CHAP. VI. of Advanced International Relations

CHAP VI INTERNATIONAL TRADE AND MULTINATIONAL CORPORATIONS

VI.0 INTERNATIONAL TRADE

Is the exchange of capital, goods, and services across international borders or territories. In most countries, such trade represents a significant share of gross domestic product (GDP). While international trade has been present throughout much of history (see Silk Road, Amber Road), it’s economic, social, and political importance has been on the rise in recent centuries.

VI.0.1 Microeconomics in International Trade and Corporate firm

VI.0.1.1 Markets in International Trade and Corporate firm

Microeconomics examines how entities, forming a market structure, interact within a market to create a market system. These entities include private and public players with various classifications, typically operating under scarcity of trad-able units and government regulation. The item traded may be a tangible product such as apples or a service such as repair services, legal counsel, or entertainment.

Firms under imperfect competition have the potential to be "price makers", which means that, by holding a disproportionately high share of market power, they can influence the prices of their products.

VI.0.1.2 Production, cost, and efficiency in International Trade and Corporate firm

In microeconomics, production is the conversion of inputs into outputs. It is an economic process that uses inputs to create a commodity or a service for exchange or direct use. Production is a flow and thus a rate of output per period of time.

Opportunity cost refers to the economic cost of production: the value of the next best opportunity foregone. Choices must be made between desirable yet mutually exclusive actions. It has been described as expressing "the basic relationship between scarcity and choice."

 The opportunity cost of an activity is an element in ensuring that scarce resources are used efficiently, such that the cost is weighed against the value of that activity in deciding on more or less of it. Opportunity costs are not restricted to monetary or financial costs but could be measured by the real cost of output forgone, leisure, or anything else that provides the alternative benefit (utility).

VI.0.1.3 Supply and demand in International Trade and Corporate firm

The supply and demand model describes how prices vary as a result of a balance between product availability and demand. The graph depicts an increase (that is, right-shift) in demand from D₁ to D₂ along with the consequent increase in price and quantity required to reach a new equilibrium point on the supply curve (S).

  Prices and quantities have been described as the most directly observable attributes of goods produced and exchanged in a market economy. The theory of supply and demand is an organizing principle for explaining how prices coordinate the amounts produced and consumed. In microeconomics, it applies to price and output determination for a market with perfect competition, which includes the condition of no buyers or sellers large enough to have price-setting power.

The law of demand states that, in general, price and quantity demanded in a given market are inversely related. That is, the higher the price of a product, the less of it people would be prepared to buy of it (other things unchanged). As the price of a commodity falls, consumers move toward it from relatively more expensive goods (the substitution effect). In addition, purchasing power from the price decline increases ability to buy (the income effect). Other factors can change demand; for example an increase in income will shift the demand curve for a normal good outward relative to the origin, as in the figure. All determinants are predominantly taken as constant factors of demand and supply.

VI.I Market Structures in International Trade and Corporate firm

For defining market structure we first need to understand what market is? Market is a place where buyers and sellers meet and exchange goods or services. And now if we extend this concept a little more, there are certain conditions which create the structure of a market. Such conditions can be condensed in the following

• Number of Buyers
• Number of sellers
• Buyer Entry Barriers
• Seller Entry Barriers
• Size of the firm
• Product Differentiation/ Homogeneous Product
• Market Share
• Competition

The above factors are the quick reference if you need to judge the market structure and under which one particular firm belongs to.

VI.2.1 Classification of Market Structure

As there are lot many factors deciding on the market structure, there are lot many variations as well determining the particular market structure in the economy. If we try to explore that individually it might not crystallize our concept.

