Analysis of Dunnings Paradigm - Assignment Example

INTRODUCTION AND OVERVIEW OF FOREIGN DIRECT INVESTMENT Foreign direct investment (FDI) is the investment made by a company, group or entity based in one country, of a company, group or entity based in another country. Foreign direct investment is an important aspect in the overall economic condition of the country. According to John Dunning, Multinational Enterprises are the one that are involved in foreign direct investment (FDI). These organizations own or control their value by adding business in more than one country. The multinational enterprises have influenced the global economy at large. The total world outward stock of FDI was estimated to be $10,672 billion in 2005 (EC, 2015).This huge amount was due to the increasing activities of multinationals. These activities of Multinational enterprises have a direct impact on rising amount of world GDP. The overall global foreign direct investments have been fluctuating over the last few years. One of the reasons for this was the economic and financial crisis that has affected the world economy. Economic crisis of 2008 has changed the behavior of the international investors and they have become more cautious before making investment in other countries. If the Foreign direct investment flow for the last few years has been analyzed; then a fluctuating trend can be identified. FDI flows had declined in the year 2012. However this flow had increased again in the year 2013. This increase in the FDI Flows was caused in the era of 2010 and 2013 because FDI flows during this period were less influenced by the global financial and economic crisis. Total FDI outflows increased approximately by 57 % in the year 2011. From this, the equity capital and reinvested earnings were the main cause of this increment as reported by EC (2015). However, in the year 2012, outward flows of FDI dropped again. This decline in FDI was caused due to reduced FDI activity with some traditional partners. Then in the year 2013, the FDI flow rose again up to 12 %. The main source of improving FDI was The United States and its direct investment into the European Union that rose approximately three times more than the year 2013 (EC, 2015). At the present time, Multinationals have become an integral part of life. Today, a local citizen can drive a BMW or Toyota. He can work at the IBM office while staying in his own country, eat at McDonalds, use an Apple cell phone, etc. All of these luxuries and facilities have been possible due to the existence of Multinationals Enterprises. It is due to these Multinational outlets that citizen of one country can choose to purchase the product of any brand from another country. DUNNING PARADIGM Dunning in the year 1977 devised the approach of OLI, which is also known as Electric approach (Dunning & Lundan, 2008b). This study deals with the study of foreign direct investment (FDI). It has encouraged a great deal of applied work in economics and international business. It has unveiled a very positive perspective of looking at multinational enterprises (MNEs). Dunning’s approach does not represent a formal theory that can be confronted with data in a scientific way. However, it has devised a helpful framework for categorizing many recent analytical and empirical researches on foreign direct investment (FDI) (Markusen, 1995). These factors frame the extent of foreign investment to be undertaken by the Multinational Enterprises. The first factor deals with discussing the competitive advantages of the firm such as superior technology, brand recognition, and unique product qualities. According to Dunning & Lundan (2008a) these factors ultimately lead to ownership and lead the organization to gain competitive advantage. Dunning & Lundan (2008a) have suggested that a successful Multinational Enterprise has some firm-specific advantages. These advantages allow the organization to overcome the costs of operating in a foreign country. The second one is the location-based advantages. The advantages may include such as cheap resources, favorable exchange rate, government policies, and regulations. Moreover, the contacts with local agencies and government in a foreign country are also reviewed, which are unavailable to the firm in the home country (Dunning & Lundan, 2008a). Thus, all these factors are critical to gaining the competitive advantage as well as in achieving the success in the foreign country. Third is the internalization advantage. It influences on determining how a firm chooses to operate in a foreign country, trading off the savings in transactions, hold up and monitoring costs of a wholly owned subsidiary. These advantages are contrasted with advantages of other entry modes such as exports, licensing, or joint venture. It is also involved in protecting the reputation of the company (Dunning & Lundan, 2008a). GRADUAL CHANGES IN DUNNING PARADIGM In the publication of 1979, Dunning framed two sets of ownership advantages. Primarily the advantage that resulted from a limited access to inputs, intangible assets or markets and secondly those advantages that are directly associated with factors contributing the firm to become multinational (Dunning & Lundan, 2008b). Then in the revised publication of 1983, Dunning proposed this idea differently in a clearer manner. He distinguished among ownership advantages that arise from the proprietary ownership of specific assets of the firm to the ownership advantages that can only be exploited if internalized (Dunning & Lundan, 2008b). In 1981, Dunning revised the model and included necessary systematic distinction between home country and the host country. The tendency of enterprises of a particular nationality was determined to involve in foreign production. It was found that it would fluctuate with the