THE ECLECTIC PARADIGM AS
A GUIDE TO FOREIGN
MARKET ENTRY
-2-
ABSTRACT
Businesses tend to expand and spread their operations to foreign countries. This decision to enter a
new market is a very important one and it requires a strategic approach.
The strategy of entry implored by an organisation is crucial. The various modes of entry are
exporting, joint venture, licensing and foreign direct investment (FDI).
There has been extensive research and literature review of the factors that contribute to the choice
of strategy implored as entry mode. The factors according to the eclectic paradigm can be
strategically classified into three; namely: ownership specific advantage, location attractions of
alternative countries or regions and internalization advantage. (Dunning, 2000).
This paper will review how relevant the eclectic paradigm is to market entry decisions and the
interdependence of the three variables as stated in the model.
-3-
CONTENTS
Abstract
3
Introduction
5
Literature review: Understanding the Eclectic Paradigm
6
Mode of Entry
8
Limitations and Conclusion
9
-4-
1. INTRODUCTION:
Every business was established to make money that is, business owners want returns on their
investment. It is during this process of making profit that the need to expand, diversify or go global
come to bare.
This decision is enter a new market is a very important one and it requires a strategic approach (S.
Agarwal, Sridhar Ramaswami, 1990).
The strategy of entry implored by an organisation is crucial. The various modes of entry exporting,
joint venture, licensing and foreign direct investment (FDI).
There has been extensive research and literature review of the factors that contribute to the choice
of strategy implored as entry mode. The factors according the eclectic paradigm can be strategically
classified into three; namely: ownership specific advantage, location attractions of alternative
countries or regions and internalization advantage. (Dunning, 2000).
The influence of John Dunning on International Business can not be over emphasied as his works
through numerous publications spanning decades have help shape the field through his insight and
leadership. (Rugmann, 2010).
The eclectic paradigm recognises the need for a business entity to have certain advatages in terms of
ownership, location and internalisation in other to enter foreign market and engage in foreign
investment.
The OLI theory is an alias for the Eclectic Paradigm; has been one of key models that have guided
foreign direct investments for decades.(Zhao, X., Decker, R., 2004) (Yung-Heng Lee, Dr. Yann-Haur
Huang, 2009)
Quoting Yung-Heng Lee and Dr. Yann-Haur Huang, “Dunning (1977) first introduced the OLI theory
and later the theory was developed by Dunning himself (1980, 1988, 1995, 1998, 2000) and other
scholars such as Goodnow (1985); Hill, Hwang, Kim (1990); Macharzina & Engelhard (1991); Agawal
& Ramasvisami, (1992); Woodcock, Beamish & Makino, (1994); Brouthers, Brouthers &Werner
(1999); Brouthers, K.& L. Brouthers (2000); Cantwell & Narula (2003).” (Yung-Heng Lee, Dr. YannHaur Huang, 2009)
The aim of the model is to point out and observe the elements afftecting the start and growth of
foreign production. (Zhao, X., Decker, R., 2004). Stephen Hymer put in an arguement that foreign
acquisiton is driven by the inate desire to increase market power. (Hymer, 1976)(Beatriz de Blas,
-5-
Katheryn Niles Russ, 2012). In his thesis, Hymer concluded that proper understanding of direct
investment will be achieved by studying international operations and their financing.(Hymer, 1976).
The paradigm is a broad blueprint of how a company can have considerable market power in respect
of competitive advantage, how the value adding prerequiste determines a firms location and
financial implications of transactions. In conlusion it is a framework relating to business strategy of
reach, acquisition and order. (Cohen, 2007)
2. LITERATURE REVIEW: Understanding The Eclectic Paradigm
The OLI model established three variables that impact the mode of entry of FDI firms. The variables
are advantages on the part of the organistion. They are Ownership Advantage, Location Advantage
and Internalization Advantage.
These three advantages cum variables are key components an cannot be overemphsised when it
comes to internalization.
THE OWNERSHIP ADVANTAGE:
The insight to develop a business from an idea (Coase, 1937) and operating it by itself an ownership
advantage; the growth of the business is from within (Dunning, 1991). (CUERVO, n.d.). These are
competitive a firm has over other international firms when entering a foregin market. That is, firm
specific advantage in relative to the nature and nationality of the entrepreneur (Zhao, X., Decker, R.,
2004).
