Chiara Franco Francesco Rentocchini Why do firms invest abroad? In this paper, we put forward the idea that an essential point to analyze FDI concerns their underpinning motives. Motives are at the core of FDI and FDI are only but one of different alternative means for firms to grasp an opportunity in a foreign country.
T he central thesis of the eclectic theory, or the eclectic paradigm since the mid- s, has always been that channels of inter national economic involv ement or international economic. THE MULTINATIONAL BUSINESS REVIEW 2 Reconciling Internalization Theory and the Eclectic Paradigm du n n I n g ’s e c l e c t I c pa r a d I g m The eclectic paradigm has been developed by John Dunning in a series of publications (Dunning , , , ). This paper sets out the importance of internalisation theory to international business research and practice. It examines the context against which the theory has been developed, the environmental conditions in which the multinational enterprise has evolved and .
He developed a framework to explain the success of certain industries and how that contributes to the prosperity of a nation. I shall first look into the concept of National Competitiveness and describe Porter's theory and framework on it before doing a critique on Porter's theory by considering the views and findings of several academics.
Lastly I shall explore some missing dimensions from Porter's work and conclude on the effectiveness of Porter's theory.
Concept of National Competitiveness The concept of National Competitiveness has been in public debate for a long time. The works of prominent neoclassical economists such as Adam Smith and David Ricardo had shown the benefits of trading between countries, with Ricardo's theory of Comparative Advantage being one of the tenets of international economics.
However, Reinert explains that although in the theory of neoclassical economics, all economic activities are alike in the sense that they are equally good for a nation. That is not the case in reality as some industry will produce industry rents such as higher profits, higher wages and higher taxable income.
It is thus through the appropriation of such industry rents that the context of National Competitiveness is studied Reinert, It is hoped that dynamic industries can create rent for the nation and the spillover effects of having these industries can be of high value to the home country Gray, It is through such economic growth that the welfare of a nation and the standard of living for its citizens can be improved.
Although prominent economists such as Paul Krugman has argued that the concept of National Competitiveness is unfounded due to the fact that countries do not compete with each other the way companies do and that competitiveness has been used by political parties to push through tough policies, there is no doubt that competitiveness is a key issue and priority for many policy makers around the world.
Countries such as Ireland and Singapore has created Competitive Councils while in Costa Rica, competitiveness is part of the national mission Ketels, Let's briefly examine Porter's view on National Competitiveness through his work: The Competitive Advantage of Nations.
Porter's Competitive Advantage of Nations Due to Porter's training as an economist, he felt it was necessary to understand the competitiveness of nations from a microeconomic approach Snowdon and Stonehouse, He was able to take certain knowledge of industrial economics and bridge them with the views of business strategy.
Porter felt the competitiveness of a company was determined by the return on invested capital but for countries, competitiveness means productivity measured by value, not volume. Grant mentioned that a depreciating dollar help the US become more competitive But Porter Snowdon and Stonehouse, disagrees that declining currency values makes a country more competitive, rather the falling wages within that economy signals a lack of competitiveness.
Therefore the ultimate determinant of the productivity of the economy is the productivity of the firms within that economy. What makes firms productive is the sophistication of the firms themselves, how they compete, and also the business environment within which the firms compete.
In his work The Competitive Advantage of Nations Porter,he sought to look at the business environment which can help firms to achieve successively higher levels of achievement and productivity.
He identified four main elements which formed the Diamond. Below is a brief overview of the four main elements and others: Factor Conditions Factors can be basic or advanced, generalized or specialized. A sustainable competitive advantage in a particular industry is created by specialized and advanced factors such as a specific technology for that industry.
Basic and generalized factors are easily replicated and usually inherited not created such as cheap raw materials. A lack of basic resources may force a company to innovate and upgrade while an abundance of basic resources may lead firms to become complacent and inefficient.
Demand Conditions The nature of home demand is the key to global success. It is not the size of the home demand but rather its character that makes the difference. Sophisticated and demanding home buyers helps the firm to see an early picture of buyer needs and satisfying those needs improves the firm competitiveness globally.
A small domestic demand may in fact drive firms to explore foreign markets and pursue a global strategy to overcome any deficiencies in local demand conditions. Related and Supporting Industries These are industries that share common technologies, inputs, distribution channels, customers or activities, or provide products that are complementary.
World class related industries can be sources of ideas, technology, individuals, while supporting industries often deliver the most cost effective or highest quality input. All of these can be advantages in international competition. Close working relationships creates a quick and constant flow of information and a continuing exchange of ideas and innovations between suppliers and end users.
Nations are typically competitive in industries where clusters of related and supporting industries are geographically concentrated, making the interactions closer and more dynamic. It is difficult to have the same level of interaction with foreign companies.
The birth and upgrading of new firms and industries that occur in clusters of local industries are less likely to occur if the nation relies heavily on foreign-supplier and related industries.
The social and political environment tends to have a distinct impact on the kinds of industries in which a nation favors. Nations will probably succeed in industries where the strategies, structures and practices favored by the national environment are well suited to competition in the industry.
Local rivals provide a powerful stimulus to the creation and persistence of competitive advantage as local rivalries often goes beyond just business competition to become personal.T he central thesis of the eclectic theory, or the eclectic paradigm since the mid- s, has always been that channels of inter national economic involv ement or international economic.
Abstract Professor Michael Porter's work on Competitive Advantage of Nations is hugely influential yet controversial (Davies and Ellis, ). He developed a framework to explain the success of certain industries and how that contributes to the prosperity of a nation. This paper updates some of the author's thinking on the eclectic paradigm of international production, and relates it to a number of mainstream, but context-specific economic and business theories.
dunnings eclectic paradigm: an ownership, location and internalization (oli) perspective on the multinational enterprise (mne) Dunning's eclectic paradigm is the most widely used device for analysing the complex decisions that determine where and why international production takes place.
Dunnings Eclectic theory Location Theory Majoritarian politics The politics of policy - making in which almost everybody benefits from a policy & almost everybody pays for it.
THE MULTINATIONAL BUSINESS REVIEW 2 Reconciling Internalization Theory and the Eclectic Paradigm du n n I n g ’s e c l e c t I c pa r a d I g m The eclectic paradigm has been developed by John Dunning in a series of publications (Dunning , , , ).