The industrial organization hypothesis

According to the industrial organization hypothesis, when a firm conducts business in another country, it faces several disadvantages in competing with local firms.These disadvantages emanate from differences in language, culture, legal systems and other cross-country differences.If, in spite of these disadvantages, the firm engages in FDI, it must have some advantages arising from a well-known brand name, patent-protected technology,managerial expertise and other firm-specific strength.It is these firm-specific advantages that explain why a firm can compete successfully in a foreign market.One problem with this hypothesis, however, is that it fails to explain why the firm does not utilize its advantages by producing in the home country and exporting, which is an alternative to FDI as an entry mode.