The Eclectic Paradigm in the Global Economy

Economic globalisation and the subsequent growth of global and alliance capitalism have fundamentally affected the way in which MNC activities are undertaken and organised. The various contributions to this special issue have evaluated the eclectic paradigm in the global economy, and its validity as a theoretical basis to understand these developments. This paper places these contributions into context. We highlight that globalisation has increased the interactive dynamics between and among 'O', 'L' and 'I' characteristics at firm, industry and country level, in at least two ways. First, a knowledge-based society has meant that the efficient exploitation of MNCs' ownership advantages and the continual need to augment and sustain their competitive advantages is ever more crucial, leading to a complex interdependence between ownership and location advantages. Second, globalisation has affected how MNCs seek to organise their cross-border activities coherently in response to changing boundaries of the firm. We find that the paradigm continues to provide a framework which facilitates how best to synthesise relevant complementary theories, or how to choose between potentially competing theories, and helps to operationalise them.     

Japanese Foreign Direct Investment in the UK Electronic Industry: The Eclectic Approach

This article analyses the combined effects of Japanese firms' ownership and location advantages on the size of foreign direct investment (FDI). The size of FDI is measured by two proxies, the firm's employment level and its total assets. Econometric models are estimated. The estimated regression models show that the parent company's firm-specific resources and the external economies in the located region determine the flow of FDI at the time of entry of Japanese electronic firms in the UK. This result shows that empirical analysis on FDI flows should combine both the ownership and location advantages, as suggested by Dunning's eclectic paradigm.     

Emerging market multinationals and internalisation theory

There is ongoing debate about the applicability of internalisation theory to Emerging Market Multinationals (EMNEs). Internalisation theory normally describes multinationals exploiting superior knowledge directly abroad rather than licensing its use to foreign firms. We argue that EMNEs can be explained readily in terms of internalisation theory. This involves internalisation in the opposite direction: knowledge is internalised by EMNEs which then exploit it utilising home-country cost advantages. However, this is normally achieved by means that avoid the licensing of key technologies from leading firms. This clarifies the theoretical basis of EMNE strategic asset seeking investment. Market-seeking investments are also linked to technology-seeking investments through fixed costs. A model formalises the arguments, establishing conditions leading to different types of equilibria when an advanced-economy firm competes with an emerging-economy firm. The range of factors that it incorporates means that it is also compatible with other theories of the EMNE.     

From OLI to OLMA: Incorporating Higher Levels of Environmental and Structural Complexity into the Eclectic Paradigm

Theorists using the eclectic paradigm have drastically restricted their analytic scope to the firm and its subsidiaries, rarely exploring more finely grained firm structures, such as business processes. By contrast, organisational theorists examining multinational firm behaviour have employed a richly differentiated array of firm structural forms though without developing a precise delineation of the international business environment. Eclectic researchers are adept at handling environmental, but not structural, complexity, while the reverse seems true for organisational theorists. This study extends the eclectic paradigm by incorporating higher levels of environmental and structural complexity through two methods: (1) a deconstruction of the multinational firm into business processes; and (2) a more complete definition of the international business environment, called geovalent elements. The paper argues that an enhanced eclectic paradigm called OLMA (for Ownership, Location, Mode of entry, and Adjustment) provides the complete set of concepts needed for studying the modern multinational firm.     

The Co-evolutional Advantage: Strategic Management Theory and the Eclectic Paradigm

The eclectic paradigm has been one of the leading frameworks for explaining multinational activity over the past two decades. Yet recent trends in international business pose a challenge to the explanatory power of the paradigm. Strategic management theory, with its focus on performance differences between firms, provides a useful complement to the OLI framework in understanding the activities of the modern multinational. In particular, global competition and the management of a firm's global stocks and flows of knowledge merit closer attention.The advent of global competition requires us to shift from the existing institutional perspective of comparisons of firms and markets or of foreign firms and local firms to a firm-level perspective of comparisons of the multinational firm to its global competitors. It also necessitates a focus on firm-level capabilities in knowledge management relative to competitors, the development of these capabilities involving both macro and micro co-evolutionary processes. Our arguments incorporate these changes to extend the OLI paradigm to accommodate both an economic and a strategic management perspective.     

