Les 4: Internationalization theories
Theoretical perspectives on internationalization
Neo classical perspective on firms
Neo classical theory assuming perfect markets
Underlying assumptions of perfectly competitive markets:
o Perfect markets are characterized by almost costless exchange because of their
efficiency
• Many buyers and sellers,
• Perfect information,
• Known technology, etc.
o These result in the perfect co-ordination of supply and demand (the invisible hand)
and leads to the 'correct' (shadow) price
We observed many American firms coming to Europe.
The theory doesn’t focus on the firm it was all the other factors.
In a perfectly competitive world, companies are not something worthy of exploration.
No focus on …
o Existence: why do they exist
o Boundaries: what does the market do, what limits them
o Internal organization: how it should be managed of companies.
o And certainly not on multinational companies.
The American challenge: the Americans where coming with their new/ innovative products and were
challenging the home (European) industry.
Theory of capital movements
Even if no study of multinational companies, there was this phenomenon of international
investment.
Theory of capital movements (macro)
o Mundell tried to explain international investment flows
• Investment flows from countries with low financial cost/returns to countries
with high financial costs/returns.
o Foreign direct investment (FDI) as a financial flow
o Looking at droppings instead of the elephant (company)
We look at existing theories to look what is happening
Invest where the money is expensive and get the money where it is cheap
We are only going to look at the finances.
Economic approaches
Market imperfections
New theoretical and empirical research on internationalization in 1960s
The oligopoly theory of FDI based on monopolistic advantages (Hymer-Kindleberger, 1960,
1969, 1976)
Is still very useful and used till today
o Need of advantage by firm to overcome liability in foreign countries
o Need for higher return abroad due to higher costs abroad
Product cycle theory of international trade and investment (Vernon, 1966)
Les 4 18/10/2022 Pagina 1 van 9
, Trade enhancing (vertical) and trade destroying (horizontal) FDI (Kojima-Ozawa, 1971, 1973,
1975)
o Exports and FDI
In some circumstances the theories are still valid
You don’t expect to make more money in a foreign company you need competitive advantage to
have success etc.
My great invention needs to overcome these obstacles
Monopolistic advantages (Hymer-Kindleberger)
Stephen Hymer’s critique of Mundell: Hymer used industrial economics to analyse Mundell’s model
of FDI and identified several critical failings:
Simultaneous cross-flows of FDI between countries cannot be explained by simple capital
scarcity.
Financing FDI by local borrowing cannot be explained by the differential cost of capital.
FDI in productive activities cannot be explained by flows of pure finance (portfolio capital).
The focus of FDI in particular industries cannot be explained by factor endowments.
o E.g. FDI focused on capital- and technology-intensive activities.
Flows of investments go both ways
They finance in the host country every activity needs to be financed and it will come from the
home country
Why would multinationals finance locally if it is so expensive?
Because it is a different currency
Problem when you are going to sell for the local: you were going to sell, produce, promote, etc.
locally source locally because you are creating a useful chain
Investing somewhere to produce for export, then the local circumstances don’t really matter.
There is more to it than money
If you are investing in a capital intensive country, why would you than go to capital poor country.
Explaining the existence of MNEs: Hymer identified several reasons for the increasing involvement of
multinationals (MNEs) in the global economy:
Cross-border ownership reduces the number of firms in global industries, so increasing
concentration.
MNEs exist under imperfect competition and earn monopolistic profits.
MNEs exploit their oligopolistic (aka ownership) advantages across countries at low marginal
cost (economy of scale effects).
International activities provide gains from international diversification of economic, financial
and political risks (portfolio effects).
The money is just one aspect and the most important one.
