knowledge will either leak out, making further licences difficult, or be used in
such a way that it damages the good name of the licensor. In each case there
are internalization advantages, so that a company will decide to carry out the
relevant activity itself in the foreign country.
Like rival theories, Dunning's approach is not seen as the be-all and end-
all explanation for the existence of multinationals. It does, however, succeed in
bringing together, in an elegant manner, what were until then a number of
relatively separate schools of thought.
By now we have discussed a number of reasons for international trade and
FDI. However, we cannot as yet explain why a particular nation is able to
achieve international success in a particular industry. In other words: why are
certain products successful in one country while other products are produced
in another country?
As we mentioned earlier, the theory of absolute and relative comparative
cost advantages (Section 3) offers a reasonable explanation for general trends
in international trade flows. Usually, however, these advantages cannot explain
why a certain country imports or exports specific industrial goods. As we will
discover in Section 7, economies of scale (Section 3) are an important source of
competitive advantage in many sectors of industry. We have already seen, how-
ever, that this theory does not really answer the question as to which country
will produce which product. The product life cycle theory (Section 4) has cer-
tainly made an important contribution to explaining the distribution of some
high-tech products, but it raises almost as many questions as it answers. Why
is it that one particular country leads the rest in a new industry? Why are some
industries seemingly immune to the loss of competitive advantage suggested
by Vernon? And why is it that in many sectors of industry, innovation is now
seen as an on-going process and not a one-off event, after which an invention
quickly becomes standardized and production is taken over by low-wage coun-
tries? Finally, Dunning’s eclectic theory (Section 4) provides us with a very
interesting and more or less comprehensive explanation of the existence of
multinational companies. It does not, however, explain why some countries
gain particular ownership advantages while others do not.
5 THE COMPARATIVE AND COMPETITIVE
ADVANTAGE OF NATIONS
Criteria for a theory of national comparative
and competitive advantageIn this section we will discuss Porter's analysis, in which he attempts to
provide an explicit answer to the questions listed above. Porter maintains that
The International Division of Labour 19