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Economics of Multinational Enterprise

Name

Institution

QUESTION 1

International business is by no means recent phenomena. MNES have their roots in the international market. The Mnes exploits the market by setting up parallel production and distribution production rather than entering the market via trade. Therefore, contrary to the matching of perfect competition in the market, the Mnes demonstrated effectiveness of oligopolistic market even in a foreign market because it is able to provide a cheap diversification of the portfolio. From the national point of view, trade is profitable because it involves the transmission of factor inputs other than capital inputs. They include technology and experts in management, these inputs contribute to the development of not only the company but also the country. Trade is based on the concept of comparative advantage, therefore, both countries gains.

On the other hand, the imperfect competition benefits the company. Furthermore, it reduces most of the risk faced by companies in the international market. Nonetheless, it leads to better terms of trade as the company enjoys the economies of scale.FDI was considered the most likely solution to maximize profits. Three reasons were presented: (i) the firm’s advantage may be very difficult to price; (ii) FDI eliminates the costs of defining and managing a licensing agreement; (iii) it is simply not possible to sell oligopolistic power.

QUESTION 2

There are two types of foreign direct investment (FDI), horizontal and the vertical FDI. Horizontal investment refers to a situation whereby a company duplicates its activities in countries where it has identified investment opportunity. Consequently, vertical opportunity refers to a situation whereby a company stages of production to different countries. All over the world, companies consider two major factors as it chooses where to invest; the production cost and market viability. In the above case, the company in the USA is faced with the dilemma of either inverting horizontally or vertically in country Row. First of all, the comparison reveals that the average fixed cost in USA is $200 while in a foreign country Row is $225. The selling price of the products in USA is $ 250 while in Row is $300. The market share of this company in USA is $60 million. This company is considering building a plant in country Row where there are three established companies each with a market share of $100 million. These companies sell their products for $270.

Notably, the company is USA want to establish a plant of the replica of the one in USA, in terms of the plant cost and expenses. Putting into considerations the factors of FDI, the company in the USA should not establish a plant in the country Row. Instead, the company should stage some of the operation activities in Row. By doing this, cost will be reduced while at the same time accessing the market. The selling price in Row is $300 which is higher than $250 in USA. However, this is attributed to the cost of shipping and tariffs; hence the company should not feel like it is making a lot of profits in the foreign land.

Question 3

If the tariff level was above 10%, it would make it profitable for the company to produce in the USA. However, if the tariff cost were less than 10% it would be safer to produce in Row. A vertical FDI should occur here because the wage difference is far much higher while there is minimal trade cost.

Question 4

.The concept of effective interest rate implies that the nominal tariff cost of the finished good significantly understates the de facto protection for the value added in the process of production. Therefore, in this scenario, the company could have produced in Row if the components part of the final manufactured goods were protected.

Question 5

Amongother, factor to consider is proximity-concentration trade off. Assuming a firm which is a monopoly want to go international, and the firm want to retain monopoly this assumption of monopoly can be related to O’ in the famous OLI or ownership –Location- internationalization framework. The firm has unique advantages in terms of product quality, management system and marketing. This gives it ownership over the other firms. However, it still possesses some model of monopolistic competition so that it competes with other firms. Despite the fact that the company makes profits in the foreign market, profitability depends on factors such as advertising and quality of output). The analysis of proxity-concentration trade off reveals that the higher fixed cost favors exporting over FDI while higher trade cost favors FDI to exporting.

Export platform FDI, assuming the model is the same, and the host country are identical with the same economic union. We know that the intra-union barriers are the same as the external barriers. There is an implication that the firm want to establish two plants in each union country. Now, in the event the intra-union barriers are reduced so that it will be less than the trade cost, this will not affect the profits to the exporting countries from the firms’ country of origin.

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