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the company will decide foreign direct investment; otherwise choose exports.
c. The Eclectic Theory of International Production
The theory was proposed by the British economist J. H. Dunning in 1976 and is also often
called OIL theory (Organization or Ownership-Internalization-Location). The core content of
this theory is that the foreign direct investment for enterprises to be engaged in is decided on
the ownership advantages, internal advantages, and location advantages of three joint
decisions. Denning believes that if an enterprise only has ownership advantages, then, the
enterprise should choose licensing arrangements means of technology transfer. If an
enterprise has ownership advantages and internalization advantages, it should select domestic
production and exports. And only when the enterprise has the ownership, the internal, and
location advantages of the three at the same time, the enterprise will choose foreign direct
investment.
Detailed on Eclectic Paradigm of OLI Ownership-Location-Internalization advantages:
Organization (Ownership) advantages can be understood as the capabilities for
businesses to meet their current or potential customers demand. Ownership, firm specific
advantage, includes Patent and Trade Market, Technology, Name recognition, Core
competency of a firm i.e., an ability meeting with the current/potential customers demand (If
having the ownership advantages, the enterprise should choose licensing arrangements way to
proceed the technology transfer over other forms of entry. The licensing Specific Advantages
such as knowledge-based software, patent items or intellectual properties).
Internalization advantages. Internalization is about decision to make an activity internal
to the firm, theres got to be an advantage of internalized. Internalization comes about from
market imperfections. We take the service enterprises as example. In order to overcome the
incompletes and uncertainties from external market and to prevent foreign competitors
copying, the enterprises will use of its intangible assets resulting from the internalization of
specific advantages for being used in transaction cost benefit. Having learned from Barkley
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and the views of people such as Carson, Denning had his view that the enterprises having the
ownership advantages of intangible assets, through the expansion of their own organizations
and business/management activities and the use of internalizing these advantages, will obtain
more than non-equity transfer potential or real profits. However, the enterprises with the
ownership and internal of the competitive advantages do not necessarily have to choose
foreign direct investment. They can also choose to expand domestic scale, and then exports to
be fully rewarded. So ownership and internal advantages to the foreign direct investment is
not a sufficient condition but a necessary condition.
Location advantages. It is external advantages to the firm. It is not owned by enterprises
but by the host country; therefore, enterprises can not control discretionally, but adjust and
take this advantage. It is mainly characteristic in three aspects: the immovable factor and
endowment of the host country, such as natural resources, convenient geographical location, a
large of population; the host country's political system, policies and regulations with flexible,
concessive, and other favorable conditions (i.e., free tariff barriers), as well as the formation
of good infrastructure and gathered economy. Location factors directly affect foreign direct
investment of MNEs on the decision on the location and the international production system
layout, a fully foreign direct investment rather than necessity. When meeting with the
following three advantages, MNEs will have global oligopolies: 1. must have some strategic
advantage which allows it to compete effectively with domestic firms; 2. must select
countries for investment which have attractive sourcing and/or marketing environments; 3.
must have managerial ability to coordinate operations located in foreign countries at a cost
that is less than the benefit received from operating in these locations.
In short, Denning's theory explains the causes of foreign direct investment for developed
countries, the same to say, Dennings theory is on why we go to foreign to invest businesses,
but he did not conduct the research on the management of MNEs. While, Uppsala Theory is
the research on how we form foreign business. Consequently we know, even though firms
pursue international entries, they need to have a clear advantage and Uppsala provides Stage
model - The Uppsala Internationalization Process Model.
B)
Relating these theories to our own research interests and practical applications:
Both writers of this Final Exam come from Taiwan and one is interested in the research
by using the Eclectic Paradigm of Dunning. Taiwan is a developed country full of a lot of
Multinational Enterprises (MNEs). Due to the economic globalization and the pressure of
developing industry or services, Taiwan Government will be forced to come forward to
support the domestic enterprises in foreign direct investment. Therefore, even though the
small-medium level firms in Taiwan currently have no the three specific advantages as Dunning
proposes to FDI, it is getting trend for those small-medium firms to have expressed the strongly
desire to FDI. Otherwise, the theory of Wells, L.T. (1977) also could be used as the reasons
for Taiwan small-medium firms to go globalization or involve with international business
instead of the Dunnings. Wells proposed the theory to compromise Denning theory when
lacking of the absolute competitive advantage. The comparative advantages for such
multinational companies are from low-cost. Consequently, the time for Taiwan MNEs or
small-medium level firms to FDI is coming. Eclectic Paradigm of OLI Advantages will be
usually applied when involving international businesses. The researches concerned will be
more and more often.
