The Oli Eclectic Paradigm Economics Essay

In this section, two theories have been determined according to their usefulness in explaining what characterizes multinational organizations. In this admiration, sub-section 2. 1. 1 is specialized in the OLI eclectic paradigm and sub-section 2. 1. 2 to stable heterogeneity.

2. 1. 1 OLI eclectic paradigm

A common theoretical platform aiming at detailing the decision of serving a foreign market via foreign direct investment is the OLI eclectic paradigm produced by John H. Dunning in 1977. This theory has taken a person (firm) perspective into international economics, that was lacking in those days. Indeed, international trade once was described in a Hecksher-Ohlin framework where factor endowments and efficiency increases were the drivers of internationalization. More precisely, OLI stands for: (O)wnership advantages, (L)ocation specific edge, and (I)nternalization benefits. These constitute the three conditions to be satisfied in order for a firm to engage in FDI. Even though the emphasis of today's thesis is not on the determinants of FDI as a result, the OLI paradigm has some relevance in describing the characteristics of multinational organizations, among other activities.

A more detailed explanation of these three conditions is presented subsequently.

Ownership gain (O)

In the OLI paradigm, firm-specific assets constitute the foundation of organizations' internationalization decision. Indeed, being lively in a overseas market induces some troubles the effect of a lack of knowledge about foreign consumers, foreign business practices and/or labour market conditions and regulations in the hosting current economic climate, among others (Marrewijk, 2007, pp. 328). These hurdles in turn result in extra costs for multinationals, hence the need for such organizations to possess some type of comparative advantage to be able to outweigh them. Such advantages tend to be known as firm-specific assets you need to include things such as patents, a brand, and/or an excellent knowledge related to technology or business routines (Ibid). Knowledge-based possessions are theoretically assumed to be of great importance in your choice of FDI because they are easier to transfer to the foreign affiliate marketers than capital-based belongings. Indeed, moving knowledge can be done at lower costs and doing this is improbable to impede the output of the mom company, contrary to transferring capital-specific property (Markusen, 1995). Overall, and moreover, the benefit possessed by multinational firms should allow them to involve some kind of market power in the international market to be able to render your choice of serving the marketplace via FDI beneficial (Ibid).

Location benefit (L)

In addition to firm-specific investments, there should be some type of location advantages related to the variety economy in order for firms to choose serving a international market via FDI rather than by exports. Such advantage could be (but is not restricted to) in terms of market size, lower development costs, different factor endowments, and/or favourable trade regulations in the hosting economy. Different motives underlying a firm's decision to activate in FDI determine the type of location benefit to be worth focusing on (Markusen, 1998). Indeed, as advanced in Markusen (1998), a company seeking efficiency increases (vertical FDI) will seek to determine part of its development string in a country where creation costs are lower and/or where in fact the factor used intensively in the creation of its good is considerable. As the interest of firms starting this kind of FDI is primarily in the home market, favourable trade plans between two countries (low tariffs on exports and imports) would increase the interest of a company in the other market as a potential host country for trading. On the other hand, a firm seeking access to a fresh market (horizontal FDI) will generally decide on a country where in fact the demand is possibly large. Actually, the larger the marketplace, the larger the incentives to duplicate development facilities in that market, in particular when export costs are high. As pointed out in Markusen & Venables (1998), your choice to activate in horizontal FDI is determined by the difference between the extra costs of having several creation facilities and the costs of serving the international market via exports.

Internalization advantages (I)

At last, there should be an advantage from the firm's viewpoint in internalizing the possession of the nice(s) it produces. This third condition is the one determining the method of access in the international market, and so constitutes a crucial aspect in your choice for FDI. The truth is, a firm possessing an ownership advantages has three main ways of serving the overseas market; it can sell via place ventures (exports), it can provide the international market via arm's-length trades, i. e. via licensing, franchising, or subcontracting the circulation of the goods to a party in the foreign market (Navaretti & Venables, 2004, p. 299), or it can internalize the benefit. As stated before, location advantages could bring about one particular modes of entrance being more profitable. Also, the decision whether to keep full control over a product (internalizing it) is made predicated on trust, among other things. A firm will normally choose for internalizing its edge if it concerns that the neighborhood firm or entity with which it could develop a long-term deal copies the merchandise or reneges. That is all the more relevant considering that, for a company to activate in FDI, its superior knowledge should be easily transferable to the foreign internet marketer as the success of its internationalization relies on it. Easily transferable knowledge gets the downside to be also "easily" disperse to domestic producers (Markusen, 1998). Thus, "multinationals might find it difficult to safeguard their firm-specific possessions, and difficult or expensive to motivate unbiased local firms to do something in their best passions" (Navaretti & Venables, 2004, p. 35). Under these circumstances, a foreign company will decide to serve the foreign market via FDI rather than relying on market ventures or licensing, for its knowledge never to be dissipated to local opponents.

In summation, this theory suggests that a organization needs to have a comparative advantage of some kind in the coordinator market in order to find it profitable to engage into foreign direct investment or at least to internationalize its activities. This condition is the main in today's circumstance as it unveils some characteristics of multinational companies and constitutes the basis of the theoretical foundation of FDI spillovers that will be provided in section 2. 2. Moreover, the OLI paradigm instructs us that FDI will be chosen rather than exports or arm's-length agreements in situations where in fact the internalization of the possession advantage is essential to keep up the comparative benefit in the variety country. Finally, the theory innovations that the number country's characteristics influence your choice about the way a foreign market is dished up, where different location characteristics are important with regards to the strategic motives of FDI (efficiency seeking or market-seeking).

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