Why Multinational Companies Seek to Invest in Developing Countries.

This guide will help you understand why multinational companies seek to invest in developing countries. This white paper will address such issues as getting foreign counties to grow tobacco instead of food for local production. It will include issues as production gains from manufacturing in various cities in Mexico then assembling in the United States. We will also review international production and trading patterns. For example purposes, we will use Acme Automotive as an example of a company.

ACME Automotive

Trade, cost and Price

Tobacco Farmers

U.S. to subsidize

The U.S. subsidized tobacco farmers in foreign countries promotes the international movement of capital. The reason this is encouraged is to increase their rate of return, this is especially true of developing countries. The government guarantee's a fair price for the tobacco. (McCuen, 2000) This is what keeps rural areas alive. "As capital moves out of the source country to a foreign country, the supply of capital decreases in the source country." (Sawyer, W.C., & Sprinkle, R.L., 2005, pg 112) The U.S. also benefits as the capital invested in the foreign country earns a higher rate of return. Long term effects of the foreign country they will lose money. (Jacobs, 2005) After their contract is over tobacco farmers are not guaranteed a price per bushel. In the long run the country losses it's domestic food production. (Jacobs, 2005)

The practice shifts the equilibriums for price of tobacco and food items. Less supply of food increases the price of food. More supply of tobacco decreases the price of tobacco. As price decreases demand rises. (Jacobs, 2005) "The result, the overall return to capital in the source country rises" (Sawyer, W.C., & Sprinkle, R.L., 2005, pg 112)

Another adverse effect of tobacco farming in foreign countries is the use of Pesticides, which is typically not regulated in foreign countries. "Tobacco companies are jeopardizing the health of Third World tobacco farmers who are required to use dangerous pesticides under exclusive contracts that hook them to company credits, according to a report released Monday by a major development group. " (Lobe, 2002)

Nuevo Laredo, Tamaulipas Mexico

Nuevo Laredo is one of the most vibrant cities along the U.S. border. The city offers many incentives for U.S. manufactures to do business in their city. Below are the qualifying factors of the benefits from doing business in this city.

The best location in Mexico to import / export and distribute your products to the main Mexican and US cities.

The state and municipal governments offer tax reductions and abatements as well as other incentives.

The local average for the employee's turnover in maquiladoras is lower than 3%, lowest average along the border.

More than 20 years without a labor strike. Labor unions actively assist plant management to encourage punctuality and to minimize absenteeism of union employees.

(Codein, 2005)

Incentives for doing business in Nuevo Laredo

STATE INCENTIVES

1. Abatement on 2% payroll taxes during the first two years of operation.
2. Abatement of 50% on the 2% payroll taxes during the following two years of operation.
3. Abatement of registry cost in the Public Registry of Property and Public Registry of Corporations for the Articles of Incorporation and increment of capital which will develop productive activities; and
4. The new or existing corporations looking to expand their operation and creating new jobs, will receive the benefits of the Training Courses for their Employees by the (ITACE) Institute of Tamaulipas that specialize in Training for Employees.

MUNICIPAL INCENTIVES

1. Reduction in property tax on urban, suburban and rural land (Real State Tax).
2. Reduction in taxes for acquired property (Real State Tax).
3. Abatement of copyright costs for certificates, notarization, notarized copies, research and validation of documents.
4. Abatement in cost for planning, zoning and paving services
   • Building permits
   • Building / land use permits

Municipal services

• Reduction in contract service of water and sewage
• Improvement, modification, beautification and maintenance of roadways

(above incentives programs, Codein, 2005)

Wages of Nuevo Laredo

TOTAL ANNUAL COMPENSATION AND EMPLOYER COSTS (Below Table - Codein - Comité para Desarrollo Industrial de Nuevo Laredo, A.C. , 2005)

(Expressed in Mexican Currency - $)

