Monopolistic Advantage Theory – FDI Based Theories | International Business

Monopolistic Advantage Theory

Monopolistic Advantage Theory
Monopolistic competition | Monopoly economics | Monopoly market
Types of foreign direct investment theories | International Business
Management Notes

Monopolistic advantage theory, first proposed by S. H. Hymer in his doctoral thesis and later expanded by C. P. Kindleberger, explains the reasons multinational corporations (MNCs) are able to compete successfully against local firms. It is a microeconomic theory that makes the firm the center, as well as the cause, of the international movement of capital and goods.

The theory elucidates why firms choose to internationalize their operations. Typically, MNCs are at a disadvantage compared to local firms because they have to cope with liabilities of foreignness, lack of local know-how, high cost of acquiring this knowledge in other countries, etc.

Monopolistic Advantage Theory explains that multinational companies prefer FDI because it provides the firm with control over resources and capabilities in the foreign market and a degree of monopoly power relative to foreign competitors. Key sources of monopolistic advantage include proprietary knowledge, patents, unique know-how, and sole ownership of other assets.

The main aspect of this theory is superior knowledge and economies of scale. While going to the foreign market, domestic player has broader knowledge about psychological proximity. So, we need to go with the superior product in which we have a monopolistic advantage.

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