The Appropriability Theory of the Multinational Corporation

Abstract

The appropriability theory of the multinational corporation emphasizes the conflict between innovators and emulators of new technologies. Appropriability is "high," and innovators can protect their profits more easily for sophisticated technologies and on breakthroughs that can be transmitted worldwide through the innovator's own subsidiaries. Conversely, appropriability is "low," and multinationals find it less profitable to create simple technologies and ideas that require market transfer. This theory explains the limited role multinationals have played in the development of simple products and simple production technologies, both of which are important to the developing countries. The appropriability theory also predicts that products in Vernon's product cycle will move to stage II when developed countries start successful emulation of the product and to stage III when developing countries start successful emulation. The profit-maximizing price strategy an innovating multinational should follow is to sell new products at below the monopoly price and slowly cut the price of the product as appropriability mechanisms erode. In the long run, the multinational will be forced to sell at the perfectly competitive price. If the multinational has no long-run profit advantage over other producers, its long-run market shares should approach zero as the perfectly competitive price is approached.