REVIEW Pergamon International Business Review 9(2000)163-190 www.elsevier.com/locate/ibusrev The eclectic paradigm as an envelope for economic and business theories of MNE activity John H.Dunning Reading University.UK and Rutgers University.USA Abstract This n the eclectic and busi- ness theories It sug ests that by dynamizing the paradigm,and widening it to embrace asset- augmenting foreign direct investment and MNE,activity it may still claim to be the dominant paradigm explaining the extent and pattern of the foreign value added activities of firms in a ntensive and allance based market cconomy.2000 Elsevier science paradigm:Foreign direet investment,Multinational enterprise 1.Introduction:the contents of the eclectic paradigm For more than two decades,the eclectic(or OLI)paradigm has remained the dominant analytical framework for accommodating a variety of operationally testable economic theories of the determinants of foreign direct investment(fdi)and the foreign activities of multinational enterprises(MNEs).2 The eclectic paradigm is a simple,yet profound,construct.It avers that the extent, geography and industrial composition of foreign production undertaken by MNEs is determined by the interaction of three sets of interdependent variables-which, themselves,comprise the components of three sub-paradigms.The first is the com- As described,for example.in Caves ()and Dunning (193).For the purposes of this article we use fdi and international production,viz.production financed by fdi,as interchangeable terms
International Business Review 9 (2000) 163–190 www.elsevier.com/locate/ibusrev The eclectic paradigm as an envelope for economic and business theories of MNE activity John H. Dunning Reading University, UK and Rutgers University, USA Abstract This paper updates some of the author’s thinking on the eclectic paradigm of international production, and relates it to a number of mainstream, but context-specific economic and business theories. It suggests that by dynamizing the paradigm, and widening it to embrace assetaugmenting foreign direct investment and MNE, activity it may still claim to be the dominant paradigm explaining the extent and pattern of the foreign value added activities of firms in a globalizing, knowledge intensive and alliance based market economy. 2000 Elsevier Science Ltd. All rights reserved. Keywords: Eclectic paradigm; Foreign direct investment; Multinational enterprise 1. Introduction: the contents of the eclectic paradigm For more than two decades, the eclectic (or OLI1 ) paradigm has remained the dominant analytical framework for accommodating a variety of operationally testable economic theories of the determinants of foreign direct investment (fdi) and the foreign activities of multinational enterprises (MNEs).2 The eclectic paradigm is a simple, yet profound, construct. It avers that the extent, geography and industrial composition of foreign production undertaken by MNEs is determined by the interaction of three sets of interdependent variables — which, themselves, comprise the components of three sub-paradigms. The first is the com- 1 Ownership, Location and Internalization. 2 As described, for example, in Caves (1982, 1996) and Dunning (1993). For the purposes of this article we use fdi and international production, viz. production financed by fdi, as interchangeable terms. 0969-5931/00/$ - see front matter 2000 Elsevier Science Ltd. All rights reserved. PII: S 09 69 -5931(99)00035-9
164 J.H.Dunning/International Business Review 9 2000)163-190 petitive advantages of the enterprises seeking to engage in fdi (or increase their existing fdi),which are specific to the ownership of the investing enterprises,i.e. their ownership(O)specific advantages.This sub-paradigm asserts that,ceteris par- ibus,the greater the competitive advantages of the investing firms,relative to those of other firms-and particularly those domiciled in the country in which they are seeking to make their i investme the more they are likely to be able to engage n creas their fo duction The the loc onal (of alter e countries or regi fo ing the di of MNEs.Th more the immobile,nat 0 with thei created owments,which firn own competitive advantag er than a nestic, n,the more advantages by The third sub-paradigm of the OLI tripod offers a framework for evaluati ing alter native ways in which firms may organize the creation and exploitation of their core competencies,given the locational attractions of different countries or regions.Such modalities range from buying and selling goods and services in the open market, through a variety of inter-firm non-equity agreements,to the integration of intermedi- ate product markets,and an outright purchase of a foreign corporation.The eclectic paradigm,like its near relative,internalization theory,avows that the greater the net benefits of internalizing cross-border intermediate product markets,the more likely a firm will prefer to enga age in foreign production itself,rather than license the right to do so,e.g.by a techn ical se rvic or franchise agreement,to a foreign firm. The eclectic paradigm 6 ther asserts that the of the OLI articular firn and the res nse of the firm to that config tion tual In articular,it will 月ct the nomic and eat of th of the ng f and of t n w the oinvest: he the orhe activity in which rms are engaged;th aracteristics of vidual inve nrms,including th bjectives and strategies in pursuing these objectives;and the raison d'etre f the fdi Regarding thi Ia: t contextual variable,scholars have identified four main types of foreign based MNE activity. 1.That designed to satisfy a particular foreign market,or set of foreign markets, viz.market seeking,or demand oriented,fdi 2.That designed to gain access to natural resources,e.g.minerals,agricultural pro- ducts,unskilled labor,viz.resource seeking,or supply oriented fdi. 3.That designed to promote a more efficient division of labor or specialization of an existing portfolio of foreign and domestic assets by MNEs,i.e.rationalized 3 As for eman set out in Buckley and Casson (1976.1985.1998).Hennart (1982.1989)a
