Labor Costs and Foreign Direct Investment: Exploring the HOSE Equation and Alternative Approaches

Last Updated: 31 Mar 2023
Pages: 6 Views: 137

A literature review shows that labor costs do not play any significant role in the first attempts to provide an analytical explanation of this new trend. A HOSE equation, amended in order to encompass FED, is elaborated in order to explain outward FED from developed to developing and emerging countries based on differences in labor endowment and therefore in wage rates. Step by step, the equation introduces the technological gap, institutions and government policies. Then it is shown that such equation when reversed to explain outward FED from emerging to developed countries is at odds with the traditional HOSE framework.

Turning the HOSE theory upside down does not help to explain reverse FED outflows room emerging to developed countries. An alternative approach is called for, in which a labor cost advantage (a lower wage rate than abroad) is a home market advantage for emerging countries to invest abroad. A final section provides some empirical examples that labor matters and a lower home wage rate is a decisive comparative advantage for Indian and Chinese multinationals investing in developed countries. Additional evidence shows that the technological gap and the home country's institutions and government policy matter as well.

JELL: OFF, OFF, 053 Keywords: emerging counterrevolutionaries, outward foreign erect investment, China, India, HOSE theorem, labor costs, wage differentials, skilled and unskilled labor, technological gap, government policies Introduction The growth of outward foreign direct investment (FED) from emerging countries has accelerated in the first decade of the sass and has been less markedly affected by the 2008-2012 economic crises in the Bricks than overall FED in the rest of the world.

Order custom essay Labor Costs and Foreign Direct Investment: Exploring the HOSE Equation and Alternative Approaches with free plagiarism report

feat icon 450+ experts on 30 subjects feat icon Starting from 3 hours delivery
Get Essay Help

Moreover, multinational companies (Macs) from emerging countries have developed various strategies; one of the most striking is to invest abroad in developed countries. The latter is the focus of this paper, since it is not common that less-developed countries undertake significant outward FED in more-developed countries. The existing economic literature is more used to analyzing FED flows that go the other way round from developed to less-developed countries.

However, in the recent years, a series of articles have provided analyses about the determinants of outward Fids from emerging to developed countries, primarily focusing on a technological Soot China By Allahabad far that such a "reverse" FED outflow - compared with the flow explained by the tankard theory - is, together with Respectively Professor Emeritus at the University Paris 1 Pants©on Sorenson and Professor at the University of Turin. The authors would like to thank Graze lotto-Sillies, Christian Mille and Vitriol Avail, as well as two anonymous reviewers, for their comments on a previous version of this paper. However, all remaining mistakes are of our own. 3 Brazil, Russia, India and China. 1 Available online at http://eases. Laic. It 4 ICE, Volvo. 10, n. L (2013) technological catching-up, basically due to lower labor costs in home countries such as India, China and other emerging countries.

When such an assumption is mentioned, it is Just as a brief remark (Mille et al. , 2010). Why is this so? Our guess is that outward FED by Macs from emerging to developed countries is so deeply at odds with the analytical framework of the standard international trade and foreign investment theory that no one has attempted to go to the logical conclusion of this "reverse" FED outflow, I. E. Explaining this "reverse" flow requires reversing and finally rejecting the standard theory itself. Such is the major contention of the present paper. The paper is organized as follows. A brief coverage of the most recent empirical evidence regarding outward FED from emerging countries and in particular the Brick (1) is followed by a survey of the literature that has attempted to explain or interpret this new trend (2).

Then, starting from a very simplified standard Hecklers- Olin-Steamrollering (HOSE) framework, amended in such a way as to integrate FED, it is demonstrated first that labor cost matters as a determinant of outward FED from emerging to developed countries and, second, that the standard model is incorrect / inconsistent with its usual assumptions about international capital flows between plopped and less developed (emerging) countries, thus calling for an alternative approach which this article paves the way for (3).

