Introduction
Eclectic paradigm is a theory used in the field of business economics. It is also referred to as OLI-Framework or OLI-Model, and has been related to international business through the advantages it possesses, which benefit multinational corporations.
It is describes an improvement of Dunning theory of internalization that was based on transaction cost theory. Eclectic paradigm has been the strongest ever paradigm that offers a greater understanding of cross-border transaction and foreign value-added activities of business firms. This is through agreements on inter-firm collaboration and trading at arm’s length (Dunning, 1997, p.4).
Application of theories
There was an earlier belief that no single theory could explain the existence of foreign direct investment. This is the reason why Dunning come up with the eclectic approach. He suggested that international production is a result of internalization, ownership, and localization process.
These theories target the determinants of foreign direct investment. According to Dunning, it is much possible to view the act of using international financial market as a cover mechanism to mobilize ownership and location factors through foreign portfolio investment FPI.
This is in the case when the decision involved in FPI is firm specific and recognized (Dunning & Gray, 2003, p.16). In real world, eclectic paradigm can be used to give a clear explanation on the means of ownership, internalization, and location advantages, which give shape to multinational Enterprise (MNE) entry to specific market (Johnson & Turner, 2003, p.226).
Modes of Internationalization
Internationalization aspects are more culturally based visions that highlight human variables underlying particular corporate actions. In addition, Internationalization is associated with economic and business strategy analyses of international market (Sitkin & Bowen, 2010).
There are various modes of entry into international markets including direct export, licensing, international agents, international distributors, strategic alliances, joint ventures, overseas manufacturing, and international sales subsidiaries. Internationalization process takes place in a number of stages that involve indirect licensing, direct exporting through a local distributor, foreign presence, home manufacture, foreign assembly, and manufacturing (Anon, N.d).
Comparison and Contrast between Comparative Advantage and Dunning’s Eclectic Paradigm
Comparative advantage
This may be defined simply as the ability of an individual, company, or economy to conduct an activity better than another for some fixed, almost unchangeable reason. Comparative advantage is important in making decisions such as what products one should make or sell. If a company is unable to make a product that is unlikely to change, the company might be well advised to make a different product.
Dunning’s Eclectic Paradigm
In his theory, Dunning recommends on future improvements and reappraisal of the OLI characteristics of the paradigm and accepts the increasing importance of indulging in FDI (Margardt, 2007, p.31). His concepts of localization and ownership advantage enlarged the standard neoclassical theories of international production and dealt more on empirical facts (Cheng & Hitt, 2004, p. 30).
Just like internalization paradigm, Eclectic Paradigm provides an analytical outline that aims at explaining the activities of industrial formats, growth, geographical movement and any type of international business. Its operational robustness in international market is also limited (Dunning, 1997, P.4).
In addition, it rejects all the means related to international production. The theory also picks important competing ways to explain the international phenomenon. The starting point of eclectic paradigm is the Heckscher-Ohlin factor.
This assumption factor acts as an endowment explanatory factor for international trade. The theory’s assumptions imply that all the international markets operate efficiently, no scale for economies, and presence of perfect and costless information (Johnson & Turner, 2003, p.225).
Born Global’s Relation to International Theories
Born Global firm is a business organization that utilizes resources of any given country or several countries. These firms are the ones that are growing in numbers in international business activities (Cavusgil & Knight, 2009, p.1). Scholars in the early 1980’s started to recognize the ability of some companies to undergo internalization (Sitkin & Bowen, 2010).
This seemed to be the earliest study to investigate the Born Global phenomenon. Researches revealed that understanding of the foreign and international market relating to local agents, joint venture partners and licensing methods supported faster entry to the market.
Two other scholars, Hedlund and Kverneland, in 1985 claimed that these studies create doubt on traditional view, that internationalization of companies occurs slowly, and suggested that internalization views should be revised to cater for differences in climatic conditions (Cavusgil & Knight, 2009, p.29).
Market Imperfection Theories; Ownership, Localization and Internalization
These theories refer to the advantages of an eclectic paradigm. Here, ownership refers to as origin of investment, characterized with ease of investment funds transfer and choice of investment like Equity including amount, location and others.
Secondly, localization is the direction of investment. It is the commitment and level of government support for portfolio investment. Thirdly, internalization refers to the reason for investment, which is characterized with correlation of returns with other markets, especially home market, and mobility of finance capital (Blomstrom, Kokko & Zejan, 2000).
A Case Study carried out in Guinness Nigeria limited (GNL) on drinks consumption show that, GNL started many breweries branches in different location on the region. The pressure to enhance local ownership and staff grew up rapidly in 1970’s and by 1980’s, localization process was complete.
Localization process here involved three different issues. First, the level of local shareholding increased; secondly, there was choosing of Nigerian Directors; and finally, the decrease in number of experienced managers.
This pressure came from the local staff, government, and corporate Headquarters (Hailey, 1993, p.10). By 2007, Nigeria was the second biggest consumer of this beverage behind the UK (Dunning & Gray, 2003, p.19).
Conclusion
International businesses relation and trade is a very important issue to a nation’s economic growth and development. Furthermore, the manner in which countries participate in foreign trade and global economy is an important aspect of life in the contemporary society (Katsikeas & Morgan, 1997, p.68).
Eclectic paradigm does not only focus on international production theory, but also represents the integration of other theories such as theory of the firm, location, organization and trade theory. It therefore covers the view of John Dunning in a broader perspective (Johnson & Turner, 2003, p.226).
Reference List
Anon. N.d. Modes of Entry into International Markets. Web.
Blomstrom, M., Kokko, A., & Zejan, M., 2000. Foreign direct investment: firm and host country strategies. NY: Palgrave Houndmill. Web.
Cavusgil, T., S., & Knight, G., 2009. Born Global Firms: A New International Enterprise. NY: Business Expert Press.
Cheng, J. L., & Hitt, M. A., 2004. Managing multinationals in a knowledge economy: economics, culture, and Human Resources. Oxford: Elsevier ltd. Web.
Dunning, H. J., 1997. Alliance capitalism and global business. London: Routledge. Web.
Dunning, H. J., & Gray, E., 2003. Extending the eclectic paradigm in international business: essays in honor. Cheltenham Edward Elgar Publishing limited. Web.
Hailey, J., 1993. Localization and Expatriation: The Continuing Role of Expatriates in Developing Countries. Web.
Johnson, D., & Turner, C., 2003. International Business: Themes and Issues in the Modern Global Economy. NY: Routledge. Web.
Katsikeas, C., & Morgan, R., 1997. Theories of international trade, foreign direct Investment and firm internationalization: a critique. Management Decision, 35(1); 68 – 78.
Margardt, D., 2007. A Critical Comparison of Internationalization Theories: Eclectic Paradigm of Dunning vs. Uppsala school. Norderstedt: Grin Verlag. Web.
Sitkin, A., & Bowen, N., 2010. International Business. Oxford: Oxford University press.