Strategic Management: Formulation and Implementation

Monopolistic Advantage Theory

Stefan Hymer saw the role of firm-specific advantages as a way of marrying the study of direct foreign investment with classic models of imperfect competition in product markets. He argued that a direct foreign investor possesses some kind of proprietary or monopolistic advantage not available to local firms.

These advantages must be economies of scale, superior technology, or superior knowledge in marketing, management, or finance. Foreign direct investment took place because of the product and factor market imperfections.

The direct investor is a monopolist or, more often, an oligopolist in product markets. Humer implied, that governments should be ready to impose controls on it.

Product And Factor Market Imperfection

Caves (1971) expanded Hymer's theory and hypothesized that the ability of firms to differentiate their products - particularly high income consumer goods and services - may be a key ownership advantages of firms leading to foreign production.

The consumers would prefer to similar locally made goods and thus would give the firm some control over the selling price and an advantage over indigenous firms. To support these contentions, Caves noted that companies investing overseas were in industries that typically engaged in heavy product research and marketing effort.