John Dunning in the Eclectic Paradigm - Essay Example

John Dunning in the Eclectic Paradigm 16 March Eclectic paradigm as espoused by Dunning is a theory that works towards the merger of various international economic theories that were previously isolated. Among the issues in international economic activities that are discussed in this theory are those concerning export, foreign direct investment, and finally, matters concerning licensing. There are further factors that are used in the determination of this theory and these include the following: ownership, location, and internalization (Dunning 1995, p.461). According to Dunning, the last three mentioned can be considered advantages in the regular activities of the diverse companies in the international market. One of the conditions, which Dunning states is required for a company to properly conduct its international activities, is the availability of what he terms as net ownership advantages. These advantages are both tangible and intangible and they are used to determine that advantages that a company has in markets, which are foreign or unknown to it. According to this theory, there are two diverse types of foreign direct investment, which can be distinguished in the market, and these include the following: resource seeking investments, and market seeking investments. The former is concerned mainly with those investments whose aim is to seek those materials that are required for the daily productivity of a company, such as raw materials among other inputs. Market seeking investments, on the other hand, are often made to ensure that a company is able to enter a market which is existing, and if there is no existing market, to ensure the cultivation of a new one (Dunning 2009, p.21). One of the three advantages that Dunning discusses in his theory is that of ownership and this refers to those advantages that a company has through competition to engage in foreign investment. He states that the higher the competitive advantages that companies have at home, the more likely they are to get involved in foreign production. One of the most fascinating examples of ownership advantage is that of the international furniture company IKEA. This company is based in about thirty-eight countries and has more than three hundred stores all over the world. In the developed world, it is one of the most recognizable brands and this has made it extremely popular with the consumers in these countries. Despite its large size, this company owns all the stores bearing its name in all the countries in which they can be found. This ensures that the company not only has the advantage of getting profits directly from its subsidiaries, but it also gets to study the market on its own, and through its own experience, makes improvements to ensure a maximization of profits. Another advantage, which is discussed by Dunning, is that concerning location where the company is located in an area where it can easily have access to raw materials as well as cheap labor. This ensures that the company gets to reduce the cost of producing its products, hence being able to gain an edge over its competitors by selling at lower prices. An example of taking advantage of location to make investments is that of various companies in the developed world, especially Europe and America, which have chosen to move their production plants to countries such as India and China. These companies have taken advantage of the fact that the countries they move to are rich in raw materials have low tariffs on goods produced, and finally, they have cheap labor that can be used for production. The final advantage espoused by Dunning is that involving internalization and this is where a company conducts its own production of goods for the market. Instead of working through partnerships such as licensing and joint ventures, companies choose to establish their own plants, which they fully own. This is immensely beneficial for the company because it is able to not only produce goods efficiently on its own, but it also has the chance to be directly involved in the marketing of its products. Therefore, the company ends up maximizing its profits while ensuring that its dominance in the market is secured. The eclectic paradigm has been compared to other theories that were espoused by previous scholars in the field. Among these is the Coasian theorem that states that if external trade is possible and this trade does not incur any transaction costs, then the bargaining that will take place will ensure that the company involved has an efficient outcome despite the previous allocation of property rights (Petzinger, 1999). However, when this theory is put into practice, it has been found to be weak because its reliance on bargaining and property rights does not consider the fact that there are instances when they can be poorly defined (Fox 2007, p.373). Kindleberger, alternatively, came up with the Hegemonic stability theory, which states that the international system is expected to remain constant if there is only one state at its helm (Hampton 2006, p.131). If rival hegemonies come up, then there is a possibility that the international economic system would become unstable. Kindleberger further states that the only way to hinder such an event from happening would be for a single hegemony to remain dominant and dominate those rules and arrangements that often affect