Eclectic paradigm of international production
For the first time, the eclectic paradigm of international production was publicly presented at the symposium International Location of Economic Activity on the occasion of the awarding of the Nobel Prize in Economics to B.Ulin in Stockholm in June 1976. In this theory, an attempt has been made to synthesize elements of theories of branch markets and internalization with other approaches to the study of international production. The theoretical framework of the paradigm is based on three important factors influencing the firm's choice of different models for entering specific markets: property (O), production location (L).
Owning the company's property benefits (O) shows whether it has a competitive advantage. Hence, this factor includes special advantages of the firm, resulting from the use of the theory of industrial markets. In a later typology, J. Dunning distinguishes the advantages of ownership by owning assets (Oa) and by reducing transaction costs (Ot). They are formed only due to changes in the structure of the market. They mirror the features of the hierarchical structure of TNCs. A network of these assets located in different countries leads to both a reduction in transaction costs and to the acquisition of transactional benefits arising from the overall management of a large structure.
The advantages of locating production (L) abroad determine where the production of a particular product is more lucrative: abroad or in one's own country. They are determined by comparative advantages and trade barriers, including tariffs and transportation costs.
How to ...
Tired of looking for a solution?Get Your ESSAY Now!
J. Dunning determines the effect of foreign ownership through productivity differences, which are supposed to rest on the spatially displaced intangible assets of parent companies. For example, in the mid-1950's. American subsidiaries in the UK did not have better results than their British counterparts, and, hence, were poorer than their parent companies. Consequently, it can be assumed that this was the result of the influence of the immobile characteristics of the US economy. This effect J. Dunning calls a special component of placement. American subsidiaries did not have the same productivity as their parent firms, but remained more competitive than local enterprises, which is explained as follows. In the middle of XX century. The Anglo-American differences in productivity were partially explained by the location of the enterprises, and partly by the specific characteristics of the property. The degree of advantage of US firms is not due to the consequences of foreign direct investment, but to the achievements that American firms had before engaging in production activities abroad.
The evolution of the influence of country factors on the distribution of international economic activity can be estimated in two ways. The first method is to estimate the volume of products produced within national borders, regardless of the ownership of the invested capital. The second method - in calculating the volume of output of national firms, including their units abroad.
Explaining the activities of firms outside national borders, J. Dunning supplemented the benefits that enterprises received from having property in their own country and abroad. He explored the various options available to firms related to the features of their creation and the use of resources and capabilities within current and potential jurisdictions. In order to understand the scope and model of firms' activities that ensure the creation of value added abroad, it should be explained whether firms prefer to generate and (or) use their property advantage in-house, and (or) absorbing (buying) other enterprises or their rights. Such advantages J Dunning calls the advantages of internalization (I). They arise from the simultaneous acquisition of benefits from the use of firm-specific and country-specific benefits derived from FDI. This happens for a number of reasons. First, asset and intermediate products markets may be imperfect and require large transaction costs. Secondly, it may be in the firm's interest to retain the exclusive right to assets (for example, technology), which it has significant competitive advantages (for example, monopoly rent). Along with other advantages, they make it possible to explain the scale and geography of the value added activities within TNCs.
Thus, the advantages of internalization determine whether the advantage of owning an overseas property will be obtained through the establishment of a foreign subsidiary, through an export branch or other solutions, for example, licensing technologies. These advantages depend on the level of transaction costs determined by the chosen model of the firm's exit to foreign markets.
Ready to make your order?Get your great paper now
The eclectic paradigm is designed to explain the degree and nature of international production, i.e. production, financed by foreign direct investment, undertaken by TNCs. According to the paradigm, at any one time this will depend on the configuration of the three sets of forces:
1) pure competitive advantages that some national companies have compared to others when entering a market or a set of markets (these advantages can arise either from the privileged property of firms or from access to assets that generate revenue, or with their ability to coordinate these assets with others across national boundaries to neutralize their real or potential competitors);
2) Scales corresponding to the interests of companies to develop the market to create and (or) use these assets, and thus added value with their help;
3) the extent to which the firm chooses to place these value-adding assets outside national boundaries.
The eclectic paradigm further shows that the value of each of these advantages and their combination will depend on the specific conditions and can vary depending on the industry, countries and regions and the characteristics of the firms.
Let us explain the essence of the eclectic paradigm. Any holistic theory of international production must rely on two interrelated components of economic analysis-the neoclassical theory of factors of production and the theory of market insolvency. Neoclassical theory extends to the production of work in process and assumes the possibility of international mobility of factors of production. Other things being equal, the geographical distribution of factors of production, the more expanding international production take place. The nature of such production is similar to the Heckscher-Ulin-Samuelson theory, which is of an intersectoral nature.
The theory of market insolvency has to do with explaining not only the placement of certain types of economic activity beyond national borders, but also the distribution of activities between multinational and national firms. Other things being equal, the higher the transaction costs and the higher the efficiency of the TNC as the coordinator of geographically distributed activities, the more international production is carried out. Such production can be both interbranch and intra-sectoral. It is based only on O, advantages.
