Monopolistic Advantage Theory Essay

Words: 940
Pages: 4

Monopolistic Advantage Theory an approach in international business which explains why a particular national firm is able to compete with indigenous competitors in overseas market.
He started by looking at international investments which classified into two: portfolio investment and direct investment. Control is the key factor which differentiates one another. If the investor directly controls the foreign enterprise, his investment is called a direct investment. If he does not control it, his investment is a portfolio investment. Basis theory of portfolio investment is the theory of capital movement across nations mentioned that the main determinant of movement of funds across frontiers is interest rates. However, in terms of
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A third, minor reason for FDI on the part of large firms as the driver towards diversification; a strategy of diversification – of products or market locations or production locations – helps to spread risks.
The limitation/criticism of Hymer Theory:
1. Hymer did not concentrate on any particular advantage, nor did he consider whether all advantages were equally suitable as a basis for international operations. A related point is that Hymer did not sufficiently examine the role of exporting in the utilization of advantages, or how the inter-industry pattern of international operations and export intensity may be related to the extent and distribution of different sorts of advantages between firms and industries.
2. According to Hymer, lack of international integration, costs and disadvantages of foreigners were the basis of the barriers to international operations. In an imperfectly integrated world economy the concept of monopolistic advantage as a prerequisite of international operations has strong theoretical appeal. However, with increasing international integration and the reduction in the cost of international operations, this relevance may be progressively undermined, as the possession of firm specific advantage may no longer be necessary in order to offset such costs.
3. The theory of firm specific advantage could only explain horizontal FDI. In fact for a long time vertical FDI was ignored, which means that theory was not applicable to