Strategic Management: Formulation and Implementation

The Eclectic Paradigm

The eclectic paradigm is developed by John Dunning seeks to offer a general framework for determining the extent and pattern of both foreign-owned production undertaken by a country's own enterprises and also that of domestic production owned by foreign enterprises.

Table 1-3 identifies some of the more important configurations of the ownership, location and internalization (OLI) advantages. Some of these can best explains the initial of foreign direct investment (FDI). Others are more helpful in explaining sequential acts of foreign production.

Industrial Organization Theory

Mainly explains the nature of the ownership (O) advantages that arise: (1) from the possession of particular intangible assets - assets advantages (Oa); (2) from the ability of the firm to coordinate multiple and geographically dispersed value-added activities and to capture the gains of risk diversification- transaction cost minimizing advantages (Ot).

The theory of property rights and the nternalization paradigm explain why firms engage in foreign activity to exploit or acquire these advantages.

Theories of location and tradeexplain the factors determining the siting of production.

Theories of oligopoly and business strategy explain the likely reaction of firms to particular OLI configurations.

The eclectic paradigm suggests that all forms of foreign production by all countries can be explained by reference to the above conditions.

Dunning further argued that the eclectic paradigm offers the basis for a general explanation of international production.

The propensity of enterprises of a particular nationality to engage in foreign direct investment will vary according to the economic et al. specific characteristics of their home country and the country(ies) in which they propose to invest, the range and types of products they intend to produce, and their underlying management and organizational strategies.

Combining the data in Tables 1-3 and 4 we have the core of eclectic paradigm which, according to Dunning, offers a rich conceptual framework for explaining not only the level, form and growth of MNE activity, but the way which such activity is organized.

Furthermore, this paradigm offers a robust tool for analyzing the role FDI; for predicting the economic consequences of MNE activity, and for evaluating the extent to which the policies of home and host governments are likely both to affect and be effected by that activity.