The ownership advantage theory suggests that a firm owning a valuable asset that creates a competitive advantage domestically can use that advantage to penetrate foreign markets through FDI
Foreign direct investment
A foreign direct investment (FDI) is a controlling ownership in a business enterprise in one country by an entity based in another country. Foreign direct investment is distinguished from portfolio foreign investment, a passive investment in the securities of another country such as public stocks and bonds, by the element of "control".
What are ownership advantages?
58 What are Ownership Advantages? parties can be monitored. The party whose output is the most difficult to tains title to the residual by means of equity ownership. T he equity owner example, where contracting problems are not as se vere. The ke y is that transaction, will affect the final governance form. benefits from innovation.
What is the ownership advantage theory of FDI?
The ownership advantage theory suggests that a firm owning a valuable asset that creates a competitive advantage domestically can use that advantage to penetrate foreign markets through FDI ? This theory is consistent with the observed patterns of int'l and intra-industry FDI ? Only partly explains why FDI occurs. Click to see full answer.
Why does a company need an ownership advantage to overcome liability?
First of all, a company needs an ownership advantage in order to overcome the liability of foreignness. Ownership refers to the possession of a certain valuable, rare, hard-to-imitate, and organizationally embedded resource that allows a company to have a competitive advantage compared to foreign rivals.
Why are ownership advantages typically considered intangible?
Hence, ownership advantages are typically considered intangible. These advantages should be valuable, rare, hard-to-imitate, and organizationally embedded. In other words, the resource should be so valuable that a company can derive a competitive advantage over foreign rivals.
What is the OLI framework used for?
An eclectic paradigm, also known as the ownership, location, internalization (OLI) model or OLI framework, is a three-tiered evaluation framework that companies can follow when attempting to determine if it is beneficial to pursue foreign direct investment (FDI).
What are the three parts of Dunning's eclectic theory?
ownership, location, and internalizationThe framework follows three tiers – ownership, location, and internalization. The eclectic paradigm assumes that companies are not likely to follow through with a foreign direct investment if they can get the service or product provided internally and at lower costs.
What are the advantages of internalizing ownership?
One way an internalization advantage arises is when the firm's assets (its ownership advantage) are easy to copy. Producing within the firm, rather than licensing to an outside firm, may make it easier for a firm to protect its assets.
What is Dunning OLI framework?
OLI (Ownership, Location, Internalization) Paradigm or Eclectic Paradigm developed by John Dunning provides a holistic framework to identify and evaluate the significance factors influencing foreign production by enterprises and the growth of foreign production. The idea of OLI was first conceived, by Prof.
What is monopolistic advantage theory?
Monopolistic advantage theory states that the reasons multinational corporations (MNCs) are able to compete successfully against local firms. It is a microeconomic theory that makes the firm the center, as well as the cause, of the international movement of capital and goods.
Who developed eclectic theory?
John Dunning's Eclectic Model, introduced in 1976 (Dunning, 1977) and refined by him several times since then (1988, 1993), is a key contribution to the separation of international business studies (IBS) from international economics and trade theory and to the development of global strategy.
Why do firms need ownership advantages to compete abroad?
First of all, a company needs an ownership advantage in order to overcome the liability of foreignness. Ownership refers to the possession of a certain valuable, rare, hard-to-imitate, and organizationally embedded resource that allows a company to have a competitive advantage compared to foreign rivals.
What is internalization theory of FDI?
Internalization theory suggests that gains from FDI morles of foreign expansion would be higher relative to non-FDI modes. The theory of inlernalization has come under increased criticism. on tile premise that there are agency costs to internalization that. may be higher than costs of non-equity forms of international.
What are the three sets of advantages in the theory of the OLI paradigm?
The OLI framework is made up of the following three main components. They include ownership, location, and internationalization advantage.
What is the theory of the firm?
In 1960, Hymer introduced a microeconomic theory of the firm, focusing on international production rather than trade, which Dunning & Rugman (1985) point out as being Hymer's great insight. It considered the key requirements for an individual firm in a given industry to invest overseas and thus become an MNE [ 5] , including tradable ownership advantages and the removal of competition. The thesis drew influence from Coase's Nature of the Firm (1937), which studied the firm in relation to international activities, and discussing the efficient allocation of assets to dispersed locations.
