Samila
Amany
ECLECTIC
PARADIGM
(OLI
PARADIGM)
MARKET
IMPERFECTION/
INTERNALIZATI
ON
LOCATION
SPECIFIC
ADVANTAGES
STRATEGIC
BEHAVIOR
VERNON’S LIFE
CYCLE MODEL
Global JV/
Alliances
A global JV will be
successful if the
entry mode is
eclectic paradigm
when product
advantage presents:
Product or
company specific
advantages must
exist in order for a
successful Global
JV.
Study shows that a Joint
Venture is often seen as a
viable business in
imperfect market. Studies
show a failure rate of 3061%, and that 60% failed
to start or faded away
within 5 years (Osborn,
2003). And that is when
the allocation of goods
and services by a market
is not efficient.
Location specific
advantages
are when the
company derives
greater benefit
through a foreign
establishment such as
Global JV.
Vernon suggests a Joint
Venture should happen
after the initial stages of
a product life cycle. If a
global Joint Venture
happens in initial stages
the chances of
unsuccessful transfer
may occur.
Global Car
Manufacturing
An example to this
theory would be
Saab’s car
company acquired
by General Motors,
which many of its
loyal customer
wrung their
collective hands
over the perceived
loss of Swedish
ingenuity. This
theory provides a
framework to
manufacturer
industries as to
when determining
if it is beneficial to
pursue.
By By Brian
Douglas, Special to
AsianWeek, May
30, 2003
http://news.asianwe
ek.com/news/view_
article.html?article
_id=77c0a69dc719
730116ced5853c66
1024
The market imperfection
in global car
manufacturing falls in
majority times specially
in Asia due to cultural
differences, as was the
case with the alliance
between Renault, a
French car company, and
Nissan
I have a very
interesting example.
This one is my own
experience and
knowledge. For
example in Iran all
the Automobile parts
are provided by
western European
countries however;
all the assembly lines
are completed in Iran.
This is due to the
location specific
advantage because of
the cheap Plant costs,
cheaper fixed assets,
as well as cheaper
labors. But all the
parts are made in
mostly “France”.
The use of joint
ventures stems
from theories on
how strategic
behavior influences
competitive
positioning of the
firm. According to
Alan Rugman the
motivations to joint
venture for
strategic reasons
are numerous.
One main example
for strategic
behavior in Auto
Industry would be
the top Auto
manufacturers
come up with
Hybrid cars. This
idea is
revolutionary and
other
manufacturers will
imitate the original
design.
Global
Oligopolies
Global Oligopoly
can be defined in
Eclectic Paradigm
when an oligopoly
organization has
One imperfection that
comes to mind when it
comes to Global
Oligopolies is; where
competitive
Advantages (natural
and created) that are
available only or
primarily in a
particular place.
One strategic
behavior or
innovativeness for
global oligopolies
in our era is either
The product life cycle
of a product in global
oligopolies depends on
the industry. For
example ipod and
The Automobile’s life
cycle has certainly
shortened. However;
The usage life cycle
may have been
shortened on the other
hand the life cycle for
the research and
analysis for the same
automobile may have
been longer than before.
In general automobile
life cycle like many
other industries has
been shortened.
Licensing Vs.
Other Modes
Of Entry
company specific
advantages, such as
a comparative
advantage over
other companies. A
very unique
example could be
OPEC. OPEC are a
few nations that are
trying to control the
production and
price of the oil.
interdependence requires
that multinational firms
maintain tight control
over foreign operations so
they have the capability
to launch attack against
their global competitors
(as Kodak has done with
Fuji).
Global Oligopoly
location is very
uneven in the world
since most MNE’s
headquartered in
developed countries.
to merge with one
another or buying
out the smaller
competitors.
Based on OLI
Paradigm the
Licensing or supply
through a foreign
affiliate is a more
profitable strategy
in serving the
foreign market.
The Multinational
enterprises have several
choices of entry mode,
ranking from the market
(arm's length
transactions) to the
hierarchy (wholly owned
subsidiary). The
Multinational enterprises
choose internalization
where the market does
not exist or functions
poorly so that transactions
expenses of the external
route are high.
The subsistence of a
particular know-how or
core ability is an asset
that can give rise to
economic rents for the
firm. These rents can be
earned by licensing the
Firm Specific Advantages
to another firm, exporting
products using this Firm
Specific Advantages as an
Nakos, Brouthers and
Keith D. proposed
that (1) mall and
medium-sized
enterprises (SMEs)
with greater firmspecific advantages
will tend to prefer
equity modes of entry
to better exploit this
advantage; (2)
location-specific
advantages (such as
small niche markets)
means SMEs will
tend to prefer more
equity-based modes
of entry; and (3)
internalization
advantages will mean
SMEs may prefer
more equity-based
modes of entry.
