According to the existing macroeconomic theory or neo-classical theory of foreign direct investment, capital would flow from capital rich countries that provide low return-on- capital to capital-poor countries that can give higher profit. However, Hymer (1960 cited in (Pearce, 2012) argues that the existing theory is not adequate. He proposed the new theory of microeconomic theory focuses to the industry level which different from the existing one that focus on country-specific. Hymer also said that FDI will occur only in imperfect or concentrated market and ownership advantages are needed. Ownership advantage is the first important element in Dunning’s electric framework that make firm become competitive and allow firm to enter to foreign market; others two elements are location advantage and internalisation. However, this essay will focus on ownership advantage only.
The essay will begin with briefly explain about foreign direct investment and neo-classical theory of foreign direct investment. Then, the essay will further explain on how hymer’s contribute to the inadequacies of the existing theory. The essay will then explain about perfectly competitive market, imperfect market, concentrated market, importance and the emergence of ownership advantages. Lastly, the essay will briefly examine the criticisms of Hymer’s analysis and the introducing of Dunning’s eclectic framework, which he makes ownership advantages become a very important element in new theory of the multinational enterprise or MNE. Examples will be provided throughout the essay.
To begin with, foreign direct investment or FDI was defined as one of the key thing that multinational enterprise or MNE does in order to gain competitive advantages for the firm. It is the process that firm want to enter the new markets apart from its home country by acquiring ownership of asset, control and add value of the firm in another country or host country. With FDI, the firm can gain, control and access to sources of new technologies, capital, labour, management skill and product providing by host country that the firm was invested in (Moosa, 2002).
The traditional theory of FDI or neo-classical theory said that capital should flow from capital rich to capital poor countries. This is because as in capital rich countries (i.e. developed countries such as UK) most of the capital has been undertaken, less profitable opportunities available, higher domestic competition, higher expense of labour and cost of production is also higher compared to capital poor countries (i.e. developing countries such as Thailand) so the investments would only occur in the poorer economy in order to maximize the profits. The foreign investors will bring capital into the host country and producing the same goods (Khan, 2007, Alfaro et al., 2005). However, Hymer (1960 cited in(Pearce, 2012) introduced a microeconomic theory of the MNE which was firm-specific. He noted four facts that used to argue the inadequacies of the existing neo-classical theory, which only focus on trade rather than other elements.
First, the older theory state that there is one-way flow of FDI that is from capital rich to capital poor countries only, however, in the post-war years, FDI was two-way flows between developed countries. For example, Tata Steel, a steel manufacturing ranked in top ten of the global, was founded in India decided to do FDI in the United States and as a consequence, 5 million jobs were supported. In this case FDI flow to capital rich country or developed country so this shows that FDI does not only flow to capital poor countries only (PTI, 2011).