Dunning’s Eclectic Paradigm Professor John Dunning proposed the eclectic paradigm as a model for finding the extent and form of the value-chain operations that companies own abroad. Tormenting draws from assorted theoretical positions, including the comparative advantage and the factor proportions, monopolistic advantage, and internalisation advantage theories. Let’s use a existent house to exemplify the eclectic paradigm. The Aluminum Corporation of America ( Alcoa ) has over 130,000 employees in approximately 43 states. The company’s integrated operations include bauxite excavation and aluminium refinement. Its merchandises include primary aluminium ( which it refines from bauxite ) , automotive constituents, and sheet aluminium for drink tins and Reynolds Wrap® . The eclectic paradigm specifies three conditions that determine whether or non a company will internationalise via FDI: ownership-specific advantages, location-specific advantages, and internalisation advantages.
To successfully come in and carry on concern in a foreign market, the MNE must possess ownership-specific advantages ( alone to the house ) relative to other houses already making concern in the market. These consist of the cognition, accomplishments, capablenesss, procedures, relationships, or physical assets held by the house that allow it to vie efficaciously in the planetary market place. They amount to the firm’s competitory advantages. To guarantee international success, the advantages must be significant plenty to countervail the costs that the house incurs in set uping and runing foreign operations. They besides must be specific to the MNE that possesses them and non readily movable to other houses.
Examples of ownership-specific advantages include proprietary engineering, managerial accomplishments, hallmarks or trade name names, economic systems of graduated table, and entree to significant fiscal resources. The more valuable the firm’s ownership-specific advantages, the more likely it is to inter- nationalize via FDI. One of Alcoa’s most of import ownership- specific advantages is the proprietary engineering that it has acquired from R & A ; D activities. Over clip, Alcoa has besides acquired particular managerial and selling accomplishments in the production and selling of refined aluminium. The house has a well-known trade name name in the aluminium industry, which helps increase gross revenues. Because it is a big house, Alcoa besides net incomes from economic systems of graduated table and the ability to finance expensive undertakings. These advantages have allowed Alcoa to maximise the public presentation of its international operations. Location-specific advantages refer to the comparative advantages that exist in single foreign states.
Each state possesses a alone set of advantages from which companies can deduce specific benefits. Examples include natural resources, skilled labour, low-priced labour, and cheap capital. Sophisticated directors recognize and seek to profit from the host state advantages. Aloca- tion-specific advantage must be present for FDI to win. It must be profitable to the house to turn up abroad, that is, to use its ownership-specific advantages in concurrence with at least some location-specific advantages in the mark state. Otherwise, the house would utilize exporting to come in foreign markets.17 In footings of location-specific advantages, Alcoa located refineries in Brazil because of that country’s immense sedimentations of bauxite, a mineral found in comparatively few other locations worldwide. The Amazon and other major rivers in Brazil generate immense sums of hydroelectric power, a critical ingredient in electricity-intensive aluminium refinement.
Alcoa besides benefits in Brazil from low-cost, comparatively knowing labourers, who work in the firm’s refineries. Internalization advantages are the advantages that the house derives from internalising foreign-based fabrication, distribution, or other phases in its value concatenation. When profitable, the house will reassign its ownership-specific advantages across national boundary lines within its ain organisation, instead than dispersing them to independent, foreign entities. The FDI determination depends on which is the best option—internalization versus utilizing external partners—whether they are licensees, distributers, or providers. Internalization advantages include: the ability to command how the firm’s merchandises are produced or marketed, the ability to command airing of the firm’s proprietary cognition, and the ability to cut down purchaser uncertainness about the value of merchandises the house offers.
18 Alcoa has internalized many of its operations alternatively of holding them handled by outside independent providers for five grounds. First, Alcoa direction wants to minimise airing of cognition about its aluminium refinement operations— knowledge the house acquired at great disbursal. Second, compared to utilizing outside providers, internalisation provides the best net return to Alcoa, leting it to minimise the costs of operations. Third, Alcoa needs to command gross revenues of its aluminium merchandises to avoid cheerless universe aluminium monetary values by providing excessively much aluminium into universe markets. Fourth, Alcoa wants to be able to use a differential pricing scheme, bear downing different monetary values to different clients. The house could non distinguish its monetary values really efficaciously without the control over the distribution of its concluding merchandises that internalisation provides. Finally, aluminium refinement is a complex concern and Alcoa wants to command it to keep the quality of its merchandises.