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Exploring the Knickerbockers theory of oligopolistic competition

In accordance with Kaleem (2011), the Knickerbockers' theory of oligopolistic competition involves readings, presentation, quizzes and resources. This theory forms area of the next approach to horizontal foreign direct investment (FDI). An oligopoly is an enterprise industry when a few businesses control the majority of the market. For example, a business where four organizations control about 85% of the domestic market may be looked at as an oligopoly. Examples of such industries include the oil and global tire industries. Within the same type of thought, businesses in an oligopoly industry are quite sensitive to advertise share and loss of market share in this industry is frequent an introduction to the extinction of a firm. Therefore, when one organization reduces prices, opens a new market or expands capacity, the other companies in the market have to quickly respond in kind if not risk loosing their market share. If so, Knickerbockers' theory is that whenever one oligopoly member undertakes FDI, the other members feel forced or constrained to imitate/copy that idea (Kaleem 2011).

On the other hand, the eclectic theory is based on the OLI paradigm which is a mixture of three diverse theories of FDI that concentrate on a certain question of FDI=O+L+I. The O in the equation represents ownership advantages or firm specific advantages (Hill 2011). Alternatively, 'L' represents the positioning advantages while 'I' means internalization advantages. The organization's specific advantage is normally intangible and can be transmitted within the international enterprise at an inexpensive (economies of scale benefits, technology, and brand name). According to Hill (2011), the advantages may result to lower costs or/and higher income that can counterbalance the costs of operating distantly within an abroad location. However, a multinational firm operating a plant in a foreign nation is confronted with extra costs paralleled to a home competitor. These costs may include increased communication costs and distant operation, institutional, legal and language diversities, and insufficient knowledge regarding local market conditions. Basically dunning's theory ties together ownership advantage, internalization advantage, and location advantage.

In proportion to Ietto-Gillies (2005), the Knickerbockers' theory pays to in explaining foreign direct investment because it is dependant on the notion that FDI flows are a strategic rivalry reflection between organizations in the global marketplace. The idea looks at the partnership between foreign direct investment and rivalry in oligopolistic industries. A crucial competitive characteristic associated with an oligopoly industry is interdependence of the main element players: this means that the actions of one firm may have an instant impact on the main element competitors, constraining a reply in kind (p. 88). For example, if firm C is an oligopoly and cuts its prices, firm C has the ability to eliminate market share from its rivals, constraining those to respond with the same price cuts so as to retain their market share. This sort of imitative behavior might take a number of forms within an oligopoly.

One firm increases prices, the other organizations follow the lead, and one firm expands its capacity and the opponents copy for fear that they may be left in a disadvantageous position in the near future. Predicated on this, Knickerbockers' argued that a similar type of imitative behavior characterizes foreign direct investment. Taking a good example of an oligopoly in the U. S, where three firms Q, R and S dominate the marketplace, firm Q decides to improve the packaging of its products and brands. Apparently, organizations R and S reflect in case this venture is successful, it may possibly lead to increased customer preference on the products and brands of firm Q hence giving the firm the benefit of properly packaged brands and the first firm to introduce such kind of packaging. Besides firm Q might realize some customer needs that other businesses have not yet discovered and commence focusing on them. Given these options, firm R and S decide to imitate firm Q and begin packing their products in a similar manner (Hill 2011).

According to Hill (2011) there is sufficient evidence that such imitative characteristics lead to foreign direct investment. As a matter of fact, studies that looked at foreign direct investment by organizations in america through the 1950s and 1960s indicate that organizations based in industries that are oligopolistic tended to imitate one another's FDI.

A similar occurrence has been observed with regards to foreign direct investment undertaken by companies in Japan during the 1980s. For instance, Nissan and Toyota responded in kind to investments by Honda in Europe and the United Sates by undertaking their own foreign direct investment in Europe and the United States. Moreover, it is possible to expand Knickerbockers' strategic behaviour theory to embrace the multipoint competition concept. Actually, multipoint competition results when two or more businesses run into one another in distinct national markets, regional markets, or industries. However, economic theory puts forward that to a certain extent like chess players jockeying for advantage, organizations will attempt to match the moves of one another in various markets to make an effort to hold each other in check. The primary idea is to make certain that a competitor doesn't gain a demanding position in one market and from then on use the gains generated to reduce attacks that are competitive to other markets (Erdilek 1985, p. 68).

In relation to Hill (2011), Samsung CELLULAR PHONE Company and Nokia Phone Company for instance, compete against each other in the global market. If Nokia enters a certain foreign market, Samsung will follow the lead. Surprisingly, Samsung feels compelled to imitate Nokia to be able to ensure that Nokia doesn't gain a posture that is dominant in the global market that it could possibly leverage to get competitive advantage in other markets. Nevertheless, the contrary also hold, with Nokia imitating Samsung when the firm is the first someone to get into a foreign market.

