Why Do Businesses Internationalise

Topics: Economics, Transaction cost, Globalization Pages: 4 (816 words) Published: May 2, 2015
Why Do Businesses Internationalise?
1. Why do businesses internationalise? Compare and contrast mainstream and alternative theories. (Firms search for, efficient, cheap, productive locations)

MNE – multinational enterprise

Neoclassical Trade Theories

Heckscher-Ohlin’s Factor Endowments:
A mathematical model, It predicts patterns of trade (production and consumption) based upon a country’s factor endowments. Factor endowments include land, labour and capital. The amounts of these vary between countries. Goods differ according to the types of factors used to produce them. Argued that a country should export those goods that intensively use those resources that are relatively abundant in that country.

However has poor predictive power.
Assumes perfect competiton
Implies all firms are identical (does not account for market imperfections)

New Trade Theory

- Efficient outcome vertical fragmentation of production across several counties: Efficiency and equilibrium based
Labour in developing counties
Developed countries specialise in capital intensive components

- Different assumptions to explain international production of horizontal type: similar products located in countries at similar stage of development (ie developed countries) (R&D and cost of transportation)

Economies of scale, early entrance get lock on world market, discourages entry

Mainstream International Business Theories

Transaction Cost Theory:
Firms rely on authority and hierarchy, markets rely on exchange Firms exist as markets fail in transactions costs become too high Firms reduce transaction costs through imposition of authority

Correcting failure – Monopolistic or Oligopolistic

It is based on the ‘first fundamental theorem’ of welfare economics: “a competitive market economy can give rise to a Pareto optimal allocation of resources (a situation where no-one can become better off without somebody else becoming worse off)

It is as such, like...
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