2 - The MNE and Models of International Economic Activity

Summary

In Chapter 1, we presented a microeconomic view of the multinational enterprise (MNE) based on the theory of economic organization. Yet foreign direct investment was traditionally a concern of international economics, a branch disposed to use general-equilibrium tools for explaining economy-wide or worldwide phenomena: nations' patterns of commodity trade, the allocation of their endowments of factors of production, and the functional distribution of income. Does international economics offer a distinctive and sufficient explanation of MNEs to place against the organizational explanation from Chapter 1? If so, which has the more explanatory power? If not, how can organizational models of the MNE be consistently embedded within models of international production and exchange?

Foreign Direct Investment and International Capital Flows

The key junction between international economics and the MNE is the export of equity capital that occurs when a company starts a foreign subsidiary. International flows of capital are a central concern of international economists, who long explained the MNE as simply an arbitrager of equity capital from countries where its return is low to countries where it is high. If the differing rates of return to capital that induce these movements correspond to differences in the social marginal productivity of capital, then the MNE's activity also raises the world's real income.

This approach ties the MNE to a considerable body of general-equilibrium theory about the interrelationships of international trade, international movements of factors of production, and the distribution of income (see Section 2.3).