The Multinational Enterprise in the World Economy

Posted: November 26th, 2013

The Multinational Enterprise in the World Economy

Question one       

Foreign direct investment is a vital instrument in international trade. It represents the amount that is invested in foreign countries. An increase in foreign direct investment will decrease the absolute amount of wages. This is because most of the money will be invested abroad. As a result, capital will remain in the country to pay for the wages. The labor productivity influenced by the foreign direct investment will have a negative impact on the wage rate.

The amount of income received by the owners of capital can increase but the product of capital will decrease. This is because the capital invested abroad will benefit the foreigners. As a result, they will receive profits. Conversely, the host country will remain undeveloped. This is evident in the poor infrastructure. If capital is employed in such a place, it will yield low returns.

When the owners of capital invest their money in foreign countries, they will receive their returns. The people in the foreign country will also benefit from the investment because there will be more employment opportunities. The infrastructure in the country will be well maintained. However, the owners of the capital will not benefit because the level of investment in the country will be low.

In a trade environment with no mobility of either capital or labor, there will be no direct investment. Most of the countries will be left to their own mechanism. A country endowed with labor will suffer due to lack of capital to invest in the labor market. Similarly, a nation better endowed with capital will also suffer. In this case, the total world product will decrease. Consequently, free trade will allow such countries to trade with each other. Therefore, the total world product will increase

Question  two

The less developed countries face several predicaments in their quest for economic development. One of the problems is the poor infrastructure in most countries. The poor infrastructure hinders communication and transport. For example, a town that grows vegetables has impenetrable roads. By the time the farmer gets to the market, the vegetables have either gone bad or lost their original taste and color. Another problem that less developed countries face is the exportation of primary materials. Due to the nature of these goods, the prices are relatively low. On the other hand, less developed countries have a tendency of importing machinery and other finished products. As a result, the balance of trade is often a deficit. Less developed countries have growing industries as opposed to developed industries in developed nations. Consequently, competition between these types of industries will be inequitable.

Foreign aid to less developed countries from developed countries had grown significantly. This stirred a debate because it was not healthy even though the less developed countries benefited from the aid their countries remained poor. After the Second World War, both Asia and Africa were in the same economic level. However, Asia improved while Africa stagnated due to foreign aid. This predicament has been solved by the promotion of trade by the World Trade Organization. Trade is viewed as a long-term solution for the less developed countries. Trade will facilitate the flow of goods and services from one country to another. It provides a good foundation for societies to improve their livelihood. Trade also allows the less developed countries to keep their pride. Both developed and less developed countries face problems of barrier to trade, taxes, subsidies and several restrictions. However, the general agreement on tariffs and trade has allowed for the negotiation of terms of trade between member countries.

Question three

Presently, multi-national enterprises have played a significant role in international trade.

In the next quarter-century, these enterprises will take globalization to the next level. The multi-national enterprises are involved in the process of shifting their expertise and resources to less developed and developed nations. The aim of this shift is to perform research and develop the foreign countries. Multi-national enterprises are trying to enlarge the global market by penetrating through the numerous borders and developing partnerships. By transferring technology to these nations, these enterprises change the environment and facilitate trade.

Multi-national enterprises have also channeled their efforts to internalization. Internalization refers to the overlapping of economic boundaries. This gives the less developed countries an opportunity to develop their own economy and establish the infrastructure in their regions. These countries will focus their attentions to good governance and a stable economy in order to compete with other countries.

In the next quarter-century, multi-national enterprises will expose the less developed countries because of the direct investment opportunity they provide. With their strategy of research and development, the communities in the less developed countries will be exposed to a wide range of technology and skills. This will increase their competitive ability. Importers will no longer have the ability to destroy local industries because these industries will be more empowered. By transferring their knowledge and equipments, these enterprises will eliminate barriers to trade, subsidies and other trade restrictions. Multi-national enterprises will promote synergy among countries and different organizations. As a result, the different talents, abilities, skills and technology will be employed for the common good of the entire globe. A high quality of products and services will be in the market in the next-century.

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