economic characteristics of their home countries and the countries in which they intend to invest (Dunning & Lundan, 2008b). Lately in the year 1993, Dunning added a fourth, firm-specific, condition to the basic three proposed in 1979, that is OLI, it states that the given configuration of the OLI advantages that are faced a particular firm should be consistent with the long-term management strategy of the firm’s foreign production plan(Dunning & Lundan, 2008b). CRITICISM Obscuring Dunning viewed OLI Model as a paradigm. For making this a concrete truth, Dunning had to revise the framework continuously, this was done in order to include including all the possible factors that would affect the Multinational enterprises (Hansen& Ahmed–Kristensen, 2012). However, this resulted in a change in the advantages of Ownership largely, and Location and Internalization to small extend. These factors were revised numerous times during the era of past thirty-seven years. This ongoing revision minimized the value of the framework in the eyes of many of the scholars. In an attempt to be a complete paradigm and to hold all related facts, the OLI paradigm has started to create confusion. To tackle the problem of this confusion of choosing between five different models some scholars now choose to use the earlier, simpler version. While others choose to follow the new most difficult version (Dunning & Lundan, 2008b). Nevertheless, still the Dunning Model is of great importance. Even after tracing of many confusions that arose in the advantages of Ownership the Dunnings typology of O, L, and I advantages, still remain relevant for the International business scholars and the confusion of O advantages should not be considered to be affecting the advantages of I and L advantages (Dunning & Lundan, 2008b). Deficiency in Definition of Location When talking about the Location factors it can include both local adjustment to address the host market and rent-yielding resources, particularly the knowledge-based resources (Emre Yildiz, 2013). They are attached to a certain location and Multinational enterprises could incorporate into its proprietary resource base or may access via alliance arrangements in the host country. Location factors set the phase for Multinational enterprises activities. However, it only has had meaning for competitive advantage when interacting with the resources and capabilities of Multinational enterprises. The Dunning Model assumes that Multinational enterprises act as rational players to accommodate market imperfections (Dunning, 2013). For this reason, it addresses the query of why a Multinational Enterprise enters a specific host country through foreign direct investment. However, this approach cannot explain the differences in performance between Multinational enterprises within the same host country nor does it deals with strategic asset seeking strategies (Head, 2007; Hill, 2012). Lack of International Corporate Strategy Strategies play a very crucial role in integrating the activities of the various functional areas of a business in order to achieve long-term organizational objectives. However, The Dunning Model eventually does not deal with issues of strategy or the actions of the firm, as opposed to its capabilities and possibilities. (Dunning, 2004). Dunning in its publication of year 2004 said that that the framework of his Eclectic Paradigm is an economic framework. This framework describes the tendencies of a group of firms to establish its production abroad and to possess the means of production, in spite of just having the sketch of the actions of a particular firm. Another aspect of Dunning Model is that because of its more concentrated emphasis on static market failure, the Dunning paradigm has been criticized for lacking its vitality. In Dunning’s publication, it is noticed that a static eclectic paradigm cannot adequately explain the strategies of Multinational Enterprise employed for dealing with the consistent changing in the world economy(Wang, 2012). Hence, a model of global strategic management is required to be incorporated in accordance with the dynamics of environmental changes (Dunning, 2004). While building this model of global strategic management, it should be kept in mind to include an exogenous shock event in the model and analyze how an environmental change moderates the relationships between Multinational enterprise endogenous components, including resources, strategy, and structure, external context in terms of location, and performance. The exogenous shocks refer to unexpected events that occur independently of the international business environment, they but have massive effects on the business environment by disrupting the original business order (Li & Tallman, 2011). Most common exogenous shocks that can strike international business environment may include large-scale disasters that can cause disorders of multiple vital systems. These include factors comprising of energy supplies, transportation and communications (Tucker, 2011). Being a static theory Dunning’s Paradigm, it cannot define the non-business reasons or flexible information for manufacturing Foreign Direct Investment from developed country firms to developing countries(Lee, 2013). Keeping in mind all the lacking points in Dunning’s paradigm it is proposed to construct a more specific model for the task. In this model should be constructed keeping in mind the position company’s view of global strategic management as one suited to a punctuated equilibrium international business environment. It should be departed from conventional static focus on market failure that supports the eclectic paradigm and other transaction costs that derive economics models of Foreign Direct Investment. The model of global strategy should depicts performance levels of