Some of these advantages are in form of intellectual properties, technology, copyrights, brand
name, patents etc. They usually tranferrable exclusive intangible assets. That is, assest that a firm
owns that can be used to gain competitive advantage in a foreign market.
In whatever strategy implored, there must be considerable market power or cost advantage enough
to write off the set-up cost and operational cost.
For proper understanding, let us look at the case of a multinational enterprise, Strabucks.
Starbucks is an American comapany that sells coffee. In January 2012, Strarbucks entered the Indian
market after agreeing to partner with Tata Global Beverages (Starbucks Newroom, 2012) (The
-6-
Economic Times, 2012). They would have considered additional operational cost in relative to
existing local competitors like Barista Lavazza and Indian Coffee House.
Although Starbucks has ownership advantages in terms of technology and brand name; to cover the
extra cost of cultural distance, legal, institutional and language differences and market analysis they
had to opt for a joint venture with Tata Global Beverages for them to be able to exhibit their
ownership advantages and compete effectively. To effect their brand name and expertise will make
ground on revenue and ensure effiecient competitive strategy in the new market.
This move is supported by the broad interpretation of the ownership edge by John H. Dunning in
1993. His argument was based on the inept ability of multinationals to go into partnership vis a vis
joint ventures which will enable them enjoy instutuional structures and relative assets as controlled
by their allies (Dunning, 1993) (Rugmann, 2010).
The ownership advantage is also referred to as firm specific advantage.
THE LOCATION ADVANTAGE:
Moving across boarders require more than mere basic knowledge of the host country.
After strategic inward analysis of the ownership and internalization(to be discussed later)
advantages, a firm has to take into consideration the location advantages that can be derived from
the home nation.
Location advantages could be in terms market size, learning system, mode of government,
socialization and other aspects of government and (Zhao, X., Decker, R., 2004) political activity
(Dunning, 2001).
Cost of labour, nature of market in the host country, economic and political activities are importaant
to a firm to determinant of foreign direct investment (Castro, 2000) (Bento, 2004).
In the case of MTN a South African telecommunication company investing in Nigeria, they took into
consideration location advantages of the host country Nigeria before comitting to foreign direct
investment in 2001. Location advatages like large population which will guarantee more subscribers
to a large extent, network of businesses that need seamless communication, cheap cost of labour
etc.
-7-
Sound knowledge of the relationship between the features of an organisation`s home country and
its entry mode options help decision-makers. This reduces the risk of friction associated with
alliances and in return contribute to the success of international expansion (Mayrhofer, 2004).
The location advatage is also referred to as country specific advantage.
THE INTERNALIZATION ADVANTAGE:
This explains the advantage a firm has in taking control of its own production process intstead for
opting for joint venture or licensing.
The Internalization advantage has a bond with Ownership advantage as the Ownership advantage
will not be reckoned with if the organisation framework is not from within; that is internalized
(Rugmann, 2010).
Entreprenuers seek to internalize to avoid the problems of the market and to gain from the
imperfections in the price system and government resource control. (Dunning, 1977) (CUERVO, n.d.)
Market failure can arise through incurring transaction costs by overcoming imperfections in the
market structure or hinderances to trade in the external markets. The cost is inversly related to the
volume of trade. Primarily all markets are faced with costs of serach, communication, quality
control, transport, tax returns and contracts expenses. Failure can also come in the form external
market inadaequacy to deal with risk and uncertainty. On another note, failures can occur through
government levy vis a vis taxes and other forms of trade barriers and regulations
3. MODE OF ENTRY
To guard us on the proper use of the eclcetic model to determine the choice of mode of entry, it is
paramount to discuss the various modes of entry available to firms after which they have considered
their advantages in terms of ownership, location and internalization.
Entry modes are based on four main attributes: Risk, Returns, Control and Resource Availabilty (S.
Agarwal, Sridhar Ramaswami, 1990).
-8-
The four different entry modes are:
a. Exporting
b. Joint Venture
c. Foreign Direct Investment
d. Licensing
a. EXPORTING
This entails producing in one country and selling in another. A manufacturing plant will be
based in one nation and distribution will take finished goods to different foreign markets.
The reach depends on how large the firm is.
It is a low resource mode in terms of investment and low returns as well. It gives a firm
operational control but it is quite inadequate in terms of marketing management control (S.
Agarwal, Sridhar Ramaswami, 1990).