Source from:
Entry mode choice of
SMEs
According to
Barlette and
Ghoshal; Foreign
direct investment is
chosen as the
preferred mode of
entry as strategic
behavior in recent
years.
iphone by Apple! Apple
and other tech
manufacturers are in the
global oligopoly as not
many of them are in the
market, however they
are in a fierce
competition and ought
to attempt to come up
with new products in a
regular basis which
reduces the products
life cycle. On the other
hand aerospace industry
is almost in an
oligopoly situation
where for the most part
this industry has not
changed in the last 50
years. Although I have
to add that it has had
changes here and there
however compare to 50
years in tech industry,
the aerospace industry
had minimal changes.
Therefore; the life cycle
of the products in this
industry may be longer
than high tech industry.
Based on Vernon’s
Model, Licensing or
any mode of entry falls
under the last stage
which is “Standardized
Product Stage”.
Off-Shoring To
India Of
Software
Development
Global FDI
In Banking
Industry
input, or adjustment
subsidiaries abroad.
Source from: OLI
Paradigm - The Eclectic
Theory was evolved by
John Dunning
Entrepreneur.com
According to one
of the aspects of
Eclectic Paradigm
it is better for a
company to exploit
a foreign
opportunity itself,
rather than through
an agreement with
a foreign firm.
This recent phenomenon
has couple cons; the first
imperfection to the
market maybe to the
economy of the country
that sends the jobs to
India. due to high
unemployment, I
personally was impacted
by off-shoring resulting 2
years of unemployment
and receiving
unemployment insurance.
The other con may be to
the firm in long run due
to the lack of knowledge
of the needs of target and
niche market.
Where the company
derives greater
benefit through a
foreign
establishment, in the
Eclectic Paradigm
theory it is called
Location Specific
Advantages. Here,
location advantage is
due to lower cost of
workforce.
According Karsten
Schudt,
outsourcing
Software
Development to
India has its own
strategic behaviors
such as; The
activity is
performed with the
low cost while
maintaining the
high quality. He
argues that this has
reduced the
company’s risk
exposure to
changing
technology and
changing buyer
preferences.
The development of the
software is one the last
stages of Vernon’s life
cycle. The software is
developed in India and
will be available in
international market.
Due to the
exclusiveness of the
industry these type of
products have a
medium life cycle. It is
longer than ipod and
other gadgets however;
shorter than many other
non-tech products.
According to
Dunning’s eclectic
theory correlation
between each OLI
variable and FDI is
explained in detail.
t is concluded that
monopolistic
advantages of
technology and
management
experience of
foreign investors
along with China’s
low labor cost and
great market
potential might be
important factors
attracting FDI in
China.
Since each investor
directly deals with the
Banking industry in the
host country, the
imperfection that comes
to mind would be
different banking rules
and regulations that each
investor has to deal with
it. And also since this is
not IMF or World Bank
then investing in
developing countries
would be risky at the
same time highly
profitable in short run.
One should do careful
analysis before investing
in high risk areas of the
world.
There are many
advantages on how to
Invest the money in
the global market.
Iran has an interest
rate of 22% on CD’s
as well as very low
taxation policy. Swiss
on the other hand has
a very safe banking
system no one will
ever know about
one’s banking
information,
therefore; many take
advantage of this and
Invest in the Swiss
bank as oppose to
other first world
countries banks.
According to Hans
Degryse;
competing banking
firms relax overall
competition by
lowering future
barriers to entry.
banks strategically
commit to disclose
borrowers
information. By
doing this, they
invite rivals to
enter their market.
Disclosure of
borrower
information
increases an
entrant's secondperiod profits. This
dampens
competition for
serving the firstperiod market.
Source from:
Softening
Competition by
In my opinion Foreign
Direct Investment has
variety of life cycle
depending on which
country is the host
country, as well as the
nature of the
investment. It can also
depend of the charting
period. FDI life cycle
can differ from one
country to another
country.
Music
Download
Industry
By definition of
OwnershipLocation- and
Internationalization
(OLI) Paradigm,
the music industry
due to its nature of
downloading online
will meet two of
the aspects which is
ownership and the
internationalization
. The latter one is
the most important
due to the power of
internet this
industry has
expanded fast
around the world.
The reason could
be teenagers are
more into
computers and this
is the target group
for music
industries, therefore
only by contracting
between the artists
and the companies,
this industry could
take over.
The imperfection in the
music industry could be
the free downloads that
are available online
around the world. Which
can be detrimental to the
music industry. For
example there are Persian
Music web sites that are
available online at no
cost, therefore people
would listen and
download the music at no
cost.
Based on the
definition of the
Location Specific
Advantages, music
industry has no
“location Specific
Advantage” due to
the nature of the
business which is
downloading music
online. The definition
is based on a
particular place that
has advantage over
the other places for
the life of the
business. Whereas
here internet can be
all around the world.
Enhancing Entry:
An Example from
the Banking
Industry
http://ideas.repec.o
rg/p/sef/csefwp/85.
html
One Strategic
Behavior in the
Music download
industry could be
that amateur as
well as young
musicians have the
opportunity to
introduce
themselves to the
global market.
The life Cycle of the
products are shortened
in any technology
industry such as music
industry. As mentioned
the sooner the musician
can be introduced to the
global market the
shorter their product
life cycle will be.