company. The range of advantages, which can be both tangible and intangible, can
be very wide. According to Rugman (1987) they can be summarized as follows:
- proprietary technology due to research and development activities;
- managerial, marketing, or other skills specific to the organizational function of
the firm; - product differentiation, trademarks, or brand names;
- large size, reflecting scale economies;
- large capital requirements for plants of the minimum efficient size.
The presence of ownership advantages, however, in no way fully explains the
existence of the multinational company. For example, if a company gains an
ownership advantage over other companies for a certain foreign market, it
could simply export its products to that market. That is why the second con-
dition must also be present: location advantages.
Location advantages include all of the factors which we discussed with
respect to the classic theories of trade and which we will discuss in Section 5
with respect to Porter’s analysis, ranging from an abundance of fertile land and
cheap labour to a liberal capital market and a sound infrastructure. To that we
can also add the favourable investment conditions offered by some countries in
order to attract foreign investors. These may be in the form of subsidies, tax
exemptions, or cheap housing. The benefits for the firm come from the combi-
nation of ownership advantages and location advantages. However, even if this
is the case, it will not necessarily lead to FDI and, therefore, to the establishment
of a multinational company. After all, the company can also sell its ownership
advantages or license them out to another company in the foreign market. That
is why the third condition must be met: internalization advantages.
A company possesses internalization advantages if it is more profitable to
exploit its ownership advantages itself in another country than to sell or
license them. There are countless arguments in favour of internalization. To a
large extent these arguments have their origin in Coase’s and Williamson’s
transaction cost approach (1937 and 1975 respectively). In the first place, if the
ownership advantage is a combination of highly specific company factors, it
might be difficult to sell or license it. And even if it were possible, the advan-
tages and the contract for these advantages would be so complex that setting
up and exploiting them would be extremely costly. This applies to a lesser
degree if the advantage being sold is a specific, easily isolated invention. The
problem in this situation, however, is that it would be difficult for the
buyer/licensee to get a good idea of what he is purchasing or acquiring a licence
for. After all, if the licensor releases too much information before concluding
the contract, he will have very little left to sell or license. Finally, the company
may be afraid that by licensing certain company-specific knowledge, this
18 International Human Resource Management