Market Structure	Seller Entry Barriers	Seller Number	Buyer Entry Barriers	Buyer Number
Perfect Competition	No	Many	No	Many
Monopolistic competition	No	Many	No	Many
Oligopoly	Yes	Few	No	Many
Oligopsony	No	Many	Yes	Few
Monopoly	Yes	One	No	Many
Monopsony	No	Many	Yes	One

From the above chart now it’s clear that how the market structure can be defined by the various factors and their way of exercising certain power over the market. However if we consider the gradual increase of competition from least to maximum, we will come up to the following conclusions: 

Monopoly; Oligopoly; Monopolistic Competition and Perfect Competition

Now let’s look at some of the examples of all the market structure mentioned above so that the concept can dig into your mind and facilitate in your application of market structure

• Monopoly: Companies which are state owned and entry for other players are not allowed. If we take example from Indian perspective there is one example we can think of is Indian railway which is the monopoly as there is no other contributor exercising in the same market.
• Oligopoly: In US and other countries people buy their automobiles from different companies. Here the buyers are many, sellers are few, and competition is high.
• Monopolistic Competition: Let’s take a common example. Look around your locality. There are some good numbers of restaurants serving their customers. Though they might be producing same kind of recipes, the branding would be different. And that’s the catch of monopolistic competition. Many buyers, many sellers, almost same product but different branding and fierce competition.
• Perfect Competition: Though in concept perfect competition exists, however in real life only near perfect competition can exist. And the staple food and vegetables we buy from the market is perfect competition. However when they start branding they move toward oligopoly.
• In case of Monopsony and Oligopsony there are almost no practical examples though they are just the opposite of monopoly and oligopoly respectively (buyers rule).

IV.3 Macroeconomics

Macroeconomics examines the economy as a whole to explain broad aggregates and their interactions "top down", that is, using a simplified form of general-equilibrium theory. Such aggregates include national income and output, the unemployment rate, and price inflation and sub aggregates like total consumption and investment spending and their components. It also studies effects of monetary policy and fiscal policy.

Since at least the 1960s, macroeconomics has been characterized by further integration as to micro-based modeling of sectors, including rationality of players, efficient use of market information, and imperfect competition. This has addressed a long-standing concern about inconsistent developments of the same subject.

Macroeconomic analysis also considers factors affecting the long-term level and growth of national income. Such factors include capital accumulation, technological change and labour force growth.

Gross Domestic product means the total value of goods produced and services provided in a country in a year. GDP is customarily reported on annual basis.

Using the Expenditures Approach

Expenditures

Transfer Payments	$54
Interest Income	$150
Depreciation	$36
Wages	$67
Gross Private Investment (I)	$124
Business Profits	$200
Indirect Business Taxes	$74
Rental Income	$75
Net Exports (X-M)	$18
Net Foreign Factor Income	$12
Government Purchases (G)	$156
Household Consumption (C)	$304

By using the data in Table 1 we can calculate the GDP using the expenditures approach. As you can see, the table contains more data than is necessary so you have to look for the parts which make up the expenditures approach to calculating GDP.  The necessary data is highlighted within the table. Remember:

GDP = C + G + I + (X - M)

In this case the C is represented by Household Consumption which is $304.
The G refers to Government Spending which is $156.
 I is gross private investment and is $124.
 (X - M) is the net exports and in the table is shown to be $18.

Therefore: 

GDP = $304 + $156 + $124 + $18

GDP = $602 

GDP = compensation of employees + gross operating surplus + gross mixed income + taxes less subsidies on production and imports

GDP = COE + GOS + GMI + T_{P & M} – S_{P & M}

• Compensation of employees (COE) measures the total remuneration to employees for work done. It includes wages and salaries, as well as employer contributions to social security and other such programs.
• Gross operating surplus (GOS) is the surplus due to owners of incorporated businesses. Often called profits, although only a subset of total costs are subtracted from gross output to calculate GOS.
• Gross mixed income (GMI) is the same measure as GOS, but for unincorporated businesses. This often includes most small businesses.

