Assessing the Essence of Teh Eclectic Paradigm
Aspects frequently highlighted include global media and telecommunications, global brands, worldwide production and integrated financial markets. At the forefront of these phenomena are Multi National Enterprises (MNEs), benefiting from the opening of markets across the globe, and from advances in computing and internet technology, which make it possible to link far-flung activities in global networks.
Considering these elements, globalization can further be defined as the process of increasing and deepening interactions between individuals and organizations across the globe, facilitated by advancing communications technology and the opening of markets to trade and investment. Theories of International production have attempted to explain the convergence towards a globalised world, while addressing the different types of international expansions. These theories have focused on MNEs and Foreign Direct Investment (FDIs).
FDI can be defined as investment by an organization in a business in another country, with a view to establishing production in the host country. While Raymon Vernon is known for his theory of Product life cycle, Stephen Hymer laid emphasis on the location and ownership advantages of countries, which helped in attracting FDI from MNEs. John Dunning incorporated Internalisation to the analysis of Hymer, which became known as the Eclectic Paradigm (or OLI Paradigm), one of the most comprehensive theoretical explanations with specific focus on FDI.
Still the Eclectic Paradigm is being challenged in the modern globalised world, as it fails to take into account the implications of existing modes of entry of MNEs, as well as the advantages of Alliance Capitalism. It is being discussed further in this report. Theories of International production have greatly facilitated the understanding of the globalization phenomenon. Different theorists at different time intervals attempted to justify the expansion of MNEs across the globe.
Hymer (1970) was the first one to propose that MNEs are institutions of international production rather than international capital movement. Still he ignored the natural imperfections attributed to transaction costs in an imperfect market. In today’s world, with the proliferation on Internet use, imperfections like bureaucratic hurdles and control of distribution systems (Bain, 1956) are absent. Even the imperfections like price determinism and information transfer are shrinking.
Thus it can be argued that Hymer’s major contribution relating to the importance of structural market imperfection in determining FDI activity does not hold good for corporations, which are expanding globally through e-channels (for instance). Vernon (1966) came up with the International Product Life Cycle (IPLC) theory, which explained the locational dimension of FDI. According to him, production first starts in the home country fro local markets, and exporting is used to attain foreign markets.
As the product matures and production is standardized, production moves to less developed countries to reduce labour costs. The basic assumption of the IPLC is that knowledge is not equally and universally distributed (Vernon, 1966). This assumption, however, is not applicable in today’s world, as Vernon (1979) himself admits that there is a more perfect distribution of knowledge across the globe. He argues that firms who are global scanners follow a different trend than that of the IPL approach, because such firms have the ability to effectively scan global markets for the best factor endowments.
Though, a lot has been discussed and said on the theories of International production, yet none of the approaches (Hymer, Vernon, Barney) simultaneously explains the importance of resources heterogeneity, entrepreneurial competence, network governance and the rise of alliance capitalism. Thus, an overarching analytical framework is needed, that can synthesize these disparate views and account for the importance of location- based advantages and ownership advantages. Such a framework was developed by Dunning (1973; 1988; 1993) known as The Eclectic Paradigm.
It is a framework that explains the growth of MNEs by bringing together disparate theories. According to Dunning, the Eclectic Paradigm is less of an alternative theory of International production and more of a framework that synthesizes the essential and common characteristics of each main theoretical explanation on the growth of MNEs. For more than two decades the Eclectic Paradigm (EP) remains a widely used general framework for studying the growth of MNCs and Dunning has also continuously revised and extended the EP to explain changing facets of MNCs.
Dunning (1988) has re-stated that the EP is robust and general enough to incorporate future developments like renewed the focus on entrepreneurship and the emergence of global networks (Dunning, 1995). The Eclectic Paradigm explains that the Foreign Direct Investment (FDI) and growth of multinational corporations (MNCs) is linked to the extent and nature of ownership-specific advantages of the firm, the extent and nature of location bound endowments, and the extent to which markets for these advantages are best internalized by the from itself.
In short, it is the configuration of these Ownership (O), Location (L) and Internalization (I) advantages that determines a firm’s international production and growth. In a somewhat updated version, Dunning (1988) describes the three essential factors for international expansion: * Ownership Advantages are unique competitive or monopolistic advantages, typically developed in the home market, that permit the firm to compete successfully in overseas markets.
These factors are of two types: Asset Advantages arise from proprietary ownership of unique assets protected by structural market distortions, and Transactional advantages provide a unique capacity to capture value from the transaction benefits of owning a network of assets located in different countries. * Location factors, tied to the local foreign market, which make production in the host country preferable. These are immobile factors, such as cheaper labour, high shipping costs, local image or trade barriers, that can be combined with transferable intermediate ownership assets to generate superior products. Internalisation factors, typically related to the industry, produce transactional market failure in transferring ownership advantages to foreign markets. This also explains the naming of the EP as the OLI configuration as well. The eclectic model, then, pulled together the key elements of neo-classical theory – location, industrial organisation theory – monopolistic advantage and internalization theory – transactional efficiency. It used this eclectic mix to produce an internally consistent, compelling and testable model of the multinational firm and its strategic processes.