In the final section, some empirical facts are provided that exemplify and accord with such an alternative explanation for Indian and Chinese outward FED in developed countries, in particular the role played by home country lower skilled labor costs (4). 1 . Multinational companies from emerging countries: an overview The literature on "Third World multinationals" during the sass and sass (All, 1983) concentrated on South-South operations, mainly within regional (e. . Asian) strategies, even if some cases of early South-North FED already existed.

This was the case of some international operations promoted by South Korean enterprises. During the sass, however, the South-North trend became much more intense and global in its orientation, and the attention of economists has been attracted by the emerging country multinationals, their drivers, outcomes and impact. "Emerging multinationals", especially those from Asian countries, became a new and very Camelot et al. , 2010). However, a lively debate still surrounds the notion and definition of "emerging countries".

It must be stressed that this is a dynamic and evolutionary concept, Just like the notion of "transition" used as regards post- communist market economies that constantly needs to be updated. Consequently, it cannot be fixed once and for all. Therefore, the list of emerging countries should be related to a given period of time. In fact, fourteen countries are common to all the current suggested listings of emerging countries, I. E. The four Brick plus Argentina, Chile, Egypt, Hungary, Indonesia, Malaysia, Mexico, Poland, Thailand and Turkey.

We also examine five of the countries which are usually classified as emerging by all except one of the sources mentioned in footnote (4): South Africa, often recruited to create the BRICK (capital S being for South Africa); Slovenia and the Czech Republic since they are ahead of Hungary and Poland in terms of economic development. South Korea and Taiwan, still considered as 4 Namely the emerging country groups provided by the MIFF, Boston Consulting Group, Standard & Poor's and BAN Paris (Bri©re, 2009). W. Andre, G.

Ballet, Emerging countries' multinational companies investing in developed countries: at odds with the HOSE paradigm? 5 emerging countries by official international sources such as UNCLAD, can be assessed as fully-fledged developed market economies from several points of view, including technology levels, industrial dynamics, infrastructure and wages, and definitely as front runners with regards to outward FED from emerging countries. Hong Kong is a special case, playing a crucial role in supporting the multinational growth of Chinese firms (only outward FED data from mainland China show up in Table 1).

The "reverse" outward FED which we focus on below is a part and parcel of this big outward push of emerging countries' Macs Just before and during the current economic crisis. The dramatically strong momentum of outward Fids from emerging countries in the sass, until 2007, also applies to their better reaction to the 2008-2012 economic crisis: it is similar to the case of the Brick. The outward FED stock of the listed emerging countries has expanded tremendously during the sass, up to the 2008 crisis (Table 1).

While the value of the world's outward FED has nearly doubled from 2000 to 2007, it has been multiplied by 3. 5 in the listed emerging countries, and by 5 times when it comes to the Brick. Emerging countries and their Macs, day after day, appear to become major players in the global outward FED name. It must be noted that there is an outstanding momentum of growth for Polish, Indian, Hungarian, and Russian outward FED stock. The share of emerging countries in the outward FED stock world total has risen from 3. 8% in 2000 up to 6. 7% in 2007, whereas the corresponding percentage rises from 1. 3% to 3. % regarding the Brick. Its bottom in 2008-2009; this has slowed down the growth trend of global outward FED from 2008 to 2011. Such slowdown has affected some emerging countries, namely Argentina, Hungary, Slovenia, South Africa and Taiwan more than the average. In reticular, Indonesia shows a substantial drop in its outward FED stock. A similar trend has not affected the outward FED stock from other emerging countries and even less so from the Brick. After 2007, this share went on increasing for emerging countries (9. 3% of world total in 2011) and even more so for the Brick (4. 9% of world total in 2011).

Cite this Page

Labor Costs and Foreign Direct Investment: Exploring the HOSE Equation and Alternative Approaches. (2018, Aug 24). Retrieved from

Don't let plagiarism ruin your grade

Run a free check or have your essay done for you

plagiarism ruin image

We use cookies to give you the best experience possible. By continuing we’ll assume you’re on board with our cookie policy

Save time and let our verified experts help you.

Hire writer