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Презентация на тему Firms in the Global Economy: Export Decisions, Outsourcing, and Multinational Enterprises

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PreviewMonopolistic competition and tradeThe significance of intra-industry tradeFirm responses to trade: winners, losers, and industry performanceDumpingMultinationals and outsourcing
Chapter 8Firms in the Global Economy: Export Decisions, Outsourcing, and Multinational Enterprises PreviewMonopolistic competition and tradeThe significance of intra-industry tradeFirm responses to trade: winners, IntroductionWhen economies of scale exist, large firms may be more efficient than Introduction (cont.)Internal economies of scale imply that a firm’s average cost of Introduction (cont.)In most sectors, goods are differentiated from each other and there The Theory of Imperfect CompetitionIn imperfect competition, firms are aware that they Monopoly: A Brief ReviewA monopoly is an industry with only one firm. Monopoly: A Brief ReviewAssume that the demand curve the firm faces is Fig. 8-1: Monopolistic Pricing and Production Decisions Monopoly: A Brief Review (cont.)Average cost is the cost of production (C) Fig. 8-2: Average Versus Marginal Cost Monopoly: A Brief Review (cont.)The profit-maximizing output occurs where marginal revenue equals Monopolistic CompetitionMonopolistic competition is a simple model of an imperfectly competitive industry Monopolistic Competition (cont.)A firm in a monopolistically competitive industry is expected to Monopolistic Competition (cont.)Q = S[1/n – b(P – P)] Q is an Monopolistic Competition (cont.)Assume that firms are symmetric: all firms face the same Monopolistic Competition (cont.)AC = n(F/S) + cAs the number of firms n Fig. 8-3: Equilibrium in a Monopolistically Competitive Market Monopolistic Competition (cont.)If monopolistic firms face linear demand functions, Q = A Monopolistic Competition (cont.)At some number of firms, the price that firms charge Monopolistic Competition (cont.)If the number of firms is greater than or less Monopolistic Competition and TradeBecause trade increases market size, trade is predicted to Fig. 8-4: Effects of a Larger Market Monopolistic Competition and Trade (cont.)As a result of trade, the number of Fig. 8-5: Equilibrium in the Automobile Market Fig. 8-5: Equilibrium in the Automobile Market (cont.) Table 8-1: Hypothetical Example of Gains from Market Integration Monopolistic Competition and Trade (cont.)Product differentiation and internal economies of scale lead The Significance of Intra-industry TradeIntra-industry trade refers to two-way exchanges of similar The Significance of Intra-industry Trade (cont.)About 25–50% of world trade is intra-industry.Most Table 8-2: Indexes of Intra-Industry Trade for U.S. Industries, 2009 Firm Responses to TradeIncreased competition tends to hurt the worst-performing firms — Fig. 8-6: Performance Differences Across Firms Trade Costs and Export DecisionsMost U.S. firms do not report any exporting Fig. 8-7: Winners and Losers from Economic Integration Trade Costs and Export Decisions (cont.)Trade costs added two important predictions to Table 8-3: Proportion of U.S. Firms Reporting Export Sales by Industry, 2002 Fig: 8-8: Export Decisions with Trade Costs DumpingDumping is the practice of charging a lower  price for exported Dumping (cont.)Dumping can be a profit-maximizing strategy:A firm with a higher marginal Protectionism and DumpingA U.S. firm may appeal to the Commerce Department to Protectionism and Dumping (cont.)Next, the International Trade Commission (ITC) determines if injury Protectionism and Dumping (cont.)Most economists believe that the enforcement of dumping claims Multinationals and OutsourcingForeign direct investment refers to investment in which a firm Multinationals and Outsourcing (cont.)Greenfield FDI is when a company builds a new Multinationals and Outsourcing (cont.)Developed countries have been the biggest recipients of inward Fig. 8-9: Inflows of Foreign Direct Investment, 1980-2009 Multinationals and Outsourcing (cont.)Two main types of FDI:Horizontal FDI when the affiliate Multinationals and Outsourcing (cont.)Vertical FDI is mainly driven by production cost differences Multinationals and Outsourcing (cont.)Horizontal FDI is dominated by flows between developed countries.Both Fig. 8-10: Outward Foreign Direct Investment for Top Countries, 2007-2009Source: UNCTAD, World Investment Report, 2010. The Firm’s Decision Regarding Foreign Direct InvestmentProximity-concentration trade-off: High trade costs associated The Firm’s Decision Regarding Foreign Direct Investment (cont.)FDI activity concentrated in sectors The Firm’s Decision Regarding Foreign Direct Investment (cont.)The horizontal FDI decision involves The Firm’s Decision Regarding Foreign Direct Investment (cont.)The vertical FDI decision also The Firm’s Decision Regarding Foreign Direct Investment (cont.)Foreign outsourcing or offshoring occurs The Firm’s Decision Regarding Foreign Direct Investment (cont.)Internalization occurs when it is The Firm’s Decision Regarding Foreign Direct Investment (cont.)Vertical integration involves consolidation of The Firm’s Decision Regarding Foreign Direct Investment (cont.)Foreign direct investment should benefit SummaryInternal economies of scale imply that more production at the firm level Summary (cont.)Monopolistic competition predicts intra-industry trade, and does not predict changes in Summary (cont.)Dumping may be a profitable strategy when a firm faces little Summary (cont.)Multinational corporations undertake foreign direct investment when proximity is more important
Слайды презентации

