International Factor Movements - Multinational Enterprises

Multinational Enterprises

Multinational enterprises (MNEs) manage production or deliver services in more than one country. According to the United Nations Conference on Trade and Development's World Investment Report from 2007, as of 2005 there were over 77,000 parent company MNEs and 770,000 foreign affiliates. From an international economics viewpoint, there are two central questions about why MNEs exist. The first question is why goods and services are produced in multiple countries, instead of a single country. The second central question regarding MNEs is why certain firms decide to produce multiple products—why they internalize other areas of production. The first question can be answered rather simply. Different countries have different resources that companies may need for production. Also, transport costs and barriers to trade often mean the MNEs are necessary to access a particular market. The short answer to the second question it that firms internalize because it is more profitable for them to do so, but the exact reasons behind why it is more profitable to internalize are a more difficult issue. One possible reason for internalization is to insulate MNEs from opportunistic business partners through vertical integration. Technology transfer (here defined as any kind of useful economic knowledge) is also posited as a reason for internalization. A detailed discussion of these issues, however, is outside the scope of this article.