Country-Specific 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).
The a list below provides the various types of FSAs which the MNE can possess. There are three
basic types of ownership advantages for a multinational enterprise. These include:
Knowledge/technology, broadly defined so as to include all forms of innovation activities.
Economies of large size (advantages of common governance) such as economies of scale and
scope, economies of learning, broader access to financial capital throughout the MNE
organization, and advantages from international diversification of assets and risks; and
monopolistic advantages that accrue to the MNE in the form of privileged access to input and
output markets through patent rights, ownership of scarce natural resources, and the like.Some of
these O(rganizational) advantages can be found with de novo firms (i.e. first time overseas
investments), others come from being an established affiliate in a large, far flung multinational
enterprise. Economies of common governance clearly belong to the latter category. Therefore
FSAs can change over time and will vary with the age and experience of the multinational.
Analysis of Country-Specific Advantages from a Resource Based View
The nature and role of country-specific resources (CSRs) goes back to the work of the early trade
theorists who focused their analyses on basic factor inputs such as land, labour and capital. In
this context, CSRs were seen as inherited rather than created with the result that a country's
endowment of CSRs was taken as fixed or static and second, that CSRs were locationally
immobile meaning that availing of these resources required some form of presence in the country
in which they were held. From a competitive viewpoint, the focus of attention was on the basic
inputs into the production process and on how endowments of these factors varied from country
to country.
More recent work has broadened the discussion of CSRs still further to include not only inherited
resources but also those that are created by a country. The common feature of this type of
resource is that it is a product of investments made over a long period of time in any given
country. Typical examples of such resources which have been cited in the literature include the
nature of the
education system
technological and organisational capabilities
communications and marketing infrastructures
labour productivity and
research facilities
For example a study by Shan and Hamilton (1991) demonstrated how the success of the US
biotechnology industry was a function of a collection of unique, advanced resources including,
government support for research in the field, an aggressive entrepreneurial culture supported by
favourable capital markets, and a high level of R&D expenditure. Their study also showed that it
was a desire to gain access to these unique country-specific resources which was the basis for
Japanese cooperative ventures with American firms in this industry.
It is necessary to fully explore the relationships between a firm's stock of firm-specific resources
and its country-of-origin. Dunning (1981) has argued that firm-specific advantages (resources),
though endogenous to particular firms, are not independent of their industrial structure, economic
systems and institutional and cultural environments. Thus, for example, much of the international
success of Japanese firms has been attributed to the role of their home government and its
ministries as well as the ethos of the Japanese population towards work, authority and living
standards
Gray (1982) draws a distinction between "physical" national characteristics (land, natural
resources, labour supply and capital) that influence the stock of country-specific resources and
"social" national characteristics (social structure, tax structure, treatment of R&D and
government policy) which influences a country's stock of firm-specific resources.
The most comprehensive treatment of the links between the physical, economic and institutional
environment of a country and its stock of CSRs and FSRs is provided by Porter's Diamond of
National Advantage (Porter 1990; 1991).
In short, the resource-based view of the firm also promises to greatly inform issues relating to
international marketing strategy. Firms in different countries may originate from and operate in
very different environments. Consequently, they may develop resource configurations that can
have a dramatic impact on international competition as illustrated,
Country Specific Advantages (The L(ocation) Factor)
The firm must use some foreign factors in connection with its domestic FSAs in order to earn
full rents on these FSAs. Therefore, the locational advantages of various countries are key in
determining which will become host countries for the MNE. Clearly the relative attractiveness of
different locations can change over time so that a host country can to some extent engineer its
competitive advantage as a location for FDI.The country specific advantages (CSAs) that
influence where an MNE will invest can be broken into three categories: E, S and P (economic,
social and political). Economic advantages include the quantities and qualities of the factors of
production, size and scope of the market, transport and telecommunications costs, and so on.
Social/cultural advantages include psychic distance between the home and host country, general
attitude towards foreigners, language an cultural differences, and the overall stance towards free
enterprise. Political CSAs include the general and specific government policies that affect inward
FDI flows, international production, and intrafirm trade. An attractive CSA package for a
multinational enterprise would include a large, growing, high income market, low production
costs, a large endowment of factors scarce in the home country, and an economy that is
politically stable, welcomes FDI and is culturally and geographically close to the home country.

Firm-Specific Advantage
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.