The Multinational Enterprise (MNE) A multinational enterprise (MNE) is defined as one that has operating subsidiaries, branches or affiliates located in foreign countries. The ownership of some MNEs is so dispersed internationally that they are known as transnational corporations. The transnationals are usually managed from a global perspective rather than from the perspective of any single country.

Multinational Business Finance While multinational business finance emphasizes MNEs, purely domestic firms also often have significant international activities: Import & export of products, components and services Licensing of foreign firms to conduct their foreign business Exposure to foreign competition in the domestic market Indirect exposure to international risks through relationships with customers and suppliers

Globalization and Creating Value in the Multinational Enterprise 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. Reaching that goal requires combining three critical elements: An open marketplace High quality strategic management Access to capital

Exhibit 1.1 Creating Firm Value in Global Markets

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 of Comparative Advantage 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

The Theory of Comparative Advantage 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

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 (as a result of government interference and ulterior motivations) At least two factors of production – capital and technology – now flow directly and easily between countries

The Theory of Comparative Advantage Modern factors of production are more numerous than in this simple model Although the terms of trade are ultimately determined by supply and demand, the process by which the terms are set is different from that visualized in traditional trade theory Comparative advantage shifts over time, as less developed countries become developed and realize their latent opportunities The classical model of comparative advantage did not really address certain other issues, such as the effect of uncertainty and information costs, the role of differentiated products in imperfectly competitive markets, and economies of scale

The Theory of Comparative Advantage Comparative advantage is however still a relevant theory to explain why particular countries are most suitable for exports of goods and services that support the global supply chain of both MNEs and domestic firms. The comparative advantage of the 21st century, however, is one based more on services, and their cross-border facilitation by telecommunications and the Internet. The source of a nations comparative advantage is still created from the mixture of its own labor skills, access to capital, and technology.

The Theory of Comparative Advantage Many locations for supply chain outsourcing exist today (see the following exhibit). It takes a relative advantage in costs, not just an absolute advantage, to create comparative advantage. Clearly, the extent of global outsourcing is reaching out to every corner of the globe.

Exhibit 1.2 Global Outsourcing of Comparative Advantage

Market Imperfections: A Rationale for the Existence of the Multinational Firm MNEs strive to take advantage of imperfections in national markets for products, factors of production, and financial assets. Imperfections in the market for products translate into market opportunities for MNEs. Large international firms are better able to exploit such competitive factors as economies of scale, managerial and technological expertise, product differentiation, and financial strength than are their local competitors.

Market Imperfections: A Rationale for the Existence of the Multinational Firm Strategic motives drive the decision to invest abroad and become a MNE and can be summarized under the following categories: Market seekers Raw material seekers Production efficiency seekers Knowledge seekers Political safety seekers These categories are not mutually exclusive.

Sustaining and Transferring Competitive Advantage In industries characterized by worldwide oligopolistic competition, each of the above strategic motives should be subdivided into proactive and defensive investments. Proactive investments are designed to enhance the growth and profitability of the firm itself. Defensive investments are designed to deny growth and profitability to the firm’s competitors.

Exhibit 1.3 What Is Different about International Financial Management?