Question

1. Multinational enterprises Which of the following are common characteristics of multinational enterprises (MNES)? Check all that apply. Low ratio of foreign sales to total sales Foreign sales that represent a high proportion of total sales Acquisitions in nonrelated markets Facilitated tehnology transfer by exerting competitive pressures on foreign firms Creation of subsidiaries that are independent production units Low capital productivity Complete the following table by indicating whether each assumption is used by multinational enterprise (MNE) analysis, conventional trade theory, or both. Check all that apply. Assumption MNE Analysis Conventional Trade Theory Goods are exchanged at competitive prices. Resources are transferred from lower to higher productive uses. Factor inputs move freely among nations.

Answer 1

1.

• A multinational enterprise is a business corporation that owns production of goods and services other than its home country. They represent a higher proportion of foreign sales on the total sales to maximize profit. They facilitate technology transfer to enhance the competitiveness of the foreign firms and they create subsidiaries which are independent production units.

• Whereas, conventional trade theory suggests that wage inequality increases in the developed country if there is a trade between a developed and a developing country. The assumption in the table can be differentiated on the basis of their origin in either multinational enterprise or conventional trade theory.

Goods are exchanged at competitive prices and factor inputs move freely among nations applies to both of them.

Whereas, resources are transferred from lower to higher productive uses only in multinational enterprises.

• Types of diversification in an MNE are

Horizontal diversification refers to the offering of new services to existing customers. Vertical diversification refers to the movement of the firm to the previous or the next stage of the production cycle. Conglomerate diversification refers to the introduction of new products that are not related to its previous production.

An automaker establishes foreign dealership => Forward vertical

Cigarette manufacturer acquires a toy company => Conglomerate

Softdrink owns companies that produce an identical product in Germany, Russia, and Mexico => Forward vertical

A steel producer owns businesses involved in the extraction of raw material => Backward vertical

• Foreign direct investment refers to the investment by a firm in a foreign country that controls and collects the revenue from their investment.

FDI is an effective method of technology transfer. It occurs when the parent company has sufficient common stock in foreign countries to assume a voting control. It occurs when a country sells investment goods in a foreign country.