Слайд 2 Preview
Monopolistic competition and trade
The significance of intra-industry trade
Firm

PreviewMonopolistic competition and tradeThe significance of intra-industry tradeFirm responses to trade:

responses to trade: winners, losers, and industry performance
Dumping
Multinationals and

outsourcing

Слайд 3 Introduction
When economies of scale exist, large firms may

IntroductionWhen economies of scale exist, large firms may be more efficient

be more efficient than small firms, and the industry

may consist of a monopoly or a few large firms.
Production may be imperfectly competitive in the sense that excess or monopoly profits are captured by large firms.
Internal economies of scale result when large firms have a cost advantage over small firms, causing the industry to become uncompetitive.

Слайд 4 Introduction (cont.)
Internal economies of scale imply that a

Introduction (cont.)Internal economies of scale imply that a firm’s average cost

firm’s average cost of production decreases the more output

it produces.
Perfect competition that drives the price of a good down to marginal cost would imply losses for those firms because they would not be able to recover the higher costs incurred from producing the initial units of output.
As a result, perfect competition would force those firms out of the market.

Слайд 5 Introduction (cont.)
In most sectors, goods are differentiated from

Introduction (cont.)In most sectors, goods are differentiated from each other and

each other and there are other differences across firms.
Integration

causes the better-performing firms to thrive and expand, while the worse-performing firms contract.
Additional source of gain from trade: As production is concentrated toward better-performing firms, the overall efficiency of the industry improves.
Study why those better-performing firms have a greater incentive to engage in the global economy.

Слайд 6 The Theory of Imperfect Competition
In imperfect competition, firms

The Theory of Imperfect CompetitionIn imperfect competition, firms are aware that

are aware that they can influence the prices of

their products and that they can sell more only by reducing their price.
This situation occurs when there are only a few major producers of a particular good or when each firm produces a good that is differentiated from that of rival firms.
Each firm views itself as a price setter, choosing the price of its product.

Слайд 7 Monopoly: A Brief Review
A monopoly is an industry

Monopoly: A Brief ReviewA monopoly is an industry with only one

with only one firm.
An oligopoly is an industry

with only a few firms.
In these industries, the marginal revenue generated from selling more products is less than the uniform price charged for each product.
To sell more, a firm must lower the price of all units, not just the additional ones.
The marginal revenue function therefore lies below the demand function (which determines the price that customers are willing to pay).

