Economics of Multinational Enterprise - Admission/Application Essay Example

Economics of Multinational Enterprise For the part (a) of the first question, different countries will tend to have different resources. Therefore it is not possible for the countries to be able to produce two commodities in the same proportion. As a result of this, there will be variation in the in the factors of production since some countries have adequate labor while others have adequate capital. The comparative advantage of a country is usually determined by the factors of production in that country. In order for production to take place there are inputs injected in the production process and the objective is always to maximize profits and minimize the losses and labor, land and capital are the key factor to consider in this particular case (Ietto-Gillies, 230). Therefore any country will go for a good that is easy and cheap to produce making use of the locally abundant factor of production. Most developed countries have abundant capital in their possession while the developing countries on the other hand are rich in labor. As for the Heckscher-Ohlin theory, the developing countries will opt to choose a good that will demand more labor that capital so as to utilize the natural advantage in hand. As a result, the country will produce what is best at and trade with another country in what it is not able to produce. An example is that a country like Kenya is one of the leading producers in Tea but it is not able to produce cars hence imports from China and Japan. Even when one of the countries is capable of producing both the goods than the other, the two will eventually end up benefiting from trade because if they have different natural advantages (Peng, 140). The output of a country that specializes will automatically increase and due to this the profit generated will rise too. For the part (b) of the question, a perfect competition is a market where no one has the power to influences the prices of the homogeneous products. Perfect competition conditions are usually strict and due to these characteristics there are very few such markets. An imperfect competition is a market that does not have the characteristics or the conditions present in a perfect market. An oligopolistic is a market structure where there are few sellers. Some of the characteristics in this form of market are; non-price competition, no free entry, ability to set prices, perfect knowledge and product differentiation. In oligopolistic market, profit maximization is achieved by producing where the marginal revenue equals marginal cost. Oligopolistic firms have different strategies of pricing. On e of the strategy is through entry forestalling price where they operate a limit-pricing strategy in order to defer new comers. The firms may also collude with the rival firms to set the prices together. Another strategy is predatory pricing in an intention to kick rivals out of the market. Question 2 My advice to the company is to first work with the existing plant for the next ten years until it is able to clear the existing loan. This is because the money borrowed for this firm was offered at a lower interest of 10% while the funding of the new firm would be involves taking a greater loan. The existing plant serves the firms needs as it should. Establishing new plant would not have additional revenue for the company. This is because the profit gained from selling the products in the foreign company is equal to what is gained by selling the products in the US. The product is sold at $300 but due to costs that related to foreign investment, it goes down to $250 the same as that sold in America. The company could thus focus on the local markets which are yet to fully saturate and would thus optimize the profits using the existing resources. After the company has explored the local market fully, it can look for investment opportunities in foreign markets. At this time the firm will have completed paying the loan used to set the first plan and maybe have some capital for setting a second firm without taking a loan. In making the foreign investment, the company could also seek to invest in markets that have attractive factors making the investments have greater returns than the local markets. This is because investing in foreign markets is more involving and should have greater returns. Question 3 1a, Trade cost issues: Country 1 costs= 100+60: 100+80 1: 1.125 1b, I. If there were no trade costs and there was no disintegration of process the cost of the two countries would be same. II. If the trade cost ratio value was zero there would be no trade at all. 2a . I. When the value of tc is 1.125 II. If Ta=1, Tc=0.8 b. Ta= 0.8 ×1.125= 0.9 C As the value of tc increases so does the value of ta. Value of ta and tc being below zero means that the profits to be gained by trading goods made in country a in b is high. Question 4 Ownership, Location and Internalization (OLI) is a theory that was developed by Dunning and is used to by enterprises which plan on becoming multinationals. This theory assesses the ownership advantages that explain why there certain firms that perform well in the international market while other do not. In terms of ownership, a firm possesses a collection of assets such as distribution chains, managerial structure, patents and product development all which would be useful in a international market as it is in the local market. For location advantages looks at which location is most strategic for an organization while the Internalization advantages defines the manner in which a firm operates in a foreign country. The advantage of using this theoretical approach in studying the internalization markets is that it studies the specific individual enterprise incentives (Butler, 103). This involves conducting a research on the cost of undertaking some business transactions within the firm or using other channels in the market. The aim is to ensure that the method used is the most cost effective and efficient. When making international investment, the firm needs to access the risk in relations to the returns from the investment. This is because there are some countries which have attractive factors while other has undesirable factors which make the cost of investing in the foreign market more than the returns. Some of the risks that one needs to assess include the political and economic risk. Economic risks are measured by the country’s ability to pay back it debt. A country which pays its debt provides a stable investment environment (Chandra, 134). Political stability is also crucial in investment. Work Cited Butler, Kirt C. Multinational Finance: Evaluating Opportunities, Costs, and Risks of Operations. Hoboken, NJ: Wiley, 2012. Print. Chandra, Prasanna. Investment Analysis and Portfolio Management. S.l.: Tata Mcgraw-Hill, 2008. Print. Ietto-Gillies, Grazia. Transnational Corporations and International Production: Concepts, Theories and Effects. Cheltenham: Edward Elgar Pub, 2012. Internet resource. Peng, Mike W. Global Strategy. Mason, Ohio: South-Western, 2014. Print. Read More