Monopolistic Advantage Of Internalization Theory

To begin with, regarding the fact in Hymer Theory, a national firm can start their operation in a foreign country by making a distinction between direct investment and portfolio investment that occur in abroad. Portfolio investment is create through capital market instruments securities such as stocks and bonds. In investment portfolio, the funds will be transferred to company that ask for the securities (issuer), not necessarily by creating new jobs. Although there are issues occurred after receiving the funds from capital market to enlarge its business or to open a new business, it also called employment.

Not to mention there is only a few funds that go to the issuer to strengthen the capital structure or even to pay bank loans. Most importantly,

Based on Buckley and Casson, they suggested that a firm overcomes market imperfections by creating its own market which called internalization theory. Internalization theory means that an extension of market imperfections which focused on the gains from internalization available in the presence of market failures. In other words, it is any market that does not perfectly follow the information flow and provide instantly available buyers and sellers. For instance, when foreign subsidiaries invest in companies that are not licensing, the company can send information across borders where it maintained it in the firm, which may produce better returns on investments

Thus, by having a manger that knows and understands headquarters desires and wants is therefore of great importance when investing and operation in foreign markets. By way of example, Toyota’s primary competitive advantage is about the sale of its reputation for high quality and its sophisticated manufacturing techniques, which can easily for them to convey by contract. As a result, Toyota has chosen to retain ownership of their automobile assembly plants which are located at abroad. Conversely, internalization theory holds that when transaction costs are low, firms are likely to contract with outsiders and internalize by licensing their brand names or franchising their business