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Monopolistic Advantage Theory
Monopolistic Advantage Theory
Rhoda Moore
Assignment 1
Professor Jung Wan Lee , Ph.D.
Introduction
Monopolistic Advantage Theory has played an integral part in how some parts of the world has
developed, giving the receiving country access to products and services that would not otherwise
It suggests that foreign direct investment is made by organizations in sectors or countries where
there is little or no competition. This is afforded by the company possession superior products or
services in comparison to those of the indigenous country. These advantages normally fall into
The Five Forces approach emphasize fives categories that must be carefully analyzed before
making a decision concerning entering an FDI arrangement. Establishing this foundation allows
the business to meaningfully examine important concepts and perform their risk assessment
Firms possessing monopolistic advantage are at liberty to choose strategies that they feel will
best maximize their investment. The strategies are not always as successful as planned, therefore,
the principals of these multinational companies must take the time to assess the reasons so many
companies, who in the past, possessed the monopolistic advantage, have failed.
Article Review
MNCs, as one of their strategies to expand their business, invest by way of Foreign Direct
Investment in countries where based on their strategies, they expect to continue making profits.
Wonglimpiyarat (2012), in his study, to analyzed how MNCs such as Apple and Microsoft use
technology strategies and competition to establish technology standards. These standards, when
established countries, afford them a monopolistic advantageous position allowing them, through
MNCs must consider their position in each market carefully, as they may find themselves
investing and not making the expected returns on their investment. Michael Porter, (1980, 1985)
through his model, demonstrated how a company or industry can be analyzed to establish
In his article, Wonglimpiyarat (2012), showed where Apple had the advantage of superior
technology, however, they underestimated the barriers to entering that market, no doubt, due to
its exceptional technology. They were accurate in doing the best they could to safeguard their
technology. This monopolistic advantage was short-lived as Microsoft entered the market with a
substitute product at a much reasonable price which the consumers were willing to accept. Apple
had indeed set a standard that made it difficult for most companies to even try to compete with
them, but Microsoft in its strategies, not only broke into the market but set another standard that
has been accepted to date. Notwithstanding, Apple still has a share of the market, but Microsoft
has by far reached a larger percentage of the population world-wide. Wonglimpiyarat (2012)
went further to show that having gained a competitive advantage, Microsoft was then able to
We see this kind of business strategy playing out in different industries as large companies seek
On the other hand, IBM, seeing the plight of Apple did their analysis and moved forward. They
entered the market when Apple had the monopolistic advantage. They ceased the opportunity to
get a piece of the pie until eventually, they took the larger portion. Apple, as was said earlier,
knew the treasure they had and held it close to their bosoms. This strategy worked against them
in the long run because their computers could not be afforded by everyone and their platform
was restricted. Since they had superior knowledge, they were high priced. They took a strategic
decision to not create interconnections with others, alternatively, they pursued a niche market
producing extravagant products. IBM, alternatively, was extremely free with their platform.
Which incidentally was what led to their success and eventually their downfall. Since the IBM
platform was unrestricted, developers were encouraged to create clones of IBM Pcs. By this
time, IBM had become the market leader, owning the platform most compatible with other
networks. According to Shim and Lee (2012), IBM became the platform owner in the early
1980s taking over from Apple who held that position up to the 1970s. Giving free access to
cloning meant increasing its market share and extending to area where they may not have
previously considered. This monopolistic advantageous position allowed IBM to charge high
prices resulting in high prices to some consumers, while other enjoyed a more economic price.
Their open-standard strategy made handsome profits, with Intel and IBM being the official
platform owners, they were able to leverage their position. As platform owners, they possessed
the ability to control the evolution of the platform architecture. (Shim and Lee, 2012) Alas, their
open-standard strategy failed them just like Apples. So this challenges the position of the
monopolistic advantage theory, as in both cases, these firms did have superior knowledge,
cutting edge technology and were well respected for their product. My position is that it takes
more than these factors. They are a few other things that are of significant importance.
On the other hand, in addition to the factors that should be present for monopolistic advantage to
take place, namely economies of scale, superior technology and knowledge. Majeed and Ahmad,
(2009) alluded that other factors that play a significant role in the success of such an investment.
