Country-Specific Advantage
See also Firm-Specific Advantage
A (Multi-National Enterprise (MNE) operating a plant in a foreign country is faced with additional costs compared to a local competitor. The additional costs could be due to
- (i) cultural, legal, institutional and language differences;
- (ii) a lack of knowledge about local market conditions; and/or
- (iii) the increased expense of communicating and operating at a distance.
Therefore, if a foreign firm is to be successful in another country, it must have some kind of an advantage that overcomes the costs of operating in a foreign market. Either the firm must be able to earn higher revenues, for the same costs, or have lower costs, for the same revenues, than comparable domestic firms.
PROFIT = TOTAL REVENUES - TOTAL COSTS - COST OF OPERATING AT A DISTANCE
Since only foreign firms have to pay "costs of foreignness", they must have other ways to earn either higher revenues or have lower costs in order to able to stay in business. So, if the MNE is to be profitable abroad it must have some advantages not shared by its competitors. These advantages must be (at least partly) specific to the firm and readily transferable within the firm and between countries. These advantages are called ownership or firm specific advantages (FSAs) or core competencies. The firm owns this advantage: the firm has a monopoly over its FSAs and can exploit them abroad, resulting in a higher marginal return or lower marginal cost than its competitors, and thus in more profit. These advantages are internal to a specific firm. They may be location bound advantages (i.e. related to the home country, such as monopoly control over a local resource) or non-location bound (e.g. technology, economies of scale and scope from simply being of large size).
The a list below provides the various types of FSAs which the MNE can possess. There are three basic types of ownership advantages for a multinational enterprise. These include:
- Knowledge/technology, broadly defined so as to include all forms of innovation activities.
- Economies of large size (advantages of common governance) such as economies of scale and scope, economies of learning, broader access to financial capital throughout the MNE organization, and advantages from international diversification of assets and risks; and monopolistic advantages that accrue to the MNE in the form of privileged access to input and output markets through patent rights, ownership of scarce natural resources, and the like.
- Some of these O(rganizational) advantages can be found with de novo firms (i.e. first time overseas investments), others come from being an established affiliate in a large, far flung multinational enterprise. Economies of common governance clearly belong to the latter category. Therefore FSAs can change over time and will vary with the age and experience of the multinational.
Analysis of Country-Specific Advantages from a Resource Based View
The nature and role of country-specific resources (CSRs) goes back to the work of the early trade theorists who focused their analyses on basic factor inputs such as land, labour and capital. In this context, CSRs were seen as inherited rather than created with the result that a country's endowment of CSRs was taken as fixed or static and second, that CSRs were locationally immobile meaning that availing of these resources required some form of presence in the country in which they were held. From a competitive viewpoint, the focus of attention was on the basic inputs into the production process and on how endowments of these factors varied from country to country.
More recent work has broadened the discussion of CSRs still further to include not only inherited resources but also those that are created by a country. The common feature of this type of resource is that it is a product of investments made over a long period of time in any given country. Typical examples of such resources which have been cited in the literature include the nature of the
- education system
- technological and organisational capabilities
- communications and marketing infrastructures
- labour productivity and
- research facilities
For example a study by Shan and Hamilton (1991) demonstrated how the success of the US biotechnology industry was a function of a collection of unique, advanced resources including, government support for research in the field, an aggressive entrepreneurial culture supported by favourable capital markets, and a high level of R&D expenditure. Their study also showed that it was a desire to gain access to these unique country-specific resources which was the basis for Japanese cooperative ventures with American firms in this industry.
It is necessary to fully explore the relationships between a firm's stock of firm-specific resources and its country-of-origin. Dunning (1981) has argued that firm-specific advantages (resources), though endogenous to particular firms, are not independent of their industrial structure, economic systems and institutional and cultural environments. Thus, for example, much of the international success of Japanese firms has been attributed to the role of their home government and its ministries as well as the ethos of the Japanese population towards work, authority and living standards
Gray (1982) draws a distinction between "physical" national characteristics (land, natural resources, labour supply and capital) that influence the stock of country-specific resources and "social" national characteristics (social structure, tax structure, treatment of R&D and government policy) which influences a country's stock of firm-specific resources.
The most comprehensive treatment of the links between the physical, economic and institutional environment of a country and its stock of CSRs and FSRs is provided by Porter's Diamond of National Advantage (Porter 1990; 1991).
In short, the resource-based view of the firm also promises to greatly inform issues relating to international marketing strategy. Firms in different countries may originate from and operate in very different environments. Consequently, they may develop resource configurations that can have a dramatic impact on international competition as illustrated,
Country Specific Advantages (The L(ocation) Factor)
The firm must use some foreign factors in connection with its domestic FSAs in order to earn full rents on these FSAs. Therefore, the locational advantages of various countries are key in determining which will become host countries for the MNE. Clearly the relative attractiveness of different locations can change over time so that a host country can to some extent engineer its competitive advantage as a location for FDI.
The country specific advantages (CSAs) that influence where an MNE will invest can be broken into three categories: E, S and P (economic, social and political). Economic advantages include the quantities and qualities of the factors of production, size and scope of the market, transport and telecommunications costs, and so on. Social/cultural advantages include psychic distance between the home and host country, general attitude towards foreigners, language an cultural differences, and the overall stance towards free enterprise. Political CSAs include the general and specific government policies that affect inward FDI flows, international production, and intrafirm trade. An attractive CSA package for a multinational enterprise would include a large, growing, high income market, low production costs, a large endowment of factors scarce in the home country, and an economy that is politically stable, welcomes FDI and is culturally and geographically close to the home country.
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