Explain how direct investment in Mexico by MNC\'s located in the US can be expla

Question

Explain how direct investment in Mexico by MNC's located in the US can be explained by the Heckscher-Ohlin model of trade. Explain how the Heckscher-Ohlin model of trade can explain the movement of labor from Mexico to the United States. What effect will the movement of labor and capital have on real returns to these two factors across countries? Suppose movements of labor and capital are restricted, but goods and services trade freely. What effects will these restrictions have on the real returns to labor and capital across countries?

Explanation / Answer

(a) The direct investmetn in Mexico by the US shows that the cost of production is less for business to be conducted. It shows that the factos of production in Mexico shows cheap labour and availability of abundance of raw materials for US MNCs. According to the Heckscher-Ohlin model of trade, when there is availability of factors of production costing less then the rate of exports increases due to availbility of abundance of cheap labour, raw materials, location at affordable cost, etc. It shows that for US the business conducted would be costing less in Mexico rather than in US.

(b) The trade can be explained by the movement of labor from Mexico to the United States which shows that the country shows immigration of cheap labours to the US. It means that ther eis scarcirty of low income labour in the US which is going to show an immigration of workers from Mexico. It shows that the recruitment agencies of Mexico would provide manpower to the US and would earn from per head labour accordingly. It would give income opporturnity to Mexico and benefits to the US.

(c) The real returns would be affected by the movement of capital and labour across countries. This is shown as the foreign countries like the United States which holds a stronger currency would like to invest in Mexico then it would increase the economy of the later country. This shows that the established Multi National Companies coming to country like Mexico would increase employment opporturnity over there although it solves the purpose of the company to get cheap labour and location at affordable cost in Mexico. The result from the second factor which is immigration of cheap labour from Mexico to the United States would be helpful for the US to take along labour costing less which shows low cost of production and rise in revenues. The more the labours availble in abundance in Mexico is immigrated to the US the more money would be generated in the form of revenues for the US. The recruitment agencies in Mexico would earn from this process of immigration of the manpower regularly.

(d) Whent he movement of labour and capital are restricted then US cannot take benefit to reduce its cost of production. But if goods and services are traded freely then tax imposed would nullify in such a case and it would not charge more spendings by US companies to perform trade across differnt countries. The free trade of goods and services would thereby, reduce the expenditures incured by multi national companies in the form of tax to exports goods abroad. It would help the companies to save money and increase the scope of revenues.

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