Assessing the Essence of Teh Eclectic Paradigm in Today's Globalised World.

Topics: Economics, International economics, Eclectic paradigm Pages: 9 (2737 words) Published: April 26, 2012
Mauritius College of the Air
In Collaboration With
University of Mauritius

International Business
Cohort 4

Name of Student: Ashish Gopee|
“Assessing the significance of the Eclectic Paradigm in today’s Globalised world.”| |

Thomas Friedman (1999: xvii) in his book, The Lexus and the Olive tree, described the world as “being tied together into a single globalised marketplace and village”. It has become commonplace to observe that we are all now living in a globalised world, transforming the way we live and work. 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...
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