A Motive for MNC’s going International

The process of internalization is strategic, it serves as an efficient method for corporations to maintain dominance within a market. Internalization of the market is buying up competition instead of risking to compete with them. It poses as an alternate solution to competing. A key example of internalization is when a corporation has competition in the same market, but the competitor has some sort of advantage; such as technological advancements. Instead of the dominant firm attempting to create its own technology similar to the competitor, the firm can simply buy up the competition. This will not only reduce the competition, but it will also provide the firm with access to the competitor’s advantage. This internalization is consistent with the OLI model; which is a liberal theory that is a possible explanation for why MNCs go international. Dunning views markets as spontaneous, natural and imperfect regarding property knowledge. OLI theorizes that corporations have incentives to internalize the market. This incentive is due to the profit maximizing motives. For example, its more efficient to buy up competition and their technology instead of attempting to create the technology. OLI has three requirements of MNCs; 1) MNCs must own specialized knowledge. 2) Foreign investment must be more advantageous than home markets and 3) Export and licensing agreements must be less attractive than FDI. This OLI model is complimented by Spero and Hart’s oligopoly theory which claims that firms move aboard to exploit the monopoly power they possess through factors such as unique production, control of technology etc. it should be noted that both of these models focus on competitive advantage or core competence strategy. The knowledge, skills and resources that corporations possess provide them with a competitive advantage compared to others. A key factor that increases competitive advantage is the division of labour which is when production is spilt up into various specific activities and carried out by affiliates in different locations. A location which is best suited to that particular production or service, thus providing a competitive advantage. A key success of the division of labour is illustrated by international subcontracting. The offshore sub-contracting by firms is an example this. Finally, the internalization process is likely to reduce exports and licensing. As illustrated by the requirements of OLI, internalization is successful if licensing and exports are less advantageous. Therefore, it is evident that internalization will result in the reduction of these other methods. Internalization proves to be an efficient model, however, with technology continuously expanding, internalization has become too costly or difficult. Due to this, corporations should conduct cost-benefit analysis of all three models (OLI, PCM, GRP) in order to determine which model is best and if they should even go international.

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