The usefulness of the eclectic paradigm as a construction for incorporating and relating substitute theories of international business, and in dealing with changes over time in the practice of international business
The eclectic paradigm, namely the OLI paradigm was put together by the economist John Henry Dunning (1927-2009) in the past due 1970's. Dunning's early on research centered on American owned affiliate marketers in the UK and their higher output compared to their local competitors. He considered how and why these firms could actually be competitive locally with indigenous UK businesses and started to raise questions about the features of multinational businesses as an final result with their activities abroad. He determined certain solid specific advantages and also advantages derived from the united states of origins (Dunning, 2001). They are first two the different parts of the later assembled paradigm, the O which refers to Ownership advantages and the L which identifies locational advantages. These early on works and the early identification of the O and L and their shared interaction are at first shown in the reserve North american Investment in Uk Production Industry (Dunning, 1958). This stream of research continued through the 1960's when Dunning was working on American organizations in Europe.
Later through the 1970s, inspired by Buckley and Casson, Dunning started to address deal cost explanations in an internationalization point of view (the I component of the paradigm) in addition to the previously recognized O and L advantages. He was worried about why firms decided to generate and exploit their specific advantages internally alternatively than through the open market pushes. This broadened his perspective and articulated more clearly the early view he previously on the O and L components. And by the time he was putting together all of those other paradigm by the end of the 1970ґs, he appeared back again to the 50ґs and 60's and the ideas of Vernon, Hymer among others and interpreted them from within this platform and elaborated how their ideas were expressed from the eclectic paradigm. Intellectually, he brought everything together, not simply contemporary but also previous theories, bringing all these explanations together in a few sort of rubric that allows to connect them.
Since then, the eclectic paradigm's simpleness yet its thoroughness properly combines international business ideas and allows experts from different domains and disciplines to systematically make clear the growth of multinational activity (Cantwell and Narula, 2001).
- The Eclectic Paradigm Revisited
The eclectic paradigm itself is not an justification of the MNC rather it helps explain the particular level, determinants and patterns of the foreign value added activities (international creation) of companies, and or countries. The paradigm offers a platform that an explanation can be obtained. It isn't itself a predicting theory but it is a way of linking different theories that can be then used to help understand different kinds of foreign development according to their specific contexts and motivations (Dunning, 2001).
The Eclectic Paradigm and its OLI components have gone through different revisions and are thought as follows:
O: Ownership advantages. These are firm net competitive advantages that companies from one country possess over those organizations from other countries when servicing a particular market.
L: Location advantages. The amount to which companies decide to locate overseas value added activities. These value added activities can be the result of internalizing.
I: Internalization. The amount to which companies add value with their output by discovering as more profitable to internalize the technology and exploitation with their ownership advantages somewhat than through the open market.
(Dunning, 2000, 2001; Ietto-Gillies, 2012)
An interesting aspect of the OLI elements is that they are not impartial from the other person but that they communicate. For example, the worthiness added activities produced by locational advantages nourish back again to the O advantages. That is why an often misunderstood and controversial factor is the O, due to fact that it's called possession, scholars like Rugman relate it only to firm specific advantages. However, the O also refers to advantages that come from the companies of the united states of source (home country). Quite simply, what Dunning (2001) at first intended by (O) Possession described the nationality of possession as opposed to the possession of possessions by a firm. It was down the road that Dunning acknowledged and expanded the Ownership benefits to include stable specific and other types of advantages like the ones caused by engaging in foreign production. Another reason this is so important is because it does not necessarily imply the MNE should be legally identified by the possession of investments, but if instead there can be an international business network that's not entirely owned, it could still be steady with the notion of capabilities made within such a network associated with firms of a certain nationality of source. On the other hand the L aspect has to do with variety country advantages and it is just not essential to compare the web host with the home but different number countries with one another in determining where in fact the firm goes to produce.
- OLI: Combining and relating IB theories
The eclectic paradigm comes from other international business ideas which can be themselves affected by economic and organizational ideas. The paradigm draws from ideas of the average person firm such deal cost economics (internalization) and market power ideas and their relationship with marketplaces and combines them with macroeconomic approaches to foreign production like the product lifecycle theory (Cantwell and Narula, 2001). This encompassing aspect of the paradigm has brought many criticisms, one of the very most popular ones telephone calls it a "shopping list of variables". Dunning (2001) taken care of immediately this criticism by clarifying that every variable of the paradigm is built predicated on well-known and accepted financial and organizational ideas. Furthermore, he clarifies that the objective of the paradigm had not been to explain all varieties of international creation but to provide a construction that helps plan a technique that can lead to a better description of different types of foreign development.
