exporting country should specialize in the production of only those products in which it has a
comparative cost advantage. This theory was based on the hypothesis of immobility of
factors of production as opposed to the mobility of products.
According to the theories based on market structure, firms which invest abroad must have
a comparative advantage in terms of one or more of the following factors:
- Cost of capital
- Economics of scale
- Infrastructure for research and development
- Funds for advertisement, etc.
These advantages should be sufficiently significant to offset the costs of setting up a
company in a foreign country.
The Theory of Product Cycle shows that the choosing by the firm between exporting,
producing abroad and license agreement depends on the stage of the product cycle. The
product cycle has three phases:
1) The product develops in the country of origin where the firm has a comparative
technological advantage. The firm may have a complete monopoly in its exports
without facing any competition from others. The product is not yet
technologically standardized.2) The technology of production settles down and the product attains maturity. At
this point, foreign competitors may appear on the scene. In order to maintain its
advantage, the firm may shift its location of production to countries where it can
obtain lower costs of production.3) The firm may start producing either in the country where it was previously
exporting or in a less developed country to take advantage of lower labor costs
with a view to exporting from there to the rest of the world.- Hymer’s Theory of Imperfect Markets.
S.Hymer, a Canadian economist developed this theory in 1960. First, he presented a
critique of neo-classical theory; according to the theory capital moves from countries
where it is abundant or where interest rates are low to countries where it is scarce or
where interest rates are high. In fact, the neo-classical theory could, to a great extent,
explain the American foreign investments in postwar years. However, it fails to explain
crossed investments in continents/countries like USA-Europe, Europe-Japan, Japan-USA.
Besides, multinational companies often borrow in financial markets of host countries to
finance their investment in that country and sometimes even to finance a part of their