GLOBALIZATION AND

MULTINATIONAL ENTERPRISE
The process by which the world is
becoming increasingly interconnected
allowing goods, capital and people to move
around the globe efficiently

WHAT IS GLOBALIZATION?
One that has operating subsidiaries,
branches or affiliates located in foreign
countries

WHAT IS MULTINATIONAL ENTERPRISE?

Examples of MNE
GLOBALIZATION AND
CREATING VALUE
Creating firm
value in
Global
Markets
 THEORY OF
COMPARATIVE ADVANTAGE
THEORY OF COMPARATIVE ADVANTAGE
• The theory of comparative advantage provides a basis for explaining and justifying
international.
• Requires the following assumptions:
• free trade;
• perfect competition;
• no uncertainty;
• costless information; and
• no government interference.
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
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, although perhaps unequally
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
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
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 nation’s comparative advantage is still created from the mixture
of its own labor skills, access to capital, and technology.
THEORY OF COMPARATIVE ADVANTAGE
• Many locations for supply chain outsourcing exist today.
• It takes a relative advantage in costs, not just an absolute advantage, to create
comparative advantage.
• The extent of global outsourcing is reaching out to every corner of the globe.
COMPARATIVE ADVANTAGE vs. COMPETITIVE ADVANTAGE
Comparative Advantage
• When a company/country can
produce goods at a lower
opportunity cost than its
competitors
• A component of competitive
advantage
• Generated by a firm's ability to
produce a good or service at a
lower cost than its competitors
Competitive Advantage
• Represents any benefits and
advantages that a company may
have over its competitors like
having a low cost structure, low
cost of labor, better access to raw
materials, etc.
• Provide an edge over rivals and an
ability to generate greater value for
a firm and its shareholders
Exhibit 1.3 What is different about International Management?
 • Market seekers
WHY DO FIRMS • Raw material seekers
BECOME • Production efficiency seekers
MULTINATIONAL? • Knowledge seekers
• Political safety seekers
THE GLOBALIZATION
PROCESS
Exhibit 1.4 – Initiation of the globalization process
Exhibit 1.5 – Foreign direct investment sequence
Exhibit 1.6 – The potential limits of financial globalization