Geographic clustering and outward foreign direct investment

This study addresses an important neglected question: To what extent do geographic clusters promote outward foreign direct investment (ODI)? We find evidence that clusters do promote ODI and so support Porter's argument that advantages gained in clusters can be the foundations of successful internationalisation. Digging deeper, we find that certain cluster incumbents promote more ODI than others, with more experienced firms and firms with stronger resource bases accounting for more ODI. We also find that firms located in clusters within major global nodes/cities engage in more ODI. Finally, we find that both localisation and urbanisation economies promote ODI. However, the former, within-industry effects, are more important. Overall, this study echoes Dunning's call for more focus on the ‘L’ component of the ownership, location, internalisation (OLI) paradigm and particularly on the advantages that reside in clusters that make them not only attractive destinations for foreign direct investment (FDI) but also fertile environments from which FDI can spring.     

The Chinese outward foreign direct investment motives in ASEAN countries through export performance: The role of competitive intensity among Chinese smartphone manufacturers

This study aims to examine the impact of outward foreign direct investment (OFDI) objectives on the achievement of export performance under competitive intensity. We apply the diverse theoretical perspectives of the eclectic paradigm and institutional theory. Primary data were collected from 162 Chinese manufacturer–exporter companies. Specifically, this research shows that Chinese OFDI motives increase its export performance in ASEAN markets. Furthermore, we discover that competitive intensity moderates the relationship between strategic assets-seeking foreign direct investment (FDI) motive and export performance, but not the relationship between market-seeking FDI motive and export performance. Hence, this study presents a holistic assessment of Chinese smartphone manufacturers' export performance by accounting for the overlooked effect of firms seeking FDI motive through the moderating of competitive intensity.     

Alan Rugman’s methodology

This paper argues that the intellectual contribution of Alan Rugman reflects his distinctive research methodology. Alan Rugman trained as an economist, and relied heavily on economic principles throughout his work. He believed that one good theory was sufficient for IB studies, and that theory, he maintained, was internalisation theory. He rejected theoretical pluralism, and believed that IB suffered from a surfeit of theories. Alan was a positivist. The test of a good theory was that it led to clear predictions which were corroborated by empirical evidence. Many IB theories, Alan believed, were weak; their proliferation sowed confusion and they needed to be refuted.Alan’s interpretation of internalisation was, however, unconventional in some respects. He played down the trade-offs presented in Coase’s original work, and substituted heuristics in their place. Instead of analysing internalisation as a context-specific choice between alternative contractual arrangements, he presented it as a strategic imperative for firms possessing strong knowledge advantages. His heuristics did not apply to every possible case, but in Alan’s view they applied in the great majority of cases and were therefore a basis for management action.     

The Eclectic (OLI) Paradigm of International Production: Past,Present and Future

This article describes the origins, and traces the subsequent evolution of the eclectic paradigm from the mid-1950s to the present day. It does so in the light of the changing characteristics of MNE activity and of the global economic scenario. The article concludes by asserting that the eclectic paradigm still remains a powerful and robust framework for examining contextual specific theories of foreign direct investment and international production.     

The influence of ownership structure on internationalization

Common reasons mentioned for a firm's internationalization are related to advantages for the firm. However, if firms are conceptualized as political coalitions, this view does not seem to be sufficient to explain why and to what extent firms internationalize. A principal-agent theoretical approach focusing the ownership-stake-related motivations and bargaining power of owners plus the range of actions managers can employ in different ownership situations offers an alternative explanation. We consequently studied the influences of ownership structure – defined as the concentration of ownership – on a firm's degree of internationalization and the main regions of international diversification. Overall, we conclude that the relationship is non-linear. To test our hypotheses, we utilize panel data for the 102 largest German manufacturing firms from 1990 to 2006. The analysis confirms our assumptions.     

