Instructor’s Manual
CHAPTER 9
INTERNATIONAL FACTOR MOVEMENTS AND MULTINATIONAL ENTERPRISES
CHAPTER OVERVIEW
This chapter examines the role of international capital flows as a substitute for trade in capital-intensive
products. Special attention is given to the multinational enterprise that carries on the international reallocation of
capital. The chapter also analyzes the international mobility of labor as a substitute for trade in labor-intensive
goods.
The chapter begins by discussing the nature and operation of the multinational enterprise. Also considered are
the motives for foreign direct investment, including both demand factors and cost factors. Next, the chapter
considers the question of whether when supplying products to foreign buyers, it is preferable to produce
After completing this chapter, the student should be able to:
• Describe a multinational enterprise and the reasons why it diversifies its operations in foreign countries.
• Explain why a multinational enterprise is a source of conflict for source and host countries.
BRIEF ANSWERS TO STUDY QUESTIONS
Instructor’s Manual
1. Vertical integration generally results in the establishment of foreign subsidiaries that supply inputs going
3. That rates of return on investments in developing countries exceed those on investments in industrial
4. Demand and cost factors tend to underlie a firm’s decision to undergo direct foreign investment.
5. There is no exact definition of a multinational enterprise. However, it is generally recognized that
6. The decision to undergo direct foreign investment or licensing is based on several criteria: (1) import
8. The traditional trade model involves the movement of finished products among nations, while multinational
9. A joint venture leads to welfare gains when the newly established firm adds to productive capacity and
fosters competition, enters markets that the parent firms could not enter, and yields cost reductions
Instructor’s Manual
10. In response to higher U.S. wage rates, labor migration from Mexico to the United States results in a
reduction in the Mexican labor supply and an increase in the U.S. labor supply. Wage rates tend to rise
11. a. P = $4, Q = 5, consumer surplus = $12.50, profit = $0.
12. a. Wage = $6, payments to native American workers = $12, payments to U.S. capital owners = $2.