The other writer of the Final Exam will be interested to go for mainland China for doing
business/service there in the future; the follows are her practical applications attention:
The Applicability of Service Using the Theory of FDI
Traditionally, since the transfer of knowledge can replace the transfer of products,
Vernon thinks that the theory of manufacturing multinationals also can be used to explain the
service of multinationals. Denning (1989) extended the international production eclectic
theory developed in manufacturing to the services sector and pointed out the theory is
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not a statement is true or false statistics are frequently misused by researchers who try to
apply them directly to abstract statements to prove whether the statement is true or false.
Also It is important to note that the best research design which is the strategy for
developing a scientific body of knowledge. They are developing an explicit theory in an
axiomatic or process description form, selecting a statement generated by the theory for
comparison with the results of empirical research, designing a research project to test the
chose statements correspondence with empirical research.If the statement derived from the
theory does not correspond with the research results, make appropriate changes in the theory
or the research design and continue with the research. If the statement from the theory
corresponds with the results of the research, select further statements for testing, or attempt to
determine the limitations of the theory.
competition is waged ever more fiercely. In the arena of international business, competitive
advantage is a short-lived thing and understanding the contribution from disciplines is crucial
because in a brutally competitive economic universe with scant margin for error, the power of
knowledge assumes exponential value to prosper the international business.
Market Imperfection (Hymer). Economic conditions include market size, growth
prospect, rate of return, urbanization, etc. Overall, some studies find that FDI has a
significantly positive impact on growth and more beneficial for the export-led growth
economies of some countries. The major determinants of FDI are market size, labor force
growth, infrastructure index and trade openness. The most significant and influential factors
are market size and labor force growth (http://www.adbi.org/discussion-paper/2006/11/
28/2066.fdi.south.asia.policy.trends/impact.and.determinants.of.fdi/).
The Contribution of Root Discipline from Organizational Theory
Organizations and environment (O&E). Researchers stated either organizational
outcomes or environmental outcomes are significantly different approaches to O&E research.
The first aims to contribute to organization theory and performance; the other aims to
improve environmental performance (Bansal and Jijun, 2006).
Organizational Theory in Education. The quality of education and training implies that
technical training should be enhanced in comparison with general education. If the
governments have measures to direct a large numbers of pupils to technical training schools,
in other words, as at early stage of industrialization, governments had placed a priority on
development of skill-intensive sectors of labor-intensive industries, they were improving in
quality of the whole educational and training system, which is a prerequisite as well as
contribution on the development of a paradigm (like organization advantages) in IB.
In order to build strategy for attracting FDI on the comparative advantages, specifically
for the regions having natural resources, policy usually is aimed at calling resource-seeking
FDI, which foreign investors are provided most favored condition in doing their business
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there. Labor-intensive type is the FDI another choice and the regional authority themselves
offer investment opportunities rather than waiting foreign investors submitting their
proposals. For long-term strategy, common measures, such as public investment on
infrastructure and education and training should be used to help contribute in IB.
Law on domestic and foreign investment should be merged into one to create the image
that host country does not treat domestic investment and foreign investment unequally.
Regulation should be more transparent and more investor-friendly by widespread
dissemination of information about the investment environment in the country. In investment
promotion workshop, the personal contacts should also be utilized. In addition, skilled human
capital is crucial for capturing and impacting the positive effects from FDI (countries with
skilled labors can more easily adjust and develop the gain from FDI). And which will
facilitate the contribution to the development of IB.
The Contribution of Root Discipline from Political Science
Political Science. In placing a priority of development for export-oriented FDI, although
protection is sometimes desired from foreign investors at pre-operational stage, openness
seems to be a significant positive determinant of FDI. Therefore, to really promote FDI into
any country, countries should be more open. In general, the tariff rate for foreign invested
firms imports should gradually reduce according to international agreements, which would
also be a contribution for political science on the development of a paradigm in IB.