Foreign direct investment in the banking sector: the case of Italian banks in the '90s

The present paper addresses the issue of the determinants of the growth of multinational banks upon foreign markets at a micro individual level. Theories and approaches suggested so far about globalisation of the banking sector basically relate banks' international growth to the theory of the multinational enterprise. Accordingly, this paper relies on the eclectic paradigm, which views the foreign direct investment decision to be a combination of ownership, internalisation and location advantages. Empirical evidence is provided through an econometric model based on count data techniques, with reference to the Italian case in the decade 1989–1999. Results show that the availability of resources and international experience already gathered by the parent banks have positive effects on their decision to undertake direct investments abroad. Multinational banks are also proved to grow internationally in order to internalise their pre-existing bank–client relationships, and to locate their foreign units where they can exploit positive externalities related to the presence of important international financial centres.     

The Challenge of Electronic Markets for International Business Theory

We examine the extent to which the eclectic paradigm of international production, and its composite theories, can help explain the coming E-commerce revolution. Our findings are that the basic tenets of the paradigm appear to hold well, but the operational application of several of the constituent parts and the context in which they are being considered, need to be redefined in the light of some of the unique characteristics of Internet transport.     

The decision to export: Firm heterogeneity,sunk costs,and spatial concentration

Integrating perspectives of the Uppsala model of internationalization process, international new ventures and trade theories of heterogeneous firms, this paper develops a dynamic discrete-choice model of export decisions by a profit-maximizing firm. Empirical analyses based on a panel data set of Chinese firms show that sunk costs, productivity, firm size, foreign ownership, industry competition and spatial concentration are positively associated with the decision to export, while state ownership has a negative association with the probability of exporting. However, we find that the relationships are not always uniform and depend on firm-specific idiosyncrasies. The results show that foreign-invested firms and large firms (regardless of ownership) rely on productivity performance related advantages for expanding overseas, while domestic firms, especially small- and medium-sized enterprises, build competitive advantage by leveraging agglomeration economies and the associated spillovers. Our results highlight the role of firm heterogeneity, sunk costs and spatial concentration in shaping the export behavior of firms.     

Domestic firms competing with multinational enterprises: The relevance of resource-accessing alliance formations

The literature includes several papers that compare multinational enterprises (MNEs) to local firms along several dimensions such as financial strength or production capacity. Nevertheless, the focus on how latter firms compete against the former is often missing in the literature; local firms are typically seen as inferior in terms of resources and thus, unable to compete against MNEs. This paper aims at revisiting this competitive ‘battle’. Through a case-based design in a ‘multinational’ domestic market that seems to favour MNEs, we explore how local firms respond to MNEs’ purported superiority. Findings indicate that local firms respond through alliance formations that enable them to access fitting resources and counter ownership advantages of MNEs. Therefore, resource-accessing strategies spearheaded by local firms suggest that ownership advantages should not be inherently translated into competitive advantages for the MNEs. Implications for international business are discussed and avenues for further research are suggested.     

Do Chinese firms benefit from government ownership following cross-border acquisitions?

Chinese firms’ increasing cross-border acquisitions (CBAs) in recent years seem to challenge the explanatory power of received theories of multinational enterprise (MNE) due to their relatively unique characteristics and the active role of the Chinese government. In this study, we seek to revisit and contextualize the OLI paradigm in conjunction with the institution-based view and examine how Chinese firms’ post-CBA long term performance is associated with government ownership. Our study shows that Chinese firms with more government ownership demonstrate better post-CBA long term performance. However, the above relationship is differentially moderated by such firm-level boundary conditions as political connections and financial slack, and the country-level institutional boundary conditions (i.e., the host country formal institutions and the home-host country cultural distance). We discuss our findings in detail and explore theoretical and practical implications for both Chinese firms and other emerging economy (EE) firms.     