Examples of multinationals involved in the exporting entry mode is Nike. Taking advantage
of location (cheap labour cost, government structure etc.) and ownership (brand name,
technology etc.) moved its manufacturing operations to Asia to distribute to different parts
of the world (The Guardian, 2014).
b. JOINT VENTURE:
The joint venture mode requires low investment but usually ensures high returns cum risk.
(S. Agarwal, Sridhar Ramaswami, 1990).
It is an agreement entered by two or more firms whereby they agree to share
responsibilities, profit, loss and ideas in order achieve a pre-agreed goal. The joint venture
formed is a separate entity from the parties inovled.
A new joint venture has just been reached by British luxury car manufacturers Land Rover
and Chery Automobiles of China. The investment is to include a plant in the Asian country
and it is to enhance exchange the intellctual knowledege from Britain and the location
advantage of China in terms of labour and general operational cost. The operation chain will
commence in 2014 (Li Fusheng, Li Fangfang, 2014).
-9-
c. FOREIGN DIRECT INVESTMENT:
This is the investment that ensure an entrepreneur acquires full ownership of factors of
production in a foreign market.
It is a high risk venture in which the investor has high stake in the control and marketing
operations (S. Agarwal, Sridhar Ramaswami, 1990).
One of the famous stories of direct invesment in Nigeria is Etisalat, United Arab Emirates
joint agreement with Mubadala Development Company of the same country to directly
invest in the telecommunication business in 2007 (Etisalat, 2014). They took into
consideration the growing telecommunication market as at then, large population, and
government structure to go into direct investment. We should note that the ownership
advantage of Etisalat overrides that of the other company; sustanable brand name.
d. LICENSING:
Licensing is an entry mode whereby permission is given to a firm in the host country to
either carry out services or manufacture products under the name of the licensor in another
country. The license comes at a fee which guarantees the use of the licensor intellectual
property, patent, brand name etc for business.
Coca-cola has just got the licensing rights to SAB Miller`s Appletiser brand and 19 other nonalcoholic brands (International Business Times, Rapti Gupta, 2014)
4. LIMITATIONS AND CONCLUSION:
A model would be regarded as of dubuious value if it leaves no issue unresolved which will
relatively serve as a guide to further research and theorizing (B. J. Loasby, 1971) (Dunning,
2000).
The purpose of this paper was to carry out a basic review of the eclectic paradigm in relation
to the choice of entry modes by businesses seeking to enter into a foreign market.
We gathered that firms as seen in the examples of real life multinational enterprises, tune
their mode of entry in line with their ownership adavantages, location advantages and
internalization adavantages.
This paper is to be considered as a broad overview of how effective the eclectic model can
be used to analyse why a firm considered a choice of entry considering its advantages.
- 10 -
We can deduce from the paper that business seeking to internationalize need a critical
review of its resources, goodwill standing, brand analsyis, technological prowess,
distribution channel, structure of the market in the host country, availabilty of labour, labour
cost, economies of scale, government structure, population, tax payable etc before deciding
to enter the market via; exporting, licensing, joint venture or foreign direct investment.
Understanding these competitive advantages cannot be over empahsied as they go along
way to determine the success of a firm. A less pragmatic approach might spell doom for the
venture.
We can also deduce that their interdependence among the three variables in the Eclectic
model. For instance, practically, internalizing advantage largely depends on a firms
ownership advantages. (Dunning, 2000).
One of the shortcomings of the model is its inadequacy to evaluate the timing of entry as to
when the firm should move into the foreign market. Timing of entry could be early or late;
either way it is quite important to the organisation as both timing period has its advantages
and disadvantages.
Quoting directly from Dunning; “an add-on dynamic component to the eclectic paradigm, an
extension of its constituent parts to embrace asset-augmenting FDI and cross- border nonequity ventures, and a more explicit acknowledgement of increasing role of the access of
ownership of resources and capabilities can do much to uphold its position as the dominant
analytical framework for examining the determinants of MNE activity. We believe that
recent technological and economic events, and the emergence of new explanations of MNE
activity have added to, rather than subtracted from, the robustness of the paradigm.While
accepting that, in spite of its eclecticism (sic), there may be some kinds of foreign-owned
value-added activities which do not fit comfortably into its construction, we do believe that it
continues to meet most of the criteria of a good paradigm and that it is not yet approaching
its own `creative destruction’ (Foss, 1996)”. (N. J. Foss, 1996) (Dunning, 2000)
All in all John H. Dunning`s established OLI Model is a very relevant framework that has
guided internationalisation for decades and it is still relevant as a guide to an entrepreneur`s
inetrnationalisation strategy. It is blueprint to guide through the interpedence of advantages
and ensure a good choice of entry mode.
