1. The Multinational Enterprise (MNE)
A multinational enterprise (MNE) is defined as one that has operating subsidiaries, branches or affiliates located in foreign countries.
The ownership of some MNEs is so dispersed internationally that they are known as transnational corporations.
The transnationals are usually managed from a global perspective rather than from the perspective of any single country.

2. Multinational Business Finance
While multinational business finance emphasizes MNEs, purely domestic firms also often have significant international activities:
Import & export of products, components and services
Licensing of foreign firms to conduct their foreign business
Exposure to foreign competition in the domestic market
Indirect exposure to international risks through relationships with customers and suppliers

3. Globalization and Creating Value in the Multinational Enterprise
Global business, like any business, is the social science of managing people to organize, maintain and grow the collective productivity toward accomplishing productive goals, typically to generate profit and value for its owners and stakeholders.
Reaching that goal requires combining three critical elements:
An open marketplace
High quality strategic management
Access to capital

4. Exhibit 1.1 Creating Firm Value in Global Markets

5. The Theory of Comparative Advantage
The theory of comparative advantage provides a basis for explaining and justifying international trade in a model world assumed to enjoy:
free trade;
perfect competition;
no uncertainty;
costless information, and
no government interference.

6. The 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

7. The 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, albeit perhaps unequally

8. The 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

9. The 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

10. The 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 nations comparative advantage is still created from the mixture of its own labor skills, access to capital, and technology.

11. The Theory of Comparative Advantage
Many locations for supply chain outsourcing exist today (see the following exhibit).
It takes a relative advantage in costs, not just an absolute advantage, to create comparative advantage.
Clearly, the extent of global outsourcing is reaching out to every corner of the globe.

12. Exhibit 1.2 Global Outsourcing of Comparative Advantage

13. Market Imperfections: A Rationale for the Existence of the Multinational Firm
MNEs strive to take advantage of imperfections in national markets for products, factors of production, and financial assets.
Imperfections in the market for products translate into market opportunities for MNEs.
Large international firms are better able to exploit such competitive factors as economies of scale, managerial and technological expertise, product differentiation, and financial strength than are their local competitors.

14. Market Imperfections: A Rationale for the Existence of the Multinational Firm
Strategic motives drive the decision to invest abroad and become a MNE and can be summarized under the following categories:
Market seekers
Raw material seekers
Production efficiency seekers
Knowledge seekers
Political safety seekers
These categories are not mutually exclusive.

15. Sustaining and Transferring Competitive Advantage
In industries characterized by worldwide oligopolistic competition, each of the above strategic motives should be subdivided into proactive and defensive investments.
Proactive investments are designed to enhance the growth and profitability of the firm itself.
Defensive investments are designed to deny growth and profitability to the firm’s competitors.

16. Exhibit 1.3 What Is Different about International Financial Management?