2. 2
A multinational enterprise (MNE) is a firm that
has operating subsidiaries, branches or
affiliates located in foreign countries.
Global companies are different from domestic
companies in that they can take advantage of
market imperfections, such as interest rate and
exchange rate and tax advantages in certain
countries.
3. MNEs strive to take advantage of imperfections in
national markets for products, factors of
production, and financial assets.
Market Imperfections for products translate
into market opportunities for MNEs.
Monopolies, etc.
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 their local competitors. 3
4. Purely domestic firms can have significant
international activities, since they can
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
Purely domestic firms can have significant
international activities, since they can
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
4
5. Competitive MNEs maximizing their firm
value must have three critical
elements in place:
An open marketplace
High quality strategic management
Access to capital
This is illustrated in the next pyramid
graph
5
7. Firms become multinational for one or several of the
following reasons:
Market seekers – produce in foreign markets either to
satisfy local demand or export to markets other than their
own
Raw material seekers – search for cheaper or more raw
materials outside their own market
Production efficiency seekers – produce in countries
where one or more of the factors of production are cheaper
Knowledge seekers – gain access to new technologies or
managerial expertise
Political safety seekers – establish operations in
countries considered unlikely to expropriate or interfere with
private enterprise
1-7
8. 1-8
Phase One: Domestic Operations
Trident Corporation
(Los Angeles, USA)
U.S. Suppliers
(domestic)
U.S. Buyers
(domestic)All payments in US dollars;
All credit risk under U.S. law
9. In Phase One, Trident is not itself international or
global in its operations
However, some of its competitors, suppliers or buyers
may be
This is one of the key drivers pushing Trident into
Phase Two, the first transition of the globalization
process
This is the Global Transition I: The Domestic
Phase to The International Trade Phase
1-9
10. 1-10
Canadian Buyers
Are Canadian buyers creditworthy?
Will payment be made in US$ or C$
Mexican Suppliers
Are Mexican suppliers dependable?
Will Trident pay US$ or Mexican pesos?
Trident Corporation
(Los Angeles, USA)
Phase Two: Expansion into International Trade
11. The Theory of Comparative Advantage provides
a basis for explaining and justifying international trade
in a model assumed to enjoy
Free trade
Perfect competition
No uncertainty
Costless information
No government interference
1-11