164 J.H. Dunning / International Business Review 9 (2000) 163–190 petitive advantages of the enterprises seeking to engage in fdi (or increase their existing fdi), which are specific to the ownership of the investing enterprises, i.e. their ownership (O) specific advantages. This sub-paradigm asserts that, ceteris paribus, the greater the competitive advantages of the investing firms, relative to those of other firms — and particularly those domiciled in the country in which they are seeking to make their investments — the more they are likely to be able to engage in, or increase, their foreign production. The second is the locational attractions (L) of alternative countries or regions, for undertaking the value adding activities of MNEs. This sub-paradigm avers that the more the immobile, natural or created endowments, which firms need to use jointly with their own competitive advantages, favor a presence in a foreign, rather than a domestic, location, the more firms will choose to augment or exploit their O specific advantages by engaging in fdi. The third sub-paradigm of the OLI tripod offers a framework for evaluating alternative ways in which firms may organize the creation and exploitation of their core competencies, given the locational attractions of different countries or regions. Such modalities range from buying and selling goods and services in the open market, through a variety of inter-firm non-equity agreements, to the integration of intermediate product markets, and an outright purchase of a foreign corporation. The eclectic paradigm, like its near relative, internalization theory,3 avows that the greater the net benefits of internalizing cross-border intermediate product markets, the more likely a firm will prefer to engage in foreign production itself, rather than license the right to do so, e.g. by a technical service or franchise agreement, to a foreign firm. The eclectic paradigm further asserts that the precise configuration of the OLI parameters facing any particular firm, and the response of the firm to that configuration, is strongly contextual. In particular, it will reflect the economic and political features of the country or region of the investing firms, and of the country or region in which they are seeking to invest; the industry and the nature of the value added activity in which the firms are engaged; the characteristics of the individual investing firms, including their objectives and strategies in pursuing these objectives; and the raison d’eˆtre for the fdi. Regarding this last contextual variable, scholars have identified four main types of foreign based MNE activity4 : 1. That designed to satisfy a particular foreign market, or set of foreign markets, viz. market seeking, or demand oriented, fdi. 2. That designed to gain access to natural resources, e.g. minerals, agricultural products, unskilled labor, viz. resource seeking, or supply oriented fdi. 3. That designed to promote a more efficient division of labor or specialization of an existing portfolio of foreign and domestic assets by MNEs, i.e. rationalized 3 As, for example, set out in Buckley and Casson (1976, 1985, 1998), Hennart (1982, 1989) and Rugman (1982, 1996). 4 For an elaboration of these and other kinds of fdi (e.g. escape, support, and passive investments), see Dunning (1993) chapter 3, p. 61–3
JH.Dunning/International Business Review 9200)163-190 sequenti rial to it nvesti hms andor to reduce those of theit competitors,Le.strategic asser Combining our knowledge of the individual parameters of the OLI paradigm with that of the economic and other characteristics of home and host countries,and of the investing,or potentially investing,firms,it is possible to derive a wide range of fairly specific and operationally testable theories.Thus,it may be hypothesized that some sectors,e.g.the oil and pharmaceutical sectors,are likely to generate more fdi than others e g the iron and steel or aircraft sectors because the characteristics of the former generate more unique O advantages,and/or because their locational needs favor production outside their home countries.and/or because the net benefits of internalizing cross-border intermediate product markets are greater. Similarly.it is possible to predict that the significance of outward fdi will be eater for some Switzerland and the Netherlands.than for othe .g.Russia and India,simply by knowing about their e onomic histories the th of their ho markets onal thei capabil th Fin some firms same nationa rom the sa lustry,are more likely to engage in fdi others.Somet s,thi ect their size on the whole. large rms tend to more multinational than small firms;sometimes the ir attitude to risk paru cularly those associated with foreign ventures and of foreign partnerships with foreign firms;and sometimes their innovating product,marketing,locational,or fdi strategies. The extent and pattern of foreign owned production will depend on the challenges and opportunities offered by different kinds of value added activity.Thus the growth of existing,and the emergence of new,markets e.g.in China,over recent years,has led to a considerable expansion of various kinds of market seeking fdi- particularly in fast growing industries,e.g.telecommunications.By contrast,the rate of expansion of several natural resource sectors has been less impressive,as many products have become less resource intensive,due,for example,to the innovation of new alloy improved recycling techniques,the miniaturization of components,and the replac ment of natural by svntheti materials.The reduction of both tra artificial barriers to most for ms of trade has le to cy seeking fdi hoth mong develope d cou and betwee ed and deve Whil kinds of technology have become anagement contract ave repla d fdi. C.g in the hotel and s sectors,in the more knowledge and trade ntensive indus s The fo mainly in the form of the owth of horizontal,i.e.product specialization,and the latter in the growth of vertical,i..process
