Internalisation vs. Knickerbocker Theory

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Internalisationvs. Knickerbocker Theory

Theact of Acquiring business assets or starting business operations in acountry by a person or firm whose origin is a different country, asan act of business investment is referred to as Foreign DirectInvestment (FDI). The primary distinguishing factor between such aninvestment and a portfolio investment is that it has direct controland therefore it influences how a foreign business makes itsdecisions. Two theories, the Internalisation, and the Knickerbockerconcepts have been developed to explain why firms get involved in theformer.

Accordingto the Knickerbocker`s theory, FDI operations in an oligopolisticmarket are based on mimicry, and other companies imitate a firm`saction. However, the theory fails to explain why the leading companydecides to make a move before the other businesses and why it doesnot consider options such as exportation and licensing (Gorynia,Nowak, Trąpczyński &amp Wolniak, 2015).The two theories try to justify why firms get involved in this formof investment, but the internalization theory goes on to give anexplanation as to why companies prefer FDI to the other two options.The theory outlines three significant drawbacks associated withlicensing Giving away of exclusive technology to another firm. Dueto the licensing procedures, a firm does not have full control of itsactivities, and lastly, the former is not suitable for companieswhose competitive advantage does not depend on its products as onadministration, marketing and manufacturing abilities that producethe latter. The internalization theory provides a better descriptionof FDI since it gives a description as to why FDI is preferred overlicensing. It also identifies some of the weaknesses of exporting asan alternative.


Gorynia,M., Nowak, J., Trąpczyński, P., &amp Wolniak, R. (2015).Government support measures for outward FDI: An emerging economy’sperspective. ArgumentaOeconomica,1(34),229-258.