A critical evaluation of the advantage theory
Pages 4

The removal of conflict reason for control also relied on market failure. Hymer pointed out that enterprises are frequently connected to each other through markets across national boundaries. They compete by selling in the same markets or one firm may sell to another. In such a situation profits may be increased if one firm controls all the enterprises rather than having separate firms in each country. In other words, it is profitable to substitute centralised decision-making for decentralised decisionmaking. Whether this takes place will depend on whether markets are perfect. In particular, if there is duopolistic or oligopolistic interdependence between the firms involved in horizontal relationships, some form of collusion will increase joint profits, and once again integration or merger is possibly the most effective form of collusion. However, if there are many firms, or if entry is easy, then there is not much point in trying to control the market and international operations will not take place. A similar analysis will apply if the interdependence between firms is vertical. Again, as long as there are only a few buyers and sellers, integration or any other effective form of cooperation between the firms will increase joint profits. In neither the horizontal nor the vertical case is it necessary for one of the firms to possess an advantage over the others, although they are likely to be leading members of their respective national oligopolies. The only consideration is whether the increased profits from cooperation/collusion are more than sufficient to offset the costs of international operations. The important point is that international operation is no longer synonymous with the exploitation of some form of firmspecific asset under the firm’s own control.