Multinational enterprise, as the consequences of the ability or inability of individual firms to adapt their internal resources and capabilities, strategies, locations, and structural forms to sudden environmental shifts. This dynamic model should explicitly take into account the consideration of discontinuities in the international environment, conversely to the traditional, eclectic paradigm (Goncalves et al., 2012). The model should be constructed in two steps formerly a dynamic model of global strategy should be developed. It should broadly demonstrate the advantage of this model over the eclectic paradigm in explaining Multinational enterprise activities in the face of the sudden environmental changes. Secondly, it should demonstrate the nature of changes caused. It is proposed that certain types of resources, strategy, and structure should be planned properly. This may help Multinational enterprise to achieve relatively higher performance (Porter, 2011). Extension of the eclectic paradigm into a strategic management perspective argues that international market failure underlies the existence of Multinational enterprise. The couple of market failures that influence international trade and investment are structural and transactional market failure. The structural market failure arises from economies of scale, knowledge advantages, distribution networks, product diversification, and some forms of government intervention that are tied to the size, scope, or abilities of multinational firms that cannot be established through market means. Moreover, the Transactional market failure refers to market inefficiencies caused by transactional uncertainties. They prevent arms’ length pricing from providing sufficient information about the transaction to enable the transaction to conclude a bargain. The foundation of MNEs’ O and I advantages was made with the help of analyzing international market failure. However, because of its emphasis on static market failure, the eclectic paradigm has been criticized as lacking dynamism. CONCLUSION According to Dunning, he devised the eclectic paradigm because of dissatisfaction with existing theory of international production, the Hymer-Kindle berger approach, the product-cycle theory, and the internalization theory. All these comprise of incomplete details of international production. Therefore, Dunning proposed an alternative line of improvement in his paradigm. In this, he tried to integrate the existing theories in a general and ‘eclectic’ model, in particular. According to Dunning, a firm should involve in Foreign Direct Investment if three conditions are completely satisfied. Primarily it should possess net ownership advantages from other countries; Subsequently, It is beneficial to internalize those advantages rather than to use the market to pass them to foreign firms; lastly, firm should analyze the Location advantages and correlate it with the ownership advantages. For building the dynamic model of international strategic management, consideration should be shifted from market failure towards the need for developing and exploiting Multinational Enterprise’s endogenous components. These components include resources, strategy, and structure. They assist in having benefit of effectiveness. Moreover, it should demonstrate the role of these components in linking the O, I, and L factors of the traditional Dunning Model. REFERENCES Dunning, J. H. (2004). An evolving paradigm of the economic determinants of international business activity. Managing multinationals in a knowledge economy, Advances in International Management, vol. 15, pp. 3-27. Dunning, J. H. (2013). Multinationals, Technology & Competitiveness. New York: Routledge. Dunning, J. H., & Lundan, S. M. (2008a). Institutions and the OLI paradigm of the multinational enterprise. Asia Pacific Journal of Management, vol. 25, no. 4, pp. 573-593. Dunning, J. H., & Lundan, S. M. (2008b). Multinational enterprises and the global economy. Cheltenham: Edward Elgar Publi Emre Yildiz, H. (2013). Performance implications of multinationality: moderating role of foreign market entry mode. Multinational Business Review, vol. 21, no. 4, pp. 334-357. EC. (2015). Foreign Direct Investment Statistics. Available from http://ec.europa.eu/eurostat/statistics-explained/index.php/Foreign_direct_investment_statistics[Accessed 10 March 2015] Goncalves, M. X., Campos Filho, L. A. N., Casanova, L., & Esteban Jardim, P. (2012). Institutional Theory, Membership in Business Groups and the Internationalization of Brazilian Multinationals. Available from https://flora.insead.edu/fichiersti_wp/inseadwp2012/2012-17.pdf[Accessed 10 March 2015] Hansen, Z. N. L., & Ahmed–Kristensen, S. (2012). Connecting engineering operations to strategic management: a framework for decision making in engineering offshoring. International Journal of Product Development, 17(3), 204-227 Head, K. (2007). Elements of multinational strategy. New York: Springer Science & Business Media Hill, C. W. (2012). Global business. London: McGraw Hill Lee, C. K. (2013). Study on the foreign investment preferential policy formulated by host country. African Journal of Business Management, vol. 7, no. 38, 3977-3993. Li, S., & Tallman, S. (2011). MNC strategies, exogenous shocks, and performance outcomes. Strategic Management Journal, vol. 32, no. 10, pp. 1119-1127. Markusen, J. R. (1995). The boundaries of multinational enterprises and the theory of international trade. The Journal of Economic Perspectives, pp. 169-189. Porter, M. E. (2011). Competitive advantage of nations: creating and sustaining superior performance. New York: Simon and Schuster. Tucker, R. (2011). Green optical communications. IEEE Journal. Wang, Z. (2012). Episteme, Techne And Phronesis In International Business. Reviewers/Évaluateurs, 126. Read More