- 11 -
Bibliography
B. J. Loasby, 1971. Hypothesis and paradigm in the theory of the firm. Economic Journal, Volume 81,
p. 863–885.
Beatriz de Blas, Katheryn Niles Russ, 2012. Hymer’s Multinationals. s.l.:s.n.
Bento, J. P. C., 2004. Analysing the pattern and determinants of Portugal’s tade in manufactured
goods: a time series approach (1971-98). Nottingham, s.n.
Castro, F., 2000. FDI in the European periphery: the competitiveness of Portugal. Leeds, s.n.
Coase, R. H., 1937. The Nature of the Firm. Economica, pp. 386-405.
Cohen, S. D., 2007. Multinational Corporations and Foreign Direct Investments: Avoiding Simplicity ,
Embracing Complexity. New York: Oxford University Press.
CUERVO, J. C., n.d. A review and extension of entrepreneurship in Dunning‟s international business
(IB) paradigm. Macau: s.n.
Dunning, J. H., 1977. Trade, location of economic activity and the MNE: a search for an eclectic
approach.
Dunning, J. H., 1991. The eclectic paradigm of international production: apersonal perspective.
s.l.:s.n.
Dunning, J. H., 1993. The globalization of business.
Dunning, J. H., 2000. The eclectic paradigm as an envelope for economic and busiess theories of
MNE activity. International Business, Volume Review 9 , p. 163–190.
Dunning, J. H., 2001. The Eclectic (OLI) Paradigm of International Production: Past Present and
Future. International Journal of the Economics of Business, 8(2), pp. 173-190.
Etisalat, 2014. Corporate Information. [Online]
Available at: http://www.etisalat.com.ng/aboutus_corporate_info.php
[Accessed December 2014].
Hymer, S. H., 1976. The International Operations of National Firms: A study of Foreign Direct
Investment, Cambridge, Massechusetts and London: The MiT Press.
International Business Times, Rapti Gupta, 2014. Coca-Cola, SABMiller Merge Business to Create
'Coca-Cola Beverages Africa. [Online]
Available at: http://www.ibtimes.co.in/coca-cola-sabmiller-merge-business-create-coca-colabeverages-africa-615342
[Accessed December 2014].
Li Fusheng, Li Fangfang, 2014. China Daily. [Online]
Available at: http://usa.chinadaily.com.cn/business/2014-10/27/content_18809722.htm
[Accessed December 2014].
Mayrhofer, U., 2004. International Market Entry: Does the Home Country Affect Entry Mode
Decision?. Journal of International Marketing, 12(4), pp. 71-96.
N. J. Foss, 1996. Research in Strategy, Economics and Michael Porter. Journal of Management
Studies.
- 12 -
Rugmann, A. M., 2010. Reconciling internalization theory and the eclectic paradigm. Multinational
Business Review, 18(2), pp. 1-12.
S. Agarwal, Sridhar Ramaswami, 1990. CHOICE OF FOREIGN MARKET ENTRY MODE: IMPACT OF
OWNERSHIP, LOCATION AND INTERNALIZATION FACTORS. Palgrave Macmillan Journals.
Starbucks Newroom, 2012. Tata Global Beverages and Starbucks Form Joint Venture to Open
Starbucks Cafés across India. [Online]
Available at:
http://web.archive.org/web/20120204124053/http://news.starbucks.com/article_display.cfm?articl
e_id=616
[Accessed 11 December 2014].
The Economic Times, 2012. First Starbucks cafe to come up in South Mumbai by October end.
[Online]
Available at: http://articles.economictimes.indiatimes.com/2012-09-28/news/34148399_1_johnculver-open-stores-starbucks-china
[Accessed 11 December 2014].
The Guardian, 2014. Nike lists abuses at Asian factories. [Online]
Available at: http://www.theguardian.com/business/2005/apr/14/ethicalbusiness.money
[Accessed December 2014].
Yung-Heng Lee, Dr. Yann-Haur Huang, 2009. Entry mode Choices between Wholly-Owned and Joint
Ventures of Taiwanese Firms in China–An Eclectic Theory Perspective. The Journal of International
Management Studies, 4(1).
Zhao, X., Decker, R., 2004. Choice Foreign Market Entry Mode - Cognitions from Empirical and
Theoretical Studies.
- 13 -