The sum of COE, GOS and GMI is called total factor income; it is the income of all of the factors of production in society. It measures the value of GDP at factor (basic) prices. The difference between basic prices and final prices (those used in the expenditure calculation) is the total taxes and subsidies that the government has levied or paid on that production. So adding taxes less subsidies on production and imports converts GDP at factor cost to GDP(I).

Y = C + I + E + G.    where Y = GDP; C = Consumer Spending; I = Investment made by industry; E = Excess of Exports over Imports and G = Government Spending

GDP can be contrasted with gross national product (GNP) or, as it is now known, gross national income (GNI). The difference is that GDP defines its scope according to location, while GNI defines its scope according to ownership. In a global context, world GDP and world GNI are, therefore, equivalent terms.

GDP is product produced within a country's borders; GNI is product produced by enterprises owned by a country's citizens. The two would be the same if all of the productive enterprises in a country were owned by its own citizens, and those citizens did not own productive enterprises in any other countries. 

In practice, however, foreign ownership makes GDP and GNI non-identical. Production within a country's borders, but by an enterprise owned by somebody outside the country, counts as part of its GDP but not its GNI; on the other hand, production by an enterprise located outside the country, but owned by one of its citizens, counts as part of its GNI but not its GDP.

We can also compute the annual growth rate if we know the amount per period by which the amount increased. The formula is:

Annual growth rate = (   , Where n is the number of periods in the year n=4.

Example: The previous quarter GDP is 6502.3, and the current quarter GDP is 6580.8. What is the equivalent annual growth rate?

Annual growth rate = 

VI.I.2 Models

VI.I.2.1 Adam Smith's model

Adam Smith displays trade taking place on the basis of countries exercising absolute cost advantage over one another on the International trade and Multinational Corporations on Feasible Set model

Budget or Feasible Set

The International trade and Multinational Corporations also have a choice of models. The first International community knows that many of the papers will need to be copied on both sides. The second International community knows that very few of the papers it copies will need double sided copying. of course, the second International community will not pay much more for this, while the first International community will do it.

Formula: PA+PB+PN  GB

Example 1: Given a Budget Z, with the product A which consume 5, for and Product B Consume for 12, the total Budget is 6000 within Graphic,

Solution: A+B  BGT   17AB 6000      

3^rd resolution of Math equation 5A 353         12B 353

5A+12B6000, AB= ,   A   70.6, B  29.4 

  

Example 2

Example 1: Given a Budget W, with the product X which consume 6, for and Product Y Consume for 4, the total Budget is 60 within Graphic,

6X+4Y 60     XY =6      5Y 6 

10 XY  60      6X 6       X  =1    Y

   .

Example 3:

Given a Budget U, with the product D which consume 4, for and Product E Consume for 8, the total Budget is 500 within Graphic

 VI.I.2.2 theory of Externality (negative or Positive) Diagram on International trade and Multinational Corporations

 Is a community element considered at the economics level that can affect the Organization Development positively or negatively on individual and Organizational system of the society. It’s Negative when it affect negatively the community and it’s positively when it affect positively the community

  An external benefit on International trade and Multinational Corporations is a benefit that someone gains because of someone else's action, outside of any market transaction between them as Community. 

A public good on International trade and Multinational Corporations asset is an element such as peace keeping, Educated and so on that provide to the Societies in the world people, (provide it for everybody) Examples: World Bank finance the Roads, water, and sewers are public and International goods (unless you're living alone out in the country). 

A free rider is a person who gains an external benefit, or a benefit from a public good, without paying for it.  Suppose you said that you did not want to pay community income tax anymore, and that, in return, I think you will not reclaim for protection. 

