form of Foreign Direct Investment (FDI), Foreign Portfolio Investment, and Loans · FDI in a country occurs when non-residents own 10% or more of domestic assets. . This can be via purchase of physical assets or a significant amount of shares of a company in order to gain management control o Thus, it is not portfolio investment where control of company's management is not involved. . It usually takes the form of Multinational Corporations (MNC) infiltrating the domestic market o MNC also called TransNational Corporation (TNC) and MultiNational Enterprise (MNE) . Three components of FDI: equity capital, intra-firm loans, and reinvestment of retained earnings. Equity Capital: refers to that portion of the organization's capital, which is raised in exchange for the share of ownership in the company. These shares are called the equity shares. Intra-firm loans: A transaction that occurs between two subsidiaries of the same parent company. For example, if a supplier sells to a retailer, and both are owned by the same conglomerate, this is said to be an intracompany transaction. Reinvestment of retained earnings: Keeping profits and reinvesting them into the firm. . FDI through Mergers and Acquisitions of firms in the host country by firms in the source country
· FDI through 'greenfield projects' (i.e., projects not constrained by prior work, as in, e.g., constructing on unused land) o Industries where technological skills and production technology are key Economics of Capital Mobility Stylized Facts: . FDI is a form of international capital flows . Plays an important role in the general allocation of world capital across countries · It shifts capital from rich, capital-abundant economies to poor, capital-scarce economies o Thus allowing the rates of return to capital to converge o Enhancing the efficiency of the global stock of capital · Developing countries are almost all net recipients of FDI . Multinational FDI investors bring to the host developing countries scarce capital, superior technologies and new industries Diagram shows the capital flows from an abundant economy to a scarce economy. Home and Foreign: Allowing capital mobility Capital Flow MPK MPK* E r Capital Ko K, K' EC1111 - Lecture 4 scarce - economy r' r* 0 K* Colpiraro+K* rich 8 economy Ko > K" total amount of capital · Allocation efficiency o Same returns from saving o Same borrowing costs o Capital goes where it is more productive o But not everyone gains
· Analogous to the analysis under migration, the receiving country gains: