Theoretical Considerations and Development of the Model

Abstract

The concept of “advantage” is at the core of several theoretical approaches to multinational enterprises (MNEs). It was first introduced by industrial organization theorists and theorists of the firm. Stephen Hymer was the first scholar to apply it to the study of MNEs. He argued that MNEs have an “advantage” that they bring to the host markets, allowing them to overcome the higher costs of operating in these markets.1 Hymer was trying to refute theories developed in the 1950s and 1960s such as international economics (IEs) and international trade. IE focused on the export of capital that occurred when a firm initiated a foreign operation and regarded the MNE as a mere arbitrager of equity capital from countries where its return was low to countries where it was high.2 “General equilibrium theory of international trade” understood MNEs as a function of a country’s “comparative” advantage. In this approach, factor endowments and trade flows are interrelated. Some countries have the endowments to become home bases for MNEs, while others do not have these endowments and become hosts. Stephen Hymer’s “industrial organization” approach made the firm the unit of analysis. The issue of “control” became central to his understanding of foreign direct investment (FDI), because it allowed him to introduce the concept of “advantage.” Having control over a foreign operation permits the firm to fully appropriate certain skills and abilities that other firms do not have. Those skills and abilities are the firm’s “advantage.”3