Essay: Moffett, M.H., Stonehill

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[. . .] For their product they can then advance their phones technologically while country B. is able to make their phones even more accident proof. The issue with absolute advantage is that there is no other product to compare it to while only producing and selling the product at home. Therefore, there will be no advancements on such product which will decline in sales. The host civilization will then seek other countries products that fit their needs. Although cost efficient, absolute advantage has many disadvantages that comparative advantage may avoid.

4. Based on the reading assignment (and in your own words), why are MNEs better able to exploit global opportunities (versus purely domestic competitors)?

Global financial management will inherit risks that pure domestic competitors alone will not generally face. MNE's are specifically trained for these risks and will be facing much more as business moves forward, i.e. political risks. Although many of the complications that MNE's face are also extensions to those that a domestic competitor faces. Domestic finance theory will approach many issues and economical businesses with a strategy that accommodates foreign complexities (Moffett, 2012,-page 12). The responsibility of a domestic competitor is to try to only fix the issue to the extent that the habitat and its civilization will agree upon.

MNEs are faced with the reality that they will have to make a structure that is stable enough for each corporation to follow and change where need be. Therefore to exploit any global opportunity an MNE would be better suited as they are faced with many more obstacles to establish peace within the business while domestic competitors are only touching base at their host environment. MNEs are faced with a variety of foreign practices therefore an MNE will change their way of business to fit each country while domestic competitors have no experience in the matter and will attempt business as their culture views it to be.

When global opportunities are available, businesses will seek out those who are sensitive to the environment they are intending to do business with, rather than those whose beliefs may insult that country's faith. Although domestic competitors face issues and risks that are similar to those an MNE faces, they are generally handled in the manner that is believed to be right in their region rather than that of the host country.

5. What are the assumptions of the Theory of Comparative Advantage? Provide two of your own examples where these assumptions are weak or invalid, refuting the theory.

The first assumption to comparative advantage is the statement that trade is sustainable. Trade between countries is typically thought of as the buying and selling specific products and services. For example, the current American debt is unlikely consistent with sustainable trade. For America to receive the goods necessary, we must either sell our assets or assume a debt. We chose to assume a debt that will progress on day after day. Although the solution to prevent debt would to be tax our imports, that in turn would dissert the idea of free trade amongst the people. For trade to be sustained there would have to be equal import share as there are exports. Which means for America to prevent debt, we would have to supply the product we intend to trade for the product we receive. Therefore, this assumption to the theory of comparative advantage is irrelevant to this particular situation.

Another assumption of comparative advantage is there are no externalities. If prices are wrong due to negative externalities then a product will be imported to rapidly and exported entirely too much. For example, if a product is cheap it is assumed that product will sell more than that of another similar product that is more expensive. Therefore a company may order much more of the less reliable cheaper product when their consumers really intend on buying a product that they can rely on whether it be more expensive or not. I.e. The Samsung galaxy 2 although more cost efficient would not be a customer's pick due to the Samsung galaxy 3's advancement in technology. Therefore, the negative externalities affected the company's decision to order a product that is more cost effective rather than order a product that is consumer convenient and preferred. Comparative advantage's assumption of no externalities is also invalid due to this certain situation.

References

Moffett, M.H., Stonehill A.I., & Eitemen, D.K. (2012). Fundamentals of multinational finance (4th Ed.). Boston, MA: Prentice… [END OF PREVIEW]

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