J.H. Dunning / International Business Review 9 (2000) 163–190 165 or efficiency seeking fdi. This type of fdi, though related to the first or second kind, is usually sequential to it. 4. That designed to protect or augment the existing O specific advantages of the investing firms and/or to reduce those of their competitors, i.e. strategic asset seeking fdi. Combining our knowledge of the individual parameters of the OLI paradigm with that of the economic and other characteristics of home and host countries, and of the investing, or potentially investing, firms, it is possible to derive a wide range of fairly specific and operationally testable theories. Thus, it may be hypothesized that some sectors, e.g. the oil and pharmaceutical sectors, are likely to generate more fdi than others, e.g. the iron and steel or aircraft sectors, because the characteristics of the former generate more unique O advantages, and/or because their locational needs favor production outside their home countries, and/or because the net benefits of internalizing cross-border intermediate product markets are greater. Similarly, it is possible to predict that the significance of outward fdi will be greater for some countries, e.g. Switzerland and the Netherlands, than for others, e.g. Russia and India, simply by knowing about their economic histories, the core competencies of their indigenous firms, the size of their home markets, their experience in foreign markets, and the locational attractions of their immobile resources and capabilities, relative to those of other countries. Finally, some firms, even of the same nationality and from the same industry, are more likely to engage in fdi than others. Sometimes, this might reflect their size — on the whole, large firms tend to be more multinational than small firms; sometimes their attitude to risk — particularly those associated with foreign ventures and of foreign partnerships with foreign firms; and sometimes their innovating product, marketing, locational, or fdi strategies. The extent and pattern of foreign owned production will depend on the challenges and opportunities offered by different kinds of value added activity. Thus the growth of existing, and the emergence of new, markets e.g. in China, over recent years, has led to a considerable expansion of various kinds of market seeking fdi — particularly in fast growing industries, e.g. telecommunications. By contrast, the rate of expansion of several natural resource sectors has been less impressive, as many products have become less resource intensive, due, for example, to the innovation of new alloys, improved recycling techniques, the miniaturization of components, and the replacement of natural by synthetic materials. The reduction of both transport costs and artificial barriers to most forms of trade has led to more efficiency seeking fdi — both among developed countries and between developed and developing countries.5 While, as some kinds of technology have become more standardized and/or more codifiable, licensing agreements and management contracts have replaced fdi, e.g. in the hotel and fast foods sectors, in the more knowledge and trade intensive indus- 5 The former mainly in the form of the growth of horizontal, i.e. product specialization, and the latter in the growth of vertical, i.e. process specialization
166 J.H.Dunning/Intermational Business Review 9 (2000)163-190 tries,e.g.pharmaceuticals,industrial electronics and management consultancy,the economies of global integration have made for a dramatic increase in merger and acquisition(M and A)activity (UN,1998).Moreover,the advent of electronic com- merce is not only heralding the end of the geography of some financial and infor- mation markets,but is revolutionizing the organization of intra-firm production and trade.? The ntent and predictions of the eclectic paradigm are firmly embedded in a r of diffe rent and b none thes mprene an ctivity, 8, 1g0 st of he he too,are c th h othe fdi. ocu erational production,.g.its ownership.strco on partic ocational pronl or its organizational form Thus,location theory forms the basis of the 'where'of MNE activity;industrial organization and resource based theories of the firm offer some reasons 'why'foreign owned affiliates may have a competitive edge over their indigenous competitors;while the concept of the firm as a 'nexus of treaties (Williamson,1990)is critical to an understanding of the existence of MNEs,and of why firms prefer to engage in fdi rather than sell their O specific assets,or the rights to use them.to independent foreign producers. Much of this paper will,in fact,seek to demonstrate how,and in what ways,these Approaches are complementary to each other and of how the cclectic paradigm offers lone of these theories and a