• Join over 1.2 million students every month
  • Accelerate your learning by 29%
  • Unlimited access from just £6.99 per month

The MNE and Market Power

Extracts from this document...

Introduction

´╗┐The MNE and Market Power. Stephen Hymer, in his doctoral dissertation of 1960, later published in 1976, offered a theory of FDI that focused on the behaviour of the MNE itself. As Dunning and Rugman have pointed out, Hymer's dissertation: "...escaped from the intellectual straightjacket of neo-classical type trade and finance theory, and moved us towards an analysis of the MNE based upon industrial organisation theory." (1985; p.228). Hymer's explanation for the existence of the MNE centred upon the exploitation of market power. Market power results from imperfections in the goods and factor markets. If a perfect market existed for goods and factor inputs then the MNE would not exist. Trade is a result of the country-specific advantages possessed by a nation whereas FDI is the result of firm-specific advantages in response to market imperfections. An example of a market imperfection in the goods market that serves as a barrier to free trade are tariffs. A country that erects barriers to trade to protect a domestic industry will simply attract subsidiaries of an MNE, who can avoid customs duties by undertaking production in the host nation. ...read more.

Middle

These advantages should enable the firm not only to achieve higher profits than they would by operating at home, but also to earn more than the local firms of the host country. These intangible assets that firms posses may include brand names, managerial expertise, patented technology and economies of scale. For a firm to operate overseas these assets must be firm-specific and transferable to the subsidiaries. For Hymer, these advantages help the MNE close markets and therefore increase market power. While the possession of intangible assets is a necessary condition for foreign production, they are not a sufficient explanation of why firms undertake FDI. As Agarwal (1980) points out, a firm in possession of intangible assets, and therefore possessing an advantage over rival firms in a foreign market, can simply exploit these advantages through exporting, rather than FDI. The preference for FDI over exporting can partly be explained by the locational advantages offered by a particular country or region. Such advantages may include lower production costs, the size of the market, political stability, a favourable regulatory environment and inducements to invest. ...read more.

Conclusion

While both Hymer and Kindleberger argue that market imperfections are central to their theory of the MNE, neither identify internalisation specifically as a paradigm for a theory of FDI. The idea of internalisation is fundamental to the theory of the MNE, and will be discussed in the next section. As McCulloch states: "Direct foreign investment is precisely a firm's internalization of economic activity across a national boundary - internationalization of management." (1990; p.187). Despite the limitations of Hymer's work, it is widely regarded as seminal in the field of international production, as it was the first time that the idea of market imperfections was applied as an explanation for the MNE. The work of Hymer therefore laid the groundwork for future research in the theory of the MNE. ________________ [1] Kindleberger (1984) argued that Hymer, through his general discussion of market imperfections did indeed understand the importance of transaction costs. Rugman however, refutes this, arguing that Hymer's focus was on the ability of the MNE to use it's monopolistic power to close markets. He argues: "At no point in the thesis does Hymer make explicit statements about either internalisation or transaction cost arguments." (1986:p.104) ...read more.

The above preview is unformatted text

This student written piece of work is one of many that can be found in our International Baccalaureate Business Studies section.

Found what you're looking for?

  • Start learning 29% faster today
  • 150,000+ documents available
  • Just £6.99 a month

Not the one? Search for your essay title...
  • Join over 1.2 million students every month
  • Accelerate your learning by 29%
  • Unlimited access from just £6.99 per month

See related essaysSee related essays

Related International Baccalaureate Business Studies essays

  1. Marketing. In my project, I am going to be looking at how Nestls Smarties ...

    Annotation of maps to highlight the importance of various features would also be beneficial. Photographs These can be used to present a lot of information for which text may be unsuitable, e.g. indicating competitors around a particular business, showing the layout of a business.

  2. In this paper, we will focus in four main factors which had the most ...

    When gold price increases suddenly, especially when Vietnam dong is not reliable and safe enough, individuals or investors must use method of purchasing real estate in gold or dollar. This is obvious. According to an estimate, real estate transactions in gold still make up 60 -70%.

  1. Free essay

    Media Planning for BMW ActiveHybrid 7. The BMW ActiveHybrid 7 was introduced in 2010. ...

    Compared with the standard version of 760i, the car's fuel-consumption has improved significantly because of the application of the new hybrid power technology created by BMW. Based on the announcement of U.S. Environmental Protection Agency, the fuel-consumption is merely 26 miles/gallon (EPA, 2010).

  2. Organisational Behaviour

    This can be a very effective way of managing a business, but if the business was to grow it would become increasingly harder to monitor the business alone. Task 2 Due to Regal's age the leadership styles would of changed over the years, but some old traditions would mean that not everything could change.

  1. BP Financial analysis

    New areas are also being researched and developed e.g. concentrated solar thermal power. Founded more than 100 years ago, BP is Britain's largest company and the second largest oil major in the world after Exxon, based on its financial performance in 2009.

  2. We have spent plenty of hours in finally approving the decision of producing rip ...

    The great demand for this product once they hit the market will undoubtedly benefit the organization. The organization intends to position this product in the mid-high price range and extremely high quality and durability. Competition Review We have discussed an uncontrollable environmental factor known as competition.

  1. Questions on Globalisation and International Trade

    Managing an international business is different from managing a purely domestic business for at least four reasons. These are: (1) countries are different; (2) the range of problems confronted by a manager in an international business is wider and the problems themselves more complex than those confronted by a manager in a domestic business; (3)

  2. Organisational Behaviour (in short called as OB) is concerned with the study of the ...

    2.3 Evaluate the different approaches to management used by different organisations: Managers must make choices about how to group people together to perform their work. Five common approaches ? functional, divisional, matrix, team, and networking?help managers determine departmental groupings (grouping of positions into departments).

  • Over 160,000 pieces
    of student written work
  • Annotated by
    experienced teachers
  • Ideas and feedback to
    improve your own work