Abstract. This paper first sets out the main features of the eclectic theory of international production and then seeks to evaluate its significance of ownership- and location-specific variables in explaining the industrial pattern and geographical distribution of the sales of U S . affiliates in fourteen manufacturing industries in seven countries in 1970.
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H There is now a consensus of opinion that the propensity of an enterprise to iNTRoDucTtoN engage in international production-that financed by foreign direct investmentThe Underlying rests on three main determinants: first, the extent to which it possesses (or can Theory acquire, on more favorable terms) assets' which its competitors (or potential competitors) do not possess; second, whether it is in its interest to sell or lease itself; and third, these assets to other firms, or make use of-internalize-them how far it is profitable to exploit these assets in conjunction with the indigenous resources of foreign countries rather than those of the home country. The more the ownership-specific advantages possessed by an enterprise, the greater the inducement to internalize them; and the wider the attractions of a foreign rather than a home country production base, the greater the likelihood that an enterprise, given the incentive to do so, will engage in international production. This eclectic approach to the theory of international production may be summarized as follows.* A national firm supplying its own market has various avenues for growth: it can diversify horizontally or laterally into new product lines, or vertically into new activities, including the production of knowledge; it can acquire existing enterprises; or it can exploit foreign markets. When it makes good economic sense to choose the last route (which may also embrace one or more of the others), the enterprise becomes an international enterprise (defined as a firm which services foreign markets). However, for it to be able to produce alongside indigenous firms domiciled in these markets, it must possess additional ownership advantages sufficient to outweigh the costs of servicing an unfamiliar or distant environment [H irsch 19761. The function of an enterprise is to transform, by the process of production, valuable inputs into more valuable outputs. Inputs are of two kinds. The first are those which are available, on the same terms, to all firms, whatever their size or nationality, but which are specific in their origin to particular locations and have to be used in that location. These include not only Ricardian type endowments-natural resources, most kinds of labor, and proximity to market^,^ but also the legal and commercial environment in which the endowments are used-market structure, and government legislation and policies. In classical and neoclassical trade theories, differences in the possession of these endowments between countries fully explain the willingness and the ability of enterprises to become internat i ~ n a lbut since all firms, whatever their nationality of ownership, were assumed ;~ to have full and free access to them (including technology), there were no advantages to be gained from foreign production. 'John H. Dunning is Professor of International Investment and Business Studies at the University of Reading He has been working in the field of international investment and the multinational enterprise since the mid 1950s and has published several books and numerous articles on the subject The author is much indebted to Professor Guy Landry of Brandon University, Winnipeg who was responsible for most of the computational work behind Tables 3-6 and who assisted in writing the first draft of pages 12-23.
The second type of input is that which an enterprise may create for itself-certain types of technology and organizational...