Monopolistic Advantage Theory

Profit (economics), Foreign direct investment, Monopoly

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 international production (FDI), there’re some criticisms about this theory: 1.FDI does not necessarily involve movement of funds from the home to host country (some firms are also borrowing abroad). 2.FDI often takes place both ways: both countries involved are investors and host to FDI 3.If the main determinant of FDI is interest rate differentials between countries, FDI is expected to exist in a particular country with various industries. However, FDI tends to concentrated on particular industries across various countries Hymer also specified that FDI exists not because of interest rate differential It is about the international transfer of proprietary and intangible assets - technology, business techniques, and skilled personnel. Hymer assumes that FDI involves extra costs and risks, such as: 1.Cost of communication

2.Costs due to less favourable treatment (discrimination) by host country governments, suppliers or consumers 3.Different politics and economics conditions of foreign countries 4.Barriers in terms of lacking of familiarity with the customs and language/culture differentials 5.Costs and risks of exchange rate fluctuations

The reasons why firms willing to accept extra costs and risks are because of the expected...
tracking img