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?