Academic journal article Multinational Business Review

A Strategic Management Analysis of Ownership Advantages in the Eclectic Paradigm

Academic journal article Multinational Business Review

A Strategic Management Analysis of Ownership Advantages in the Eclectic Paradigm

Article excerpt

Abstract:

This paper proposes a new typology of Ownership (O) advantages as a function of their differential managerial implications in established multinational enterprises (MNEs). We argue that the mainstream typology of O advantages proposed in Dunning's eclectic paradigm does not recognize the uniqueness of individual firms. We therefore propose a new typology of O advantages, which distinguishes among four types, based on the geographic source of such advantages and their transferability across borders. Moreover, we acknowledge the importance of resource recombination advantages. Two case examples illustrate the implications of the new typology for established MNEs.

Keywords: FDI; multinational enterprise; MNE; eclectic paradigm; OLI; ownership advantages.

INTRODUCTION

John Dunning first introduced his eclectic paradigm (or OLI model with O, L and I referring to Ownership, Location, and Internalization, respectively) in 1976 (Dunning 2001; Dunning and Lundan 2008a). He refined the model several times over a period spanning three decades. The eclectic paradigm rapidly became one of the dominant analytical frameworks to explain the determinants of foreign direct investment (FDI) and foreign activities of multinational enterprises (MNEs). Intrigued by the productivity differences between the US and UK manufacturing industries in the 1950s, and by the impact of multinational activity on reducing such differences, Dunning ultimately identified ownership advantages, location advantages, and internalization advantages as the keys to explaining the scope, geography, and impacts of MNE activities (Dunning 2001). Given the economic changes in the 1980s and 1990s, e.g., the rapid increase of international integration and the rise of knowledge seeking investment, Dunning continued to extend and refine the eclectic paradigm (Dunning 2000), but its major purpose remained explaining "the international production of all firms from a particular country or group of countries" (Dunning 2001, 186).

The OLI model primarily intends to analyze the rise of MNE activity: who internationalizes, where is production located, and how are international activities organized? (Guisinger 2001; Madhok and Phene 2001). However, many established MNEs now have a wide dispersion of their production activities, and the key challenge for them is the strategic management of internal resources embedded in a variety of subsidiaries (Guisinger 2001; Madhok and Phene 2001). Although entry mode choices and location selection are still important, the key challenge facing established MNEs is the need for resource recombination across borders (Verbeke 2008) given a set of affiliate locations and entry modes. With the basis of competitive advantage shifting more towards "a firm's ability to create and manage a knowledge portfolio" (Madhok and Phene 2001, 244), recombining extant O advantages has become more complex, especially for established MNEs.

Unfortunately, Dunning's typology of O advantages does not contribute much to understanding resource recombination challenges within established MNEs. Dunning's typology does not recognize the uniqueness of individual firms (Tallman 2004), thereby offering limited analytical power useable by MNE managers. Moreover, the geographic sources of O advantages and their transferability, two elements critical to established MNE strategic management, receive very limited attention in Dunning's typology. Finally, the role of MNE strategic management in resource recombination processes (Verbeke 2008), though addressed in Dunning and Lundan (2008a), is not given in-depth attention.

To remedy the weaknesses of Dunning's eclectic paradigm, in terms of explaining established MNE behavior and providing guidance to senior MNE managers, we propose a new typology of O advantages in the present paper. We select the established MNE as the unit of analysis and argue that Dunning's typology of O advantages (Dunning 1993, 1995, 2006; Dunning and Lundan 2008a) must be revised. …

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