Strategic Management: Formulation and Implementation

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.

International Product Life Cycle

I have already examined this theory, but there is a close relationship between international trade and international investment. The international product life cycle theory explains that foreign direct investment is a natural stage in the life of a product.