Copyright 2010 Pearson Prentice Hall. All rights
reserved.Chapter 1Globalization and the Multinational
EnterpriseCopyright 2010 Pearson Prentice Hall. All rights
reserved.1-2The 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 nown as
transnational corporations. The transnationals are usually managed
from a global perspecti!e rather than from the perspecti!e of any
single country.Copyright 2010 Pearson Prentice Hall. All rights
reserved.1-3Multinational Business Finance "hile multinational
business finance emphasi#es MNEs, purely domestic firms also often
ha!e significant international acti!ities$% &mport ' e(port of
products, components and ser!ices% )icensing of foreign firms to
conduct their foreign business% E(posure to foreign competition in
the domestic maret% &ndirect e(posure to international riss
through relationships with customers and suppliersCopyright 2010
Pearson Prentice Hall. All rights reserved.1-4Globalization and
Creating Value in the Multinational Enterprise *lobal business, lie
any business, is the social science of managing people to organi#e,
maintain and grow the collecti!e producti!ity toward accomplishing
producti!e goals, typically to generate profit and !alue for its
owners and staeholders. +eaching that goal re,uires combining three
critical elements$% An open marketplace% High quality strategic
management% Access to capitalCopyright 2010 Pearson Prentice Hall.
All rights reserved.1-5Exhibit 11Creating Fir! Value in Global
Mar"etsCopyright 2010 Pearson Prentice Hall. All rights
reserved.1-6The Theor# o$ Co!parati%e &d%antage The theory of
comparative advantage pro!ides a basis for e(plaining and
-ustifying international trade in a model world assumed to en-oy$%
free trade.% perfect competition.% no uncertainty.% costless
information, and % no go!ernment interference.Copyright 2010
Pearson Prentice Hall. All rights reserved.1-7The Theor# o$
Co!parati%e &d%antage The theory contains the following
features$% E(porters in /ountry A sell goods or ser!ices to
unrelated importers in /ountry 0% 1irms in /ountry A speciali#e in
maing products that can be produced relati!ely efficiently, gi!en
/ountry A2s endowment of factors of production, that is, land,
labor, capital, and technology% 1irms in /ountry 0 do liewise,
gi!en the factors of production found in /ountry 0% &n this way
the total combined output of A and 0 is ma(imi#edCopyright 2010
Pearson Prentice Hall. All rights reserved.1-8The Theor# o$
Co!parati%e &d%antage% 0ecause the factors of production cannot
be mo!ed freely from /ountry A to /ountry 0, the benefits of
speciali#ation are reali#ed through international trade% The way
the benefits of the e(tra production are shared depends on the
terms of trade, the ratio at which ,uantities of the physical goods
are traded% Each country2s share is determined by supply and demand
in perfectly competiti!e marets in the two countries% Neither
/ountry A nor /ountry 0 is worse off than before trade, and
typically both are better off, albeit perhaps une,uallyCopyright
2010 Pearson Prentice Hall. All rights reserved.1-9The Theor# o$
Co!parati%e &d%antage Although international trade might ha!e
approached the comparati!e ad!antage model during the nineteenth
century, it certainly does not today, for the following reasons$%
/ountries do not appear to speciali#e only in those products that
could be most efficiently produced by that country2s particular
factors of production (as a result of go!ernment interference and
ulterior moti!ations)% At least two factors of production % capital
and technology % now flow directly and easily between
countriesCopyright 2010 Pearson Prentice Hall. All rights
reserved.1-10The Theor# o$ Co!parati%e &d%antage% 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 !isuali#ed in traditional trade theory% /omparati!e ad!antage
shifts o!er time, as less de!eloped countries become de!eloped and
reali#e their latent opportunities% The classical model of
comparati!e ad!antage did not really address certain other issues,