Слайд 8 Monopoly: A Brief Review
Assume that the demand curve

Monopoly: A Brief ReviewAssume that the demand curve the firm faces

the firm faces is a straight line Q =

A – B(P), where Q is the number of units the firm sells, P the price per unit, and A and B are constants.
Marginal revenue equals MR = P – Q/B.
Suppose that total costs are C = F + c(Q), where F is fixed costs, those independent of the level of output, and c is the constant marginal cost.

Слайд 9 Fig. 8-1: Monopolistic Pricing and Production Decisions

Fig. 8-1: Monopolistic Pricing and Production Decisions

Слайд 10 Monopoly: A Brief Review (cont.)
Average cost is the

Monopoly: A Brief Review (cont.)Average cost is the cost of production

cost of production (C) divided by the total quantity

of production (Q).
AC = C/Q = F/Q + c
Marginal cost is the cost of producing an additional unit of output.
A larger firm is more efficient because average cost decreases as output Q increases: internal economies of scale.

Слайд 11 Fig. 8-2: Average Versus Marginal Cost

Fig. 8-2: Average Versus Marginal Cost

Слайд 12 Monopoly: A Brief Review (cont.)
The profit-maximizing output occurs

Monopoly: A Brief Review (cont.)The profit-maximizing output occurs where marginal revenue

where marginal revenue equals marginal cost.
At the intersection of

the MC and MR curves, the revenue gained from selling an extra unit equals the cost of producing that unit.

The monopolist earns some monopoly profits, as indicated by the shaded box, when P > AC.

Слайд 13 Monopolistic Competition
Monopolistic competition is a simple model of

Monopolistic CompetitionMonopolistic competition is a simple model of an imperfectly competitive

an imperfectly competitive industry that assumes that each firm
can

differentiate its product from the product of competitors, and
takes the prices charged by its rivals as given.

Слайд 14 Monopolistic Competition (cont.)
A firm in a monopolistically competitive

Monopolistic Competition (cont.)A firm in a monopolistically competitive industry is expected

industry is expected to sell
more as total sales in

the industry increase and as prices charged by rivals increase.
less as the number of firms in the industry decreases and as the firm’s price increases.
These concepts are represented by the function:

Слайд 15 Monopolistic Competition (cont.)
Q = S[1/n – b(P –

Monopolistic Competition (cont.)Q = S[1/n – b(P – P)] Q is

P)]
Q is an individual firm’s sales
S is the

total sales of the industry
n is the number of firms in the industry
b is a constant term representing the responsiveness of a firm’s sales to its price
P is the price charged by the firm itself
P is the average price charged by its competitors

Слайд 16 Monopolistic Competition (cont.)
Assume that firms are symmetric: all

Monopolistic Competition (cont.)Assume that firms are symmetric: all firms face the

firms face the same demand function and have the

same cost function.
Thus all firms should charge the same price and have equal share of the market Q = S/n
Average costs should depend on the size of the market and the number of firms:
AC = C/Q = F/Q + c = n F/S + c

Слайд 17 Monopolistic Competition (cont.)
AC = n(F/S) + c
As the

Monopolistic Competition (cont.)AC = n(F/S) + cAs the number of firms

number of firms n in the industry increases, the

average cost increases for each firm because each produces less.
As total sales S of the industry increase, the average cost decreases for each firm because each produces more.

Слайд 18 Fig. 8-3: Equilibrium in a Monopolistically Competitive Market

Fig. 8-3: Equilibrium in a Monopolistically Competitive Market

Слайд 19 Monopolistic Competition (cont.)
If monopolistic firms face linear demand

Monopolistic Competition (cont.)If monopolistic firms face linear demand functions, Q =

functions, Q = A – B(P),
where A and

B are constants.
When firms maximize profits, they should produce until marginal revenue equals marginal cost:
MR = P – Q/B = c
As the number of firms n in the industry increases, the price that each firm charges decreases because of increased competition.

