Feedback: Discussion Questions #3

Chapter 8: The Political Economy of Foreign Direct Investment

[1] Do you think it is correct for the European Commission to restrict mergers
between American companies that do business in Europe? (For example, the
European Commission vetoed the proposed merger between WorldCom and
Sprint, both U.S. companies, and it carefully reviewed the merger between
AOL and Time Warner, again both U.S. companies).

Comments: The European Commission has a right to regulate the European

market, even if the regulation involves American companies. Those taking this
perspective will suggest that such restrictions should be made independently of
other considerations, even when the parent governments of the companies have
approved the mergers. Others, however, argue that the European Commission does
not have the right to restrict a merger that has been approved by parent
governments. In doing so, the European Commission is in effect protecting
domestic companies from foreign competition, and violating the spirit of the
WTO.

[2] How should a firm with self-sufficient production facilities in several

ASEAN countries respond to the creation of a single market? What are the
constraints on its ability to respond in a manner that minimizes production
costs?

Comments: The creation of the single market means that it may no longer be
efficient to operate separate duplicative production facilities in each country.
Instead, the facilities could either be linked so that each specializes in the
production of only certain items or several sites should be closed down and
production consolidated at the most efficient locations. Existing differences
between countries as well as the need to be located near important customers may
limit a firms ability to fully consolidate or relocate production facilities for

production cost reasons. Minimizing production costs is only one of many

objectives. For example, location of production near R&D facilities can be critical
for new product development. The location decision needs to examine long run
economic success, not just cost minimization.