Economics Assignment 代写 The Existing Macroeconomic Theory
Second, the existing theory said that a country would not do engaging in export and import FDI at the same time. However, Hymer noted that in fact most MNE in developed countries did receive inward FDI and engaged in outward FDI across the national boundaries at the same time.
Third, the outward investments in every industries are not the same, it vary from industry to industry. For example, some industries such as technological industries were usually strong in outward FDI while aircraft industries were usually weak because of less overseas investment. Hymer argued that if capital availability was the only thing that influences FDI, any industry could be equal and have the same level of ability to invest abroad so existing theory was inadequate in this circumstance as well.
Fourth, some FDI does not involve in trade and capital transfer, for example, UK firm decided to set up subsidiaries in Canada and let the subsidiaries being financed locally without trading between UK and Canada. This is the case that the firm let the capital raising by it owns so capital does not move from one country to the another which is not compatible with the existing theory of FDI. Hymer (1976 cited in (Denisia, 2010) state that FDI is a firm-level strategy decision rather than in the country scale as the existing theory said, it depended on the industry and the firm that drive firms overseas investment.
Therefore, Hymer suggested that the existing neo-classical theory does not cover and cannot explain lots of situation. The theory was too weak and insufficient in explaining the decision to set up value-adding activities overseas to become MNE, it based on perfectly competitive market which foreign firms will be exist only when there is a super-normal profits. To illustrate this, in perfectly competitive market, there are lots of competitors and all firm are identical; using the same technology, produce the same goods and faced the same costs. Whenever the demand increases and exceeds the supply, all firms make super-normal profit and persuade foreign firms to enter to the market. However, as foreign firms get into the business so the supply is increasing up until the point that supply is equal to demand, all firms including MNE will make only normal profit. Thus, foreign firms or MNE will be driven out because they have to pay extra costs of being foreign, dealing with unfamiliar environment which leads to higher overall cost of production compared to other local firms. In order to be in the market and become MNE, foreign firm would have to have something that can overcome this disadvantage, which is a firm specific advantages or ownership advantages. It occurs when firm are better in product, technology, and management practice compare to other competitors (Pearce, 2012).
Ownership advantages, the first element in Dunning’s electric framework, are firm specific characteristics that give them the competitive advantages in their home country. The characteristics are mainly on knowledge or know-how such as management practice, differentiated product and advance in technology. In addition, ownership advantages do not include only intangible assets such as knowledge, brand and organizational structure buy also including capital and industry market structure (Rugman, 2010).
If the firm decide to enter a foreign market, the firms have to make strategic decision to choose the entry mode since there are many modes of foreign market including exporting, licensing, joint venture, and sole venture as well as consider their firm specific characteristics or ownership advantages (Agarwal and Ramaswami, 1992).
Ownership advantages play as a significant role in all entry modes because in order to transfer these characteristics abroad and become MNE, the characteristics have to be strong enough to overcome local firms, compensate for the extra costs (i.e. Learning cost) and barriers (i.e. tariff barriers). If firms have lower levels of ownership advantages, the firms may considering exporting or not enter to the foreign market (Ghahroudi, 2009).
Hymer clearly state in his work that ownership advantage or what he called firm specific advantages are necessary and important for firm to become a MNE. However, he argued that MNE do not exist in perfectly competitive market because of the nature of the market that every firm are identical and lack of firm specific advantages as mentioned above. But MNE does exist in imperfect market with the important influence of ownership advantage. Consider the same situation but under the imperfect market, all firms are not identical, some are better and more successful than others but all firms still produce the same products. Again, when demand exceed supply, foreign firms getting into the market but this time they have ownership advantage, they have better in technology and management practices. Once supply catch up with demand, foreign firms with ownership advantage will not be driven out of the market. It will overcome the weak local firms but still behind top firms within host country. With this situation, MNE will exist and FDI do occur (Pearce, 2012).
For example, McDonald’s, KFC and Burger King, 3 main fast-food restaurants in USA were running their business under oligopoly without feeling threaten by new entrants. As In an oligopoly, big and high profitable firms dominate with virtually high immune because the barrier to entry is very high. In order to overcome these big firms, the new entrants need very powerful ownership advantages including technology, products, management and reputation as well as very high amount of capital to start-up while existing firm can operated at much lower cost and much more effective. If KFC decide to open the first store in UK and become success, other firms will follow KFC to that market to take market share away from KFC. This example explains how oligopoly’s environment works. Firms with strong ownership advantages easily do it because this ownership advantages are strong enough to overcome any barriers.
Moreover, examine kind of industrial sectors and market structures, Hymer (cited in (Pearce, 2012) also suggested that ownership advantages are likely to emerge and exist in very concentrated market. With the drive of FDI, two markets can be merged together. For example, there are 3 big firms in country A; another 3 big firms in country B and both markets are identical and independence. If one of the firms in country B make strategic decision to enter market country A and become MNE, all firms in country A will fell threaten because the new entrant has strong ownership advantages, well establish trade name, technology, management team and reputation. Because of the entrant of the forth firm, one of the firms in country A may break into country B market as well to take more market share and become MNE. When the new entrants become successful in both market, all remaining firms from both countries will make the same movement. As a result, both markets will have 6 firms and all of them are MNE. With this example, it can be said that FDI flow in two-ways, it flows between two countries as Hymer developed his argument to the neoclassical theory. Without ownership advantages, two-ways flow of FDI do not exist in this case because the new entrants need strong competitive advantage to confront with cost of being a foreign and overcome barriers to entry.