Слайд 20 Monopolistic Competition (cont.)
At some number of firms, the

Monopolistic Competition (cont.)At some number of firms, the price that firms

price that firms charge (which decreases in n) matches

the average cost that firms pay (which increases in n).
At this long-run equilibrium number of firms in the industry, firms have no incentive to enter or exit the industry.

Слайд 21 Monopolistic Competition (cont.)
If the number of firms is

Monopolistic Competition (cont.)If the number of firms is greater than or

greater than or less than the equilibrium number, then

firms have an incentive to exit or enter the industry.
Firms have an incentive to exit the industry when price < average cost.
Firms have an incentive to enter the industry when price > average cost.


Слайд 22 Monopolistic Competition and Trade
Because trade increases market size,

Monopolistic Competition and TradeBecause trade increases market size, trade is predicted

trade is predicted to decrease average cost in an

industry described by monopolistic competition.
Industry sales increase with trade leading to decreased average costs: AC = n(F/S) + c
Because trade increases the variety of goods that consumers can buy under monopolistic competition, it increases the welfare of consumers.
And because average costs decrease, consumers can also benefit from a decreased price.

Слайд 23 Fig. 8-4: Effects of a Larger Market

Fig. 8-4: Effects of a Larger Market

Слайд 24 Monopolistic Competition and Trade (cont.)
As a result of

Monopolistic Competition and Trade (cont.)As a result of trade, the number

trade, the number of firms in a new international

industry is predicted to increase relative to each national market.
But it is unclear if firms will locate in the domestic country or foreign countries.
Integrating markets through international trade therefore has the same effects as growth of a market within a single country.

Слайд 25 Fig. 8-5: Equilibrium in the Automobile Market

Fig. 8-5: Equilibrium in the Automobile Market

Слайд 26 Fig. 8-5: Equilibrium in the Automobile Market (cont.)

Fig. 8-5: Equilibrium in the Automobile Market (cont.)

Слайд 27 Table 8-1: Hypothetical Example of Gains from Market

Table 8-1: Hypothetical Example of Gains from Market Integration

Integration


Слайд 28 Monopolistic Competition and Trade (cont.)
Product differentiation and internal

Monopolistic Competition and Trade (cont.)Product differentiation and internal economies of scale

economies of scale lead to trade between similar countries

with no comparative advantage differences between them.
This is a very different kind of trade than the one based on comparative advantage, where each country exports its comparative advantage good.

Слайд 29 The Significance of Intra-industry Trade
Intra-industry trade refers to

The Significance of Intra-industry TradeIntra-industry trade refers to two-way exchanges of

two-way exchanges of similar goods.
Two new channels for welfare

benefits from trade:
Benefit from a greater variety at a lower price.
Firms consolidate their production and take advantage of economies of scale.
A smaller country stands to gain more from integration than a larger country.

Слайд 30 The Significance of Intra-industry Trade (cont.)
About 25–50% of

The Significance of Intra-industry Trade (cont.)About 25–50% of world trade is

world trade is intra-industry.
Most prominent is the trade of

manufactured goods among advanced industrial nations, which accounts for the majority of world trade.
For the United States, industries that have the most intra-industry trade—such as pharmaceuticals, chemicals, and specialized machinery—require relatively larger amounts of skilled labor, technology, and physical capital.

Слайд 31 Table 8-2: Indexes of Intra-Industry Trade for U.S.

Table 8-2: Indexes of Intra-Industry Trade for U.S. Industries, 2009

Industries, 2009


Слайд 32 Firm Responses to Trade
Increased competition tends to hurt

Firm Responses to TradeIncreased competition tends to hurt the worst-performing firms

the worst-performing firms — they are forced to exit.


The best-performing firms take the greatest advantage of new sales opportunities and expand the most.
When the better-performing firms expand and the worse-performing ones contract or exit, overall industry performance improves.
Trade and economic integration improve industry performance as much as the discovery of a better technology does.

