Dunning's Eclectic Theory of International Production examines the result of ownership, location and internalisation (OLI) in the context of the international production framework. Dunning (1998, p.45) believed that the OLI triad of variables determining FDI and multinational enterprise activity may be likened to a three-legged stool, where each leg is supportive of the other and the three legs are evenly balanced. These are summarised in table 5.1.
Factors which influence business access include country specific characteristics such as the differences between developed and developing countries, market size, distance between home and host countries, cultures, customs, language, country specific character, variations between countries such as the difference in tax rates, political and economic ties between governments such as NAFTA, EU, ASEAN and SADC, the political and economic environment of the home country and foreign countries (Dunning, 1979, p.287).
5.5.1.1 Ownership specific advantage of core competencies or specific assets in a “dominance market configuration”
Ownership specific advantage of core competencies or specific assets enhances the competitive advantage of the business and reduces competition through the establishment of monopolistic business. A given company could enjoy specific, unique production conditions enabling it to generate a future flow of income and profit. Certain factors are independent of multinationality and these include size, product or process diversification, and ability to take advantage of internal economies of scale (such as division of labour and specialisation, for example, efficient resource capacity usage; proprietary technology; trademarks; patents via legislation; good production management; organisational mass marketing systems; capacity for research and development; a bank of human capital, especially in the form of a broad experience base; exclusive or favoured access and the ability to obtain access to inputs such as natural resources, finance information, legislation and production markets; and government protection especially in the case of privatised state
entities). In many cases these firms have access to resources of the parent company and enjoy economies of joint supply (Dunning, 1979, p.287).
Therefore, by considering these characteristics, it would be possible to assume that the ownership specific factor is related to a business enterprise which is exploitive in its international discourse, and that such a firm would tend towards exploiting competitive behaviour (Dunning, 1979, p276). Furthermore, one could refer to such a firm as a “dominance market configuration”.
5.5.1.2 Location specific advantage of core competencies or specific assets
Dunning (1979, pp.276-280), draws links between business dominance and country specific advantages which include large and sustained markets, availability of managerial manpower, education and training, government support, labour supplies, large national markets with high incomes, availability of resources and experience, good and reliable capital markets, role of government intervention (such as privatisation) and business incentives (such as removing competition to reduce risk) to create an advantage.
The location specific advantages would be derived from a transfer of operations into a new region. These include differences in a country’s natural endowments, transport costs, macroeconomic stability, cultural factors and government regulations. Specific factors may favour the home or host country, and look specifically at spatial distribution of inputs and markets, input prices, quality and productivity, for example, labour, energy, materials, components and semi-finished goods, transport and communication costs (including advertising and access to media), government intervention, control on imports, including tariffs and quotas, tax rates, investment incentives, investment climate, political stability, infrastructure, commercial and legal aspects, transportation, psychic distance, research and development, production and marketing, level and extent of centralisation and market freedom (Dunning, 1979, pp276-280).
The above argument as presented by Dunning will be referred to as an “access scheme” that can be a strategy of choice as implemented by a business investor.
Table 5.1:Summary of Dunning's OLI theory
The Eclectic Theory of International Production (OLI) Ownership Specific Advantage (of enterprises of one nationality over those of another)
Need not arise due to multinationality: due to size and establishment • Monopoly power, better resource capacity and usage
• Proprietary technology, trademarks
• Production management organisational capacity, research and development, bank of human capital and experience
• Exclusive or favoured access to inputs • Ability to obtain inputs on favoured terms
• Exclusive, favoured access to production markets • Government protection
Which may enjoy
• Access to capacity of parent company at favoured prices • Economics of business groups
Which arise because of multinationality • Offer wider opportunities
• Favoured access to and better knowledge of information, inputs and markets
• Ability to take advantage of differences in international factor endowments
• Ability to diversify risk
Internalisation Specific Advantage (Protect against exploitation, or the ability to exploit)
• Avoidance of transaction and negotiation costs • To avoid costs of enforcing property rights • Buyer uncertainty
• Market may not permit price discrimination • Need of seller to protect quality of products • To capture economies of interdependent activities • To compensate for absence of future markets • To avoid or exploit government intervention • To control supplies and conditions of sale
• To control market outlets
• To be able to engage in such practices as cross-subsidisation, predatory pricing as a competitive or anti-competitive strategy.
Location Specific Advantage
(favours home or host country)
• Spatial distribution of inputs and markets • Input prices, quality and productivity • Transportation and communication costs • Government intervention
• Control on imports including tariff barriers, tax rates, incentives, climate for investment and political stability • Infrastructure, commercial, legal and transportation
• Psychic distance such as differences in language, culture and customs
• Economies of scale, research and development, production and marketing
(Source: Dunning, 1979, p.276)
5.5.1.3 Internalisation as a specific advantage of core competencies or specific assets: “exploitative business strategy”
Dunning (1979, pp.275-289) defines the internalisation incentive advantage or the internalisation advantages as the view of exploiting the ownership advantage by not contracting out of the associated activity, but by deliberately pursuing it and retaining control over it. This kind of market structure is inclined to protect against or exploit market failure. Factors important here would include issues such as avoidance of transaction and negotiating costs, avoiding costs of enforced property rights, buyer uncertainty which is not characteristic of price discrimination.
The seller needs to protect quality of products and to capture economies of interdependent activities, as well as compensate for absence of future markets. There is a need to avoid government intervention such as the traditional trade distortions, for example, quotas, tariffs, price controls, tax differentials and other market and trade barriers. Businesses attempt to control supplies and the conditions of the purchase of inputs (including
technology and control market outlets) and to engage in practices such as cross-subsidies, predatory pricing as a competitive strategy (Dunning, 1979, p.276).
Several unresolved issues still remain that underlie Dunning's internalisation theory. Rugman (1986, p.104) suggests that one of the alleged problems of the internalisation theory is that it is “a concept in search of a theory”. The theory of internalisation is a tautology, explaining that firms internalise imperfect markets until the costs of further internalisation outweigh the benefits. Another point raised is that internalisation is in fact a general theory of why firms exist, and without additional assumptions, it is merely a tautology. Furthermore, it can be argued that internalisation is too general, and can therefore be considered an approach rather than a theory. Rugman (1986, p.104), however, maintains that the key to Dunning's OLI theory is the importance of internalisation so as to prevent it from reducing the value of any associated models.
For the purpose of the matrix model, it is assumed that it is possible to discuss the internalisation incentive advantages as an “exploitive business strategy”. Market failure and government intervention would be a route to a dominant business strategy, but is very specific to the nature of individual businesses. There may be some fine overlapping areas between the main advantage premise arguments within this strategy and any of the other strategies. According to Dunning advantages such as ownership, internalisation and location specific are not static and they have a tendency to change over time (Dunning, 1979, pp.275-289).