I will critically evaluate Stephen Hymer's contribution to the micro-level theory of Multinational Business, especially on the idea of Ownership Benefit in his theory. Hymer raised debates of all important concern, what we call as 'globalisation' today. He witnessed the changes round the world in different times within his short life of 39 years, and critically analyzed the situations in several market constructions and mirrored his ideas in his thesis. It had been at first completed in 1960, but was only printed in 1976. MIT refused to sponsor the publication, as the thesis looked too simple and simple and said it lacked quantitative and analytical platform and seemed to be a mere 'ideology'. Despite all the arguments, Hymer's contribution obtained a 'cult' position in the context of International business studies. Most theorists like Buckley, Casson, Dunning and Rugman produced their ideas from Hymer's work. By enough time of his tragic fatality in a vehicle accident in1974, Hymer printed over 40 articles in top journals like North american Economic Review, The Journal of Political Market, The Overview of Economics and Information plus the Economic Journal.
Need for a Micro Level Theory
As per the macro-level theory of Foreign Direct Investment (FDI), companies in the developed countries will invest in expanding economies, but labour extensive countries to be able to increase efficiency and profits at the same time. So, as per the theory, FDI can move only in a single way i. e. from developed to developing economies. But post Second World Conflict, FDI was moving only between two major developed nations, US & UK. A very important factor to be observed in capital rich countries will there be is option of capital, but fewer opportunities to purchase and vice-versa in capital poor countries. Going by this, any country should either export or import FDI, but not do both at exactly the same time. And when capital availableness is the one factor, major assets must be produced in virtually all the industries. But only some business like pharmacy, vehicle and technology were appealing to more FDI in several countries and sectors like construction, aviation were less successful. According to the macro level theory, FDI is concerned only with transfer of capital from capital rich countries to capital poor countries. But it was observed that many firms were bringing up capital from the financial market segments overseas. This is again not compatible with the real FDI theory.
As the prevailing macro-level theory had not been able to clarify and substantiate the genuine situation across the world, Hymer recommended a micro-level theory at a company level, emphasising that there are some other factors which can be unrelated to capital seems to determine the organization level FDI decisions.
In his thesis, Hymer targeted more on International development rather than International trade, deriving ideas from Coase's Character of the organization (1937) which analyses businesses in framework of International activities and allocation of resources in a variety of locations. Hymer also drew his ideas on the restrictions of the neo-classical FDI theory, recommending that it had not been sufficient to explain the movements and formation of MNEs about the world, and there appears to be some other factors driving firms to invest overseas.
Ownership Advantages
As per Hymer, Ownership benefit is one of the most important factors that could help a firm to expand and endure as an MNE. Hymer argued that traditional theory was predicated on the idea of perfectly competitive market, where all the firms earn normal profits when you can find equilibrium and earn ultra normal income when there is an increase in the demand. Going by this, the foreign firms will earn excellent normal revenue until that time, where the demand meets supply again. Once this happens, the international businesses will be influenced from the business due to surplus transactional costs to be foreign. Therefore, Hymer recommended that firms need to do something more that would offset the disadvantage of being overseas. As per Hymer, MNE's may survive only in imperfect markets with businesses having Possession advantages compared to other organizations in the same industry. This says us that the driver of MNE's lie within the organization, somewhat than capital option of a country.
With the help of Hymer's micro-level theory and Dunning's eclectic frame work, we will observe different market situations and observe how Hymer's micro level theory demonstrates the value of possession advantages.
Perfectly Competitive market
Assume an industry is present in 2 countries (A& B) and in both, conforms to the conditions of perfect competition. Which means that there are huge amounts of firms that are employing exact same technology to create the same product. Therefore, all the organizations in both countries should ask for the same amount to their customers and also face same costs of creation. So in this case, all the businesses in both the countries earn normal income in industry equilibrium. Under these situations, no firm comes with an ownership advantages.
Though the industries in both the countries are similar and produce the same type of product, some institutional factors such as labour market segments, legal framework will change between both the countries. Hymer argues these factors are major contributors towards negatives of being international.
Now, presume something happens in country B and there is a sudden raise in the demand for the merchandise. In this scenario, demand exceeds resource and firms impose higher prices to their customers and so earn higher gains. Since the technology to create the product is same in country A, companies for the reason that country will get into the market in country B. With the new entrants on the market producing more of the same product, the source will capture up the demand and the market will be motivated back to equilibrium. Local companies in B will endure because they are familiar with the market conditions and normal profits will be sufficient for them to be able to survive. But firms from country A will not endure this, as they'll incur huge transactional costs to be foreign. They cannot compete with the neighborhood firms and will be forced to leave the market soon as they do not have firm-level ownership advantage.
Imperfectly Competitive market
Assume the same situation in countries A&B, but the market conditions are imperfect. Again there is large numbers of firms competing, but the product is no longer identical. The merchandise provide same kind of value to the finish customers. Therefore, some customers are drawn to buy some products and others favor cheaper products that could fulfill their needs. Thus, few organizations are successful than others. The companies that are successful are distinguished by their strong possession advertisement or advantages such as technology, product quality or management methods.