Слайд 33 Fig. 8-6: Performance Differences Across Firms

Fig. 8-6: Performance Differences Across Firms

Слайд 34 Trade Costs and Export Decisions
Most U.S. firms do

Trade Costs and Export DecisionsMost U.S. firms do not report any

not report any exporting activity at all — sell

only to U.S. customers.
In 2002, only 18% of U.S. manufacturing firms reported any sales abroad.
Even in industries that export much of what they produce, such as chemicals, machinery, electronics, and transportation, fewer than 40 percent of firms export.
A major reason why trade costs reduce trade so much is that they drastically reduce the number of firms selling to customers across the border.
Trade costs also reduce the volume of export sales of firms selling abroad.

Слайд 35 Fig. 8-7: Winners and Losers from Economic Integration

Fig. 8-7: Winners and Losers from Economic Integration

Слайд 36 Trade Costs and Export Decisions (cont.)
Trade costs added

Trade Costs and Export Decisions (cont.)Trade costs added two important predictions

two important predictions to our model of monopolistic competition

and trade:
Why only a subset of firms export, and why exporters are relatively larger and more productive (lower marginal costs).
Overwhelming empirical support for this prediction that exporting firms are bigger and more productive than firms in the same industry that do not export.
In the United States, in a typical manufacturing industry, an exporting firm is on average more than twice as large as a firm that does not export.
Differences between exporters and nonexporters are even larger in many European countries.

Слайд 37 Table 8-3: Proportion of U.S. Firms Reporting Export

Table 8-3: Proportion of U.S. Firms Reporting Export Sales by Industry, 2002

Sales by Industry, 2002


Слайд 38 Fig: 8-8: Export Decisions with Trade Costs

Fig: 8-8: Export Decisions with Trade Costs

Слайд 39 Dumping
Dumping is the practice of charging a lower

DumpingDumping is the practice of charging a lower price for exported

price for exported goods than for goods sold

domestically.
Dumping is an example of price discrimination: the practice of charging different customers different prices.
Price discrimination and dumping may occur only if
imperfect competition exists: firms are able to influence market prices.
markets are segmented so that goods are not easily bought in one market and resold in another.

Слайд 40 Dumping (cont.)
Dumping can be a profit-maximizing strategy:
A firm

Dumping (cont.)Dumping can be a profit-maximizing strategy:A firm with a higher

with a higher marginal cost chooses to set a

lower markup over marginal cost.
Therefore, an exporting firm will respond to the trade cost by lowering its markup for the export market.
This strategy is considered to be dumping, regarded by most countries as an “unfair” trade practice.

Слайд 41 Protectionism and Dumping
A U.S. firm may appeal to

Protectionism and DumpingA U.S. firm may appeal to the Commerce Department

the Commerce Department to investigate if dumping by foreign

firms has injured the U.S. firm.
The Commerce Department may impose an “anti-dumping duty” (tax) to protect the U.S. firm.
Tax equals the difference between the actual and “fair” price of imports, where “fair” means “price the product is normally sold at in the manufacturer's domestic market.”

Слайд 42 Protectionism and Dumping (cont.)
Next, the International Trade Commission

Protectionism and Dumping (cont.)Next, the International Trade Commission (ITC) determines if

(ITC) determines if injury to the U.S. firm has

occurred or is likely to occur.
If the ITC determines that injury has occurred or is likely to occur, the anti-dumping duty remains in place.
http://www.usitc.gov/trade_remedy/731_ad_ 701_cvd/index.htm


Слайд 43 Protectionism and Dumping (cont.)
Most economists believe that the

Protectionism and Dumping (cont.)Most economists believe that the enforcement of dumping

enforcement of dumping claims is misguided.
Trade costs have a

natural tendency to induce firms to lower their markups in export markets.
Such enforcement may be used excessively as an excuse for protectionism.


