Economic

Hymer

The modern theories of the TNCs started with the seminal doctoral dissertation by

Stephen Hymer (1976)[3] where he suggests that there are two main determinants of

direct investment abroad. A key assumption in both these determinants is the

existence of market imperfections; connected to this is the desire of the company’s

managers to further enhance its market power position.

The first determinant is the existence of specific advantages that – particularly

once the domestic investment opportunities have been exhausted – put the firm in a

favourable position to branch out in foreign production locations. The advantages are

directly linked to market imperfections because the firm that commands market power

through them has a competitive advantage over its rivals. Moreover, the exploitation of

advantages in foreign markets enhances further the firm’s market power and thus it

increases the overall level of imperfections in the market.

Licensing is seen as a less profitable modality of involvement in foreign countries

than direct production; the reason for this has mainly to do with the perception that

licensing involves risks of debasing the quality of products and of losing the monopoly

over specific knowledge and technology.

The second determinant is the removal of conflicts in foreign markets. Whenever

several firms are already operating in a foreign market – or trying to get into it – a

conflictual situation is likely to emerge. The conflict can be removed either via

collusion in the sharing of markets between rivals or because a specific firm gets direct

control of production abroad. The latter strategy leads to an increase in market power

for our specific firm and thus, again, to the increase in imperfections for the market as a

whole.

Hymer’s main message is that, for direct investment to thrive there must be market

imperfections that create both advantages and conflicts. By investing directly and by

thus reducing competition, the firm aims to...