Now, assume there's a sudden increase in the demand in country B and businesses have the ability to earn excellent normal earnings. Now, businesses in country A with strong ownership advantages such as technology will be able to enter the market and survive, as there is a huge difference between them and other opponents. Firms from country A may not be able to dominate the market, but can contend with middle and poor local firms, who've low degree of ownership advantages. Hymer argues that these powerful ownership features of businesses from A will compensate for the disadvantage of being overseas. The main reason for this is within imperfect competition, organizations vary in their size and features. Thus, Hymer emphasises that people that have strong ownership advantages will become and survive as MNEs.
Oligopolistic Structure
Hymer and some other early on theorists suggested that an oligopolistic market structure will be ideal environment for MNEs to grow. We will now observe how an oligopolistic structure helps a company to develop as an MNE.
Assume a particular industry is dominated by few major organizations, who are very large in proportions and are extremely profitable, and the market is very much concentrated. These organizations are virtually immune system to the entrance of new organizations within the same current economic climate. This is because these companies have invested huge amounts to generate competitive advantages that they can use at a very low priced now. This will generate huge entry barriers to new organizations within the same economy. According to Hymer, these purchases may get into 3 major factors.
Technology
Firms commit large sums of profit research and development in the original stages to develop their own technology that they is now able to use to create goods at zero marginal costs. This will likely distinguish them from other small players in the economy, who aren't capable to invest such quantities in R&D. And such technology are normally secured by patent laws, so they are not easily imitable by other businesses.
Marketing
As the companies invest generally in R&D, same work will be put into building the brand and other marketing activities such as distribution, advertising campaigns. This will incur huge costs in the original periods, but will confirm good later when the firm establishes its brand value in the market. Again, it is a costly affair and can not be possible for other new businesses who want to enter the marketplace.
Management
These companies have top management teams at important tasks, and the techniques and methods that they use will be very expensive to construct, but are actually available to run and stable successfully, without further investment in management.
So, it's very expensive for a fresh firm to enter into such an industry since it needs large sums of opportunities in the initial stages. But, organizations in other economies which can be established and committed to the same areas on their own countries are competitive and are enticed by the profitability of the industry in the first country. Though they might incur huge amounts to setup management, recruiting and marketing functions, it will be less expensive compared to creation of a totally new firm. The firms with strong ownership advantages will enter in the market and become MNEs.
Once these organizations enter the market in a overseas country, the neighborhood firms for the reason that country identify the dominance of new players in the industry and those with strong OAs will retaliate by getting into the home market segments of their new challengers. Thus, the competition between your strong players on the market will change from national level to a global stage.
Hymer observed this kind of habits post Second World Battle, where first entry into Western european market by a US firm in particular industry business lead to the first accessibility of a Western firm in to the US for the reason that industry. Other European firms with stronger ownership advantages sensed the best way to defend their position is through retaliatory entrance of the opponents home country.
One important things to be mentioned in the oligopolistic structure is that all the companies in a particular industry will directly observe the behaviour of their competitors, i. e. their charges policies, marketing strategy or development etc. . . Being only few players, everyone will try to match their rivals move. For instance, in an Flight industry with 3 major players A, B & C, and when A reduce their fares, others will inevitably follow their avenue as more folks will be drawn towards A and can have an impact on the sales of B & C.
Criticisms
Hymer derived micro level theory of FDI, focusing on the market constructions that would permit different firms to become MNEs and his market-power methodology offers us different situations in which MNEs can or cannot survive and grow. But Dunning & Rugman (1985) increased their doubts stating that Hymer concentrated more on market-power approach and possession advantages and location advantages, but dismissed the exchange costs. According to them, firms have to have transaction specific property to minimise the expenses, whereas Hymer included tradable type advantages such as technology and economies of size. Yamin (2000) extended the argument stating that Hymer's micro-level theory helps us to investigate why businesses become MNEs by trading overseas, but his theory does not focus on the way the companies can operate efficiently in other countries using their organization level advantages.
Yamin noticed that Hymer assumes companies to be reactive to the structural market failures, but in fact, businesses are proactive in using their organization level advantages. Yamin also discovered that Hymer's theory concentrates only on revenue earning, where businesses round the world make an effort to develop their property to improve their inside efficiency. He also criticised Hymer's methodology towards oligopolistic marketplaces, saying they been successful through their size, alternatively than possessing possession advantages and the goal of oligopolies is to remove conflict. Yamin also disagreed with Hymer's notion of using possession advantages in oligopolies to reduce the competition, stating such changes in the oligopolies are inherent and natural consequences of working in market.
Conclusion
Despite the criticisms and quarrels saying that Hymer's theory is too simple and simple, we cannot ignore his contribution on the economic theories of understanding a global firm and phenomenon of development of MNEs throughout the world. At a time when everyone accepted the prevailing theory of FDI, Hymer stood up and challenged it and appealed there's a need to comprehend the MNEs at a micro level to be able to review their advancement over a period. Hymer derived his ideas of Micro level theory from Coase, concentrating on international movements of local businesses by transferring their assets abroad and their capacity to minimise conflict.
Due to his tragic loss of life, his thesis had not been popularised till 1976. The limitations of his theory cannot overshadow his achievements. Though his thesis was not accepted unanimously by all the economists, it provided basics for economists such as John Dunning to elaborate on the idea. As mentioned earlier, Stephen Hymer's micro-level theory gained a cult position in the framework of International Business. This will be enough for anybody to understand his contribution towards framework to understand the global company.
