The location of a business plays a significant role in providing a business with explicit location capabilities and generic resources necessary for its specific advantage. The articles by Zaheer and Nachum (2011), Rugman (2010) as well as Strange and Buckley (2010) are all conclusive on the relevance of Multinational Enterprises (MNEs) working in a specific location. For instance, it has been found out that appropriate choice of location will offer them strategic management and specific transaction advantages that are directly related to cost.
Although this view can be challenged on the basis that many multinational enterprises can derive capabilities in different locations, Zaheer and Nachum (2011) are strongly convinced that creation of value and potential of a business organization can be realized effectively when the management of any given business vividly understands the significance of location.
Rugman (2010) theoretically employs Dunning’s electric paradigm to best describe the activities of multinational enterprises business operations using the concept of internalization of multinational enterprises. He posits that while internalization of businesses has largely been ignored, there are myriad of key benefits of internalizing a business enterprise. For instance, it offers abundant competitive advantages especially at the level of domestic market. This strongly echoes Buckley and Strange (2010) position in their internalization theory. They argue on the foundation of transaction cost of acquiring information and aligning business interests.
They strongly argue that internalizing an MNE is critical for governance of an organization and ensuring that multinational enterprises are risk free. While both arguments have received many criticisms especially from opponents who campaign for evolution theory, one important factor that is of much significance in the arguments by the authors of the three articles is the fact that they are reasonably clear-cut.
All the three articles are quite categorical that there are location advantages that will be part and parcel of multinational enterprises internalizing their operations and by maintaining Dunning’s eclectic paradigm, multinational enterprises will be able to easily develop assets, capital, networks and alliances. As a matter of fact, although the given perspectives tend to differ in terms of theory, the overall impact on Multinational Enterprises is similar in one way or another.
The arguments in the three papers are appropriate bearing in mind that all of them almost unanimously agree that both strategic management and economic perspectives of multinational enterprise locations are crucial and highly need for successful operation of business organizations operating in international markets. To begin with, Rugman (2010) uses internalizing theory when evaluating the performance variations among different firms and especially when employing the ownership, location-specific and internalization framework (OLI).
He indicates that when multinational enterprises lack an institutional form, it would be difficult for them to realize the O advantages of internalizing the firm. In fact, ownership entitlement of a Multinational Enterprise (MNEs) may not be ignored at all if any success is to be realized.This sentiment is ricocheted by Buckley and Strange (2010) who also posit that internalization of MNCs has advantages which relate to transaction cost and is an important parameter for institutional, financial and organizational governance. In order to explain this in detail, the authors have used internalization theory for governance of Multinational Enterprises (MNCs).
On the other hand, Nachum and Zaheer (2011) focus on MNE internalization as a major source of a firm’s generic resources. Indeed, by referring to Dunning’s eclectic paradigm, they argue that location capability like government and political aspects, governance structures, education system, infrastructural aspects natural ‘resources as well as market size would all be advantages of internalizing a multinational enterprise. In other terms, internalizing a multinational enterprise brings forth several benefits both the firm in question and other stakeholders such as suppliers and consumers in the market.
However, the weakness of the arguments held in the three articles can be traced in the manner in which they treat the entry mode of internalizing MNEs. It is critical to note that eclectic paradigm only fits on industrial level analysis and not on transaction unit of analysis as documented by Buckley and Strange (2010) among the other authors. As such, the application of OLI needs only to be used outwardly on foreign direct investment or at firm level to focus on strategies and decision making in MNEs.
However, most of the weaknesses in the arguments presented by the three articles can be minimized or strengthened by establishing a correct understanding of mode, choice of entry and location advantages brought out in the eclectic paradigm in relationship to internalization theory since the former focuses on OLI interactions at industry level. While the latter approach may appear to be a complicated procedure and quite cumbersome to implement in a real business scenario, it is worth noting that it is the best avenue through potential weaknesses can be addressed.
Furthermore, internalization theory has a focus that is quite parsimonious and narrow and hence should focus on the indisputable and intangible knowledge advantages that are enjoyed by MNEs. Needless to say, both the electric paradigm and internalization theory on MNEs are vital when expounding on location advantages of a business organization situated in a foreign location.
References
Buckley P.J. & Strange, R. (2010). The governance of the multinational firm: insights from internationalization theory. Journal of Management Studies. 48(2):1-11.
Nachum, L. & Zaheer, S. (2011). Sense of place; from location resources to MNE location capital. Global Strategy Journal. 1:96-108.
Rugman, M.A. (2010). Reconciling internationalization theory and the eclectic paradigm. MultinationalBu,siness Review. 18(2): 1-12.