international economic relations (Dent 2001, p.732). It seems that Kindleberger is also of the opinion that the parent company should have complete dominance over its subsidiaries in other countries to ensure that they are not only stable, but that they also work towards the achievement of the profit making goals of the parent company. The macro level theory of foreign investment states that companies in countries with plenty of capital often choose to invest in those countries with little or no capital in order to take advantage of the labor intensiveness in the latter. Hymer was a critic of this theory stating that it was too general and did not take into account the other less visible anomalies that often influence these companies to make the decision to invest in capital-starved countries. Hymer’s micro level theory was heavily influenced by that of Ronald Coase, and it concentrated more on the factors influencing specific companies rather than on those that concentrated on their countries of origin (Dunning and Pitelis 2008, p.167). It was Hymer’s belief that individual companies often made their own decisions to make foreign investments, and that their countries of origin did not influence these decisions (Egelhoff, Gorman and McCormick 2000, p.205). Raymond Vernon came up with the product life cycle theory which states that early in the development of a product are often associated with the place where the said product was invented (Fishman, 2012). When this product comes to be used in the world market, however, its production slowly moves away from where it was originally made. Eventually, there are instances where the country where a product was first produced ends up importing the very same product from other countries, which have adopted its production (Sherwood-Call 1992, p.25). Aliber’s theory on the other hand is more focused on the search for advantages for companies that are foreign owned over their domestic competitors. Aliber, in his theory argues that these advantages do not come to individual companies and that instead, they come to all the companies that are based in specific currency areas (Dunning 2003, p.110). According to this theory, the foreign company only has an advantage over the local companies and not over those with which it shares the same nationality. In case there are no local companies with which to compete, then Aliber suggests that there is no need for foreign companies to compete, because the need to have an advantage over others would be nullified (Seymour 1987, p.24). When one considers Dunning’s eclectic paradigm, one will notice that it bears within it the various aspects that are found in earlier theories concerning the subject. One of the conditions that Dunning states is required for a company to properly conduct its international activities is the availability of what he terms as net ownership advantages. These are advantages both tangible and intangible and they are used to determine that advantages that a company has in markets that are foreign or unknown to it. In this assessment, we find that he has further expanded on the theories presented by other theorists before him such as Coase, Hymer, and Aliber among others. The eclectic paradigm seems to be not only an extension of these theories, but can also be considered to be an extremely bold attempt to bring all of them together so that a clear understanding can be made of them. However, this paradigm does not solely concentrate, like internalization theory, on the reasons why firms participate in foreign direct investment, but it also focuses on what gives these companies an edge in the market over other foreign companies that compete with them. However, like most of the theories mentioned above, the eclectic paradigm fails to address the various collaborative arrangements that companies make with each other when venturing into new or established markets. One would suggest that this is because joint ventures between companies are difficult to quantify, hence the silence that Dunning and the other theorist have on the subject. References Dent, C.M. 2001, "The Eurasian economic axis: Its present and prospective significance for East Asia", The Journal of Asian Studies, vol. 60, no. 3, pp. 731-759. Dunning, J.H. 1995, "Reappraising the eclectic paradigm in an age of alliance capitalism", Journal of International Business Studies, vol. 26, no. 3, pp. 461-461. Dunning, J.H. 2003, "Some antecedents of internalization theory", Journal of International Business Studies, vol. 34, no. 2, pp. 108-115. Dunning, J.H. & Pitelis, C.N. 2008, "Stephen Hymers contribution to international business scholarship: an assessment and extension", Journal of International Business Studies, vol. 39, no. 1, pp. 167-167. Dunning, J.H. 2009, "Location and the multinational enterprise: John Dunnings thoughts on receiving the Journal of International Business Studies 2008 Decade Award", Journal of International Business Studies, vol. 40, no. 1, pp. 20-34. Egelhoff, W.G., Gorman, L. & McCormick, S. 2000, "How FDI characteristics influence subsidiary trade patterns: The case of Ireland", Management International Review, vol. 40, no. 3, pp. 203-230. Fishman, C. 2012, The Insourcing Boom, Atlantic Media, Inc, Boston, United States, Boston. Fox, G. 2007, "The Real Coase Theorems", Cato Journal, vol. 27, no. 3, pp. 373-396. 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