Foreign investment involves transactions which can be described by six dimensions : (1) the financing package, (2) the level of utilization of resources to be employed in the project, (3) the import content of factors needed in the equipment of the new plant, (4) the import content of inputs needed in production, (5) the production mix and (6) the proportion of repatriated profits. This paper aims at developing a two-commodity flexible price and quantity model which recognizes these central characteristics, and exploring the nature of macroeconomic responses to foreign investments in a small open economy.

The analytical results give conditions for welfare and balance of payments improvements for the general case and, as a by-product, for the corresponding Keynesian fixed-price or classical fixed-quantity model. It is shown how they crucially depend upon a set of parameters among which the degree of substitution or of complementarity between domestic and foreign production in the host country plays a key role. Most of these parameters are identifiable in either the empirical literature or in existing econometric models, which permits empirical verification and country comparison. On the basis of Dutch and Spanish data, the results support the evidence of a current account deficit in both countries and of minor welfare improvement for the Netherlands but substantial welfare gain for Spain.

Very few issues can stir controversy and arouse passions as much as foreign investment (FI from now on) and Multinational Corporations (MNC’s). The literature on the subject is enormous. There are several grounds on which MNC’s are usually blamed: they are alleged to inhibit national entrepreneurship, discourage domestic saving, bring into the country inappropriate technology, reduce the amount of competition in the economy and worsen income distribution. There is of course considerable margin of disagreement on the single allegations and often the story being told runs precisely the opposite way. It is not always easy to compare different standpoints insofar as the previous arguments are sometimes difficult to formalize. While there are some noticeable exceptions in this respect (1), it remains true that formal models on the impact and the behaviour of MNC’s are indeed a relatively rare breed. As far as foreign investment is concerned, there is a considerable body of literature which has analysed the impact of FI mainly in the context of standard international trade models. It is perhaps useful to recall some of the main theoretical results. In a one-sector model with no distortions, an infinitesimal inflow of foreign capital will leave national welfare unchanged provided capital earns its marginal product. If we consider instead a finite inflow, this will raise domestic welfare insofar as the country will appropriate the surplus below the marginal productivity of capital schedule (2). As far as the two-sector neoclassical model of trade is concerned, foreign capital will have no effect at all unless it forces specialization on the economy. If however distortions are introduced, the results change dramatically. For instance, in a small tariff-imposing economy a capital inflow from abroad will, if profits are repatriated, reduce national welfare.

Multinational corporations and import competition assume high profiles in economic policy debates in both Canada and France. An initial glance at the structure of foreign direct investment and trade in these two countries also indicates certain similarities. The openness of the Canadian and French economies to international trade is quite comparable, while such industries as petroleum and natural gas, pharmaceuticals, and para-chemicals head both countries’ lists of the sectors with the largest shares of foreign controlled sales and assets. In addition, there is a relatively high correlation coefficient of .603 between the inter-industry measures of foreign direct investment in the two countries (based on the sales data used in this study), while the correlation between the sum of their import and foreign subsidiaries’ shares (total foreign penetration) is .489.

The work presented by Robert Owen and Pascal Auburtin represents a welcome contribution to the empirical research on the determinants of foreign direct investment. Very few studies have looked at the pattern of foreign direct investment in continental European countries, or have dealt with foreign investments other than by U.S. corporations. By concentrating their research on France the authors have filled some of this gap.

Most of the emphasis and interest in negotiations and assessments concerning integration tends to concentrate on products rather than inputs. However, freedom of movement of products within the EC does not necessarily entail the absence of protection or completely free competition if there are still constraints on inputs. In the case of imported produced inputs, intermediate goods and services, the subject has been extensively explored with the measurement of effective protection. The differences between nominal rates and effective rates can be quite striking. If the EC’s Common External Tariff were 5% on a particular product while the CET on the main produced inputs, which form 50% of the production costs, is zero then the effective rate of protection is double the nominal rate (all other influences such as differential transport costs for the finished and intermediate products being ignored). Effective protection is thus the rate of protection of the value added in the production of the final product.

Simple theory tells us that we cannot generally expect trade in finished goods to equalise the prices of untraded factors. Simple observation tells us that many factor prices do indeed display considerable and persistant international differences. The simple inference is that these factors are substantially non-traded. However, this raises more questions that it answers. Why are factors not traded? What is the impact of regulation on factor mobility? Does the operation of international trading communities affect factor mobility?

Capital utilisation and the physical stock of capital are generally assumed to be close substitutes in the production process. Thus, models of the demand for capital or of investment activity must, in principle, incorporate some notion of the optimal level of capital utilisation and its associated costs. The part played by capital utilisation in investment activity is the primary reason for this paper and it is argued that the literature in this area has tended to underemphasize its role. The discussion, however, focusses on the reasons for the lack of emphasis on capital utilisation and this is traced to both problems of theory and measurement. A simple neoclassical theoretical framework is adopted throughout, although it is fairly clear that a number of further problems will be posed by the introduction of capital utilisation into a vintage model. While the theoretical discussion is perfectly general, the empirical work uses data for the U.K. Chemicals industry, simply in order to illustrate the problems of measurement.

It has become customary to discuss the investment decision of the firm and the capital utilization decision separately. Both topics have commanded considerable attention in recent years (Nickell (1978), Betancourt and Clague (1981) provide good entry points in to the literature) and, at the informal level, the links between utilization decisions and investment decisions have been widely recognised. However, when considering investment decisions more formally, analysts often agree with Nickell that attempting to introduce a utilization dimension makes it « clear that even with just two factors, a specification of the production possibilities is quite tricky given that output will depend on the number of workers using the capital at any given time and also on the number of hours worked by each worker » (Nickell (1978) p. 145).

« First understand what you are trying to do » is always a good maxim. It is particularly important when what you actually want is not immediately obvious. This seems especially true with discussions of capital utilization, the concept of which, particularly in empirical models, is not always clear. Certainly Bosworth and Westaway identify different dimensions to capital utilization that are used by economists and it is not obvious that either of these corresponds to everyday usage. The present discussion, therefore, is an attempt to be precise about notions of capital utilization in order at least to provide a framework within which one can analyse the concepts involved and consider what measures are appropriate for empirical work.

There are few issues in the economics of the firm that have generated as much controversy and discussion as the measurement of profitability. Accountants remain sharply divided about the appropriate techniques for adjusting for inflation while in the background economists question the fundamental principles of accounting and fail to agree on whether informative indicators can be constructed at all (see Kay (1976), Fisher and McGowan (1983), Harcourt (1965), Kay and Mayer (1984) for a taste of this debate). Much of this discussion has been highly misconceived and it is a basic contention of this paper, as described in section I, that accounting figures are indeed relevant for answering a range of economically interesting questions and a desirable method of adjusting for inflation is both well defined and simple to apply in practice.

In this paper, the authors consider the impact of inflation and the U.K. Corporation Taxation system on real rates of return to equity in the U.K. There are two main sets of questions that arise in this context – how ought one go about measuring such impacts, particularly with respect to ex-post performance measures; and given that these impacts seem to be substantial, what policy implications follow? I deal with these in turn.