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The dominant explanation for the growth of multinational activity since the 1980s has been Dunning’s eclectic paradigm. The eclectic paradigm is not so much a theory of international production but a framework for investigation and analysis. It represents a synthesis and integration of different theories and draws upon various approaches such as the theory of the firm, organization theory, and trade and location theory. The paradigm sets out to explain the level and pattern of the foreign value-added activities of firms in terms of their capacity to engage competitively in these activities vis-a-vis their uni-national competitors.
In crude terms the paradigm rejects and either/or approach to international production and takes the most useful parts of apparently competing approaches to explain the internationalization phenomenon (Johnson, Turner, 2003, pp. 111).
Dunning says that, while it is not possible to formulate a single operationally testable theory that can explain all forms of foreign owned production, however it is possible to formulate a general paradigm of multinational enterprise’s activity which sets out on a conceptual framework and seeks to identify clusters of variables relevant to an explanation of all kinds of foreign owned output.
Within this framework all kinds of partial macro and micro theories of international production ca be accommodated (Johnson, Turner, 2003, pp. 110).
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The eclectic paradigm uses three sets of factors to explain the why, where and how of internationalization of production.
A firm needs ownership advantages over other firms in the market in which it is located or in which it is considering to locate.
These advantages can include technology and general innovative capabilities, information and managerial and entrepreneurial skills.
These factors link to the core competencies in the corporate strategy, and is known as the ownership (O) advantages.
These advantages are specific to a particular country but are available to all firms and include the availability of natural resources, labour either quantity or skill value, and the general social, legal, and political environment.
These are known as location or (L) advantages.
Internalization relates to the extent of ownership and control. Transactions made through the market such as exporting are arm’s length transactions. Internalized transactions take place within the boundary of the firm and enable multinational firms to overcome examples of market failure or imperfection. These are known as internalization (I) factors. (Dunning, pp. , 1993, pp. 160)
It is the configuration of the OLI advantages facing the firms and their strategic response to them that determines the quality, geographical composition, and industrial structure of international production. The eclectic paradigm however differs from the internalization theory in that it does not limit its explanation of the activities of the international enterprises to the trans-national components of such firms. Thus eclectic paradigm seeks to take account of all the relevant variables affecting foreign production (Dunning, pp. , 1993, pp. 160).
The Eclectic Paradigm of International Production. (2020, Jun 02). Retrieved from https://studymoose.com/eclectic-theory-essay
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