What is the importance of Dunning's macroeconomic theory?
With regards to macroeconomic theory, Dunning discusses country-specific assets, or location advantages, such as labour costs, societal infrastructure, and governmental control. He combines this with an expansion of Hymer's ownership advantages, which he differentiates from location advantages through their mobility, offering extensive ways for how a firm may effectively co-ordinate its assets in different countries. It is as if Dunning has taken Hymer's work one step further and made ownership advantages the most important aspect of his framework. Not only that, the paradigm revolves around competition and innovation, rather than the collusion of Hymer's oligopolies, based on the assumption that a firm's success overseas depends not only on its possession of an asset, but on how it is able to co-ordinate it to gain a competitive edge over indigenous firms
How does Hymer's theory work?
Yamin observes that Hymer assumes firms to be merely reacting to structural market failures, whereas firms are in fact proactive in their use of advantages. Instead of actively employing and developing assets, and thus improving their internal efficiency, the Hymer presses that firms' main goal be to gain profits through expansion. For example, Yamin concludes that oligopolies succeed through their size rather than possessing an ownership advantage, as the purpose of oligopolies is to remove conflict, whereas assets increase competition and encourage innovation. He suggests that Hymer's theory is incorrect, as the economist believed that the purpose of ownership advantages was to reduce competition via the creation of oligopolies. In addition, today it is no longer only oligopolist firms which may invest abroad, which suggests that the scale (or market power)-as-endgame strategy is unnecessary and that ownership advantages are key to the creation of successful MNEs.
What is the macro level theory of foreign direct investment?
At what level do you need to examine the situation to determine your firm's movements? According to the macro-level theory of foreign direct investment (FDI), industries in capital-intensive countries will invest in capital-poor, but labour-intensive countries in order to maximise profits. Hymer (1960) criticised this theory for being too general, as it does not account for the anomalies which are associated with a bird's eye view of a situation; details cannot be seen and are thus not accounted for. Influenced by Ronald Coase, Hymer offered an alternative: a micro-level theory, which was firm-specific, rather than country-specific. Dunning (1993) expanded on this revolutionary approach, introducing his controversial eclectic paradigm, which emphasised the importance of a firm's ownership advantages. This essay will focus on the continual development and emergence of concepts, observing that each new theory, whether regarded as a replacement or an improvement, is influenced by its predecessor in understanding and predicting the nature and success of the multinational enterprise (MNE).
What are the two interdependent categories of assets?
Unlike Hymer, Dunning includes Coase's exploration of transaction costs, as the list of assets and their relationship to the firm and location advantages is such that he split them into two interdependent categories: possession of assets (Oa) and those advantages which are specifically designed to reduce transaction costs (Ot) [ 18] . Oa include tangible and intangible assets, such as technologies and skill sets, while Ot includes factors which are generally intangible, such as the ability to communicate effectively with others within and between firms. Oa and Ot are combined in MNE activities, becoming "collective" [ 19] assets and thus making many ownership advantages nigh on impossible to sell, as they are closely tied to the infrastructure and culture of the firm. This is contrary to Hymer's assumption that all assets are tradable.
Is Hymer's theory of FDI macro level?
Hymer's theory is thus more similar to the macro-level theory of FDI than on first glace, as both emphasise capital and expan sion. In addition, Yamin identifies some of Hymer's ownership assets as actually location advantages, as discussed by Dunning below, such as the inclination of an American workforce to prefer to work for American companies, over foreign ones. [ 14] This implies again that Hymer, albeit inadvertently, includes elements of the macro-level theory of FDI into his own theory of the firm. If the microeconomic theory requires elements of the macro-level theory, this suggests that both theories are relevant, as one looking at the firm and the other considering the context, meaning that each is incomplete if taken in isolation.
What is ownership advantage?
The component part of ownership advantage is used to describe any specific investment or asset that Shoes International has that its competitors in Asia do not have, which is a competitive edge. This investment or asset should be able to generate healthy profits for the company.
What is the OLI framework?
Therefore, the lesson argues that the OLI framework is useful in enabling a company to effectively justify why it should set up shop in another country.
What are the components of the OLI framework?
The OLI framework is made up of the following three main components. They include ownership, location, and internationalization advantage.
How does Shoes International justify its approach?
