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Chapter 9: Problem 8

Is the theory of multinational enterprise essentially consistent or inconsistent with the traditional model of comparative advantage?

Short Answer

Expert verified
The theory of multinational enterprise is not essentially consistent with the traditional model of comparative advantage as they approach from different angles, but neither is it entirely inconsistent. Both theories recognize the benefits of international interaction, but apply to different levels of the economy - micro and macro.

Step by step solution

01

Understand the Theory of Multinational Enterprise

The theory of multinational enterprise posits that companies spread across national boundaries not merely for simple market access, but also in order to gain specific competitive advantages related to economies of scale, owing to operating in multiple countries, and internalizing cross-border markets. They establish subsidiaries in other countries to exploit the assets that are proprietary to the firm.
02

Understand the Model of Comparative Advantage

The traditional model of comparative advantage suggests that every country should specialize in the production of goods and services that it can produce more efficiently than others. By doing so, it can trade for goods that it produces less efficiently, resulting in more economic efficiency and higher global output.
03

Consider the Consistency

Assess whether the theory of multinational enterprises aligns or contradicts with the traditional model of comparative advantage. While both theories advocate for trade and argue that these can increase efficiency, they approach from different angles. The theory of multinational enterprises does not necessarily align with the traditional model of comparative advantage because it focuses more on firm-specific advantages, while comparative advantage emphasizes on country-specific efficiency. However, it does not entirely contradict it, as both theories recognize the benefit of engaging in foreign markets to optimize output and efficiency.

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Most popular questions from this chapter

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