Template:SFR:Today's Featured Article3/2016
See also Firm-Specific Advantage, Porter's Diamond of National Advantage and Sources of Strategic 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).