co non analytical framework within which each can be accommodated and fully enriched in their pplication. Finally. the rele ance of the individual components of the eclec tic paradigm,and the system of which they are par will deper nd on whether c ng t o explain Such activity is estimated to have accounted for between5%and%of all new fdi ows over of intra-firm trade both of intermediate and of final products,docu- mented,for example.by UN(9b) or selling interme ate products (Bo ewyn,1985:Dunning,1988) a ysis,we s procee n that par son.1998b).While accepting the need for rigo and the empirical ting of specific hypothese we also believ ing related hypothes the interaction between the thepries but makes its ow e predictions.p ovides a useful.and in many cases,an es foundation to thes theories.We.ther ew the eclectic par digm as a which provides a s and bo criteria in w d MNE ated. erhaps,the most ive of the research tradition in interational business which has evolved ove
166 J.H. Dunning / International Business Review 9 (2000) 163–190 tries, e.g. pharmaceuticals, industrial electronics and management consultancy, the economies of global integration have made for a dramatic increase in merger and acquisition (M and A) activity (UN, 1998).6 Moreover, the advent of electronic commerce is not only heralding the end of the geography of some financial and information markets, but is revolutionizing the organization of intra-firm production and trade.7 The content and predictions of the eclectic paradigm are firmly embedded in a number of different economic and business theories. Although taken separately, none of these offer a comprehensive explanation of the growth and decline of MNE business activity,8 taken together — i.e. as a group — they do so. Most of the theories, too, are complementary, rather than substitutable, to each other. Some tend to focus on particular kinds of fdi, but not others. Others are designed to explain different aspects of international production, e.g. its ownership, structure, its locational profile or its organizational form Thus, location theory forms the basis of the ‘where’ of MNE activity; industrial organization and resource based theories of the firm offer some reasons ‘why’ foreign owned affiliates may have a competitive edge over their indigenous competitors; while the concept of the firm as a ‘nexus of treaties’ (Williamson, 1990) is critical to an understanding of the existence of MNEs, and of why firms prefer to engage in fdi rather than sell their O specific assets, or the rights to use them, to independent foreign producers. Much of this paper will, in fact, seek to demonstrate how, and in what ways, these approaches are complementary to each other; and of how the eclectic paradigm offers both an envelope of these theories, and a common analytical framework within which each can be accommodated and fully enriched in their application.9 Finally, the relevance of the individual components of the eclectic paradigm, and the system of which they are part, will depend on whether one is seeking to explain 6 Such activity is estimated to have accounted for between 55% and 60% of all new fdi flows over the period 1985 to 1997 (UN, 1998). 7 As witnessed, by the growth of intra-firm trade both of intermediate and of final products, documented, for example, by UN (1996b). 8 The explanation of foreign direct divestment by MNEs is exactly the reverse of that of foreign direct investment. It may be brought about by a decline in their O specific advantages and/or the L advantages of foreign countries, and/or a reduced motive by firms to internalize the cross-border market for buying or selling intermediate products (Boddewyn, 1985; Dunning, 1988). 9 Throughout our analysis, we shall proceed on the assumption that paradigmatic and model building theoretic structures to understanding international business activity are complementary rather than alternative scientific methodologies (Buckley & Casson, 1998b). While accepting the need for rigorous theorizing and the empirical treating of specific hypotheses, we also believe that encompassing related hypotheses into an open-ended and comprehensive conceptual framework, which not only identifies and evaluates the interaction between the theories, but makes its own generic predictions, provides a useful, and in many cases, an essential, foundation to these theories. We, therefore, view the eclectic paradigm as a systemic framework which provides a set of general assumptions and boundary criteria in which operationally testable theories, germane to fdi and MNE theory, can be comfortably accommodated. It is, perhaps, the most expressive of the research tradition in international business which has evolved over the past two decades (Weisfelder, 1998). For an elaboration of the concept of a research tradition, see Laudan (1977)
