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WEEK 1The eclectic paradigm as an envelope for economic and business
theories of MNE activity (2000)
John Dunning
Eclectic Paradigm = a theory that provides a three tiered framework for
a firm to follow when determining if its beneficial to pursue FDI. In order
for a FDI in a foreign country to be beneficial, the following advantages
(sub-paradigms) must be present:
Ownership (Product/Company) Specific Advantages, such as
comparative advantage. The greater the competitive advantages,
the more likely to engage or increase their foreign production.
Location Specific Advantages, where the firm derives greater
advantages through a foreign establishment, Country-specific
Advantages.
(Market) Internalization, if its better for a firm to exploit a foreign
opportunity itself, rather than through an agreement with a foreign
firm (ex. Licencing).
OLI-Paradigm/Tripod
According to the eclectic paradigm, the precise configuration of the OLI
parameters facing any particular firm, and the response of the firm to that
configuration, is strongly contextual. Regarding this last contextual
variable, scholars have identified four main types of foreign-based MNE
activity.
1. Market seeking/demand oriented (MS), FDI To satisfy a
particular foreign market, or set of foreign markets.
2. Resource seeking/supply oriented (RS) FDI To gain access to
natural resources, e.g. minerals, agricultural products, unskilled
labour.
3. Rationalized/efficiency seeking (ES) FDI To promote a more
efficient division of labour or specialization of an existing portfolio of
foreign and domestic assets by MNEs.
4. Strategic asset seeking (SAS) FDI To protect or augment the
existing O specific advantages of the investing firms and/or to
reduce those of their competitors, i.e.
Several specific theories can be concluded due to the OLI-paradigm:
o It may be hypothesized that some sectors, e.g. the oil and
pharmaceutical sectors, are likely to generate more FDI than others,
e.g. the iron and steel or aircraft sectors, because the characteristics
of the former generate more unique O advantages, and/or because
their locational needs favour production outside their home
countries, and/or because the net benefits of internalizing cross-
border intermediate product markets are greater.
o Similarly, it is possible to predict that the significance of outward FDI
will be greater for some countries, e.g. Switzerland and the
Netherlands, than for others, e.g. Russia and India, simply by
, knowing about their economic histories, the core competencies of
their indigenous firms, the size of their home markets, their
experience in foreign markets, and the locational attractions of their
immobile resources and capabilities, relative to those of other
countries.
o Finally, some firms, even of the same nationality and from the same
industry, are more likely to engage in FDI than others. Sometimes,
this might reflect their size — on the whole, large firms tend to be
more multinational than small firms; sometimes their attitude to risk
— particularly those associated with foreign ventures and of foreign
partnerships with foreign firms; and sometimes their innovating
product, marketing, locational, or FDI strategies.
The extent and pattern of foreign owned production will depend on the
challenges and opportunities offered by different kinds of value added
activity. Thus the growth of existing, and the emergence of new, markets
e.g. in China, over recent years, has led to a considerable expansion of
various kinds of market seeking FDI — particularly in fast growing
industries, e.g. telecommunications. By contrast, the rate of expansion of
several natural resource sectors has been less impressive, as many
products have become less resource intensive, due, for example, to the
innovation of new alloys, improved recycling techniques, the
miniaturization of components, and the replacement of natural by
synthetic materials.
This paper
Examines the changes in the boundaries, constraints and structure of the
eclectic paradigm over the past twenty years; and those now being
demanded of it by contemporary world events and scholarly thinking. It
will set its analysis in the context of four significant happenings of the
1980s and 1990s:
1. The maturation of the knowledge-based economy
2. The deepening integration of international economic and financial
activity
3. The liberalization of cross-border markets, and the flotation of the
world’s major currencies
4. The emergence of several new countries as important new players
on the global economic stage
Now the three sub-paradigms will be discussed, and their evolution over
time:
A. Ownership sub-paradigm
The eclectic paradigm was first put forward in 1977; it was assumed that
such competitive or O specific advantages largely reflected the resources
and capabilities of the home countries of the investing firms; and that FDI
would only occur when the benefits of exploiting (adding value) these
advantages from a foreign location outweighed the opportunity costs of so
doing.
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