such as the effect of uncertainty and information costs, the role
of differentiated products in imperfectly competiti!e marets, and
economies of scaleCopyright 2010 Pearson Prentice Hall. All rights
reserved.1-11The Theor# o$ Co!parati%e &d%antage /omparati!e
ad!antage is howe!er still a rele!ant theory to e(plain why
particular countries are most suitable for e(ports of goods and
ser!ices that support the global supply chain of both MNEs and
domestic firms. The comparati!e ad!antage of the 34st century,
howe!er, is one based more on ser!ices, and their cross5border
facilitation by telecommunications and the &nternet. The source
of a nations comparati!e ad!antage is still created from the
mi(ture of its own labor sills, access to capital, and
technology.Copyright 2010 Pearson Prentice Hall. All rights
reserved.1-12The Theor# o$ Co!parati%e &d%antage Many locations
for supply chain outsourcing e(ist today (see the following
e(hibit). &t taes a relati!e ad!antage in costs, not -ust an
absolute ad!antage, to create comparative advantage. /learly, the
e(tent of global outsourcing is reaching out to e!ery corner of the
globe.Copyright 2010 Pearson Prentice Hall. All rights
reserved.1-13Exhibit 1' Global (utsourcing o$ Co!parati%e
&d%antageCopyright 2010 Pearson Prentice Hall. All rights
reserved.1-14Mar"et )!per$ections* & +ationale $or the
Existence o$ the Multinational Fir! MNEs stri!e to tae ad!antage of
imperfections in national marets for products, factors of
production, and financial assets. &mperfections in the maret
for products translate into maret opportunities for MNEs. )arge
international firms are better able to e(ploit such competiti!e
factors as economies of scale, managerial and technological
e(pertise, product differentiation, and financial strength than are
their local competitors.Copyright 2010 Pearson Prentice Hall. All
rights reserved.1-15Mar"et )!per$ections* & +ationale $or the
Existence o$ the Multinational Fir! 6trategic moti!es dri!e the
decision to in!est abroad and become a MNE and can be summari#ed
under the following categories$% Maret seeers% +aw material seeers%
7roduction efficiency seeers% 8nowledge seeers% 7olitical safety
seeers These categories are not mutually e(clusi!e.Copyright 2010
Pearson Prentice Hall. All rights reserved.1-16,ustaining and
Trans$erring Co!petiti%e &d%antage &n industries
characteri#ed by worldwide oligopolistic competition, each of the
abo!e strategic moti!es should be subdi!ided into proactive and
defensive in!estments. 7roacti!e in!estments are designed to
enhance the growth and profitability of the firm itself. 9efensi!e
in!estments are designed to deny growth and profitability to the
firm2s competitors.Copyright 2010 Pearson Prentice Hall. All rights
reserved.1-17Exhibit 1-Trident Corporation* )nitiation o$ the
Globalization .rocess Copyright 2010 Pearson Prentice Hall. All
rights reserved.1-18Exhibit 1/Trident0s Foreign 1irect )n%est!ent
,e2uenceCopyright 2010 Pearson Prentice Hall. All rights
reserved.1-19Exhibit 13.otential 4i!its on Financial
GlobalizationCopyright 2010 Pearson Prentice Hall. All rights
reserved.1-20Mini5Case 6uestions* .orsche Changes Tac" "hat
strategic decisions made by 7orsche o!er recent years had gi!en
rise to its e(tremely high return on in!ested capital: ;esi
wondered if her position on 7orsche might ha!e to distinguish
between the company2s ability to generate results for stocholders
!ersus its willingness to do so."hat do you thin: &s pursuing
the interest of 7orsche2s controlling families different from
ma(imi#ing the returns to its public share owners: Copyright 2010
Pearson Prentice Hall. All rights reserved.Chapter 1&dditional
Chapter ExhibitsCopyright 2010 Pearson Prentice Hall. All rights
reserved.1-22Exhibit 178hat )s 1i$$erent about )nternational
Financial Manage!ent9Copyright 2010 Pearson Prentice Hall. All
rights reserved.1-23Exhibit 1.orsche0s Gro:th in ,ales; )nco!e; and
MarginCopyright 2010 Pearson Prentice Hall. All rights
reserved.1-24Exhibit '+eturn on )n%ested Capital (+()C) $or
European &uto!a"ers; '
