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With Reference To At Least Three Companies Of Your Choice, Critically Evaluate Dunning's Eclectic Paradigm As A Framework Explaining The Reasons Why Companies Engage In Foreign Direct Investment.

3043 words - 12 pages

"Technological changes; particularly in the space-shrinking technologies of transport and communication, in unison with the overall decline in trade barriers, help to make possible the internationalisation of economic activity and also the development and geographic spread of companies (Dicken pp 120, Adapted)." These revolutions have induced the explosion in Foreign Direct Investment (FDI) in the last 20 years.FDI is the principle way that firms compete internationally in the modern global economy. It is an investment in which the investor acquires a substantial controlling interest in a foreign firm, or builds a subsidiary in a foreign country, (Maskus, K, 1995).Firms internationalise their operations for numerous different reasons, both general and specific. The most fundamental reason, however, is the drive for profit, which is the quintessence of all capitalist activity.In extending business activities beyond national frontiers, firms must explore a myriad of avenues. As uncertainty is paramount in the world of business, predictions made in explaining why certain phenomenon occurs are essential. These theories provide useful instruments for decision-making purposes.The British Economist, John Dunning, professor at the University of Reading, has produced a corpus of work in international business, from them, Dunning's Eclectic Paradigm (EP) proposes a multifaceted framework for incorporating a number of context specific and operationally testable theories seeking to explain a particular component of the internationalisation process of FDI. The approach specifies three sets of explanatory factors to explain the nature and direction of FDI: Ownership factors, Location factors and Internalisation.As the three principles are derived from a variety of theoretical approaches: organisation, trade and location, the notion is labelled as eclectic.The first condition is that of the "Ownership Advantage (OA)". This addresses the "why" question (why go abroad). This question hypothesizes that a firm possesses net ownership advantages vis à vis other firms or nationalities in serving particular foreign markets. This firm specific advantage largely takes place in the form of intangible assets, which are, for at least a period of time, exclusive or specific to the firm and can be transferred within the multinational enterprise at a low cost. Stephen Hymer argued that a foreign firm wishing to produce in a foreign market would have to possess some kind of firm-specific advantage that would offset the advantages held by indigenous firms. Such advantages were essentially those of firm size and economies of scale, market power and marketing skills (for example brand names, advertising strength), technological expertise (either product, process or both), or access to cheaper sources of finance. On these bases, then, a foreign firm would be able to out-compete domestic firms in their own backyard (Dicken, P. 1998, pp 182).The established position of Wal...

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