A Private cost (to me): a cost incurred in the production process by the producer; including tax and profit margins that are anticipated. Ex: raw material cost, labor cost, energy cost, transportation cost and so on

An external cost is a cost that a producer or a consumer imposes on another producer or consumer, outside of any market transaction between them (community). "External" means "outside." Here, "outside" means outside of any buying and selling among people or firms. Healthcare, smoking and fire damage, emotional cost and so on

A Social cost: assessing the overall impact of its commercial actions in terms of social costs, a socially responsible business operator should take into account its own production expenses, as well as any indirect expenses or damages borne by others. Combination of Private and External cost composition

SC= PC+EC

Example: An Corporate that manufactured mediums products, decided to buy different elements below and some ignorance element appearing 

Raw materials RwF 15 Million/ month

Health care 1.5 Million/month

 Increasing its labor cost RwF 7 Million/ month

Fire of Smoking bring damage and Personal Staffs Materials and objective disparate of fire 2 Million/month

Transportation cost 4 Million/month

Wage and others company’s advantages 1.5 Million/month

After differentiated the private cost to the external cost calculate the Social cost 

Solution   a. Private cost= RM+LE+TC+WG  15 m+7 m+4 m+1.5 m= 27.5 Millions

                      External cost= HC+FD   1.5 m+2 m= 3.5 Millions

a.    Social Cost= 27.5 m+3.5 m= 31 Millions

Negative Externalities on International trade and Multinational Corporations

A negative externality (also called "external cost") is a community activity that imposes a negative effect on an unrelated third party. It can arise either during the production or the consumption of a good or service in the Community.

A Social Optimal is a point of production for a Corporate in a monopolistically-competitive industry, or in a monopoly, or in an oligopoly is the point where the average cost curve (ATC) intersects the d emand curve (or average revenue curve).

The Ricardian model focuses on comparative and absolute advantage, which arises due to differences in technology or natural resources. The Ricardian model does not directly consider factor endowments, such as the relative amounts of labor and capital within a country.

The Ricardian model makes the following assumptions:

1. Labor is the only primary input to production
2. The relative ratios of labor at which the production of one good can be traded off for another differ between countries

Heckscher-Ohlin model

In the early 1900s a theory of international trade was developed by two Swedish economists, Eli Heckscher and Bertil Ohlin. This theory has subsequently been known as the Heckscher-Ohlin model (H-O model). The results of the H-O model are that countries will produce and export goods that require resources (factors) which are relatively abundant and import goods that require resources which are in relative short supply.

In the Heckscher-Ohlin model the pattern of international trade is determined by differences in factor endowments. It predicts that countries will export those goods that make intensive use of locally abundant factors and will import goods that make intensive use of factors that are locally scarce. Empirical problems with the H-O model, such as the Leontief paradox, were noted in empirical tests by Wassily Leontief who found that the United States tended to export labor-intensive goods despite having an abundance of capital.

The H-O model makes the following core assumptions:

1. Labor and capital flow freely between sectors
2. The amount of labor and capital in two countries differ (difference in endowments)
3. Technology is the same among countries (a long-term assumption)
4. Tastes are the same.

VI.I.2.2 Reality and Applicability of the Heckscher-Ohlin Model

In 1953, Wassily Leontief published a study in which he tested the validity of the Heckscher-Ohlin theory. The study showed that the U.S was more abundant in capital compared to other countries; therefore the U.S would export capital-intensive goods and import labor-intensive goods. Leontief found out that the U.S's exports were less capital intensive than its imports.

Additionally, owners of opposing specific factors of production (i.e., labor and capital) are likely to have opposing agendas when lobbying for controls over immigration of labor. Conversely, both owners of capital and labor profit in real terms from an increase in the capital endowment. This model is ideal for understanding income distribution but awkward for discussing the pattern of trade.

 VI.I.2.3 New Trade Theory

New Trade Theory tries to explain empirical elements of trade that comparative advantage-based models above have difficulty with. These include the fact that most trade is between countries with similar factor endowment and productivity levels, and the large amount of multinational production (i.e. foreign direct investment) that exists.

New Trade theories are often based on assumptions such as monopolistic competition and increasing returns to scale. One result of these theories is the home-market effect, which asserts that, if an industry tends to cluster in one location because of returns to scale and if that industry faces high transportation costs, the industry will be located in the country with most of its demand, in order to minimize cost.