1. Minimum wage
(Salario mínimo)
46.80 x 365 days a year

$ 17,082.00

2. Vacation Bonus
(Prima Vacacional)
25% (46.80 x 6 days)

$70.20

3. Employee Christmas Bonus
( Aguinaldo)
46.80 x 15 days

$702.00

4. Fed. Housing Tax
(Infonavit)
5% (1.0452x46.80 x 365 days)

$892.71

5. Social Security ( Seguro Social)

$5,998.98

(46.80 x 1.0452 x 365) x 18.45% = $3,294.08(Generales illnes)

(46.80 x 1.0452 x 365) x .7000% =$124.98 (Cash benefits)

(46.80 x 1.0452 x 365) x 5.95% =$1,062.32 (Disability, annuity and death)

(46.80 x 1.0452 x 365) x 7.50% =$1,339.06 (Professional risk avg.)

(46.80 x 1.0452 x 365) x 1% =$178.54 (Daycare)

6. State Employment Tax (Impuesto Estatal de Empleo)
2% (46.80 x 1.0452 x 365)

$357.05

7. Retirement Savings Plan (Sistema de Ahorro para el Retiro-SAR ) 2%(46.80 x 1.0452 x 365)

$357.08

TOTAL ANNUAL COMPENSATION (pesos)

$25,460.05

Hours Worked Annually:

Annual U.S. Wage Computation

52 Wks x 48 hrs. worked/wk =

2,496

Annual Wage
(Mexican Peso)

$25,460.05

Minus 7 days vacation =
worked annually

-48

Total hrs.
Hourly Wage

÷2,352.00
10.82

Minus 10 days holidays =

-96

(3) Current Exchange Rt.:

÷ 10.80

Total hrs. worked annually

2,352

Hourly Wage (U.S.Dollar)

$ 1.00

1. The minimum wage effective January 1st, 2005.

2. The exchange rate on January 2005 is $10.80 to the dollar. (In 2005, this rate is fluctuating daily.)

Production Gains for Acme Motors

As outlined above, there are many benefiting factors of production of the Autoturbo Quattro engines in Nueveo Laredo, Tamaulipas Mexico. The cost of production and overhead are most significant. The reason Acme Motors only makes the engines and not the entire automobile in Mexico is related to the tariffs imposed on finished goods imported into the United States rather than just a component. The company saves a significant amount of funds by taking advantage of international production from our neighboring country Mexico.

Gaines and losses for consumers

The consumer gains value of being able to purchase vehicles are a better price, however the long term effects of moving jobs outside the country can hurt the economy. The outsourcing debate refers to the movement of certain service-sector jobs from a developed country to a developing country. ((Sawyer, W.C., & Sprinkle, R.L., 2005, pg 123)

"A tariff's welfare effects can be measured by the gains and losses of consumer and producer surplus" (Sawyer, W.C., & Sprinkle, R.L., 2005, pg 152) The effect of the tariff is the lost of consumer welfare.

Reference List

Clip art is TM and © Warner Bros. Entertainment Inc. All rights reserved. LOONEY TUNES, and all related characters and elements are trademarks of and © Warner Bros. Entertainment Inc. 2003.

Sawyer, W.C., & Sprinkle, R.L. (2006 & 2003). International Economics, Second Edition. 2003 by Pearson Education, Inc., Upper Saddle River, New Jersey.

McCuen, Barbara, May 16, 2000. "Is It Time To End Tobacco Subsidies?" retrieved from www.speakout.com on October 18, 2005 from http://speakout.com/activism/issue_briefs/1245b-1.html

Jacobs, Daniel, October 18, 2005, Live Chat Session from Colorado Technical University online retrieved on October 18, 2005

Lobe, Jin, February 4^th, 2002 "Brazil: Tobacco Makes Farmers Sick" [Electronic Version] retrieved on October 18, 2005, from CorpWatch at http://www.corpwatch.org/article.php?id=1748

Codein, 2005 Comité para Desarrollo Industrial de Nuevo Laredo, A.C. [electronic version] retrieved on October 18, 2005 from http://www.codein.org/ingles/analisys_minimun.asp