3. Internationalization of production
3.1. OLI Paradigm
There are different ways in which companies can expand their activities to gain some sort of competitive advantage. Internationalization is understood as the process of incremental involvement in a country different from the one where business usually happens. The reasons for companies to seek international expansion vary (Morschett 2007):
• Resource seeking: the MNC is motivated to expand its operations on the supply side to other countries or regions to secure access to resources.
• Technology/talent seeking: many companies have an interest in investing abroad for the sake of accessing to strategic assets or knowledge. This is the case for many Asian companies that even though having a vast access to capital and investment in operations, are unable to
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The eclectic paradigm (Dunning, 1988) proposes that there are patterns determined by the configuration of the different advantages as perceived by a company and these are the motor for understanding internationalization. Because of more abundance in resources and knowledge, companies have more chances of succeeding in their home markets. Therefore the main point of the eclectic paradigm, proposes that there must exist a competitive advantage that levels the field for a foreign company to compete with local companies and still have a chance of succeeding. These advantages need to surpass the break-even of costs for setting up operations in a foreign country. This paradigm contrasts with modern theories of MNCs, which propose that instead of existing a competitive advantage strong enough to motivate the internationalization of operations, the factor behind this company behavior has to do with market failure due to high transaction costs. It is debated whether exploiting transaction or ownership advantages leads to the most successful
* Having the correct strategy and appropriate resources means the company is able to execute an international expansion.
Companies across the United States do business in other countries regularly and for various reasons. Some organizations move in to international markets to take advantage of other countries strengths and resources which allows companies to expand and grow their business, revenue, and international presence. The other reason that U.S. organizations move into international markets is to take advantage of the human resource talent, innovation, and technologies. For instance, some U.S. companies have expanded into Asian markets to leverage the technological expertise of local populations, which not only boosts business and capabilities, but also helps to expand their client base (Kokemuller, 2016).
Changes in the business environment have presented a number of challenges to establish ways of doing business. Thus, managers realized that the survival and growth of firms today and in the future relies on their aptitude to operate globally. Third world countries seek to attract American MNCs for the jobs they provide and for the technological transfers they promise. However, when these MNCs entered
Globalization can be defined as ‘international integration’, which can be described as the process by which the people of the world are unified into a single society and functioning together. This process is a combination of economic, technological, and political forces (dictionary.com).
The phenomenon globalisation can be thought of as an integration of economies, industries, markets and cultures. Globalisation is the connectedness of our world. Advanced and modern communications have made it possible for national and regional economies to combine with one another and trade freely. Globalisation is particularly common amongst capital markets and commodity markets. This phenomenon can be known as a great deal of things as globalisation can be seen as more than just “a way of doing business” but can viewed as a process, a process that allows our world to communicate and trade products.
When looking at how and why firms internationalise we need to both look at what makes a firm want to internationalize and how they do this. We will look at what defines an international firm and we will look at obstacles, but also things that might help certain firms expand internationally. We are also going to look at different trade theories, traditional approaches and how the theories have developed over time.
In economics, internationalization is the process of increasing involvement of enterprises in international markets, although there is no agreed definition of internationalization.[1]There are several internationalization theories which try to explain why there are international activities.
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
The traditional internationalization models regard that firms’ capabilities (internal factors) lead firms to make internationalizing activities. On the contrary, OC paradigm refers to internationalization as a process that internal and external factors interact so that firms obtain a competitive advantage in the global level (Mathews & Zander, 2007). According to this innovative model, firms achieve superior performance by adapting and integrating in view of a varying environment (Pisano et al, 2007). Considering that BGs try to survive, operating under uncertain conditions that change all the time, OC constitutes the most suitable way for studying them.
Globalization 1.0: It shrank the world from large to medium. The forces were a power of the country and its deployment and the duration was Columbus era to 1800.
At the phase of full development, when the business sector has been soaked and when the brand name has taken a decent footing. The most convincing reason is for development and cost-cutting. For instance we can say that, a TV maker will see the advantages of moving their creation base to where there is shabby work, working costs, wellsprings of crude material, and extensive business sector interest for the item. In addition there will be much cost investment funds as far as generation expense, and transportation cost, which is turning out to be progressively costly because of the spikes in the cost of fuel oil. In nature and the segments for the business to advantage and increase, then this player in the organization will begin to relocate to where it could boost benefit. The components which add to draw Multinational Corporations into their nation are all the pluses which will advantage its migration Here the Multinational Corporation will dependably arrange prior to fruitful their objective furthermore to make benefit.
Furthermore, the company aspires to gain more experience and knowledge in diversifying its resource base to China and perhaps even in other geographic locations.
For example: China has the highest manufacturing workforce which can prove beneficial for any MNC to shift their manufacturing department in China.
Eclectic Paradigm: - The Eclectic paradigm and transaction cost analysis – It is the length, types and pattern of international production and it is founded on the juxtaposition of the ownership-specific advantages of the company considering foreign production. The propensity to internationalise the cross-border markets for these, and the attractions of a foreign market for the production (Dunning 1988).
For any company going out for the foreign market is because of any one out of globalization, reducing tariff all over the world, to increase the market share, saturation of the local market, for getting the economies of scale of production, to use their excess capacity and use the resources where it is available at law cost.