Слайд 44 Multinationals and Outsourcing
Foreign direct investment refers to investment

Multinationals and OutsourcingForeign direct investment refers to investment in which a

in which a firm in one country directly controls

or owns a subsidiary in another country.
If a foreign company invests in at least 10% of the stock in a subsidiary, the two firms are typically classified as a multinational corporation.
10% or more of ownership in stock is deemed to be sufficient for direct control of business operations.

Слайд 45 Multinationals and Outsourcing (cont.)
Greenfield FDI is when a

Multinationals and Outsourcing (cont.)Greenfield FDI is when a company builds a

company builds a new production facility abroad.
Brownfield FDI (or

cross-border mergers and acquisitions) is when a domestic firm buys a controlling stake in a foreign firm.
Greenfield FDI has tended to be more stable, while cross-border mergers and acquisitions tend to occur in surges.

Слайд 46 Multinationals and Outsourcing (cont.)
Developed countries have been the

Multinationals and Outsourcing (cont.)Developed countries have been the biggest recipients of

biggest recipients of inward FDI.
much more volatile than FDI

going to developing and transition economies.
Steady expansion in the share of FDI flowing to developing and transition countries.
Accounted for half of worldwide FDI flows in 2009.
Sales of FDI affiliates are often used as a measure of multinational activity.

Слайд 47 Fig. 8-9: Inflows of Foreign Direct Investment, 1980-2009

Fig. 8-9: Inflows of Foreign Direct Investment, 1980-2009

Слайд 48 Multinationals and Outsourcing (cont.)
Two main types of FDI:
Horizontal

Multinationals and Outsourcing (cont.)Two main types of FDI:Horizontal FDI when the

FDI when the affiliate replicates the production process (that

the parent firm undertakes in its domestic facilities) elsewhere in the world.
Vertical FDI when the production chain is broken up, and parts of the production processes are transferred to the affiliate location.

Слайд 49 Multinationals and Outsourcing (cont.)
Vertical FDI is mainly driven

Multinationals and Outsourcing (cont.)Vertical FDI is mainly driven by production cost

by production cost differences between countries (for those parts

of the production process that can be performed in another location).
Vertical FDI is growing fast and is behind the large increase in FDI inflows to developing countries.

Слайд 50 Multinationals and Outsourcing (cont.)
Horizontal FDI is dominated by

Multinationals and Outsourcing (cont.)Horizontal FDI is dominated by flows between developed

flows between developed countries.
Both the multinational parent and the

affiliates are usually located in developed countries.
The main reason for this type of FDI is to locate production near a firm’s large customer bases.
Hence, trade and transport costs play a much more important role than production cost differences for these FDI decisions.

Слайд 51 Fig. 8-10: Outward Foreign Direct Investment for Top

Fig. 8-10: Outward Foreign Direct Investment for Top Countries, 2007-2009Source: UNCTAD, World Investment Report, 2010.

Countries, 2007-2009
Source: UNCTAD, World Investment Report, 2010.


Слайд 52 The Firm’s Decision Regarding Foreign Direct Investment
Proximity-concentration trade-off:

The Firm’s Decision Regarding Foreign Direct InvestmentProximity-concentration trade-off: High trade costs


High trade costs associated with exporting create an incentive

to locate production near customers.
Increasing returns to scale in production create an incentive to concentrate production in fewer locations.

Слайд 53 The Firm’s Decision Regarding Foreign Direct Investment (cont.)
FDI

The Firm’s Decision Regarding Foreign Direct Investment (cont.)FDI activity concentrated in

activity concentrated in sectors with high trade costs.
When increasing

returns to scale are important and average plant sizes are large, we observe higher export volumes relative to FDI.
Multinationals tend to be much larger and more productive than other firms (even exporters) in the same country.

