Exploring the Knickerbockers theory of oligopolistic competition

September 24, 2017 Human Resources

In conformity with Kaleem ( 2011 ) , the Knickerbockers ‘ theory of oligopolistic competition involves readings, presentation, quizzes and resources. This theory forms portion of the following attack to horizontal foreign direct investing ( FDI ) . An oligopoly is a concern industry in which a few houses control most of the market. For case, an industry where four organisations control about 85 % of the domestic market may be considered as an oligopoly. Examples of such industries include the oil and planetary tyre industries. In the same line of idea, concerns in an oligopoly industry are rather sensitive to market portion and loss of market portion in such an industry is frequent an debut to the extinction of a house. Therefore, when one organisation reduces monetary values, opens a new market or expands capacity, the other houses in the market have to rapidly react in sort or else hazard fring their market portion. In that instance, Knickerbockers ‘ theory is that when one oligopoly member undertakes FDI, the other members feel forced or constrained to imitate/copy that thought ( Kaleem 2011 ) .

On the other manus, the eclectic theory is based on the OLI paradigm which is a mix of three diverse theories of FDI that concentrate on a certain inquiry of FDI=O+L+I. The O in the equation represents ownership advantages or house specific advantages ( Hill 2011 ) . On the other manus, ‘L ‘ represents the location advantages while ‘I ‘ bases for internalisation advantages. The organisation ‘s specific advantage is usually intangible and can be transmitted within the international endeavor at a low cost ( economic systems of graduated table benefits, engineering, and trade name name ) . Harmonizing to Hill ( 2011 ) , the advantages may ensue to take down costs or/and higher gross that can compensate the costs of runing distantly in an abroad location. However, a transnational house runing a works in a foreign state is faced with excess costs paralleled to a place rival. These costs may include increased communicating costs and distant operation, institutional, legal and linguistic communication diversenesss, and deficiency of cognition sing local market conditions. Basically tormenting ‘s theory ties together ownership advantage, internalisation advantage, and location advantage.

In proportion to Ietto-Gillies ( 2005 ) , the Knickerbockers ‘ theory is utile in explicating foreign direct investing because it is based on the impression that FDI flows are a strategic competition contemplation between organisations in the planetary market place. The theory looks at the relationship between foreign direct investing and competition in oligopolistic industries. A critical competitory feature of an oligopoly industry is mutuality of the cardinal participants: this means that the actions of one house may hold an instant impact on the cardinal rivals, restraining a response in sort ( p. 88 ) . For case, if steadfast C is an oligopoly and cuts its monetary values, house C has the ability to take away market portion from its challengers, restraining them to react with the same monetary value cuts so as to retain their market portion. This type of imitative behaviour may take a figure of signifiers in an oligopoly.

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One house increases monetary values, the other houses follow the lead, and one house expands its capacity and the rivals copy for fright that they may be left in a disadvantageous place in the close hereafter. Based on this, Knickerbockers ‘ argued that a similar type of imitative behaviour characterizes foreign direct investing. Taking an illustration of an oligopoly in the U. S, in which three houses Q, R and S dominate the market, house Q decides to alter the packaging of its merchandises and trade names. Apparently, houses R and S reflect in instance this venture is successful, it may perchance take to increased client penchant on the merchandises and trade names of house Q therefore giving the house the advantage of decently packaged trade names and the first house to present such sort of packaging. Besides steadfast Q might recognize some client demands that other houses have non yet discovered and get down working on them. Given these options, house R and S decide to copy steadfast Q and get down packing their merchandises in a similar mode ( Hill 2011 ) .

Harmonizing to Hill ( 2011 ) there is sufficient grounds that such imitative features lead to foreign direct investing. As a affair of fact, surveies that looked at foreign direct investing by houses in the United States during the 1950s and 1960s indicate that organisations based in industries that are oligopolistic tended to copy one another ‘s FDI.

A similar happening has been observed with mention to foreign direct investing undertaken by houses in Japan during the 1980s. For illustration, Nissan and Toyota responded in sort to investings by Honda in Europe and the United Sates by set abouting their ain foreign direct investing in Europe and the United States. Furthermore, it ‘s possible to spread out Knickerbockers ‘ strategic behavior theory to encompass the multipoint competition construct. Actually, multipoint competition consequences when two or more concerns come across each other in distinguishable national markets, regional markets, or industries. However, economic theory puts frontward that to a certain extent like cheat participants cheating for advantage, organisations will try to fit the moves of one another in assorted markets to do an attempt to keep one another in cheque. The chief thought is to do certain that a rival does n’t derive a demanding place in one market and after that use the net incomes generated to minimise onslaughts that are competitory to other markets ( Erdilek 1985, p. 68 ) .

In relation to Hill ( 2011 ) , Samsung Mobile Phone Company and Nokia Phone Company for case, vie against one another in the planetary market. If Nokia enters a certain foreign market, Samsung will follow the lead. Surprisingly, Samsung feels compelled to copy Nokia in order to guarantee that Nokia does n’t derive a place that is dominant in the planetary market that it could perchance leverage to derive competitory advantage in other markets. However, the reverse besides hold, with Nokia copying Samsung when the house is the first 1 to travel into a foreign market.

