Firm-specific advantage (FSA) at the firm level manifests itself in a higher productivity of comparable assets (tangible and intangible) than competitors (Caves, 1996). Since imitation of the advantage by competitors entails high costs and high risks,the owner of the advantage is protected for a certain period of time. Since the crucial firm-specific advantages are intangible (including strategic behaviour),they are mobile within the firm at low marginal costs. Hence, integration of value-added activities (Feenstra, 1998) within the firm (i.e., internal exploitation of advantages) is an optimal strategy. Patents is an obvious example of a firm specific advantage
Location-advantage, (or Country-Specific Advantage) on the other hand is immobile and is of a public-good nature as firms have access on equal terms (putting aside congestion problems). As location-advantage is bound to regions, it may lead to geographical fragmentation of value-added activities.
We can see the relationship between Firm and Country Specific Advantage by reference to the quadrant below.
- In Quadrant one firms rely on strong low factor costs and energy costs. Cost leadership would be the typical strategy
- Quadrant four firms have specialisms such as marketing, intellectual capital, R&D etc that would drive a differentiated strategy. Where they are located is largely irrelevant as these skills are mobile.
- In Quadrant three benefit from both low costs and differentiation, which may be attributable to good infrastructure and good supply of skilled employees. One example could be financial services in London or New York.
- Quadrant two firms would have no advantages and exit the market while Q4 firms attempt to move to Q3.
It has been argued that Free Trade Zones can affect firms position in the quadrants over time. For instance oil rich Canada has benefited from access to a larger US market. The Single European Market may have had similar benefits for firms.
Analysis of Firm Specific Advantage
Foreign Direct Investment
This has implications for FDI insofar as why would a foreign company inwardly invest rather than supply the products and services? Stefan Hymer argued that a direct foreign investor should possess some kind of proprietary or monopolistic advantage not available to local firms. These advantages must be economies of scale, superior technology, or superior knowledge in marketing, management, or finance. Therefore Foreign direct investment will and has taken place place because of the product and factor market imperfections. The direct investor will be a monopolist or, more often, an oligopolist in product markets. The firms would of course have perfected these advantages in their own home market first so that there would be little additional cost to implementing these advantages abroad. Bartlett and Ghoshal call this a multi-domestic strategy for achieving maximum responsiveness to the local market conditions. International, transnational and global strategies are also viable.
Caves (1971) expanded Hymer's theory and hypothesized that the ability of firms to differentiate their products - particularly high income consumer goods and services - may be a key ownership advantages of firms leading to foreign production. The consumers would prefer to similar locally made goods and thus would give the firm some control over the selling price and an advantage over indigenous firms. To support these contentions, Caves noted that companies investing overseas were in industries that typically engaged in heavy product research and marketing effort
Erramilli, Agarwal, & Kim (1997) contend that it is not meaningful to measure firm-specific advantage per se since it encompasses so many different things