Course : X0504-Dynamics of State Interaction and

Multinational Corporations in Globalization Era

Year : 2014

Theoretical Framework of MNC:

Session 7-8
 Outline
• Introduction
• Theories of MNC
• Market economies theory
• Business economies theory
• Vernon’s Product Cycle Theory
• Dunning’s OLI
• Porter’s Strategic Theory
• Political economy theory
• Q&A

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 Introduction
• Study of MNC in IR has developed, attracting number of
academics and professor to study more on this issue.
• Theories to explain the MNC already undergone changes in
line with the development and evolution of the MNC itself.
• Jean-Francois Hennart, in his writings titled "Theories of the
Multinational Enterprise", stating explanation of trade theory
is not satisfactory in explaining the emergence of MNCs.
• Today, many emerging new theories regarding MNC
developed from the traditional paradigm of economic theory
or political and international business.

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 Theories of MNC

Robert Gilpin in the "Global Political Economy: Understanding

the International Economic Order" classifies theories of MNCs
and FDI into three main perspectives:
1. Mainstream economists or neoclassical economists.
2. Business economist perspective
3. Political economy.

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 Mainstream Economists
• Supported by neoclassical economists. Proponents of this
approach believe in the primacy of the market as the
opposition over the less important role of state.
• the location of economic activity and trade patterns are
determined by theory of location and comparative of
advantage.
• The inability of neoclassical economists to provide a
satisfactory theoretical explanation framework of MNCs and
FDI due to the origin of the MNC which is a product of
Integration market imperfections and unique experience.

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 Business Economies Approach
• This opinion believe profits brought by FDI favor to host
countries and countries of origin.
• Theories that are support this approach:
1. Vernon’s Production Cycle
2. Dunning’s Ecletic Theory
3. Porter Strategic Theory

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 Vernon’s Production Cycle Theory

• Theory developed by Raymond Vernon in the ‘60s tried to

explain market by seeking production company based in a
particular country.
• This theory grow based on the assumption that each product
follows the life cycle of the innovation stage, maturity,
decreased production (decline), until the stage of aging
(obsolescence).

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 Vernon’s Production Cycle Theory (2)
• The innovation phase, the production process is characterized by
the absence of standardization, absorbing labor (labor extensive),
and high cost, as well as close to the consumer.
• The growth cycle evolved into a mature production absorbs a lot of
capital (capital intensive) so that the economies of scale achieved
through the production of standard products that have mass.
• Maturity phase of the product, technical standardization of
production and diffusion of technology and know-how to other
countries, encourage imitation by foreign competitors. So, to dispel
foreign Integration enter the market the company set up production
facilities in other countries.

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 Dunning’s Eclectic Theory
• Theory developed by John Dunning since 1976, contains an
explanation of the determinants and the effects of MNC
activity based ownership advantages (O), location advantage
(L) state, and internalization advantages (I).
• These three elements are used to explain the MNC's decision
in determining the location, expansion or divestment abroad.

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 Dunning’s Eclectic Theory

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 Porter Strategic Theory
• Porter explained that MNCs entering the era of strategic
management. International business activity is characterized
by a value chain that starts from the extraction, production,
and marketing.
• In contrast to domestic firms, MNCs were able to conduct
their economic activities in the most efficient for certain
activities worldwide.
• The essence of strategic management is a transnational
company / MNC have more options and mechanisms or
techniques than even the largest domestic companies, for
example: FDI, strategic alliances, outsourcing component
production, and technology licensing.
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 Political Economy Approach

• In this perspective, Gilpin focuses on two main schools of

criticizing MNC, namely
– Marxism / radical theory
– State-centric theory
• In conclusion, the MNC is generally beneficial in its capacity
as promoter of a more united world.

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 Marxism/Radical Theory
• Marxism aired based on the theory developed by Stephen
Hymer, economist at the MIT graduates.
• Hymer explained that the MNC is created from market
imperfections. MNC has the ability to use the strategy to
separate the international market and eliminate competition or
exploit the advantages possessed.
• MNE is a practical institutional device which substitutes for
the market. The firm internalizes or supersedes the market

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 State-centric Theory
• State-centric views MNC as a potential threat to state power.
Therefore, the MNC needs to be regulated both by national
and international governments to ensure the autonomy and
sovereignty of the country.
• With emphasis on the role of the state in the economy, this
theory complements and enriches the explanation of the
phenomenon can not be explained bt economic theory such as
market forces.
• Gilpin pointed out the role of the UK in the 19th century (Pax
Britannica) in providing an enabling environment for the
expansion of British companies.

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 Reference
• Tirta Mursitama and Dini Adiba, Diktat Pembelajaran Bisnis
Internasional: Globalisasi dan Signifikansi Peran Perusahaan
Multinasional, Bina Nusantara University, 2013
• Robert Gilpin, Global Political Economy: Understanding The
International Economic Order, Princeton University Press,
2001

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 THANK YOU

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