JH.Dunning/International Business Review 9200)163-190 6 the static or dynamicdete inants of MNE activity.For mple,one of the eories of fd ct cycle theory rd by ernon was cor not onl by wh h hr eepened an rkets how t ationa ds cha moved from the innovatory to the standardized stage of production.By contra much of extant location theory and internalization theory seeks to identify and explain the optimum spatial and organizational dimensions of the existing resources and capabilities of firms and nations.Knickerbocker's 'follow my leader,'and Grah- am's 'tit for tat'thesis(Knickerbocker,1973;Graham,1975)also contain a longi tudinal dimension,which,for the most part,is absent in most variants of industrial organization theory,for example as originally propounded by Hymer(1960)and Caves (1971).Initially,too,the eclectic paradigm primarily addressed static and efficiency related issues (Dunning.1977),but more recently has given attention to the dynamic competitiveness and locational strategy of firms,and particularly the path dependency of the upgrading of their core cor petencies(Dunning 1995.1998) The kernel of this r is directed to examining the changes in the boundaries constraints and structi of the eclectic paradigm over the and hos ng de anded of it by y world e nts and scholarly think- In do ial att to the of alli em ng (We 9931997:Mak 1999 199 a analysis in the e conte ur sign cant happenings of the 1980s and 1990s,viz. 1.the maturation of the knowledge-based economy, 3 2.the deepening integration of interational economic and financial activity,includ- ing that fostered by electronic networks (Kobrin,1999), 3.the liberalization of cross-border markets,and the flotation of the world's major currencies.and 4.the emergence of several new countries as important new players on the global economic stage The next three sections will examine how the main intellectual thrust in explaining each of the OLI triumvirate of variables has evolved over this time.In particular.it will argue that,as the dynamie of these variables significance.so the value of the eclec paradigm has increased relative to the s 10 See ale mationalization process (eg.Johanson For a longer term perspective,and particularly for an appreciation of the evolution of the O advan onal patterns and organ 7 A generic term which suggests that the wealth of firms and countries is increasingly dependent on the kind es they form with other firms and countries.This concept is explored in g1007e e in the develor ment of market based capitalism the previous two stages being land based and machine based capitalism
J.H. Dunning / International Business Review 9 (2000) 163–190 167 the static or dynamic determinants of MNE activity. For example, one of the earliest theories of fdi, viz the product cycle theory, put forward by Raymond Vernon (1966), was concerned not only with explaining the process by which firms deepened and widened their markets,10 but also how their locational needs might change as they moved from the innovatory to the standardized stage of production. By contrast, much of extant location theory and internalization theory seeks to identify and explain the optimum spatial and organizational dimensions of the existing resources and capabilities of firms and nations. Knickerbocker’s ‘follow my leader,’ and Graham’s ‘tit for tat’ thesis (Knickerbocker, 1973; Graham, 1975) also contain a longitudinal dimension, which, for the most part, is absent in most variants of industrial organization theory, for example as originally propounded by Hymer (1960) and Caves (1971). Initially, too, the eclectic paradigm primarily addressed static and efficiency related issues (Dunning, 1977), but more recently has given attention to the dynamic competitiveness and locational strategy of firms, and particularly the path dependency of the upgrading of their core competencies (Dunning 1995, 1998). The kernel of this paper is directed to examining the changes in the boundaries, constraints and structure of the eclectic paradigm over the past twenty years;11 and those now being demanded of it by contemporary world events and scholarly thinking. In doing so, it will pay especial attention to the emergence of alliance capitalism12 and the growth of asset augmenting fdi (Wesson 1993, 1997; Makino, 1998; Kuemmerle, 1999). In particular, it will set its analysis in the context of four signifi- cant happenings of the 1980s and 1990s, viz.: 1. the maturation of the knowledge-based economy,13 2. the deepening integration of international economic and financial activity, including that fostered by electronic networks (Kobrin, 1999), 3. the liberalization of cross-border markets, and the flotation of the world’s major currencies, and 4. the emergence of several new countries as important new players on the global economic stage. The next three sections will examine how the main intellectual thrust in explaining each of the OLI triumvirate of variables has evolved over this time. In particular, it will argue that, as the dynamic composition of these variables has assumed more significance, so the value of the eclectic paradigm has increased relative to the sum 10 See also the writings of the Scandinavian school on the internationalization process (e.g. Johanson & Vahlne, 1977; Luostarinen, 1979; Welch & Luostarinen, 1988). 11 For a longer term perspective, and particularly for an appreciation of the evolution of the O advantages of firms, and their changing locational patterns and organizational modalities, see two classic studies by Mira Wilkins (Wilkins 1970, 1974). 12 A generic term which suggests that the wealth of firms and countries is increasingly dependent on the kind and quality of alliances they form with other firms and countries. This concept is explored in more detail in Dunning (1995). 13 Which elsewhere (Dunning, 1997), we suggest represents a new stage in the development of market based capitalism, the previous two stages being land based and machine based capitalism
