Chapter 1 Mbf

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Chapter 1
Globalization and the Multinational Enterprise
1-1. Globalization and the MNE. The term globalization has become very widely used in recent years. How would you define it? Narayana Murthy’s quote is a good place to start any discussion of globalization: “I define globalization as producing where it is most cost-effective, selling where it is most profitable, and sourcing capital where it is cheapest, without worrying about national boundaries.” Narayana Murthy, President and CEO, Infosys 1-2. Globalization and Value Creation. What does an MNE need in order for it to create value through the globalization process? Global business, like any business, is the social science of managing people to organize, maintain, and grow the collective productivity toward accomplishing productive goals, typically to generate profit and value for its owners and stakeholders. A multinational enterprise (MNE) needs three fundamental elements in order to build firm value: (1) an open marketplace; (2) high quality strategic management; and (3) access to capital. 1-3. Value Creation and the Concept of Capitalism. How does the concept of capitalism actually apply to the globalization process of a business, as it moves from elemental to multinational stages of development? Open markets and insightful leadership is all for nought if the MNE cannot gain ready access to affordable capital. It is capital that allows the investment needed to obtain the technology, execute the strategy, and expand across global markets. It is the “capital” in capitalism; it is the ability of the enterprise to reach out and obtain resources from outside of the firm to pursue the firm’s vision and create the value for all of the key stakeholders in the enterprise itself, and subsequently for the community and society of which it is an integral element. 1-4. Theory of Comparative Advantage. Define and explain the theory of comparative advantage. The theory of comparative advantage provides a basis for explaining and justifying international trade in a model world assumed to enjoy free trade, perfect competition, no uncertainty, costless information, and no government interference. The theory contains the following features: • Exporters in Country A sell goods or services to unrelated importers in Country B. • Firms in Country A specialize in making products that can be produced relatively efficiently, given Country A’s endowment of factors of production: that is, land, labor, capital, and technology. Firms in Country B do likewise, given the factors of production found in Country B. In this way the total combined output of A and B is maximized.


Eiteman/Stonehill/Moffett • Multinational Business Finance, Twelfth Edition

• Because the factors of production cannot be moved freely from Country A to Country B, the benefits of specialization are realized through international trade. • The way the benefits of the extra production are shared depends on the terms of trade, the ratio at which quantities of the physical goods are traded. Each country’s share is determined by supply and demand in perfectly competitive markets in the two countries. Neither Country A nor Country B is worse off than before trade, and typically both are better off, albeit perhaps unequally. 1-5. Limitations of Comparative Advantage. Key to understanding most theories is what they say and what they don’t. What are four or five key limitations to the theory of comparative advantage? Although international trade might have approached the comparative advantage model during the nineteenth century, it certainly does not today, for the following reasons: • Countries do not appear to specialize only in those products that could be most efficiently produced by that country’s particular factors of production. Instead, governments interfere with comparative advantage for a variety of economic and political reasons: to achieve full employment, economic development, national...
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