Although new trade theory can explain the growing trend of trade volumes of intermediate goods, Krugman's explanation depends too much on the strict assumption that all firms are symmetrical, meaning that they all have the same production coefficients. Shiozawa, based on much more general model, succeeded in giving a new explanation on why the traded volume increases for intermediate goods when the transport cost decreases.

VI.I.3.1 Ricardian theory of international trade (modern development)

The Ricardian theory of comparative advantage became a basic constituent of neoclassical trade theory. Any undergraduate course in trade theory includes a presentation of Ricardo's example of a two-commodity, two-country model. A common representation of this model is made using an Edgeworth Box.

This model has been expanded to many-country and many-commodity cases. Major general results were obtained by McKenzie and Jones, including his famous formula. It is a theorem about the possible trade pattern for N-country N-commodity cases.

VI.I.3.1.1 Neo-Ricardian trade theory

Inspired by Piero Sraffa, a new strand of trade theory emerged and was named neo-Ricardian trade theory. The main contributors include Ian Steedman (1941) and Stanley Metcalfe (1946). 

They have criticized neoclassical international trade theory, namely the Heckscher-Ohlin model on the basis that the notion of capital as primary factor has no method of measuring it before the determination of profit rate (thus trapped in a logical vicious circle). This was a second round of the Cambridge capital controversy, this time in the field of international trade.

The merit of neo-Ricardian trade theory is that input goods are explicitly included. This is in accordance with Sraffa's idea that any commodity is a product made by means of commodities. The limitation of their theory is that the analysis is restricted to small-country cases.

VI.I.3.2 Traded intermediate goods

Ricardian trade theory ordinarily assumes that the labor is the unique input. This is a great deficiency as trade theory, for intermediate goods occupy the major part of the world international trade. Yeats found that 30% of world trade in manufacturing involves intermediate inputs. Bardhan and Jafee found that intermediate inputs occupy 37 to 38% of U.S. imports for the years 1992 and 1997, whereas the percentage of intrafirm trade grew from 43% in 1992 to 52% in 1997.

McKenzie and Jones emphasized the necessity to expand the Ricardian theory to the cases of traded inputs. In a famous comment McKenzie (1954, p. 179) pointed that "A moment's consideration will convince one that Lancashire would be unlikely to produce cotton cloth if the cotton had to be grown in England." Paul Samuelson coined a term Sraffa bonus to name the gains from trade of inputs.

VI.I.3.3 Ricardo-Sraffa trade theory

John Chipman observed in his survey that McKenzie stumbled upon the questions of intermediate products and discovered that "introduction of trade in intermediate product necessitates a fundamental alteration in classical analysis." It took many years until Y. Shiozawa succeeded in removing this deficiency. The Ricardian trade theory was now constructed in a form to include intermediate input trade for the most general case of many countries and many goods. This new theory is called Ricardo-Sraffa trade theory.

Based on an idea of Takahiro Fujimoto, who is a specialist in automobile industry and a philosopher of the international competitiveness, Fujimoto and Shiozawa developed a discussion in which how the factories of the same multi-national firms compete between them across borders. International intra-firm competition reflects a really new aspect of international competition in the age of so-called global competition.

VI.II Multinational and Transnational Corporations

VI.II.1 Multinational Corporation

Multinational Corporation (MNC) or multinational enterprise (MNE) is a corporation that is registered in more than one country or that has operations in more than one country. It is a large corporation which both produces and sells goods or services in various countries. It can also be referred to as an international corporation. They play an important role in globalization. The first multinational company was the British East India Company, founded in 1600. The second multinational corporation was the Dutch East India Company, founded March 20, 1602, which would become the largest company in the world for nearly 200 years.

VI.II.2 Strategies

Corporations may make a foreign direct investment into one country by a company in production located in another country either by buying, selling, producing and distributing Product or services by expanding operations of an existing business in the country.

