Critique of the Internalization Theory and Eclectic Paradigm

1797 Words Jul 9th, 2018 8 Pages
A Multinational Corporation (MNC) can be defined as “a single entity that controls and manages group of goal-disparate and geographically dispersed productive subsidiaries” (Triandis and Wasti, 2008, p. 2). Multinational corporations are entities that make Foreign Direct Investment (FDI) and produce added value in countries other than the country in which they are headquartered. One of the key objectives of the MNC is to obtain capital where is it cheapest and to invest FDI and undertake production in areas that yield the highest rates of return (De Beule and Van Den Bulcke, 2009). However, many theories have been advanced to account for the decision-making process that MNCs undertake in relation to FDI. The purpose of this paper is to …show more content…
Dunning’s (1977, cited in Cantwell, 1992) OLI eclectic paradigm model is the other most widely accepted theory of FDI, and this was intended as an antidote to the failings of internalisation theory. This theory holds that the type and level of FDI offered by a multinational corporation is directly associated with the ownership benefits (O), location benefits (L) and internalisation benefits (I), which that investment offers. Benefits relating to ownership, known as Firm Specific Advantages (FSA) are benefits that can quickly and easily be transferred between the domestic and the overseas branches of the firm (Gillies, 2005). Typical examples of FSAs are economies of scale of production, company brand name or logo or technologies. Dunning originally highlighted that MNCs that invest in international production incur ‘costs of foreignness’ which emerge through diversities in language, culture, institutions and legalities or are brought about through a lack of knowledge of the conditions of the overseas market (Cantwell, 1992). MNCs that recognize higher costs of foreignness and are less easily able to transfer their firm specific advantages are likely to enter into a joint venture agreement (over other forms of overseas market entry such as establishing wholly owned subsidiaries) for this allows the MNC to more easily and rapidly access knowledge about the new market (Cantwell, 1992).

Generally OLI eclectic paradigm theory and internalisation theory are
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