International Fiancial Management

Chapter 1

Globalization and the Multinational Enterprise

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Globalization and Creating Value in the MNE

• Globalization • Building firm value in a global business requires

– An open marketplace – Strategic management – Access to capital

Copyright © 2009 Pearson Prentice Hall. All rights reserved.

1-2

Exhibit 1.1 Creating Firm Value in Global Markets

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1-3

The Theory of Comparative Advantage

• The theory of competitive 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

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1-4

The Theory of Comparative Advantage

• The features of the theory are as follows;

– 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 (land, labor, capital, and technology) – Country B does the same with different products (based on different factors of production)

Copyright © 2009 Pearson Prentice Hall. All rights reserved.

1-5

The Theory of Comparative Advantage

– Because the factors of production cannot be transported, the benefits of specialization are realized through international trade – The terms of trade, the ratio at which quantities of goods are exchanged, shows the benefits of excess production – Neither Country A nor Country B is worse off than before trade, and typically both are better off (albeit perhaps unequally)

Copyright © 2009 Pearson Prentice Hall. All rights reserved.

1-6

The Theory of Comparative Advantage

• For an example of the benefits of free trade based on comparative advantage, assume Thailand is...