Supply Chain Production with Trade and Factor Movement Across Countries

Len-Kuo Hu


This paper is intended to highlight one area of potential disagreement between the government and multinational in this second globalization era with supply chain production playing a pivotal role of trade. Built on a subgame-perfect framework the governments of both countries could decide the best allowances for their domestic labor and capital resources outflowing across borders with the consideration that multinationals would then decide their optimal foreign factor utilization policies accordingly. We find that the degree of openness for the global factor movement would be strongly influenced by the differences in the production technology, factor intensity and resource endowment between trading countries. This paper also points out that the very existence of massive factor movement across countries would create a nonnegligible hurtle invalidating the factor price equalization property as proclaimed by the conventional H-O model. By way of a meticulous design of government’s factor movement policy we hope that the current deteriorating income inequality and trade imbalance problems driven by the reckless multinationals could be gradually dampened.