UGF Lecture 3

Management > Global Firm > Dunning > Model 1 > Model 1 perfect > Model 1 imperfect

Model 1 - imperfect

Imperfect competition

If the industry in A and B conforms to the economists model of imperfect competition (with assumptions 2 and 3 unchanged), the products sold will differ in small ways. Consumers will thus be attracted to one good of one firm, rather than another. This will lead to the success and failures of enterprises.

Assume that there are now a few "star" firms with the top share of the market (6-7%), with several middle ranking firms (3-4%) and a large number of companies just surviving with a small share of the market (1%). These firms are differentiated by the strength of their competitive advantage.

Now assume that demand in B rises to that supernormal profits occur. This time firms from A can enter the market in B and survive. They could only be the star firms and with the cost of their foreignness, they would become middle ranking in B.

From this it can be concluded that those firms with the strongest OAs are more likely to become MNEs. Thus to become an MNE, a firm needs a unique ownership advantage, which differentiates it from other firms in the same industry. In addition, MNEs can only emerge if the market is imperfect.

Model 2