The Eclectic Paradigm

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Reconciling internalization theory and the eclectic paradigm


 

           
    
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Reconciling Internalization Theory and the Eclectic Paradigm Alan M. Rugman
Abstract: The eclectic paradigm of Dunning (1980) (with its OLI and four motives for FDI framework) can be reconciled with the firm and country matrix of Rugman (1981). However, the fit is not perfect. The main reason for misalignment is that Dunning is focused upon outward FDI into host economies, whereas Rugman’s matrix is for firm-level strategy covering MNE activity in both home and host countries. Keywords: internalization theory, Dunning’s eclectic paradigm, firm-specific advantages, country specific advantages, multinational enterprises.

INTRODUCTION
The field of international business has largely been developed over the last forty years through the insight and leadership of John Dunning. At the University of Reading he built upon the theory of internalization developed by his colleagues, Peter Buckley and Mark Casson (Buckley and Casson 1976), to develop what has become known as the eclectic paradigm (Dunning 1980, 1981, 1988). Together, internalization theory and the eclectic paradigm provide the cornerstones for the current theory of the multinational enterprise (MNE) (Verbeke 2009). They also provide the intellectual foundations for the rigorous theoretical and empirical analysis which characterizes research on MNEs at what has become known as the “Reading School” of international business (Rugman 2009).

Alan M. Rugman is a distinguished visiting Professor at Saint Louis University and Editor-in-Chief of Multinational Business Review. He is also a Professor of International Business at Henley Business School, University Of Reading, U.K. Email: a.rugman@henley.reading.ac.uk Acknowledgements: I am grateful to John H. Dunning for suggesting this paper, and to Alain Verbeke, Mark Casson, Lorraine Eden, Rajneesh Narula, and other colleagues at the April 2009 Reading Conference for very helpful comments.

Alan M. Rugman

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DUNNING’S ECLECTIC PARADIGM
The eclectic paradigm has been developed by John Dunning in a series of publications (Dunning 1980, 1981, 1988, 1992). There are three factors that determine the international activities of multinational enterprises (MNEs). These are ownership (O) advantages, location (L) advantages, and internalization (I) advantages. Thus, the Dunning eclectic paradigm is also known as the OLI paradigm. The OLI paradigm explains outward foreign direct investment (FDI). It suggests that MNEs develop competitive O advantages at home and then transfer these abroad to specific countries (depending on L advantages) through FDI, which allows the MNE to internalize the O advantages. In contrast to the eclectic paradigm, internalization theory is mainly used to explain the choice of entry mode. For example, I advantages overcome the externality of knowledge as a public good, such that FDI is preferred to licensing, joint ventures, or alliances. (In all of the last three modalities, there is a risk of dissipation of the firm’s knowledge advantage.) Using Dunning’s own reasoning, it is apparent that there is a close linkage between O and I advantages in that a knowledge-type O advantage needs to be internalized. As will be shown below, this...
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