Monopolistic competition: CES redux?

We study the competitive and reallocation effects of trade opening in monopolistic competition. To this purpose, we generalize the Melitz (2003) setup with heterogeneous firms and fixed and variable trade costs beyond the CES to the case of additively separable utility functions. We find that extensive margin (Melitz-type selection) effects are robust to relaxing the CES assumption. Intensive margin effects (market share reallocations across inframarginal firms) and competitive (markup) effects are instead fragile. An important implication is that measured productivity gains from trade opening are no longer ensured with non-CES preferences. We discuss our results in the light of alternative setups featuring non-additive preferences, strategic interaction and consumers' preference for an ideal variety.     

Foreign acquisitions by Chinese firms: A strategic intent perspective

This article presents a strategic intent perspective (SIP) to analyze the foreign acquisitions made by Chinese firms. It suggests that Chinese firms strategically use cross-border acquisitions to achieve goals, such as acquiring strategic capabilities to offset their competitive disadvantages and leveraging their unique ownership advantages, while making use of institutional incentives and minimizing institutional constraints. The SIP is supported by the evidence from three firms that we studied, where dozens of interviews were conducted, including the one with the founder of Lenovo. This study contributes to extant international business theories by incorporating the SIP to examine internationalization strategies of firms from developing countries.     

Organisational form and industry emergence: Nonprofit and mutual firms in the development of the US personal finance industry

Economic theories of commercial nonprofits and mutuals usually emphasise the advantages of such organisational forms in reducing agency and monitoring costs in markets that suffer from information asymmetries in exchanges between firms and their customers. This article examines the ability of such transaction cost theories to account for historical variations in the ownership and governance of firms in the US personal finance industry between the early nineteenth century and the Great Depression. It focuses, in particular, on mutual savings banks and their role in the development of the intermediated market for savings accounts. While I find some evidence in support of transaction cost theories of organisational form, I also find that entrepreneurial and socio-political factors played crucial roles in the choice of ownership and governance structures; mutual savings banks predominated in the early years of the industry because the form offered entrepreneurial advantages over investor-owned corporations and because in some states they benefitted from regulatory and political advantages that joint-stock companies lacked. Their relative decline by the early twentieth century was the result of increasing competition in the market for savings deposits, the loosening of regulatory barriers to entry, and changes in public policy that reduced the transaction, innovation and regulatory advantages that the mutual savings bank form had once held. The article draws out the theoretical implications for our understanding of the historical role of nonprofit and mutual firms.     

Alliances,Acquisitions and Multinational Advantage

This paper reviews recent empirical evidence to assess the implications of alliance formation and increasing merger and acquisition activity of multinationals in the context of the eclectic paradigm. Specifically, the paper will concentrate on the performance implications of international expansion via alliances and mergers, and their relationship to the so-called asset-augmenting foreign direct investment. It has been argued in the literature that the way in which multinationals are able to build on their existing advantages and to add to them by virtue of their international activities confers specific benefits to multinationality. We argue that the growth of cross-border acquisitions and alliances as modalities for international expansion has resulted from the continuing convergence of value-adding capabilities within the Triad, and while such activity can help to augment the asset base of the investing firms, it also has potentially anti-competitive implications.     

Cross-border acquisitions by Indian multinationals: Asset exploitation or asset augmentation?

This paper examines cross-border acquisitions by Indian multinationals and places them in the context of Emerging Country Multinationals. It tests hypotheses based on internalisation theory and the resource based view to ask if these firms are asset exploiting or asset augmenting in their takeover behaviour. Internal financial and technological resources are found to be important explanatory variables, as is asset seeking; of brands, technology and market access. The home environment in India allows firms to amass profits, to manage in a culturally diverse setting and to develop asset bundling skills. All these factors are significant in determining cross-border acquisitions.