Economics of Multinational Enterprise Name Institution QUESTION 1 International business is by no means recent phenomena. MNES have their roots in the international market. The Mnes exploits the market by setting up parallel production and distribution production rather than entering the market via trade. Therefore, contrary to the matching of perfect competition in the market, the Mnes demonstrated effectiveness of oligopolistic market even in a foreign market because it is able to provide a cheap diversification of the portfolio. From the national point of view, trade is profitable because it involves the transmission of factor inputs other than capital inputs. They include technology and experts in management, these inputs contribute to the development of not only the company but also the country. Trade is based on the concept of comparative advantage, therefore, both countries gains. On the other hand, the imperfect competition benefits the company. Furthermore, it reduces most of the risk faced by companies in the international market. Nonetheless, it leads to better terms of trade as the company enjoys the economies of scale.FDI was considered the most likely solution to maximize profits. Three reasons were presented: (i) the firm’s advantage may be very difficult to price; (ii) FDI eliminates the costs of defining and managing a licensing agreement; (iii) it is simply not possible to sell oligopolistic power. QUESTION 2 There are two types of foreign direct investment (FDI), horizontal and the vertical FDI. Horizontal investment refers to a situation whereby a company duplicates its activities in countries where it has identified investment opportunity. Consequently, vertical opportunity refers to a situation whereby a company stages of production to different countries. All over the world, companies consider two major factors as it chooses where to invest; the production cost and market viability. In the above case, the company in the USA is faced with the dilemma of either inverting horizontally or vertically in country Row. First of all, the comparison reveals that the average fixed cost in USA is $200 while in a foreign country Row is $225. The selling price of the products in USA is $ 250 while in Row is $300. The market share of this company in USA is $60 million. This company is considering building a plant in country Row where there are three established companies each with a market share of $100 million. These companies sell their products for $270. Notably, the company is USA want to establish a plant of the replica of the one in USA, in terms of the plant cost and expenses. Putting into considerations the factors of FDI, the company in the USA should not establish a plant in the country Row. Instead, the company should stage some of the operation activities in Row. By doing this, cost will be reduced while at the same time accessing the market. The selling price in Row is $300 which ...

1. Economics of Multinational Enterprise
Name
Institution
QUESTION 1
International business is by no means recent phenomena.
MNES have their roots in the international market. The Mnes
exploits the market by setting up parallel production and
distribution production rather than entering the market via
trade. Therefore, contrary to the matching of perfect

2. competition in the market, the Mnes demonstrated effectiveness
of oligopolistic market even in a foreign market because it is
able to provide a cheap diversification of the portfolio. From
the national point of view, trade is profitable because it
involves the transmission of factor inputs other than capital
inputs. They include technology and experts in management,
these inputs contribute to the development of not only the
company but also the country. Trade is based on the concept of
comparative advantage, therefore, both countries gains.
On the other hand, the imperfect competition benefits the
company. Furthermore, it reduces most of the risk faced by
companies in the international market. Nonetheless, it leads to
better terms of trade as the company enjoys the economies of
scale.FDI was considered the most likely solution to maximize
profits. Three reasons were presented: (i) the firm’s advantage
may be very difficult to price; (ii) FDI eliminates the costs of
defining and managing a licensing agreement; (iii) it is simply
not possible to sell oligopolistic power.
QUESTION 2
There are two types of foreign direct investment (FDI),
horizontal and the vertical FDI. Horizontal investment refers to
a situation whereby a company duplicates its activities in
countries where it has identified investment opportunity.
Consequently, vertical opportunity refers to a situation whereby
a company stages of production to different countries. All over
the world, companies consider two major factors as it chooses
where to invest; the production cost and market viability. In the
above case, the company in the USA is faced with the dilemma
of either inverting horizontally or vertically in country Row.
First of all, the comparison reveals that the average fixed cost
in USA is $200 while in a foreign country Row is $225. The
selling price of the products in USA is $ 250 while in Row is
$300. The market share of this company in USA is $60 million.
This company is considering building a plant in country Row
where there are three established companies each with a market
share of $100 million. These companies sell their products for

3. $270.
Notably, the company is USA want to establish a plant of
the replica of the one in USA, in terms of the plant cost and
expenses. Putting into considerations the factors of FDI, the
company in the USA should not establish a plant in the country
Row. Instead, the company should stage some of the operation
activities in Row. By doing this, cost will be reduced while at
the same time accessing the market. The selling price in Row
is $300 which is higher than $250 in USA. However, this is
attributed to the cost of shipping and tariffs; hence the company
should not feel like it is making a lot of profits in the foreign
land.
Question 3
If the tariff level was above 10%, it would make it profitable for
the company to produce in the USA. However, if the tariff cost
were less than 10% it would be safer to produce in Row. A
vertical FDI should occur here because the wage difference is
far much higher while there is minimal trade cost.
Question 4
.The concept of effective interest rate implies that the nominal
tariff cost of the finished good significantly understates the de
facto protection for the value added in the process of
production. Therefore, in this scenario, the company could
have produced in Row if the components part of the final
manufactured goods were protected.
Question 5
Amongother, factor to consider is proximity-concentration trade
off. Assuming a firm which is a monopoly want to go
international, and the firm want to retain monopoly this
assumption of monopoly can be related to O’ in the famous OLI
or ownership –Location- internationalization framework. The
firm has unique advantages in terms of product quality,
management system and marketing. This gives it ownership
over the other firms. However, it still possesses some model of
monopolistic competition so that it competes with other firms.
Despite the fact that the company makes profits in the foreign

4. market, profitability depends on factors such as advertising and
quality of output). The analysis of proxity-concentration trade
off reveals that the higher fixed cost favors exporting over FDI
while higher trade cost favors FDI to exporting.
Export platform FDI, assuming the model is the same, and the
host country are identical with the same economic union. We
know that the intra-union barriers are the same as the external
barriers. There is an implication that the firm want to establish
two plants in each union country. Now, in the event the intra-
union barriers are reduced so that it will be less than the trade
cost, this will not affect the profits to the exporting countries
from the firms’ country of origin.
.