OLI model - Essay Example

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OLI stands for Ownership, Location and Internalization; they are the three core sources of advantages, which underlie a companys decision to be multinational. Eclectic or OLI is an approach to studying a foreign direct investment (FDI). John Dunning developed the model (Faeth,…
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Download file to see previous pages The above approach neglects critical issues, which are critical in defining a multinational firm. The model has three areas where its main advantages are based, that is;
It has its advantages in explaining the MNEs existence. Ownership has its advantages in the sense that it addresses the question of why that some firms will go abroad and not others, it postulates that there are some benefits that allow it to overpower the cost of operating abroad. Since firms are the collection of different assets and MNEs candidate has a higher-than-average asset level to have an internal public goods character. The assets can be used in the production in various areas without reduction of their effectiveness.
The assets include product dimensional factor, common to model in terms of a single index of the production of the firm. The highest sophisticated treatment in these lines is found in immediate work on non-homogeneous firms that combines the horizontal simplest version motive for FDI, with an assumption of their productivity differences (Faeth, 2009). The OLI model has an aspect to pay a sunk cost in productivity determination. Low-production can be produced only for the purposes of the home market; while medium productivity ones are chosen to pay for export fixed costs, but the most productive ones chosen to pay for higher costs for FDI engagements. The above predictions are in accordance with the evidence. On a further contribution, the model provides that industries with greater heterogeneities have more firms engaged in the FDI.
Location advantages address the question of where the firm chooses to locate. Though the theory of international trade has taken ownership advantages just for granted, to make them in more obvious ways, this model has emphasized more on exploration of alternative motives to be located by MNEs abroad. The major factor that has created much attention is the clear distinction between vertical and horizontal FDI.
Horizontal FDI happens when ...Download file to see next pagesRead More
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