A corporation may choose to locate in a special economic zone, which is a geographical region that has economic and other laws that are more free-market-oriented than a country's typical or national laws.

An economic zone with free market is a market with a free movement of Goods and Services.

Free movement (Common Market) means the Partner States’ markets integrated into a

Single market in which there is:

1.      Free movement of persons;

2.      Free movement of labour;

3.      Free movement of services;

4.      Free movement of capital;

5.      Right of establishment; and

6.      Right of residence.

VI.II.2.1 Game Theory in International Trade and Corporate firm

Corporates with the same product completion on common market, should know how to manage their perfect competition with its market structure.

Corporate should understand each other on the way of producing and supplying their goods and services.

Without mutual comprehensive, the one with power can gain the market or lost causes by those small corporate.

The Profits of the Corporate or firms will not depend only on what are producing but also on how it’s playing its relationship with others (International Market system)

On game of theory, 4 model are involve

1.Players 2. Rules 3. Outcome 4. Pay off

In International Trade and Corporate firm different corporate firms have its scientific Economic model that help them managing the International trade, Multilateral and Transnational corporations and respond on the economic problem

Example:

The demand and supply equations of a good and Services and how you can calculate the equilibrium price and Quantity

Example 1.

•          4P = −Qd + 240,

•          5P = Qs + 30.

Determine the equilibrium price and quantity.

 Solution

•          4P = −Qd + 240,         P=            Qd=240-120

•          5P = Qd + 30.

                                  a) 4x30= - Qd+240    Qd= 120

                   9P=240+30                  120= - Qd+240

 b) 5x30=Qs+30   -Qs=30-150

150=Qs+30      Qs=120

       

The demand and supply functions of a good are given by

•          P = −Qd + 125                   

•          2P = 3Qs + 30.

Determine the equilibrium price and quantity

VI.II.3 Multinational corporations and Globalization

Multinational corporations are important factors in the processes of globalization. National and local governments often compete against one another to attract MNC facilities, with the expectation of increased tax revenue, employment, and economic activity. To compete, political powers push towards greater autonomy for corporations, or both. MNCs play an important role in developing the economies of developing countries like investing in these countries provide market to the MNC but provide employment, choice of multi goods etc.

Once established in a jurisdiction, therefore, MNCs are potentially vulnerable to arbitrary government intervention such as expropriation, sudden contract renegotiation, the arbitrary withdrawal or compulsory purchase of licenses, etc. Thus, both the negotiating power of MNCs and the 'race to the bottom' critique may be overstated, while understating the benefits (besides tax revenue) of MNCs becoming established in a jurisdiction.

VI.II.5 Transnational Corporations

A Transnational Corporation (TNC) differs from a traditional MNC in that it does not identify itself with one national home. While traditional MNCs are national companies with foreign subsidiaries, TNCs spread out their operations in many countries sustaining high levels of local responsiveness. An example of a TNC is Nestlé who employ senior executives from many countries and try to make decisions from a global perspective rather than from one centralized headquarters.

The number of transnational corporations have increased greatly from 7000 in 1970 to over 78,000 in 2006. What many people aren't aware of is that TNC's account for over half of the industrial output of the world. The names of some of the largest TNC's include Wal-mart, General Motors, Exxon-Mobil, Mitsubishi, and Siemens. However, according to data from 2005, only one of the 200 largest TNC's are based in a developing nation which happens to share a border with the United States, Mexico. The North holds a monopoly when it comes to large corporations including TNC's and this power difference continues to create a rift between the North and South.

VI.II.6 Criticism of multinationals

Anti-corporate advocates criticize multinational corporations for entering countries that have low human rights or environmental standards. They claim that multinationals give rise to huge merged conglomerations that reduce competition and free enterprise, raise capital in host countries but export the profits, exploit countries for their natural resources, limit workers' wages, erode traditional cultures, and challenge national sovereignty.