The international business field has been largely developed over the last decades through the insight and leadership work of John Dunning. Electric paradigm, which is well known as OLI-model or framework is an economic theory that was established by John Dunning, in 1980. The theory is based on the transaction cost, which argues that the transactions are made within an organization in case the transaction costs are higher than the internal costs in the free market (Cantwell and Narula 2003, p.41). This transaction process is termed as internalization method. The theory of electric paradigm seeks to provide a general perspective for determining the degree and pattern for both domestic and foreign-owned production companies. Dunning does not only consider organization structure as significant but also added three significant theoretical factors including ownership, location and internalization advantages. The major aim of introducing the OLI-model was to merge the international economic theories into one approach. Dunning also distinguishes different types of foreign direct investments; thus the model takes into considerations the resources of the country, location advantages and ownership advantages. Thus, Dunning identifies ownership, location and internalization (OLI) advantages some of which offer the explanation to the chronological acts of domestic and foreign-owned production.
Ownership-specific advantages
Ownership-specific advantages are the competitive advantages of the companies seeking to connect in FDI (Foreign Direct Investment). Therefore, companies that highly engage in foreign production have high chances of achieving competitive advantages. The ownership advantages are connected to the size and market position of the specific firm and these ownership advantages are often referred as monopolistic or competitive advantages (Cantwell and Narula 2001, p.111). They are advantages to the specific firm because they are the main asset for the specific firm. They also offer the firm a market position or cost advantage over a certain firm; thus enabling the firm to achieve effective business performance. Therefore, it is vital to develop and protect the ownership advantages because competitors may attempt to infringe or copy them. These advantages are further divided into standard ownership advantages, benefits of being a multinational enterprise and benefits derived from belonging to large industry. First, the standard ownership advantages are those advantages that an industry requires to compare with other rival industries in a specific location. These advantages are linked to the size, established market position that a firm enjoys and also monopolistic powers. These advantages are further linked to product diversification, exclusive access to technology, markets shares, patent rights and input factors such as labor, investment and natural resources. Therefore, the standard advantages are effective because they can contribute to market efficiency and also enable the firm to enjoy the economies of scale (Hisrich 2013, p.23). Secondly, benefits derived from belonging to large industry and the advantage of this is that that large organization may benefits from economies of joint supply in production. They can also benefits from purchasing, marketing, finance and effective access to cheaper inputs such as management, marketing and human capital.
Lastly, benefits of being a multinational enterprise, which also means that an industry is in a better position of taking advantage of varied factors endowments, tax regimes or factor prices. The company enjoys varied advantages when establishing abroad; thus it is likely to experience benefits from managing production, sales and marketing of products in domestic country. Thus, the company has the ability to exploit their technology and managerial expertise in varied regions across the globe and also gain access to expand their markets. Another advantage is the ability for the multinational companies to undertake strategic pricing of products. For instance, a firm which is located in many regions across the globe can divert their surplus from countries where there is high tax level to low tax level countries. This is essential because the total tax paid by the multinational enterprises can be reduced to a legal minimum tax. Dunning and Gray (2003, p. 23) argue that the future competitive ownership advantage of companies among other aspects would be the ability to motivate and improve the design qualities of the labor force. Firms will also need to find out new or unfamiliar markets for their products to adapt or promote the features of certain products in order to meet the needs of customers in the domestic market. This may become significant for managers in case they identify and assess the potential partners through making agreements with them; thus achieving the intended results that are the best interest of the firm.
Location-specific advantages
Location advantages means the alternative regions, which may have valuable raw materials, specific taxes or tariffs; thus an advantage of multinational companies for undertaking value adding activities. This second element of eclectic paradigm is concerned with the place of production and it attempts to explain why an industry may wish to produce products in a certain location. The advantage of this element is that the firm will be in a better position of producing commodities in their domestic country and export them to the foreign market; thus generating high revenues. The multinational company may participate in foreign production in case if finds the best location and combine it with ownership advantages or internalization gains with production in another region. Fronz (2011, p. 45) argues that the location choice of the international firm can be influenced by spatial market failure, which is the existence of trade barriers such as tax rates, high tariffs and poor environmental regulations or political instabilities.
