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In today's society Multinational enterprises play an important part in World Trade.

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Introduction

In today's society Multinational enterprises play an important part in World Trade. (Hirst, Thompson, 1999, p.68/9) says there are around 45,000 parent companies, with around 280,000 affiliates (World Investment Report 1997). Outward Foreign Direct Investment stocks stand at about $3.2 trillion along with $7 trillion Domestic and Foreign Sales and Arm length trade is $5.2 trillion. This is a massive amount of investment and in the USA 80% of trade is made by Multinational Enterprises, half of which is between Multinationals i.e. Intra Multinational. 100 largest multinationals have 20% of the total global foreign assets accounting for $2 trillion. The production of Multinational affiliates is phenomenal accounting for 5.4% of GDP in developed economies and stands even higher in developing economies at 9.1% of GDP. Inward flows of FDI in gross domestic fixed capital formation was equal to 4.4% of developed economies and 8.2% of developing economies. These statistics help us to understand just how powerful a hold Multinationals can have on economies, particularly developing economies. Throughout history economists have came up with theories, which attempt to explain the reasoning behind Multinational Enterprises. Within this piece of work we shall consider many of these theories and how they relate to Multinational Enterprises and evaluate these theories. ...read more.

Middle

Comparative Advantage also assumes full employment exists, which in reality does not exist. There is also no explanation of how different costs exist in relation to comparative costs. About 100 years later Heckscher-Ohlin came up with a potential solution to the problem of different costs etc. Heckscher-Ohlin's Theory assumes there are more than one factor of production such as land, labour and capital. It also takes into consideration that different goods need various shares of the different factors of production i.e. some goods are more labour, land or capital intensive. Also that different firms/countries contain varying amounts of the factors of production and as a result can create varying relevant factor prices. According to (Piggott, Cook, 1999, p.55) "This leads to the basic Heckscher-Ohlin conclusion - that countries should specialise in the goods which use intensively the factor of production which they have in abundance." Such an example would be if a country which was particularly abundant in labour then they would specialise in producing labour intensive goods e.g. Turkey, India, Taiwan and Korea producing labour intensive goods such as textiles and the same would be applied in reference to capital intensive and land intensive goods. ...read more.

Conclusion

In relation to Vernon's theory, it is not seen as being so relevant in the case of Multinational Enterprises who in fact cater for the global market whilst maintaining their base or headquarters in one particular country, as this goes against the basis of the theory. It is however still relevant for the inventive and innovative enterprises and as such still has much relevance today and of course relaxes the classic assumption of returning to scale. Whilst there are still other theories to consider such as Linder, Dunning, Hennart, Kojima, Hymer etc. They all have basically worked towards the incremental process in creating Multinational companies and the understanding that World Trade can indeed be fairer than in the Mercantilists original theory. All of the theories help us to gain an understanding of the pattern of trade. All of the theories however seem to assume that Free trade is the normal and acceptable economy to them, when history has taught us, this is not in fact the case. You only have to consider the stability, which existed in the East German economy until the walls came down. So there is of course still the need for the incremental process to uncover new theories to combat such problems. ...read more.

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