The ownership is needed because you want/ need to grow= oligopolistic profits
Multinations existed because of market impperfection and that they are trying to enhance them
Increase market power
Create worse situations than before
When you look at ownership advantage: 2 sides
• What I do, what products I develop
Les 4 18/10/2022 Pagina 2 van 9
Theoretical perspectives on internationalization
Neo classical perspective on firms
Neo classical theory assuming perfect markets
Underlying assumptions of perfectly competitive markets:
o Perfect markets are characterized by almost costless exchange because of their
efficiency
• Many buyers and sellers,
• Perfect information,
• Known technology, etc.
o These result in the perfect co-ordination of supply and demand (the invisible hand)
and leads to the 'correct' (shadow) price
We observed many American firms coming to Europe.
The theory doesn’t focus on the firm it was all the other factors.
In a perfectly competitive world, companies are not something worthy of exploration.
No focus on …
o Existence: why do they exist
o Boundaries: what does the market do, what limits them
o Internal organization: how it should be managed of companies.
o And certainly not on multinational companies.
The American challenge: the Americans where coming with their new/ innovative products and were
challenging the home (European) industry.
Theory of capital movements
Even if no study of multinational companies, there was this phenomenon of international
investment.
Theory of capital movements (macro)
o Mundell tried to explain international investment flows
• Investment flows from countries with low financial cost/returns to countries
with high financial costs/returns.
o Foreign direct investment (FDI) as a financial flow
o Looking at droppings instead of the elephant (company)
We look at existing theories to look what is happening
Invest where the money is expensive and get the money where it is cheap
We are only going to look at the finances.
Economic approaches
Market imperfections
New theoretical and empirical research on internationalization in 1960s
The oligopoly theory of FDI based on monopolistic advantages (Hymer-Kindleberger, 1960,
1969, 1976)
Is still very useful and used till today
o Need of advantage by firm to overcome liability in foreign countries
o Need for higher return abroad due to higher costs abroad
Product cycle theory of international trade and investment (Vernon, 1966)
Les 4 18/10/2022 Pagina 1 van 9
, Trade enhancing (vertical) and trade destroying (horizontal) FDI (Kojima-Ozawa, 1971, 1973,
1975)
o Exports and FDI
In some circumstances the theories are still valid
You don’t expect to make more money in a foreign company you need competitive advantage to
have success etc.
My great invention needs to overcome these obstacles
Monopolistic advantages (Hymer-Kindleberger)
Stephen Hymer’s critique of Mundell: Hymer used industrial economics to analyse Mundell’s model
of FDI and identified several critical failings:
Simultaneous cross-flows of FDI between countries cannot be explained by simple capital
scarcity.
Financing FDI by local borrowing cannot be explained by the differential cost of capital.
FDI in productive activities cannot be explained by flows of pure finance (portfolio capital).
The focus of FDI in particular industries cannot be explained by factor endowments.
o E.g. FDI focused on capital- and technology-intensive activities.
Flows of investments go both ways
They finance in the host country every activity needs to be financed and it will come from the
home country
Why would multinationals finance locally if it is so expensive?
Because it is a different currency
Problem when you are going to sell for the local: you were going to sell, produce, promote, etc.
locally source locally because you are creating a useful chain
Investing somewhere to produce for export, then the local circumstances don’t really matter.
There is more to it than money
If you are investing in a capital intensive country, why would you than go to capital poor country.
Explaining the existence of MNEs: Hymer identified several reasons for the increasing involvement of
multinationals (MNEs) in the global economy:
Cross-border ownership reduces the number of firms in global industries, so increasing
concentration.
MNEs exist under imperfect competition and earn monopolistic profits.
MNEs exploit their oligopolistic (aka ownership) advantages across countries at low marginal
cost (economy of scale effects).
International activities provide gains from international diversification of economic, financial
and political risks (portfolio effects).
The money is just one aspect and the most important one.
The ownership is needed because you want/ need to grow= oligopolistic profits
Multinations existed because of market impperfection and that they are trying to enhance them
Increase market power
Create worse situations than before
When you look at ownership advantage: 2 sides
• What I do, what products I develop
Les 4 18/10/2022 Pagina 2 van 9