The location advantages are categorized into three types. First, the access to and relative production cost factors, which require only an industry in a specific geographical location to exploit the resources. Language and cultural aspects can also be taken into considerations; thus it is vital for the firm to invest, as well as, consider business practices or customs before establishing the business a broad. Secondly, taxes and trade barriers are also taken into considerations. Tallman (2007, p.121) argue that firms should take into consideration government policies because they are subjected to change. Therefore, many multinational companies may consider government intervention, investments, political stabilities and control on imports before making investment decisions. Lastly, transportation cost and access to the market advantage. For instance, firms that produced commodities at high costs should attempt to locate their firm near to the market places. The goods should also be capital intensive meaning that the firm should employ skilled labor and advance technology in order to produce high quality products, which will be marketable.
Internalization advantages
Internalization advantages refers to the advantages realized from own production of commodities rather than from joint ventures of partnership business. For instance, a company can organize for the manufacture and exploitation of their core product competences in order to achieve a competitive advantage. Thus, the higher benefits of internalizing intermediate commodities across the border, the higher a company would likely to connect in foreign production (Wilkins 2003, p.115). The internalization can be explained through varied factors. First, the ability to control and plan production is an effective internalization advantage. This is where Vernon in advance revealed the way multinational companies produce products which undergo varied product life cycle in order to produce more and highly innovative products. Secondly, there is exploitation of market power through price discrimination and companies also avoid bilateral market power. Sil and Katzenstein (2010, p.89) argues that internalization is becoming obsolete and this is revealed by Buckley where he introduces new forms of internalization and examines internalization cartels as the alternative and vital form of internalization. Lastly, there is avoidance of potential government intervention. This is through use of devices such as price transfers in order to reduce transaction costs; thus improving business performance.
Ways through Which Electric Paradigm Theory Represent an Advance on Those of Earlier Theorists
Internalization theory, as established in advance by other theorists such as Buckley (1980s) and Coase (1930s), is a firm-level theory that attempts to offer varied reasons for exerting proprietary control or ownership by multinational enterprises over the firm-specific advantages. Rugman 2010, p.3) argues that all firm-specific advantages are efficiency based in international theory. The knowledge advantages evolves from a transaction cost economics whereby the public good natures of knowledge is remedied through the hierarchy of an industry overcome the market failure. The other advantages such as organizational capabilities, brand advantage and management skills are also efficiency based or compatible with resource based view. According to Dunning and Gray (2003, p.55), the internal direct investment was in advance explained within the traditional theory of internal capital movements. Thus, there are other forms of internal investments, but FDI was seen a response for different return rates on capital among varied nations. Hymer and Aliber were among the theories that exposed the deficiencies of this approach where they observed varied features of international investment (Gray 2003, p.56).
In addition, the electric paradigm includes the Hymer-types advantages presented by Hymer (1970S) add to the efficiency-based firm-specific advantage of internalization theory. Some of Hymer advantages as demonstrated by Dunning and Rugman, these advantages serve to close markets and offer potential rents to multinational enterprises. Furthermore, contrary to the firm-level analysis, the core of the internalization theory is more an industry-level analysis (Yanto, Chris and Ian 2009, p.51). Thus, the mingling of ownership, location and internalization advantages serves to explain the meaning of outward FDI (Rugman, 2010, P. 4). The real meaning of the electric theory is that the ownership, location and internalization interact in order to produce significant patterns of co-evolutionary explaining the FDI at the industrial level.
In conclusion, Dunning identifies ownership, location and internalization (OLI) advantages some of which offer the explanation to the chronological acts of domestic and foreign-owned production. Ownership-specific advantages are the competitive advantages of the companies seeking to connect in FDI. These advantages are further divided into standard ownership advantages, benefits of being a multinational enterprise and benefits derived from belonging to large industry. The second is location advantages which include the access to and relative production cost factors. Taxes and trade barriers are also taken into considerations, as well as, transportation cost and access to the market advantage. The last type of advantage is internalization advantages, which refers to the advantages realized from own production of commodities rather than from joint ventures of partnership business.
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