Lec 10: firms and their environment (ch23)

Terms in this set (16)

One theoretical explanation of MNC development is the product life cycle hypothesis. In this theory, a business will shift production around the world seeking to reduce costs and extend a given product's life. The phases of a product's life will be conducted in different countries. As the product nears maturity and competition grows, reducing costs to maintain competitiveness will force businesses to locate product in low-cost markets, such as developing economies

A more modern approach to explaining international production and MNC development is provided by the eclectic(折衷的) paradigm. According to this approach, firms have certain ownership-specific advantages (core competencies), such as managerial skills, product differentiation and technological advantages, which they can use in the most appropriate locations. They internalise their ownership-specific advantages and engage in FDI because the costs and risks are lower than licensing an overseas firm or using an import agent (i.e. engaging in an external market transaction)

Although becoming an MNC is largely advantageous to the business, it can experience problems with language barriers, selling and marketing in foreign markets, attitudes of the host state and the communication and coordination of global business activities

MNC bring developing countries with investment, which is crucial to economic growth. They also provide the host state with foreign exchange, which might be crucial in helping purchase vital imports.


MNC might prove to be disadvantageous to developing economies if they drive domestic producers out of business, source production completely from other countries, repatriate(遣返) profits, practise transfer pricing to avoid tax, force host states to offer favourable tax deals or subsidies for further expansion, and guard technology to prevent its transfer to domestic producers.
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