Similarly, the enlargement of Electrolux into Latin America, Asia, and Eastern Europe was partially driven by similar behaviours by its planetary challengers such as General Electric and Whirlpool. In fact, the foreign direct investing behaviour of Electrolux, General Electric, and Whirlpool might be explained partially by multipoint competition and competition in a planetary oligopoly. Although Knickerbocker ‘s strategic behavior theory and its extensions can be utile in explicating imitative foreign direct investing behaviour by organisations in oligopolistic industries, it does n’t give grounds as to why the first organization/company in oligopoly decides to set about foreign direct investing, instead than to licence or export. Contrary, the account on market imperfectnesss addresses this issue. Besides, the imitative theory does n’t turn to the topic of whether foreign direct investing is more efficient than licencing or exporting for planetary enlargements. Again, this issue is addressed by market imperfectnesss ( Hill 2011 ) .

On the other manus, Dunning ‘s ‘eclectic ‘ theory argues that location-specific advantages are utile in explicating the way and nature of foreign direct investing ( FDI ) . Location-specific advantages refer to the advantages that result from utilizing assets that are tied to a specific foreign location or resource gifts and that an organisation considers valuable to unite with its ain exceeding assets such as the organisation ‘s selling, technological and direction know-how. Thus, Dunning argues that uniting resource gifts or location-specific assets and the alone assets of the house frequently requires foreign direct investing. It requires the company to set up production installations where such resource gifts and foreign assets are located ( Tormenting 2002, p. 205 ) .

Consistent with Dunning & A ; Lundan ( 2008 ) , clear illustration of Dunning ‘s ‘eclectic ‘ theory statements are natural resources like oil and other minerals, which by their behaviour are specific to certain locations. However, Tormenting puts frontward that a company must set about foreign direct investing so as to work such foreign resources. Subsequently, this explains the foreign direct investing undertaken by most planetary oil companies, which must put where oil is located in order to unite their managerial and technological know-how with this cherished location-specific resource ( Dunning & A ; Lundan 2008, p. 87 ) .

Along the lines of Jones & A ; Dunning ( 1997 ) besides, low-priced highly-skilled labour is an obvious illustration of valuable human resources. The accomplishment and cost of labour varies from one state to another. In position of the fact that labour is non globally nomadic, in conformity with Dunning ‘s ‘eclectic ‘ theory it is sensible for a house to turn up production resources/facilities where the accomplishments and cost of local labour are suited to its peculiar procedures of production. For case, Electrolux is bit by bit constructing mills in China because in China there is an abundant supply of inexpensive but skilled and knowing labour. Hence, besides other factors, China is a perfect location for fabricating domestic contraptions for both the Chinese and planetary market ( Jones & A ; Dunning1997, p. 19 ) .

However, Dunning ‘s theory has suggestions that go beyond basic resources like labour and minerals. Taking Silicon Valley into consideration, which is the planetary semi-conductor and computing machine industry Centre. A figure of planetary major semi-conductor and computing machine companies such as Silicon Graphics, Intel, and Apple Computer are located near to one another in the California Silicon Valley part. Consequently, much of the production development and cutting border research in semi-conductors and computing machines take topographic point in this part ( Harzing & A ; Ruysseveldt 2004, p. 71 )

In line with Dunning ‘s ( 2002 ) statements, know-how being generated in Silicon Valley with mention to the maker and design of semi-conductors and computing machines is non available anyplace else in the universe. Since its commercialized, that know-how spreads throughout the Earth, but the taking cognition border coevals in the semi-conductor and computing machine industries is found chiefly in Silicon Valley. In the linguistic communication of Dunning, this implies that Silicon Valley has a location-specific advantage in cognition coevals in the semi-conductor and computing machine industries.

Partially, this advantage consequences from the rational endowment concentration in this part, and partially consequences from a web of informal contacts that enable houses to deduce benefit from the cognition coevals of each other. Such cognition is referred by economic experts as “ spillovers ” as outwardnesss and a well-established theory gives the suggestion that houses can deduce benefits from such outwardnesss by turn uping near their beginning ( p. 273 ) . So far, this is the instance, it is sensible for foreign semi-conductor and computing machine houses to put in production and research installations so they besides can derive knowledge about and usage of valuable emerging cognition before those located elsewhere, in so making giving them a competitory advantage in international market place. Surveies suggest that Nipponese, Chinese, European, and South Korean semi-conductor and computing machine houses are extremely puting in the Silicon Valley country, in peculiar because they wish to deduce benefits from the outwardnesss that come up in the part.

In a similar line of idea, others have argued that foreign direct investing in the United States industry of biotechnology has been motivated by the want to derive entree to the exceeding location-specific technological cognition of the United States biotechnology houses. Basically, the state ‘s specific advantages may be economic, political, or societal. Therefore, Dunning ‘s ‘eclectic ‘ theory is utile in add-on to the Knickerbockers ‘ strategic behavior theory for it helps in explicitly explicating how location factors impact the way of foreign direct investing ( Dunning & A ; Gray 2003, p. 55 ) .

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