Vernon's product lifecycle theory is the most inherently active or evolutionary in figure of all theoretical strategies of the paradigm. Hymer's market vitality and Buckley and Casson internalization ideas were limited to the period in which they were writing about them, during which an evolutionary perspective of the MNE was not yet explored. On the other hand the merchandise life cycle theory was contemporaneous to the conditions of the 1960ґs and for that reason Dunning included this evolutionary personality in the paradigm. This became an important part of the paradigm in the sense which it offered it an evolutionary and energetic perspective on how firms grow as time passes, which can be an integral area of the way the eclectic paradigm should be interpreted and used (Dunning, 2001).
In addition, from an evolutionary approach, the Eclectic Paradigm's internalization advantages are due to the conditions of improved organizational learning and technology creation, rather than to the conditions for a more efficient cost-minimizing business of an established set of trades. This starts up the possibilities of alliances in order to increase possession advantages through assistance. This will take the paradigm beyond a basic orders costs perspective and expands the types of ownership advantages, from advantages in line with Bain -which assumes benefits to exist be before going overseas- to cooperative and interdependent generated ones (Tolentino, 2001).
- The Future of the Eclectic Paradigm in IB
The eclectic paradigm has not only experienced criticisms but also encounters the issues of an increasingly changing international business environment credited to globalization and scientific advances. Within the last generations MNC activity has increased both in extent, depth and form. There is also increased global interconnectedness and interdependence which makes inter firm alliances more prevalent and necessary (Cantwell and Narula, 2001). R&D is more technical and costly also increasing just how it is carried out. Property exploiting FDI continues to be present but asset augmenting and knowledge seeking FDI are progressively important. All this has created new ways of performing cross boundary activities and various strategies that MNCs use to follow them.
Additionally, the field of IB in addition has evolved. It includes moved from a market driven view to a far more knowledge driven one. Moreover, the level of analysis has improved as well. Inside the 1990's there is a move from the macro level methodology where countries were the machine of research to a more micro strategy with the company as the unit of analysis. Recently the field is going even more micro by also paying increasing attention to behavioral (specific) considerations and therefore and can use the average person as the machine of evaluation. Actually nowadays, the course of the field International Business studies is becoming more multilevel in persona, allowing for different levels of analysis including the countries, firms and individuals. The field in addition has become more interdisciplinary by attracting from other disciplines such as sociology, anthropology, biology, geography and history. Therefore taking in to account all these changes the following question develops:
Is the eclectic paradigm heading to hold with the external changes related to globalization, technical change and the new directions in the field of international business?
I believe it will. So far the paradigm has held going back 2 decades (since the 1980's) and it seems to be getting more powerful as a guiding platform in international business studies. All its components are articulated in a way that allow all these changes. For example the Ownership component is definitely relational in identity and has included different relationships and degrees of examination (Ietto-Gillies, 2012). Therefore this does not present a danger to the paradigm but it actually improves its relevance because it allows for multilevel examination by combining different units and components of analysis and permitting them to interact. And even though there aren't many conversations of the eclectic paradigm today, the paradigm is significantly relevant now with regards to where in fact the international business field is certainly going.
Additionally, the paradigm has successfully embraced phenomena such as Alliance Capitalism, technical accumulation, international networks and dynamic capabilities, by which businesses cooperate and mutually increase their ownership advantages. These are regions of research that according to the critics are not tackled by the paradigm. In addition, the Location component of the paradigm rises in importance in the sense that subsidiary location has become important because they're inserted in their international locations and can benefit from their networks and national technology systems and for that reason adding value to the MNC.
On the other side, dynamic capabilities are manufactured not only within companies but by interacting or cooperating with other firms and celebrities (Knowledge enhancing technological dynamism) plus they become area of the O advantages. These possession advantages also come from the connections with locations with which first 'O' advantages are crucial for the development of absorptive capacity. Dunning argues that features or ownership advantages are a condition for internalizing. That is a energetic view in which advantages are an evolutionary concept.
