Theories of Multinational Enterprises. Why do they exist?

Assuming perfect markets and free trade, then trade would be the intimately efficient method of serving conflicting markets and FDI would not find place. In this framework there is no need for the MNE.

International action must therefore be a response to slightly market imperfections in the goods or factor markets. Trade, the result of sylvan-specific advantages, is replaced by firm-specific advantages, which star to FDI.

When transportation costs are added to production costs, it becomes dead to ship some products over a large distance. This is specially true of products that have a low value-to-weight ratio and dismiss be produced in almost any location (e.g., cement, haywire drinks, etc.). For such products, relative to either FDI or licensing, the attractiveness of exporting decreases.

For theoretical account the differential rate of return hypothesis suggests FDI is under copen to take advantage of higher rates of return in foreign locations; this hypothesis assumes that the goal of firms is to maximise profits;

Portfolio hypothesis considers both the rate of return and a risk element, arguing that FDI is positively associated with the rate of return and negatively related to risk;

1. An example of a market imperfection in the goods market that serves as a barrier to free trade is tariffs.



A country that erects barriers to trade to protect a domestic industry forget simply attract subsidiaries of an MNE, who can avoid customs duties by undertaking production in the host nation

2. Similarly the generally neo-classical flexible accelerator model of investment has also been extended to foreign capital movements

Imperfections in the markets for intermediate goods always lead to the development of MNEs. For example, imperfections exist in the markets for knowledge, information, technology, marketing and managerial expertise. A firm possessing an advantage in any of these areas is able to close...

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