Country-Specific Advantage
A (Multi-National Enterprise (MNE) operating a plant in a foreign country is faced with additional costs compared to a local competitor. The additional costs could be due to
- (i) cultural, legal, institutional and language differences;
- (ii) a lack of knowledge about local market conditions; and/or
- (iii) the increased expense of communicating and operating at a distance.
Therefore, if a foreign firm is to be successful in another country, it must have some kind of an advantage that overcomes the costs of operating in a foreign market. Either the firm must be able to earn higher revenues, for the same costs, or have lower costs, for the same revenues, than comparable domestic firms.
PROFIT = TOTAL REVENUES - TOTAL COSTS - COST OF OPERATING AT A DISTANCE
Since only foreign firms have to pay "costs of foreignness", they must have other ways to earn either higher revenues or have lower costs in order to able to stay in business. So, if the MNE is to be profitable abroad it must have some advantages not shared by its competitors. These advantages must be (at least partly) specific to the firm and readily transferable within the firm and between countries. These advantages are called ownership or firm specific advantages (FSAs) or core competencies. The firm owns this advantage: the firm has a monopoly over its FSAs and can exploit them abroad, resulting in a higher marginal return or lower marginal cost than its competitors, and thus in more profit. These advantages are internal to a specific firm. They may be location bound advantages (i.e. related to the home country, such as monopoly control over a local resource) or non-location bound (e.g. technology, economies of scale and scope from simply being of large size).
The a list below provides the various types of FSAs which the MNE can possess. There are three basic types of ownership advantages for a multinational enterprise. These include:
- Knowledge/technology, broadly defined so as to include all forms of innovation activities.
- Economies of large size (advantages of common governance) such as economies of scale and scope, economies of learning, broader access to financial capital throughout the MNE organization, and advantages from international diversification of assets and risks; and
monopolistic advantages that accrue to the MNE in the form of privileged access to input and output markets through patent rights, ownership of scarce natural resources, and the like.
- Some of these O(rganizational) advantages can be found with de novo firms (i.e. first time overseas investments), others come from being an established affiliate in a large, far flung multinational enterprise. Economies of common governance clearly belong to the latter category. Therefore FSAs can change over time and will vary with the age and experience of the multinational.
Country Specific Advantages (The L(ocation) Factor)
The firm must use some foreign factors in connection with its domestic FSAs in order to earn full rents on these FSAs. Therefore, the locational advantages of various countries are key in determining which will become host countries for the MNE. Clearly the relative attractiveness of different locations can change over time so that a host country can to some extent engineer its competitive advantage as a location for FDI.
The country specific advantages (CSAs) that influence where an MNE will invest can be broken into three categories: E, S and P (economic, social and political). Economic advantages include the quantities and qualities of the factors of production, size and scope of the market, transport and telecommunications costs, and so on. Social/cultural advantages include psychic distance between the home and host country, general attitude towards foreigners, language an cultural differences, and the overall stance towards free enterprise. Political CSAs include the general and specific government policies that affect inward FDI flows, international production, and intrafirm trade. An attractive CSA package for a multinational enterprise would include a large, growing, high income market, low production costs, a large endowment of factors scarce in the home country, and an economy that is politically stable, welcomes FDI and is culturally and geographically close to the home country.
See Also Firm-Specific Advantage
