in defiance of the conventional wisdom about the virtues of a staged, incremental approach to international expansion? Before being in a position to answer these questions, one must begin by outlining the established theory of the MNE and explore the extent to which its basic postulates need to be reexamined.
THE THEORY OF THE MULTINATIONAL FIRM
Although MNEs have existed for a very long time, scholars first attempted to understand the nature and drivers of their cross-border activities during the 1950s. The credit for providing the first comprehensive analysis of the MNE and of foreign direct investment goes to an economist, Stephen Hymer, who in his doctoral dissertation observed that the “control of the foreign enterprise is desired in order to remove competition between that foreign enterprise and enterprises in other countries… or the control is desired in order to appropriate fully the returns on certain skills and abilities” (Hymer :25). His key insight was that the multinational firm possesses certain kinds of proprietary advantages that set it apart from purely domestic firms, thus helping it overcome the “liability of foreignness.”
Multinational firms exist because certain economic conditions and proprietary advantages make it advisable and possible for them to profitably undertake production of a good or service in a foreign location. It is important to distinguish between vertical and horizontal foreign expansion in order to fully understand the basic economic principles that underlie the activities of MNEs in general and the novelty of the “new” MNEs in particular.