Schematically, the relationship between models of international production and the theories explaining it can be shown in Table. 2.1.
Factors of production/market insolvency in explaining the main forms of international production
Main types of international production
Production factors (the effect of the geographical factor L)
Structural (influence of L and Oa)
Transactional (the influence of O t, L
1. Market search (import substitution)
Home country for creating Oa (mobile factors/work in process). The advantage of the host country in non-mobile factors of production, which are used with Oa (natural resources, some types of raw materials).
Market size and its characteristics
Specificity of the firm lies in ownership of O and (ie knowledge), which provides privileged access to factors. Reduction of trade in goods:
a) natural - due to transportation costs
b) reworked - due to import controls. Oligopolistic structure of the market
Search and negotiation costs. Protection against distortion and violation of property rights. Economy at the expense of scale.
Part of the business portfolio is international in nature for risk sharing.
Protection against the actions of competitors
2. Search for resources (export-oriented)
Home country as above, but also the size of the market and its nature.
Host country - availability of natural and labor resources
As indicated above, but also preferred access to the market. The incentives offered by the government in relation to FDI (also important for Nos. 1 and 3).
Oligopolistic structure of the market
Avoiding the risk of contract termination and delays in delivery. Lack of future markets. Savings due to vertical integration
3. Search for performance
Vertical (basically as in points 1 and 2). Horizontal (usually the distribution of factors of production is not as significant as international production in countries with a similar resource structure). Lateral (limited effect importance)
As above, but investment has a greater impact on supply than on the market. The government induces structural imperfections in order to increase the importance (differences in taxes, investment incentives, etc.). Regional integration and reduction of trade barriers contribute to improving investment
As above. Economy at the expense of scale. Reducing risk through product diversification.
As above, but with respect to support activities, i.e. various services - transport, consulting, etc.
OLI-paradigm is criticized for its static nature and is not suitable for determining the dynamic strategy of internationalization of a firm or country. However, in defense of his theory, the author argues that at a particular point in time the strategy and scale of the TNC's activities are at a certain "point on the trajectory" the chosen path of internationalization. This trajectory is derived from the long-term and regular interaction between a combination of OLI factors and the combination of the firm's strategy that is formed in accordance with this, which, in turn, will affect the combination of OLI factors at a later point in time.
The concept of the "Investment Development Trajectory" ( Invest Development Path - IDP) was put forward by J. Dunning in 1979. The scientist suggested that the import and export of the capital of a particular country are directly dependent on the level of its economic development in comparison with other states. Then it was developed and supplemented in a number of works by J. Dunning and his joint works with R. Narula. Initially, the IDP concept assumed that countries undergo four stages of investment development, which are classified according to the ability of the country to be importers and/or exporters of FDI. For this purpose, the indicator net capital outflow index ( netto outward investment - NOI), which is defined as the difference between the amount of placed and attracted investments. The investment capacity of countries depends on the ratio of the components in the said eclectic paradigm (OLI). The concept defines the country as a net exporter/importer of investments. A positive NOI indicator shows that the country has become an export-import investment, and vice versa, in the case of a negative index value, it is a net importer. IDP suggests that companies tend to place FDI in markets with a lower GDP per capita ratio than at home, until their countries of origin reach the fifth phase.
The fifth stage was introduced by the authors in the mid-1990s, when it became obvious that the situation in the US import and export sector in the late 1980s (accumulated investment: export - 435 billion dollars, import - 395 billion dollars) - not a paradox, but a new emerging pattern. At this stage, the NOI coefficient is approaching zero, while the growth rates of capital flows in both directions continue to increase.
The fifth stage is characterized by two distinctive features. Cross-border transactions for the transfer of capital are increasingly becoming internalized. The nature of international exchange varies from trade between an independent seller and a buyer to various goods (services), described in the writings of E. Heckscher and B. Ulin, in trade within firms (or alliances) between countries producing similar products.
The eclectic paradigm of international production Dunning considers the issue of foreign direct investment as an aspect of the joint action of the eclectic and managerial theories and at the same time as the expansion of the eclectic theory. Dunning notes that there is a tendency to centralize issues related to research and development, accounting methods and the decentralization of personnel and documentary issues. In his view, this is situational in nature and depends on the "industry of the country and the firm-specific factors."
Price Plan & Our Features
- Free Outline
- Free Formatting
- Free Title page
- Free Reference Page
- Free Revisions
- Free Submission by Chapters
- Free Plagiarism Report
- Free Customer Service
- 1 – page abstract
- VIP Support
- Expedited delivery
- Essay outline
Also We Can Offer!
- Best college essays
- Buy custom essays online
- Buy essay online
- Cheap essay
- Cheap essay writing service
- Cheap writing service
- College essay introduction
- Custom essay
- Custom essays writing services
- Death penalty essay
- Do my essay
- Essay about love
- Essay about yourself
- Essay help
- Essay writing help
- Essay writing service reviews
- Essays online
- Fast food essay
- George orwell essays
- Human rights essay
- Pay to write essay
- Personal essay for college
- Write my essay
- Write my essay for me cheap
- Writing a scholarship essay