Monopolistic Advantage Theory

11/11/2016 AD655 International Business, Economics and Cultures

Rhoda Moore
Assignment 1
Professor Jung Wan Lee , Ph.D.
Introduction

Monopolistic Advantage Theory has played an integral part in how some parts of the world has

developed, giving the receiving country access to products and services that would not otherwise

have been available in their locale.

It suggests that foreign direct investment is made by organizations in sectors or countries where

there is little or no competition. This is afforded by the company possession superior products or

services in comparison to those of the indigenous country. These advantages normally fall into

these main categories, economies of scale, superior technology, or superior knowledge in

marketing, management, or finance.

The Five Forces approach emphasize fives categories that must be carefully analyzed before

making a decision concerning entering an FDI arrangement. Establishing this foundation allows

the business to meaningfully examine important concepts and perform their risk assessment

before starting the investment process.

Firms possessing monopolistic advantage are at liberty to choose strategies that they feel will

best maximize their investment. The strategies are not always as successful as planned, therefore,

the principals of these multinational companies must take the time to assess the reasons so many

companies, who in the past, possessed the monopolistic advantage, have failed.

Article Review
MNCs, as one of their strategies to expand their business, invest by way of Foreign Direct

Investment in countries where based on their strategies, they expect to continue making profits.

Wonglimpiyarat (2012), in his study, to analyzed how MNCs such as Apple and Microsoft use
technology strategies and competition to establish technology standards. These standards, when

established countries, afford them a monopolistic advantageous position allowing them, through

innovation, to gain a footprint in these countries.

MNCs must consider their position in each market carefully, as they may find themselves

investing and not making the expected returns on their investment. Michael Porter, (1980, 1985)

through his model, demonstrated how a company or industry can be analyzed to establish

whether or not competitive advantage exists.

In his article, Wonglimpiyarat (2012), showed where Apple had the advantage of superior

technology, however, they underestimated the barriers to entering that market, no doubt, due to

its exceptional technology. They were accurate in doing the best they could to safeguard their

technology. This monopolistic advantage was short-lived as Microsoft entered the market with a

substitute product at a much reasonable price which the consumers were willing to accept. Apple

had indeed set a standard that made it difficult for most companies to even try to compete with

them, but Microsoft in its strategies, not only broke into the market but set another standard that

has been accepted to date. Notwithstanding, Apple still has a share of the market, but Microsoft

has by far reached a larger percentage of the population world-wide. Wonglimpiyarat (2012)

went further to show that having gained a competitive advantage, Microsoft was then able to

launch multiple products to attract different segments of the market.

We see this kind of business strategy playing out in different industries as large companies seek

to gain advantage over their competitor.

On the other hand, IBM, seeing the plight of Apple did their analysis and moved forward. They

entered the market when Apple had the monopolistic advantage. They ceased the opportunity to
get a piece of the pie until eventually, they took the larger portion. Apple, as was said earlier,

knew the treasure they had and held it close to their bosoms. This strategy worked against them

in the long run because their computers could not be afforded by everyone and their platform

was restricted. Since they had superior knowledge, they were high priced. They took a strategic

decision to not create interconnections with others, alternatively, they pursued a niche market

producing extravagant products. IBM, alternatively, was extremely free with their platform.

Which incidentally was what led to their success and eventually their downfall. Since the IBM

platform was unrestricted, developers were encouraged to create clones of IBM Pcs. By this

time, IBM had become the market leader, owning the platform most compatible with other

networks. According to Shim and Lee (2012), IBM became the platform owner in the early

1980s taking over from Apple who held that position up to the 1970s. Giving free access to

cloning meant increasing its market share and extending to area where they may not have

previously considered. This monopolistic advantageous position allowed IBM to charge high

prices resulting in high prices to some consumers, while other enjoyed a more economic price.

Their open-standard strategy made handsome profits, with Intel and IBM being the official

platform owners, they were able to leverage their position. As platform owners, they possessed

the ability to control the evolution of the platform architecture. (Shim and Lee, 2012) Alas, their

open-standard strategy failed them just like Apples. So this challenges the position of the

monopolistic advantage theory, as in both cases, these firms did have superior knowledge,

cutting edge technology and were well respected for their product. My position is that it takes

more than these factors. They are a few other things that are of significant importance.

On the other hand, in addition to the factors that should be present for monopolistic advantage to

take place, namely economies of scale, superior technology and knowledge. Majeed and Ahmad,
(2009) alluded that other factors that play a significant role in the success of such an investment.