168 J.H.Dunning/International Business Review 9 2000)163-190 of its parts,with the contribution of each becoming increasingly interdependent of each other.Finally,the paper will give especial attention to the contribution of stra- tegic cum managerial approaches to understanding the growth and composition of MNE activity,while averring that the relevance and richness of these is enhanced if set within the overarching construct of the eclectic paradigm 2.The ownership sub-paradigm In explaining the growth of int several strands of economic and bu as s depe n the inve some nique and sustainab c itive advantage (or advantage relative to t that (or thos e)possessed by their foreign com pettors.Ind some woul argue that in tradition I neoclassical theory,in which the firm is a 'black box',no fdi is possible- as all firms have equal access to the same resources and capabilities within their own countries,while there is complete immobility of resources and capa- bilities berween countries. When the eclectic paradigm was first put forward (in 1977),4 it was assumed that such competitive or o specific advantages largely refected the resources and capabilities of the home countries of the investing firms;and that fdi would only occur when the benefits of exploiting,ie.adding value to,these advantages from a foreign location outweighed the opportunity costs of so doing Since the 1960s.the extant lite ature has come to identify three main kinds of firm or O specific competitive advantages 1.Those relating to the ossession and exploitation of mo power,as initially 1956 (1960 opoly org zatio (IO)scholar aves 197L. 2:P ,198 hese sten n from,or create some kind of barrier to entry to final product 2.Those relating to the possession of a bundle of scarce,unique and susta resources and capabilities,which essentially reflect the superior technical efficiency of a particular firm relative to those of its competitors. These advan- tages are presumed to stem from,or create,some kind of barrier to entry to factor or intermediate,product markets by firms not possessing them.Their identification The origins of the paradigm date back to 1958,when the distinction between the O advantages of irms and th advantages of count was irst made,in study by the author,of America of the reasons why firms p efer to in fdi rather thar der licens g et al agre were acknowledged by the author and other scholars in the early 199 d edition of Dunning. ted assets,and that factor markets are not fully contestable.Much earlier,several kinds of com
168 J.H. Dunning / International Business Review 9 (2000) 163–190 of its parts, with the contribution of each becoming increasingly interdependent of each other. Finally, the paper will give especial attention to the contribution of strategic cum managerial approaches to understanding the growth and composition of MNE activity, while averring that the relevance and richness of these is enhanced if set within the overarching construct of the eclectic paradigm. 2. The ownership sub-paradigm In explaining the growth of international production, several strands of economic and business theory assert that this is dependent on the investing firms possessing some kind of unique and sustainable competitive advantage (or set of advantages), relative to that (or those) possessed by their foreign competitors. Indeed, some would argue that in traditional neoclassical theory, in which the firm is a ‘black box’, no fdi is possible — as all firms have equal access to the same resources and capabilities within their own countries, while there is complete immobility of resources and capabilities between countries. When the eclectic paradigm was first put forward (in 1977),14 it was assumed that such competitive or O specific advantages largely reflected the resources and capabilities of the home countries of the investing firms; and that fdi would only occur when the benefits of exploiting, i.e. adding value to, these advantages from a foreign location outweighed the opportunity costs of so doing. Since the 1960s, the extant literature has come to identify three main kinds of firm or O specific competitive advantages. 1. Those relating to the possession and exploitation of monopoly power, as initially identified by Bain (1956) and Hymer (1960) — and the industrial organization (IO) scholars (e.g. Caves 1971, 1982; Porter 1980, 1985). These advantages are presumed to stem from, or create, some kind of barrier to entry to final product markets by firms not possessing them. 2. Those relating to the possession of a bundle of scarce, unique and sustainable resources and capabilities, which essentially reflect the superior technical efficiency of a particular firm relative to those of its competitors.15 These advantages are presumed to stem from, or create, some kind of barrier to entry to factor, or intermediate, product markets by firms not possessing them. Their identification 14 The origins of the paradigm date back to 1958, when the distinction between the O advantages of firms and the L advantages of countries was first made, in a study by the present author, of American investment in British manufacturing industry (Dunning, 1958, revised 1998). The I component was not explicitly added until 1977, although some of the reasons why firms prefer to engage in fdi rather than cross-border licensing et al agreements were acknowledged by the author and other scholars in the early 1970s. (See the 1998 revised edition of Dunning, 1958, Chapter 11) 15 Implicitly or explicitly, this assumes some immobility of factors of production, including created assets, and that factor markets are not fully contestable. Much earlier, several kinds of competitive advantages specific to foreign owned and domestic firms were identified by such scholars as Dunning (1958), Brash (1966) and Safarian (1966)
