Question

A) Outsourcing was not an issue when the factor-price-equalization theory was

developed. Does the existence of outsourcing change the implications of the

theory? Justify your answer with example.

B) Both internal and external factors affect the operation of a multinational firm.

Give examples for both and discuss how they would affect the operations of the multinational firm. (12marks)

Answer 1

Factor price equalization theory assumes prices of commodity are same when free trade occurs and when there are same factors of production like technology, land, wages. However this gets contradicted if outsourcing occurs as the good gets produced within country which has comparative advantage and lower opportunity cost and thus prices are lower in that country. An example, is prices of Apple iPhone are cheaper in US than Mexico depsite free trade.

Internal factors like employees cohesiveness, strong culture, ethical values, sound management, strong corporate governance all lead to positive outcomes for the organisation. Similarly, external factors like political stability, geopolitical factors, competitive environment, government regulation all affect the overall operations of firm. If firms face huge risk of geopolitical tension, instability in government, changing customers preferences, stringent government rules, etc then it makes business capacity to go down tremendously.

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