Critics say that some strategic considerations might not be covered by the OLI and that routines and techniques should be added (OLMA). However, even although paradigm will not specifically address routines and processes it addresses the possession advantages which could result from them. Each day problem dealing with activities create unique key capabilities that are idiosyncratic of every firm, therefore providing them with or improving existing 'O' advantages. This means that the OLI paradigm still supports for strategy concerns, especially in terms of capabilities development (in terms of O). Also for some reason in 'L' with economies of location and encounters of location. Finally also with the connection between O and L which creates a intricate relationship at different levels and interactions. For example regarding subsidiaries, competence creating subsidiaries actually improve Ownership advantages therefore providing durability to the discussion that O advantages are not only started in the MNEґs home country but also occur in subsidiaries as well.
Today we can apply this also to international business sites, so rather than a legal classification of the company, the MNE by itself, the OLI paradigm can used as a method to analyze international business networks and also the MNE company as a strategic planner of such sites. Quite simply the subject area progresses but the paradigm remains relevant, partially because of the degree of flexibility which is built in some of these characteristics, especially in the Ownership advantages, which is by the way, the most important element of the paradigm, because it is the the one that ties everything together, since it's the properties of learning that define the positioning or the transactional network basis of the organization.
The target of the eclectic paradigm is not to explain the multinational firm however the level and routine of foreign value added activities of firms. It helps make clear not only the original act of overseas production but also its progress. The eclectic paradigm overcomes the constraints of partial theories of international development and a holistic framework where existing option and complementary ideas of international creation coexist (Tolentino, 2001).
In the international business field a systemic approach is now more needed than ever, in addition it must be inherently interdisciplinary. At the start the eclectic paradigm got a more descriptive approach. It had been originally developed by integrating some international business ideas which come mainly from economics. Theory of trade in Vernonґs circumstance, theory of the firm of the industry in Hymerґs case and again theory of the firm in Buckley and Casson's circumstance. Nowadays it is pertinent to combine theories extracted from different disciplines. Various ways to think about the planet, new perspectives. That is why a systemic strategy is needed. The eclectic paradigm is currently it can be an umbrella that handles a variety of ideas, a construction that allows the understanding of how these ideas are attached and interact. Therefore what is happening is usually that the discipline is leaving some of the earlier theories which were essentially ideas of discrete specific choice, such as whether to export or not, or whether or not to locate production abroad, and regarding having located development abroad, whether to permit to and 3rd party organization or produce internally with by way of a subsidiary. Those were solid level choice decisions, but if instead something is desired and the data about how it evolves through time. Which means eclectic platform is exactly the right way to tackle a complicated system, because a paradigm like the eclectic paradigm offers a broader context, providing progressive connections between different factors and actors providing it present and future relevance.
Cantwell, J. A. and Narula, R. (2001), "The eclectic paradigm in the global economy", International Journal of the Economics of Business, vol. 8, no. 2, pp. 155-172; revised version reprinted as "Revisiting the eclectic paradigm: new innovations and current issues", chapter 1 in J. A. Cantwell and R. Narula (eds. , 2003), International Business and the Eclectic Paradigm: Expanding the OLI Construction, New York: Routledge.
Dunning, J. H. (1958). American investment in united kingdom making industry. George Allen & Unwin Ltd.
Dunning, J. H. (2000), "The eclectic paradigm of international creation: a personal perspective", section 5 in NTF.
Dunning, J. H. (2001), "The eclectic (OLI) paradigm of international creation: past, present and future", International Journal of the Economics of Business, vol. 8, no. 2, pp. 173-190; modified version reprinted as section 2 in J. A. Cantwell and R. Narula (eds. , 2003), International Business and the Eclectic Paradigm: Expanding the OLI Framework, NY: Routledge.
Ietto-Gillies, G. (2012), "Dunning's eclectic framework", section 9 in TCIP.
Tolentino, P. E. E. (2001), "From a theory to a paradigm: evaluating the eclectic paradigm as a platform in international economics", International Journal of the Economics of Business, vol. 8, no. 2, pp. 191-209; revised version reprinted as section 7 in J. A. Cantwell and R. Narula (eds. , 2003), International Business and the Eclectic Paradigm: Developing the OLI Framework, NY: Routledge.