Shoes International can effectively justify its approach by using the ownership, location, and internationalization (OLI) framework , also known as Dunning's eclectic paradigm. This framework is useful in determining holistically if carrying out a foreign direct investment is viable for the organization or not.
What are the three tiers of ownership?
The framework follows three tiers – ownership, location, and internalization . Ownership can be defined as the proprietorship of a unique and valuable resource that cannot easily be imitated, which creates a competitive advantage against potential foreign competitors.
What is value chain?
Value Chain A value chain is all the activities and processes within a company that help add value to the final product. In today’s business landscape, companies across
What are the intrinsic disadvantages of FDI?
The intrinsic disadvantages or challenges associated with FDIs, in terms of ownership, circle around the liabilities that come with foreignness since the potential investor is a non-native in the country that the FDI will be made. The challenges can include (but are not limited to) possible language barriers or lack of knowledge of the demand trends that are common among the local consumer markets.
What are the advantages of outsourcing?
The advantages of outsourcing from different countries can include (but are not limited to) lower costs and better skills to perform the value chain activities and/or better knowledge of the local markets. In such a case, management can choose between two options on how to proceed.
What are the advantages of location?
Other location advantages can include low-cost labor and raw materials, lower taxes and other tariffs, a well-trained labor force, etc. Normally, the Porter’s diamond model can be used to evaluate location advantages.
Do companies need to consider location advantages?
Companies and their management teams normally need to consider whether any location advantages, as mentioned above, exist in the market they wish to enter. Should the advantages exist, the companies can consider taking on the investment through an FDI or other pathways (e.g., franchising or licensing) provided that there is a demand in the foreign markets.
Why do companies need ownership?
First of all, a company needs an ownership advantage in order to overcome the liability of foreignness. Ownership refers to the possession of a certain valuable, rare, hard-to-imitate, and organizationally embedded resource that allows a company to have a competitive advantage compared to foreign rivals. The liability of foreignness however can be defined as the inherent disadvantage that foreign firms experience in host countries because of their non-native status. These disadvantages could vary from simply not speaking the local language to having limited knowledge on the local customer demands. The question that management should therefore ask itself is: does our firm have a certain competitive advantage that can be transferred abroad in order to offset our liability of foreignness? This could for example be a strong brand name with a great reputation, unique technological capabilities or huge economies of scale. Obviously the answer on this question should be YES in order to explain your motives for expanding abroad in the first place.
What is the OLI paradigm?
OLI is an acronym for Ownership-, Location- and Internalization- advantage. According to this paradigm, a company needs all three advantages in order to be able to successfully engage in FDI.
What are the advantages of ownership?
Ownership advantages include proprietary information and various ownership rights of a company. Brand, copyright, trademark or patent rights, and the use and skills internally available are factors that offer a company this advantage. Hence, ownership advantages are typically considered intangible.
Why should companies appraise their competitive advantage?
Therefore, companies should appraise whether they have a certain competitive advantage that they can transfer abroad to offset their liability of foreignness. For example, these could be a strong brand name with a great reputation, unique technological capabilities or huge economies of scale.
What is Porter's Diamond model?
Porter’s Diamond model is a great tool to determine these location advantages. Companies should question whether there are any location advantages the target market offers. On a negative outcome, the management is wise to keep production at home and export products instead. This assumes a demand for the company’s products and services in the international market. However, upon a positive outcome, the company might pursue certain value chain activities abroad through licensing, franchising or through FDI.
What are internalization advantages?
Finally, internalization advantages signal when it is better for an organization to produce a particular product in-house against contracting with a 3 rd party. At times, companies may find it more cost-effective to operate from a different market location while keeping production in-house.
What are ownership advantages?
The first consideration, ownership advantages, include proprietary information and various ownership rights of a company. These may consist of branding, copyright, trademark or patent rights, plus the use and management of internally-available skills. Ownership advantages are typically considered to be intangible.
What is the paradigm of the open market?
This paradigm assumes that institutions will avoid transactions in the open market if the cost of completing the same actions internally, or in-house, carries a lower price. It is based on internalization theory and was first expounded upon in 1979 by the scholar John H. Dunning.
What is location advantage?
Location advantage is the second necessary good. Companies must assess whether there is a comparative advantage to performing specific functions within a particular nation. Often fixed in nature, these considerations apply to the availability and costs of resources, when functioning in one location compared to another.