Similarly, the expansion of Electrolux into Latin America, Asia, and Eastern Europe was partly driven by similar behaviors by its global rivals such as General Electric and Whirlpool. Actually, the foreign direct investment behavior of Electrolux, General Electric, and Whirlpool might be explained partly by multipoint rivalry and competition in a global oligopoly. Although Knickerbocker's strategic behaviour theory and its extensions can be useful in explaining imitative foreign direct investment behavior by organizations in oligopolistic industries, it generally does not give reasons as to why the first organization/company in oligopoly decides to undertake foreign direct investment, rather than to license or export. Contrary, the explanation on market imperfections addresses this matter. Also, the imitative theory doesn't address the main topic of whether foreign direct investment is more efficient than licensing or exporting for global expansions. Again, this issue is addressed by market imperfections (Hill 2011).

On the other hand, Dunning's 'eclectic' theory argues that location-specific advantages are useful in explaining the direction and nature of foreign direct investment (FDI). Location-specific advantages make reference to the advantages that derive from using assets that are linked with a specific foreign location or resource endowments and that an organization considers valuable to incorporate with its own exceptional assets including the organization's marketing, technological and management know-how. Thus, Dunning argues that combining resource endowments or location-specific assets and the unique assets of the firm often requires foreign direct investment. It needs the company to determine production facilities where such resource endowments and foreign assets can be found (Dunning 2002, p. 205).

Consistent with Dunning & Lundan (2008), clear example of Dunning's 'eclectic' theory arguments are natural resources like oil and other minerals, which by their behavior are specific to certain locations. Nonetheless, Dunning puts forward that a company must undertake foreign direct investment so as to exploit such foreign resources. Subsequently, this explains the foreign direct investment undertaken by most global oil companies, which must invest where oil is positioned in order to incorporate their managerial and technological know-how with this important location-specific resource (Dunning & Lundan 2008, p. 87).

Along the lines of Jones & Dunning (1997) also, low-cost highly-skilled labor can be an obvious example of valuable recruiting. The skill and cost of labor varies in one nation to some other. In view of the fact that labor is not globally mobile, in accordance with Dunning's 'eclectic' theory it is reasonable for a firm to locate production resources/facilities where in fact the skills and cost of local labor are suitable to its particular processes of production. For example, Electrolux is steadily building factories in China because in China there can be an abundant supply of cheap but skilled and well-educated labor. Hence, besides other factors, China is a perfect location for manufacturing domestic appliances for both Chinese and global market (Jones & Dunning1997, p. 19).

Nevertheless, Dunning's theory has recommendations that exceed basic resources like labor and minerals. Taking Silicon Valley into consideration, which is the global semi-conductor and computer industry centre. A number of global major semi-conductor and computer companies such as Silicon Graphics, Intel, and Apple Computer are located close to one another in the California Silicon Valley region. Consequently, much of the production development and leading edge research in semi-conductors and computers take place in this region (Harzing & Ruysseveldt 2004, p. 71)

In line with Dunning's (2002) arguments, know-how being made in Silicon Valley with reference to the maker and design of semi-conductors and computers is unavailable anywhere else in the world. Since its commercialized, that know-how spreads throughout the world, but the leading knowledge edge generation in the semi-conductor and computer industries is available mainly in Silicon Valley. Within the language of Dunning, therefore that Silicon Valley has a location-specific advantage in knowledge generation in the semi-conductor and computer industries.

Partly, this advantage results from the intellectual talent concentration in this area, and partly results from a network of informal contacts that enable organizations to derive benefit from the knowledge generation of each other. Such knowledge is referred by economists as "spillovers" as externalities and a well-established theory provides suggestion that organizations can derive benefits from such externalities by locating near their source (p. 273). So far, this is actually the case, it is reasonable for foreign semi-conductor and computer businesses to purchase production and research facilities so they also can gain knowledge about and use of valuable emerging knowledge before those located elsewhere, by doing this providing them with a competitive advantage in international marketplace. Studies suggest that Japanese, Taiwanese, European, and South Korean semi-conductor and computer firms are highly investing in the Silicon Valley area, in particular because they would like to derive benefits from the externalities that come up in your community.

In an identical line of thought, others have argued that foreign direct investment in the United States industry of biotechnology has been motivated by the desire to gain access to the exceptional location-specific technological knowledge of america biotechnology firms. Basically, the country's specific advantages may be economic, political, or social. Therefore, Dunning's 'eclectic' theory is useful in addition to the Knickerbockers' strategic behaviour theory for it assists with explicitly explaining how location factors impact the direction of foreign direct investment (Dunning & Gray 2003, p. 55).

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