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A review of Hymer’s contribution: market imperfections and the need to exercise control

The fundamental contribution of Hymer’s thesis can be summarised in two interrelated statements. First, DFI cannot be explained as inter-country flows of ‘capital’ responding to interest rate differences. Second, in order to explain DFI, it is necessary to explain why firms find it profitable to control firms in other countries. The problem with interest rate differential theory was precisely that it could not accommodate the significance of control. The importance of the concept of control in Hymer’s thinking about DFI and the TNC cannot be overstated. Hymer regarded DFI as one form of what he called ‘international operations’, by which he meant the various ways (full or partial equity ownership, licensing, formal cartels or tacit collusion) in which firms of one nationality can control the decision-making of another (Hymer 1976:32).1 Movements of capital associated with DFI were thus not a response to higher interest rates in ‘host’ countries but took place in order to finance international operations. In order to explain DFI it was necessary, therefore, to explain control. The exercise of control, in turn, was strictly linked with the prevalence of market failure. Hymer identified two reasons for control, one relating to the firm’s exploitation of advantages and the other based on the removal of conflict between firms. Both explanations for control rely exclusively on market failure.