JH.Dunning/Intermational Business Review 9000)163-190 69 of the main contributions of the resource based 3 ting to the con of the managers of fir nout th nate the the a way which best advances the long term interests of the firm.These advantages, which are closely related to those set out in(2)are especially stressed by organiza- tional scholars,such as Prahalad and Doz(1987),Doz,Asakawa,Santos and Willi- amson (1997)and Bartlett and Ghoshal (1989,1993).They tend to be manage ment,rather than firm,specific in the sense that,even within the same corporation the intellectual et al.,competencies of the main decision takers may vary widely The relative significance of these three kinds of O specific advantages has changed over the past two decades,as markets have become more liberalized,and as wealth and assets and match these to existing market needs. At the ium. the emphasis is more on their ca abilities to and ensive sets from not only ghout the with their existing co inte but those of engaging in comple ue added advar activ an to undertake fi to protect aswell as toexploit their existing specific advantagesDunng or augmen 995).Hence too,the growing importance of multinationality,per se,as an intangible asset in its own right. The question at issue,then,is whether the changing character and boundaries of the O specific advantages of firms can be satisfactorily incorporated into the eclectic paradigm,as it was first put forward.We would argue that as long as they do not undermine the basic tenets of the paradigm,and are not mutually inconsistent.they can be,although most certainly,they do require some modification to existing sub- paradigms and theories In Tables I and 2.we set out some of the models and hypotheses which have pdso u pu divide these into two categories generating resources and capabilitiesp sessed by a firr at a given moment of tin static o ady and thos which tr such adv as the ability firm.to sustain and se its i time,i.e. mic advantages.Both kinds of d to be e.g espect on.Silverberg and Socte ()Fos nev(1995 1992)and of Iccce,Pisano g the tro and of maximizing the of in ing and accumulated knowledge
J.H. Dunning / International Business Review 9 (2000) 163–190 169 and evaluation has been one of the main contributions of the resource based and evolutionary theories of the firm.16 3. Those relating to the competencies of the managers of firms to identify, evaluate and harness resources and capabilities from throughout the world, and to coordinate these with the existing resources and capabilities under their jurisdiction in a way which best advances the long term interests of the firm.17 These advantages, which are closely related to those set out in (2) are especially stressed by organizational scholars, such as Prahalad and Doz (1987), Doz, Asakawa, Santos and Williamson (1997) and Bartlett and Ghoshal (1989, 1993). They tend to be management, rather than firm, specific in the sense that, even within the same corporation, the intellectual et al., competencies of the main decision takers may vary widely. The relative significance of these three kinds of O specific advantages has changed over the past two decades, as markets have become more liberalized, and as wealth creating activities have become more knowledge intensive. In the 1970s, the unique competitive advantages of firms primarily reflected their ability to internally produce and organize proprietary assets, and match these to existing market needs. At the turn of the millenium, the emphasis is more on their capabilities to access and organize knowledge intensive assets from throughout the world; and to integrate these, not only with their existing competitive advantages, but with those of other firms engaging in complementary value added activities. Hence, the emergence of alliance capitalism, and the need of firms to undertake fdi to protect, or augment, as well as to exploit, their existing O specific advantages (Dunning, 1995). Hence, too, the growing importance of multinationality, per se, as an intangible asset in its own right. The question at issue, then, is whether the changing character and boundaries of the O specific advantages of firms can be satisfactorily incorporated into the eclectic paradigm, as it was first put forward. We would argue that as long as they do not undermine the basic tenets of the paradigm, and are not mutually inconsistent, they can be, although most certainly, they do require some modification to existing subparadigms and theories. In Tables 1 and 2, we set out some of the models and hypotheses which have been sought to explain the origin, nature and extent of O specific advantages. We divide these into two categories, viz. those which view such advantages as the income generating resources and capabilities possessed by a firm, at a given moment of time, i.e. static O advantages; and those which treat such advantages as the ability of a firm, to sustain and increase its income generating assets over time, i.e. dynamic O advantages. Both kinds of advantage tend to be context specific, e.g. with respect 16 For a full bibliography, see Barney (1991), Conner (1991), Conner and Prahalad (1996), Cantwell (1994) and Dosi, Freeman, Nelson, Silverberg and Soete (1988); Foss, Knudsen, and Montgomery (1995); Saviotti and Metcalfe (1991). See also the writings of Teece (1981, 1984, 1992) and of Teece, Pisano and Shuen (1997). 17 Which includes minimizing the transaction costs and of maximizing the benefits of innovation, learning and accumulated knowledge
