Imperfect Competition and Bargaining Theory

1. Introduction

In Sections 6 and 7, efforts were made to explain how notions of enterprise capability can enhance our understanding of MNE. In this section, I wish to ask whether the theory of MNE would suffer if all references to market power and oligopoly theory were purged.57 I conclude that not much would be lost, and something would be gained. In doing so, the desire is to shed additional light on the Hymer theory of the MNE which wobbled schizophrenically between monopoly power and efficiency (internalization) inter- pretations.

2. The Theory of Imperfect Competition

The theory of imperfect competition endeavors to analyze how product and  factor  market  competition  evolves  when  price and output decisions are interdependent. Even in this domain, oligopoly theory is notorious for establishing results that are inde- terminate. Game-theoretic formulations make clear that different assumptions lead to different conclusions. Game-theoretic analysis, by proving that almost any outcome is possible, ends up proving nothing. Few economists claim that oligopoly theory is robust, and most recognize the unsatisfactory state of the theory of imperfect competition.

Since the work of Hymer, there have been numerous, but usu- ally quite perfunctory references to the theory of imperfect com- petition and oligopoly in the course of developing the theory of multinational enterprise. Frederick Knickerbocker (1973)  did  in fact develop a theory of  DFI  based  on  an  argument  that  firms will invest  abroad to  defend  markets  abroad.  In  essence,  he  has a “copycat” model of DFI where if one firm invests abroad, others will follow. The basic idea is that foreign investment is triggered not by the desire to seize opportunity, but by the desire to protect market power. DFI is insurance against unexpected competitive moves of one’s rivals. Knickerbocker’s reasoning lacks rigor or good logic.

Students of international business have “tipped their hat” in an almost perfunctory way to oligopoly theory and the theory of imperfect competition; in the next section, I suggest that a useful approach, at least until oligopoly theory finds its way is to (i) abandon it and (ii) focus on bargaining theory in the context of thin markets as a conceptual lens to help explain the multina- tional scope of the enterprise, and the division of profits between international firms and the (indigenous) owners of cospecialized assets.

3. Bargaining Theory, Cospecialization, and the MNE

As discussed earlier, the rationale for DFI and MNE activity fre- quently stems from the possession, by the enterprise, of difficult- to-replicate tangible and intangible assets, innovation routines, quality protocols, and the like. The exploitation of such capabilities frequently involves bringing together what the firm has at home with what other firms own abroad. Complementary technologies which are globally distributed but which must be aggregated for a new market opportunity to be addressed are a case in point. The particular geographic location in which complementary capabilities exist is of little moment. The issue is usually the same. No matter where they are located, there isn’t a well-developed market for the existence of such complementary (and possibly cospecialized) assets. Nevertheless, MNEs frequently need to make contractual arrangements for access to such assets.

Bargaining theory (not oligopoly theory) has something to say about the terms upon which access can be arranged. It suggests that the terms of trade are likely to be affected by whether either party has credible contractual alternatives. In this regard, game-theoretic models of small numbers bargaining arrangements which explore the implications of information asymmetry may well be relevant. However, the general framework isn’t one for which oligopoly theory yields deep insights. The situation is better characterized as one of bilateral “monopoly” in factor markets.

Of course, the monopoly power at issue isn’t the monopoly of market control which is the subject of antitrust (competition) policy. Rather, the situation to be modeled is one in which it is desirable to assemble complementary assets when input/factor markets are thin. Accordingly, traditional notions of oligopoly and imperfect competition are at best secondary to the issues which ought animate the theory of MNE.

In this regard, Hymer took the field of international business and international economies down the wrong path for three decades. It’s now time for these deficiencies to be addressed. The emerging literature on the resources/capabilities theory of the firm is endeav- oring to do so.

4. Public Policy

The notion that oligopoly/monopoly theory (focused on prod- uct market behavior) has utility with respect to understanding the essence of MNE strategy has already been challenged (Teece, 1981c, 1983, 1984) with respect to the theory of the MNE. For whatever reason, this challenge has largely gone unnoticed in the theoretical literature, although the actions of most policy makers today is consistent with them being unconcerned with Hymer’s worries about monopoly.58 My earlier critique was hos- tile to both Hymer’s interpretation of the MNE, as well as to the utility (in the context of MNE behavior) of oligopoly theory more generally.

The conundrum which the literature has been slow to sort out relates to both the positive and the normative theory of MNE. If one adapts a comparative institutional approach (as recommended by Williamson) then one would see the MNE not as an instrument of monopoly, but as an instrument of global efficiency, transferring technology to and enhancing capabilities in offshore subsidiaries. This is of course precisely what has happened over the past half- century of active DFI. Yet Hymer and his followers embraced the MNE with great ambivalence, enveloped as they were by market control theories of the MNE. One can take comfort that policy makers did not pay much attention; for to restrict DFI would have denied many countries access to the capability-enhancing capacities of MNEs. Indeed, whatever problems MNEs may have created, monopolizing markets at home or abroad has not been one of them. The presence of direct foreign investment by MNEs in a host economy usually results in higher wages, skill augmenta- tion, and higher quality products. Indeed, if anything, MNEs have tended to break up cozy relationships amongst incumbent domestic competitors. The growth of American DFI in the UK is a case in point.59

More vigorous competition (not diminished competition) seems to have followed the expansion of the MNE in practically all juris- dictions. Indeed, in the debate surrounding globalization, to the extent that MNEs are vilified, it is because they bring competition (not monopoly) and the erosion of market position to otherwise protected and inefficient domestic firms in the advanced industrial countries. Put differently, the policy concerns today are quite the opposite of Hymer’s.

Source: Teece David J. (2009), Dynamic Capabilities and Strategic Management: Organizing for Innovation and Growth, Oxford University Press; 1st edition.

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