He highlighted openness, exchange rate, domestic expenditures and trade ratios as important
elements that must be given serious consideration. We can see where these other factors could
indeed have a significant negative effect on the profitability of the MNC. Majeed and Ahmad,
(2009) described exchange rate as having a negative impact on the FDI. An increase in the host
countrys exchange rate as against the subsidiary will result in a devaluation of the hosts
countrys currency. This occurrence will cause the subsidiarys purchasing power to strengthen
against the host country. Furthermore, an exchange rate decline in the host country will result in
the subsidiary the ability to spend more on labour, thus increasing the level of production. In
other words, the purchasing power of the subsidiary will increase. The subsidiary would benefit
Conclusively, if the exchange rate volatility in the subsidiary country is assessed as being high,
monopolistic advantage may not be realised ceteris paribus. The host country will no doubt be
very cautious in the value of the investment made. This action may result in a lesser return than
Rahman (2009,2010) also examined how MNCs exhibited their monopolistic advantage in the
international subsidiary. He specifically considered the role that corporate governance played in
He points out that the MNCs needs to create internationally cohesive operations to sustain
control over their advantage. He emphasize that in order for the MNC to be successful they must
possess substantial monopolistic advantages to effectively contain the operational costs that are
generated based on the differences in law, culture and political sectors among other.
He furthers posits that authority would naturally pass from the parent MNC to the subsidiary.
Therefore in the initial stages especially, funds must be reserved to facilitate this integration
process. The MNC must assess the differences specifically as it relates to corporate governance,
will be done such as the Porters Five Forces, in the initial stage, this analysis more than likely
would not have gone in depth in assessing the softer skills and technical knowledge that will be
needed for the FDI to be successful. Having monopolistic advantage the MNC possess superior
knowledge and technology, but how will it execute this in the subsidiary? Of course, it will need
to harness the skills of workers who are trainable or who have already been exposed to these
technology. The manner in which this exercised is very critical to the success of this investment.
If management and staff of the newly acquired subsidiary does not trust the MNC then executing
Foreign direct investment, we must admit, has played a significant part in the development of
world economies. Initially, such investments may have been quaint, however, innovation and
technology has exploded leaving the world with a pheltora of creations which continues to
evolve. In spite of this, Anwar, (2016) has reported that many leading countries who have
actively participated in globalization are now saying that it may be to the detriment of the world
at large. They have, however, admitted that FDI has been the main source of growth of
international businesses. He shared that critics are of the opinion that globalization is eroding the
local customs and laws. He said this happens in two ways, globalization of markets and
their culture as they seek to embrace the offerings of these MNCs. Before long, the MNC will
establish itself in a market and eventually develop monopolistic advantage if the conditions are
conducive.
While the monopolistic advantage theory seem to support investing in foreign countries, I do
wonder where the balance should be. I say this because labour intensive industries in the host
countries is now left void of jobs. This allows a MNC to continue to enjoy monopolistic
advantage, however, the rate of employment, specifically those of semi-skilled and unskilled
workers. (Anwar, 2016) declines. Without jobs, these people may become self-employed or
become a burden to the government, who must now supply them with food stamps and other
Conclusion
There should be no doubt in anyones mind as to the value and contribution monopolistic
advantage has played in the development of both international and domestic businesses.
Empirical studies have also shown that countries who do not participate in international in one
way or another has not shown much economic growth. Having agreed on those facts though,
there are still unanswered questions. Where do we draw the line? Does foreign direct investment
really benefit the host country on a whole? Is this beneficial for the government in the long term?
Is it really sustainable?
References
Anwar, S. (2002) Globalization and National Economic Development: Analyzing Benefits and
Costs." Journal of Business and Management 8.4 (2002): 411-23.
Majeed, M., Ahmad, E. (2009) An analysis of Host country characteristics that determine
FDI in developing Countries: Recent Panel data evidence. The Lahore Journal of
Economics 14.2 (2009): 71-96.
Rahman, M. (2010) Corporate governance in the European Union: Firm nationality and the
'German' model. Multinational Business Review 17.4 (2010): 77-98.
Shim, S., Lee, B. (2012) Sustainable competitive advantage of a system goods innovator in a
market with network effects and entry threats. Decision Support Systems 52.2 (2012):
308.