He highlighted openness, exchange rate, domestic expenditures and trade ratios as important

elements that must be given serious consideration. We can see where these other factors could

indeed have a significant negative effect on the profitability of the MNC. Majeed and Ahmad,

(2009) described exchange rate as having a negative impact on the FDI. An increase in the host

countrys exchange rate as against the subsidiary will result in a devaluation of the hosts

countrys currency. This occurrence will cause the subsidiarys purchasing power to strengthen

against the host country. Furthermore, an exchange rate decline in the host country will result in

the subsidiary the ability to spend more on labour, thus increasing the level of production. In

other words, the purchasing power of the subsidiary will increase. The subsidiary would benefit

from this arrangement more than the host country.

Conclusively, if the exchange rate volatility in the subsidiary country is assessed as being high,

monopolistic advantage may not be realised ceteris paribus. The host country will no doubt be

very cautious in the value of the investment made. This action may result in a lesser return than

could have otherwise be realised.

Rahman (2009,2010) also examined how MNCs exhibited their monopolistic advantage in the

international subsidiary. He specifically considered the role that corporate governance played in

maximising the monopolistic advantage.

He points out that the MNCs needs to create internationally cohesive operations to sustain

control over their advantage. He emphasize that in order for the MNC to be successful they must

possess substantial monopolistic advantages to effectively contain the operational costs that are

generated based on the differences in law, culture and political sectors among other.
He furthers posits that authority would naturally pass from the parent MNC to the subsidiary.

Therefore in the initial stages especially, funds must be reserved to facilitate this integration

process. The MNC must assess the differences specifically as it relates to corporate governance,

employment law, supplier-customer etiquette. (Rahman, 2009,2010) Though a thorough analysis

will be done such as the Porters Five Forces, in the initial stage, this analysis more than likely

would not have gone in depth in assessing the softer skills and technical knowledge that will be

needed for the FDI to be successful. Having monopolistic advantage the MNC possess superior

knowledge and technology, but how will it execute this in the subsidiary? Of course, it will need

to harness the skills of workers who are trainable or who have already been exposed to these

technology. The manner in which this exercised is very critical to the success of this investment.

If management and staff of the newly acquired subsidiary does not trust the MNC then executing

its strategy will be an uphill battle.

Foreign direct investment, we must admit, has played a significant part in the development of

world economies. Initially, such investments may have been quaint, however, innovation and

technology has exploded leaving the world with a pheltora of creations which continues to

evolve. In spite of this, Anwar, (2016) has reported that many leading countries who have

actively participated in globalization are now saying that it may be to the detriment of the world

at large. They have, however, admitted that FDI has been the main source of growth of

international businesses. He shared that critics are of the opinion that globalization is eroding the

local customs and laws. He said this happens in two ways, globalization of markets and

globalization of production. Globalization of markets causes domestic markets to somewhat lose

their culture as they seek to embrace the offerings of these MNCs. Before long, the MNC will
establish itself in a market and eventually develop monopolistic advantage if the conditions are

conducive.

While the monopolistic advantage theory seem to support investing in foreign countries, I do

wonder where the balance should be. I say this because labour intensive industries in the host

countries is now left void of jobs. This allows a MNC to continue to enjoy monopolistic

advantage, however, the rate of employment, specifically those of semi-skilled and unskilled

workers. (Anwar, 2016) declines. Without jobs, these people may become self-employed or

become a burden to the government, who must now supply them with food stamps and other

benefits. Other social ills may befall the area as well.

Conclusion

There should be no doubt in anyones mind as to the value and contribution monopolistic

advantage has played in the development of both international and domestic businesses.

Empirical studies have also shown that countries who do not participate in international in one

way or another has not shown much economic growth. Having agreed on those facts though,

there are still unanswered questions. Where do we draw the line? Does foreign direct investment

really benefit the host country on a whole? Is this beneficial for the government in the long term?

Is it really sustainable?
References

Anwar, S. (2002) Globalization and National Economic Development: Analyzing Benefits and
Costs." Journal of Business and Management 8.4 (2002): 411-23.

Majeed, M., Ahmad, E. (2009) An analysis of Host country characteristics that determine
FDI in developing Countries: Recent Panel data evidence. The Lahore Journal of
Economics 14.2 (2009): 71-96.

Rahman, M. (2010) Corporate governance in the European Union: Firm nationality and the
'German' model. Multinational Business Review 17.4 (2010): 77-98.

Shim, S., Lee, B. (2012) Sustainable competitive advantage of a system goods innovator in a
market with network effects and entry threats. Decision Support Systems 52.2 (2012):
308.

Wonglimpiyarat, J. (2012) Technology strategies and standard competition Comparative

innovation cases of Apple and Microsoft. Journal of High Technology Management
Research 23.2 (2012): 90.