Several theories of direct investment highlight firm-- specific and/or home-country-specific advantages that enable a multinational corporation (MNC) to compete against host-country firms that typically are more familiar with the local business environment and do not have high costs associated with operating a project or subsidiary at a distance from the parent. Consider a perfectly competitive market, in which both MNCs and local firms are price takers.
a. Draw a diagram showing the cost structure of a price taker and a market price well above minimum average cost. Given that any firm is a price taker, how can a firm capture any economic rent (profits in excess of the opportunity cost of capital)? Show the requirements in the diagram, and indicate what the amount of economic rent would be.
b. With specific reference to a perfectly competitive market, what are some examples of firm-specific or country-specific advantages that MNCs my have which overcompensate for their lack of familiarity with local markets and the additional costs of distance they must incur? In other words, what explains the ability of multinationals to capture economic rent even if the MNC is a price taker?
The response address the queries posted in 706 words with references.
//The given discussion paper is based on the concept of 'Perfect Competition'. In this series, in the first section of the discussion, the detailed analysis of the perfect market competition is given. In addition to this, the cost structure of price taker in Short Run and Long Run are also given in the same discussion content.//
Several theories of direct investment highlight firm-specific or home-country-specific advantages that enable a MNC to compete against host country firms that typically are more familiar with the local business environment, can be explained by concept of perfect competition market:
Perfect competition is a market form in which no firm or buyer has the market power to influence prices. The study of perfectly competitive market provides the base of the theory of supply and demand (Economics for Manager, 2003).
Cost Structure of price taker in Short run:
Abnormal profit is possible for an individual firm in the short run. This condition is shown in this graph and the average revenue denoted by P is exceeding the average cost denoted by C (Perfect competition-the economics of competitive markets, 2008).
(Source: Perfect competition-the economics ...
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