4.4.4 Knickerbocker's theory of oligopolistic competition
The next approach to horizontal FDI is part of Knickerbocker's theory of oligopolistic competition.
An oligopoly is an industry in which a small number of firms controls most of the market. Hill (2005, p. 226) gives the example of an oligopoly being an industry in which four firms control 80% of a domestic market. Examples are the global tyre and oil industries. Firms in an oligopoly are sensitive to market share. In an oligopoly, loss of market share is often a prelude to a firm's extinction. Thus, when one firm reduces prices, expands capacity or opens a new market, the other players have to respond in kind or risk losing market share.
Knickerbocker's theory, then, is that when one member of an oligopoly undertakes FDI, the others feel constrained to imitate that initiative. Note that this imitative behaviour and Knickerbocker's theory say nothing about the merits of exporting or licensing. The theory of market imperfections addresses that issue.
Activity 4.1
Why does Knickerbocker's theory relate to horizontal FDI and not vertical FDI? See the end of the 'Vertical FDI' section.
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