Critique of the Internalization Theory and Eclectic Paradigm

The concept of foreign direct investment (FDI) is closely related to the definition of transnational corporation (MNE, MNC, transnational corporations). In the literature, there are several definitions describing the features that should have a firm considered as multinational enterprises.

Constraints on Multinationals Multinationals generally start off with clear advantages in two areas: They have

Dunnings Eclectic Paradigm model best describes what had attracted Tesco’s internalisation entering the American and Japanese markets. The Eclectic Paradigm consists of three factors that explains where, how and why the internationalization of a firm entering a new market. Ownership, location and internalization are the three dynamics which makes up the OLI (Dunning, 2001).ownership advantages can be either asset-based or transaction-based, in relation to Tesco the ownership advantage in which the firm had acquired was the lean supply

There are many theories given by different group of researchers about the existence of multinational enterprises or MNE's. According to John Cantwell, it was in the 1970's and 1980's that many theories on MNE's were proposed. These theories were either general theories of MNE's which were called the main institution for international production or the theories on foreign direct investment, the means by which international production is done ( Pitelis, Christos N. and Sugden, Roger, The nature of the Transnational firm, Pg 10). Amongst the most famous are the Hymer's theory of international production, the internalization theory put forward by Buckley and Casson, Dunning's Eclectic Paradigm, and the evolutionary theory

Discuss at least two (2) strategies that multinational corporations (MNCs) can undertake in order to make

Version 2015-02-09 Academic Year 2014-2015 Course unit Title: Multinational Management Course unit code: BMAN 70012 Credit Rating: 15 credits 1 Instructors Contact details Umair.Choksy@mbs.ac.uk Room: MBS East F3 Office hours: by arrangement Noemi.Sinkovics@mbs.ac.uk www.manchester.ac.uk/research/noemi.sinkovics Phone: (0161) 275 6492 Room: MBS East F11 Office hours: by arrangement

Private businesses operate to earn profits and the theoretical basis on which their economic activity rests in the maximization of profit. In the pursuit maximization of profits, multinational corporations (MNCs) often expand their businesses to countries having lower labor cost, comparatively decreased cost of doing

Dunning’s OLI paradigm (1976) is used to support firms to locate its production in countries that are financially beneficial for them. According to Dunning, “the paradigm offers a holistic framework to take in consideration all of the important factors that influence the decision of a MNE.” (Stefanović, 2008, p.241) FDI is determined through the composition of the three powerful advantages; ownership, location and internationalisation as shown in figure 1. The thesis is to assess, ‘why go multinational?’, ‘how to choose the best location?’ and ‘what actions have to be taken to enter a foreign market?’

Internalization theory itself is based on the transaction cost theory (Falkenhahn, Alexander & Roman Stanslowski (2001).). This theory indicates that transactions are made within an institution if the transaction costs on the free market are higher than the internal costs. According to Alan M. Rugman, firms become MNEs (multinational enterprises) in order to diversify themselves against the risks and uncertainties of the domestic business cycle. They also wish to expand a worldwide market, to compete with foreign companies, to reduce costs as well as to take advantage of technological expertise (Rugman, A.M. & Collinson, S. (2012).). In other words, firms must have some specific advantages overseas, may be the advantages in the transaction costs, or the pricing of public goods, or the government policies.

However, while the OLI paradigm centers around a single expansion decision, the Uppsala model views internationalisation as a gradual process with an incremental increase of knowledge of the target region and subsequent commitments in that region. Hence, internationalisation occurs faster in the OLI paradigm. Another difference between the two models is their respective focuses. The OLI paradigm focuses more inward, on the attributes of the expanding company, comprising ownership, location, and internalisation advantages and argues that companies need to combine these to minimise risk and succeed with FDI. On the other hand, the Uppsala model concentrates on the actual process of internationalisation, stating that companies should begin with low risk commitments - such as exports - to acquire knowledge of the target country and then increase their commitment based on the gathered knowledge. With higher commitment, more knowledge can be gained to be used for further commitment (Peng & Meyer

Every business has its own character which is unique and called corporate identity. It has one major part, corporate culture, often described as the “personality of an organization”. In that case multinational firms play a major role in this, as knowing how to communicate

the theories of FDI; section two will discuss the cases of both firms‘ strategic changes;

Multinational Companies (MNCs) operate across borders for different reasons such as business opportunities, economies of scale, lower labor costs and others.

Rugman, A.M. & Verbeke, A. (2004). "A perspective on regional and global strategies of multinational enterprises", Journal of International Business Studies, 35 (1): 3-18.

MNCs set up subsidiaries or joint ventures in different countries. MNCs should mainly consider the legal practices, minimum wages, Labour market regulations, the culture, industrial relations systems, the character of country’s welfare system and the cross- country differences for framing the policies. MNCs may choose to adapt the environment in the host country or develop policies based on the customs and practices of the home countries. The challenge for the HRM will be to consider all these while framing the policies and helping the company to achieve profits in that country. Even though HRM considers all these factors, MNCs are so powerful, that they bargain for the investment decisions in the country and also actively participate in lobbying for institutional changes according to their preference.(Anne -Wil Harzing 2011).For example, MNCs in Europe take parts in lobbying at European Union Level so that it will be favourable for MNCs in regard with changes made in EU regulations. (Coen 1997).