I will critically analyze Stephen Hymer’s contribution to the micro-level theory of Multinational Enterprise, especially on the concept of Ownership Advantage in his theory. Hymer raised debates on most important issue, what we call as ‘globalisation’ today. He observed the changes around the world in different times within his short life of 39 years, and critically analyzed the situations in different market structures and reflected his ideas in his thesis. It was originally completed in 1960, but was only published in 1976. MIT refused to sponsor the publication, as the thesis seemed too simple and straightforward and said it lacked quantitative and analytical framework and seemed to be a mere ‘ideology’. Despite all the arguments, Hymer’s contribution obtained a ‘cult’ status in the context of International business studies. Most theorists like Buckley, Casson, Dunning and Rugman derived their ideas from Hymer’s work. By the time of his tragic death in a car accident in1974, Hymer published over 40 articles in top journals like American Economic Review, The Journal of Political Economy, The Review of Economics and Statistics and The Economic Journal.

Need for a Micro Level Theory

As per the macro-level theory of Foreign Direct Investment (FDI), industries in the developed countries will invest in developing economies, but labour intensive countries in order to maximise efficiency and profits at the same time. So, as per the theory, FDI can move only in one direction i.e. from developed to developing economies. But post Second World War, FDI was moving only between two major developed nations, US & UK. One thing to be noted in capital rich countries is there is availability of capital, but fewer opportunities to invest in and vice-versa in capital poor countries. Going by this, any country should either export or import FDI, but not do both at the same time. And if capital availability is the only factor, major investments must be made in almost all the industries. But only some industries like pharmacy, automobile and technology were attracting more FDI in different countries and sectors like construction, aviation were less successful. As per 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 raising capital from the financial markets overseas. This was again not compatible with the actual FDI theory.

As the existing macro-level theory was not able to explain and substantiate the actual situation around the world, Hymer suggested a micro-level theory at a firm level, emphasising that there are some other factors which are unrelated to capital appears to determine the firm level FDI decisions.

In his thesis, Hymer focused more on International production rather than International trade, deriving ideas from Coase’s Nature of the firm (1937) which analyses firms in context of International activities and allocation of resources in various locations. Hymer also drew his ideas on the limitations of the neo-classical FDI theory, suggesting that it was not sufficient to explain the movements and formation of MNEs around the world, and there seems to be some other factors driving firms to invest overseas.

Ownership Advantages

As per Hymer, Ownership advantage is one of the most important factors that would help a firm to grow and survive as an MNE. Hymer argued that traditional theory was based on the idea of perfectly competitive market, in which all the firms earn normal profits when there is equilibrium and earn super normal profits when there is an increase in the demand. Going by this, the foreign firms will earn super normal profits until that point, where the demand meets supply again. Once this happens, the foreign firms will be driven out of the business due to excess transactional costs of being foreign. Therefore, Hymer suggested that firms need to do something more that would offset the disadvantage of being foreign. As per Hymer, MNE’s can survive only in imperfect markets with firms having Ownership advantages compared to other firms in the same industry. This tells us that the driver of MNE’s lie within the firm, rather than capital availability 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 see how Hymer’s micro level theory demonstrates the importance of ownership advantages.

Perfectly Competitive market

Assume an industry exists in 2 countries (A& B) and in both, conforms to the conditions of perfect competition. This means that there are huge numbers of firms that are using exact same technology to produce the same product. Therefore, all the firms in both the countries should charge the same amount to their customers and also face same costs of production. So in this case, all the firms in both the countries earn normal profits in industry equilibrium. Under these circumstances, no firm has an ownership advantage.

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Though the industries in both the countries are identical and produce the same type of product, some institutional factors such as labour markets, legal framework will differ between both the countries. Hymer argues these factors are major contributors towards disadvantages of being foreign.

Now, assume something happens in country B and there is a sudden