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170 J.H. Dunning / International Business Review 9 (2000) 163–190 Table 1 Theories explaining O specific advantages of firms. A: Group 1 Explaining Static O advantagesa 1) MSb 2) RSb 3) ESb 4) SASb Product cycle theory. (Vernon 1966, •Country (largely US) 1974) specific resources and capabilities of firms •All asset exploiting fdi •Further hypothesizes that competitive advantages of firms are likely to change as product moves through its cycle Industrial organization theories. •Largely Oa advantages initiated, or protected, •Oa advantages based on efficiency of investing firms also (Hymer, 1960; Caves 1971, 1974; by entry and/or mobility barriers to product described in various empirical studies from Dunning (1958) and Dunning 1958, 1993; Teece 1981, markets. These include patent protection, and Safarian (1966) onwards 1984) marketing, production and financial scale economies •All asset exploiting fdi •Little attention paid to asset augmenting fdi Multinationality, organizational and risk •Mainly Ot advantages, but also some Oa advantages arising from presence of investing firms in countries with diversification theories. (Vernon 1973, different economic political, cultural regimes. Ot advantages include ability to access, harness and integrate 1983; Rugman, 1979; Kogut 1983, differences in distribution of natural and created assets and of organizational and managerial experience related 1985; Kogut & Kulatilaka, 1994; Doz to these et al., 1997; Rangan, 1998) •(Potentially could be extended to include why markets for sustaining or increasing O specific advantages are best internalized.) (continued on next page)
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J.H. Dunning / International Business Review 9 (2000) 163–190 171 Table 1 (continued) 1) MSb 2) RSb 3) ESb 4) SASb Internalization theory. (Buckley & •Entirely confined to Oa and Ot advantages arising from internalization Casson, 1976, 1985, 1998a,b; Hennart of intermediate product markets 1982, 1989; Rugman 1982, 1996) •All asset exploiting fdi •Largely, though not exclusively, a static theory, though some acknowledgment that relative transaction costs of markets and hierarchies may vary as firms seek to exploit dynamic market imperfections Capital Imperfections theory. (Aliber, •Largely independent of type of fdi. The theory argues that firms from countries with strong exchange rates, or 1971) which discount capital at higher rates of interest will be tempted to invest, often by M and As, in countries which are economically weaker. The theory, as initially put forward, has no time (t) dimension; and, in essence, is a financial variant of internalization theory Follow my leader, tit for tat theory. •Mainly concerned with explaining fdi as a space related strategy among competing oligopolists. The main (Knickerbocker, 1973; Graham 1975, hypothesis is that fdi will be bunched in particular regions or countries over time; and that there is likely to be 1990; Flowers, 1976) an inter-penetration of the territories occupied by the oligopolists. Though originally applied to explain assetexploiting fdi, it is now also being used to explain some asset augmenting fdi a Oa=Ownership advantage based on the possession or privileged access to a specific asset. Ot=Ownership advantages based on capabilities to organize assets, both internal and external to the investing firm, in the most efficient way. b 1) Market seeking 2) Resource seeking 3) Efficiency seeking 4) Strategic asset seeking
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172 J.H. Dunning / International Business Review 9 (2000) 163–190 Table 2 Theories explaining O specific advantages of firms. B: Group 2 Explaining Dynamic O advantagesa 1) MSb 2) RSb 3) ESb 4) SASb 1. Resource based theory. (Wernerfelt •As initially formulated, mainly concerned with identifying and •FDI designed to augment domestic- 1984, 1995; Conner, 1991; Helleloid, evaluating variables influencing sustainability of competitive based resources and capabilities 1992; Montgomery, 1995; Conner & advantages of firms. Less attention given to traditional barriers to entry (Wesson 1993, 1997; Makino, 1998; Prahalad, 1996) and more to such variables as specificity, rareness and non-imitatability Dunning, 1996; Chen & Chen, 1999) of resources, and the capabilities of firms to create and utilize them. Mainly concerned with asset exploiting fdi and only limited recognition of Ot advantages 2. Evolutionary theory. (Nelson & •A holistic and time related approach, mainly directed to identifying and evaluating dynamic Oa advantages of Winter, 1982; Nelson, 1991; Cantwell firms. Basic proposition relates to the path dependency of accumulated competitive advantages, and that the 1989, 1994; Dosi et al., 1988, more efficient firms are in managing these advantages, the more likely they will have the capability to engage Saviotti & Metcalfe, 1991; Teece et al., in asset exploiting and asset augmenting fdi 1997) 3. Organizational (management related) •Essentially explain O advantages in terms of ability of managers to devise appropriate organizational structures theories. (Prahalad & Doz, 1987; and techniques to effectively access, coordinate and deploy resources and capabilities across the globe. These Bartlett & Ghoshal, 1989; Porter, 1991; theories, in recent years, have especially focused on the cross-border sourcing of intellectual assets and the Bartlett & Ghoshal, 1993; Doz and coordination of these assets with those purchased from within the MNE Santos, 1997; Doz et al., 1997) a Oa=ownership advantage based on the possession or privileged access to a specific asset. Ot=ownership advantages based on capabilities to organize assets, both internal and external to the investing firm, in the most efficient way. b 1) Market seeking 2) Resource seeking 3) Efficiency seeking 4) Strategic asset seeking