2. The Key Propositions of the Eclectic Paradigm:
(1 - O) The (net) competitive advantages which firms of one
nationality possess over those of another nationality in supplying any
particular market or set of markets. These advantages may arise either
from the firm’s privileged ownership of, or access to, a set of income-
generating assets,or from their ability to co-ordinate these assets with
other assets across national boundaries in a way that benefits them
relative to their competitors, or potential competitors.
(2 - I) The extent to which firms perceive it to be in their best interests
to internalise the markets for the generation and/or the use of these
assets; and by so doing add value to them.
(3 - L) The extent to which firms choose to locate these value-adding
activities outside their national boundaries.
4. OLI-Framework or Model :
the structure of organization
Ownership advantages
Location advantages
Internalization advantages
5. Internalization Theory :
Internalization theory focuses on imperfections in intermediate product markets. Two main
kinds of intermediate product are distinguished: knowledge flows linking research and
development (R&D) to production, and flows of components and raw materials from an
u p s t r e a m p r o d u c t i o n f a c i l i t y t o a d o w n s t r e a m o n e .
Internalization occurs only when firms perceive the benefits to exceed the costs. When
internalization leads to foreign investment the firm may incur political and commercial risks
due to unfamiliarity with the foreign environment. These are known as ‘costs of doing
business abroad’,arising from the ‘liability of foreignness’.When such costs are high a firm
may license or outsource production to an independent firm ; or it may
p r o d u c e a t h o m e a n d e x p o r t t o t h e c o u n t r y i n s t e a d .
6. Transaction Cost :
TYPES OF COST
SEARCH AND
INFORMATION
BARGAINING
AND DECISION
POLICING AND
ENFORCEMENT
★Search and information costs : are costs such as those incurred in determining that the
required good is available on the market, which has the lowest price, etc.
★Bargaining costs are the costs : required to come to an acceptable agreement with the other
party to the transaction, drawing up an appropriate contract and so on. In game theory this is
analyzed for instance in the game of chicken. On asset markets and in market microstructure,
the transaction cost is some function of the distance between the bid and ask.
★Policing and enforcement costs : are the costs of making sure the other party sticks to the
terms of the contract, and taking appropriate action (often through the legal system) if this
turns out not to be the case.
7. Internalization Theory :
Firm A
Firm A`
ex.subsidiary
others
①Internal transaction
②External transaction
ex:transaction,outsourching
MNEs
1 , Why FDI occurs? ①＞②
2 , Market imperfection
3 , Exploit Firm-specific advantage through ①
intangible assets = skills,knowledge,tech etc
4 , Transaction Cost go down
8. Three basic forms of international activities :
Export
FDI
International Activities
Licensing
Having knowledge about the target market abroad, for example staff with language
skills, information about import permissions, appropriate products, contacts and so on
less cost-intensive
If there are internalization advantages, the company can invest more capital abroad.
This can be achieved by export in form of an export subsidiary.
The FDI is the most capital intensive activity that a company can choose. According to
Dunning, it is considered that locational advantages are necessary for FDI. This can be
realized by factories which are either bought or completely constructed abroad.
most-capital intensive
moderate international activiy
9. 2 types of FDI :
Resource Seeking Investments
Market Seeking Investments
FDI
★establish access to basic material like
raw materials or other input factors
★enter an existing market or establish
a new market
10. Strong Export Outward FDI
Weak Inward FDI Imports
Strong Weak
Ownership
advantages
Location advantages
Trade and FDI
patterns for industries
and countries
11. OLI-Framework or Model :
the structure of organization
Ownership advantages
Location advantages
Internalization advantages
12. Licensing Yes No No
Export Yes No Yes
FDI Yes Yes Yes
Form of
market entry
Ownership Location Internalization
OLI-Framework
Categories of advantages
14. ★ The eclectic paradigm further avers that the significance of
each of these advantages and the configuration between them is
likely to be context specific, and in particular, is likely to vary
across industries (or types of value-added activities), regions or
countries (the geographical dimension) and among firms.
★ The eclectic paradigm is best regarded as a framework for
analysing the determinants of international production rather than
as a predictive theory of the MNE.
Framework for analysing
the determinants of international production :
15. I'd like to finish by thanking you for listening.