Keeping stable political and economic stability, improving overall legal framework for
promotion of FDI by creating favorable investment environment, i.e., the foreign investors
enjoy same treatment on possible areas where the host enterprises are not allowed to keep
leading position, or the dual price system for infrastructure service should be abolished. If all
of these are taken, they would contribute to the development of IB paradigm, too. Also, trade
treaties, both on the world-wide level of the WTO and in a convoluted spider web of
individual bilateral and multilateral agreements, are redefining the political landscape and aid
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result in a bad debt. These are transaction costs. These costs usually are used as the
evaluation tool when the companies decide to take FDI.
Williamsons contribution rests in specifying the variables that determine whether
market or hierarchy will have the lower transaction costs in various circumstances. Before
discussing these variables, though, we also need to mention the assumptions that Williamson
makes that underpin the theory. It is important not to confuse these assumptions with the
variables. The assumptions are bounded rationality and opportunism.
Bounded rationality refers to the fact that people have limited memories and limited cognitive
processing power. We cant assimilate all the information at our disposal, we cant accurately
work out the consequences of the information we do have.
Managers face the same problems. No matter how knowledgeable they might be, they cannot
consider all the possible alternative courses of action. Williamson doesnt assume that all
people will act opportunistically all of the time. He merely assumes that some people will act
opportunistically some of the time, and that you cant tell in advance who is an opportunist
and who is not.
The variables about transaction costs are frequency, uncertainty and asset specificity.
The real explanatory power of the theory, though, comes from the three dimensions or
variables that are used to characterize any transaction. Transactions can be frequent or rare;
have high or low uncertainty; or involve specific or non-specific assets. These three variables
will, according to the theory, determine whether transaction costs will be lowest in a market
or in a hierarchy. It is easiest to consider these variables with respect to decisions about
whether to integrate vertically.
Although TCE is very useful, it is not without its critics. It is important to recognise
some possible weaknesses in the theory.
1. It is often very difficult to measure transaction costs even if they can be defined.However
the theory assumes that it is possible to neatly separate production and transaction costs, but
in practice this is often not the case.
2. Although TCE assumes that their are limits on the extent to which decision-makers can be
rational(that is, it assumes bounded rationality), it still makes little allowance for the other
factors that we know affect decision-making. For example, the profit maximising, cost
minimising object is not considered to be problematic. In reality, we know that this is not the
case. There are often conflicts of interest among managers, the interests of managers and
shareholders may not be perfectly aligned, and so on. Consequently, power plays an
important role in decision-making.
The Price in International Business Development. Lancioni (1989) suggested in order to be
favor in the international business, price is important and the price setting should be done on
two levels in international marketingthe external market level includes factors, such as
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customer price sensitivity, competitive price levels, and government regulation; and the
internal level considers cost reduction goals, ROI objectives, sales volume requirements, and
production volume quotas, from which the both environments therefore have to be taken into
account when prices are being set in international marketing.
Other new impact IB Development: In Mayfield &. et. al. (1998), location- the role of
place as a key factor, has a significant impact on the effectiveness of international business
negotiations. Additionally, the Internet offers a powerful and a variety of practical methods in
the global marketing and also has a direct impact on international business (Natesan & Smith,
1998).
The emerging process of managing internationally calls for different perspectives,
different information, different skills, and a much greater tolerance for ambiguity and
uncertainty. We need to be aware of the competitive imperatives that underlie international
business development in order to make strategic change happen (Schaeffer, 1989). The above
can be of great assistance for business people seeking success or root in international
business.
Comment on the stage of development of the IB paradigm
Again we take the well-known example of product life cycle theory created by Vernon
(1966) for commenting on the stage of development of the IB paradigm. In his view the
products in the market will experience innovative, matured, and standardized three stages.
Later he amended by adding the "stagnation" stage. Products, in different stages of the life
cycle, need to be met with the production of different origins. During products innovation
stage, enterprise should take domestic production choice and then export the products. When
products entering the mature stage, enterprises should transfer production overseas to reduce
costs, maintain the market share of the products. When entering the standardization phase,
enterprises have a monopoly advantages vanish and the production needs to be shifted to
developing countries with low labor costs; the invention country begins importing the
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products. The Vernon product lifecycle model is an older model from after World War II, the
model has been criticized for being at the ethnocentric because it was a model that applied to
American companies to expand to developing countries, and we now live in a world that we
have exported products to the developing countries and invested in the developed countries,
i.e., we could see the situation where Chinese firms are investing in the US. However, the
Vernon lifecycle model is useful and did contribute to the development of IB.
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