International factor movements

International movement of people, resources and means of production

In international economics, international factor movements are movements of labor, capital, and other factors of production between countries. International factor movements occur in three ways: immigration/emigration, capital transfers through international borrowing and lending, and foreign direct investment. International factor movements also raise political and social issues not present in trade in goods and services. Nations frequently restrict immigration, capital flows, and foreign direct investment.

Trade in goods and services can to some extent be considered a substitute for factor movements. In the absence of trade barriers, even when factors are not mobile, there is a tendency toward factor price equalization. In the absence of barriers to factor mobility, commodity prices will move toward equalization, even if commodities may not freely move. However, complete substitution between factors of production and commodities is only theoretical, and will only be fully realized under the economic model called the Heckscher–Ohlin model, or the 2×2×2 model, wherein there are two countries, two commodities, and two factors of production. While the assumptions of that model are unlikely to hold true in reality, the model is still informative as to how prices of factors and commodities react as trade barriers are erected or removed.

International labor migration is a key feature of our international economy. For example, many industries in the United States are heavily dependent on legal and illegal labor from Mexico and the Caribbean. International labor mobility is a politically contentious subject, particularly when considering the illegal movements of people across international borders to seek work. For example, a number of European countries saw the rise in the 1990s of a number of anti immigrant political parties such as the National Front in France, the National Alliance in Italy, and the Republikaner in Germany. The subject is equally contentious among academics who have espoused numerous theories for the effects of immigration, both illegal and legal, on foreign and domestic economies. Traditional international economic theory maintains that reducing barriers to labor mobility results in the equalization of wages across countries. A number of scholars who study the effects of international labor mobility have argued that complementary immigration, which deviates from the outcome predicted by the above model, is a common phenomena. Illegal immigration in the United States provides one useful example of this critique. The above model would predict that illegal immigration in the United States would cause the wages of domestic unskilled workers to fall. Illegal immigrants would move to the United States seeking higher wages than in their home countries. The influx of foreign laborers willing to work for wages below the pre immigration market price in the United States would cause wages for U. S. domestic unskilled workers to fall and cause U. S. domestic unskilled workers to lose their jobs to the new foreign workers. However, there is both theoretical and empirical evidence that this may not always be the case. The idea behind this critique is that immigrant unskilled labor differs in certain fundamental qualities from the domestic unskilled labor force. The central difference may be immigrants willingness to work in particular occupations that are shunned by domestic unskilled workers. Studies have also been done using "natural experiments" and time series data, which had findings similar to the cross sectional studies. However, George Borjas, of Harvard University, and several other economists have used time series studies and looked at wage inequality data and found that immigration does have a significant effect on domestic laborers. Intertemporal trade represents a tradeoff of goods today for goods tomorrow, and it can be contrasted with intratemporal trade, an exchange of goods taking place immediately. Intertemporal trade is measured by the current account of the balance of payments. The foreign owner is often a firm. FDI is one way in which factors of production, specifically capital, move internationally. It is distinct from international borrowing and lending of capital because the intent of FDI is not simply to transfer resources; FDI is also intended to establish control. Two aspects of the above definition are often debated due to their inherent ambiguity. First, if a firm acquires an ownership interest in another firm, how do we determine the "nationality" of either the acquiring or acquired firms? Many companies operate in multiple countries, making it difficult to assign them a nationality. For example, Honda has factories in multiple countries, including the United States, but the firm began in Japan. How, therefore, should we assign a nationality to Honda? Should it be on the basis of where the company was founded, where it primarily produces, or some other metric? Assigning a nationality is particularly problematic for firms founded countries with very small domestic markets and for companies that specifically focus on selling goods on the international market. From an international economics viewpoint, there are two central questions about why MNEs exist. The first question is why goods and services are produced in multiple countries, instead of a single country. Technology transfer (here defined as any kind of useful economic knowledge) is also posited as a reason for internalization. A detailed discussion of these issues, however, is outside the scope of this article.