Слайд 54 The Firm’s Decision Regarding Foreign Direct Investment (cont.)
The

The Firm’s Decision Regarding Foreign Direct Investment (cont.)The horizontal FDI decision

horizontal FDI decision involves a trade-off between the per-unit

export cost t and the fixed cost F of setting up an additional production facility.
If t(Q) > F, costs more to pay trade costs t on Q units sold abroad than to pay fixed cost F to build a plant abroad.
When foreign sales large Q > F/t, exporting is more expensive and FDI is the profit-maximizing choice.
Low costs make more apt to choose FDI due to larger sales.

Слайд 55 The Firm’s Decision Regarding Foreign Direct Investment (cont.)
The

The Firm’s Decision Regarding Foreign Direct Investment (cont.)The vertical FDI decision

vertical FDI decision also involves a trade-off between cost

savings and the fixed cost F of setting up an additional production facility.
Cost savings related to comparative advantage make some stages of production cheaper in other countries.

Слайд 56 The Firm’s Decision Regarding Foreign Direct Investment (cont.)
Foreign

The Firm’s Decision Regarding Foreign Direct Investment (cont.)Foreign outsourcing or offshoring

outsourcing or offshoring occurs when a firm contracts with

an independent firm to produce in the foreign location.
In addition to deciding the location of where to produce, firms also face an internalization decision: whether to keep production done by one firm or by separate firms.

Слайд 57 The Firm’s Decision Regarding Foreign Direct Investment (cont.)
Internalization

The Firm’s Decision Regarding Foreign Direct Investment (cont.)Internalization occurs when it

occurs when it is more profitable to conduct transactions

and production within a single organization. Reasons for this include:
Technology transfers: transfer of knowledge or another form of technology may be easier within a single organization than through a market transaction between separate organizations.
Patent or property rights may be weak or nonexistent.
Knowledge may not be easily packaged and sold.

Слайд 58 The Firm’s Decision Regarding Foreign Direct Investment (cont.)
Vertical

The Firm’s Decision Regarding Foreign Direct Investment (cont.)Vertical integration involves consolidation

integration involves consolidation of different stages of a production

process.
Consolidating an input within the firm using it can avoid holdup problems and hassles in writing complete contracts.
But an independent supplier could benefit from economies of scale if it performs the process for many parent firms.

Слайд 59 The Firm’s Decision Regarding Foreign Direct Investment (cont.)
Foreign

The Firm’s Decision Regarding Foreign Direct Investment (cont.)Foreign direct investment should

direct investment should benefit the countries involved for reasons

similar to why international trade generates gains.
Multinationals and firms that outsource take advantage of cost differentials that favor moving production (or parts thereof) to particular locations.
FDI is very similar to the relocation of production that occurred across sectors when opening to trade.
There are similar welfare consequences for the case of multinationals and outsourcing: Relocating production to take advantage of cost differences leads to overall gains from trade.

Слайд 60 Summary
Internal economies of scale imply that more production

SummaryInternal economies of scale imply that more production at the firm

at the firm level causes average costs to fall.
With

monopolistic competition, each firm can raise prices somewhat above those on competing products due to product differentiation but must compete with other firms whose prices are believed to be unaffected by each firm’s actions.
Monopolistic competition allows for gains from trade through lower costs and prices, as well as through wider consumer choice.

Слайд 61 Summary (cont.)
Monopolistic competition predicts intra-industry trade, and does

Summary (cont.)Monopolistic competition predicts intra-industry trade, and does not predict changes

not predict changes in income distribution within a country.
Location

of firms under monopolistic competition is unpredictable, but countries with similar relative factors are predicted to engage in intra-industry trade.

Слайд 62 Summary (cont.)
Dumping may be a profitable strategy when

Summary (cont.)Dumping may be a profitable strategy when a firm faces

a firm faces little competition in its domestic market

and faces heavy competition in foreign markets.
Multinationals are typically larger and more productive than exporters, which in turn are larger and more efficient than firms that sell only to the domestic market.

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