OLI Paradigm Research Articles

The Dilemma Facing Strategic Choice of Entry Mode

While a large body of research has dealt with firm’s choice of ownership mode when entering a foreign market, little attention has been paid to the ex-post performance after initial entry. This article combines the transactional cost economics, Dunning’s OLI paradigm as well as the institutional view as an integrative framework to examine the relationship of firm’s foreign market entry mode choice and performance outcomes. We suggest propositions for empirical study and also consider research implications in relation to these theoretical perspectives as an explanation for firm’s internationalization.

Multinational risk and performance outcomes: Effects of knowledge intensity and industry context

A multinational presence can diversify corporate business activities and provide access to diverse overseas resources. This can enhance operational flexibility and create new business propositions that increase responsiveness to global market changes. Establishing an international corporate structure may also require irreversible investments and impose maintenance and processing costs that contravene the implied resilience and agility benefits. We distinguish between downside risk and upside potential as the relevant outcome measures to assess the implied advantages of multinationality. Consistent with the rationales of the OLI paradigm, we argue that multinational reach particularly in knowledge-based industries can reduce downside risk and enhance upside potential. These results introduce more nuances to the ongoing debate about multinational risk and performance effects. Based on a large cross-sectional dataset, we find that flexibility and responsiveness thrives on a multinational presence among firms operating in information-driven knowledge businesses. In contrast, internationalizing firms in capital-based network services display adverse risk effects.

Revenue creation: business models for product-related services in international markets – the case of Zwick GmbH & Co. KG

The aim of the paper was to give deeper insights into business models of machine manufacturers providing product-related services for international markets. Product-related services might be seen – as within this case study – as an instrument to foster primary goods sales. The case study analyses decision factors considered as crucial for medium-sized enterprises. Internationalisation is known as a complex decision situation. To trace back the main influence factors, the study brings two approaches together considering a variety of variables: Dunning's OLI paradigm and the business model approach. The results show a sound adequacy of the research approach and provide indication as to which business model seems to be applicable for manufacturers to provide product-related services to an international market.

Location Decision of Korean Manufacturing FDI: A Comparison between Korean Chaebols and Non-Chaebols

This study analysed the location selection determinants of Korean foreign direct investment (KFDI) from the perspectives of OLI paradigm and resource- and knowledge-based views. The study involved a sample of 1911 Korean multinational enterprises (MNEs) and their 3095 foreign subsidiaries during the period of 1999–2004. Specifically, the study compared the differences of foreign direct investment (FDI) location decisions (1) between less-developed and developed countries (LDCs and DCs) and (2) between chaebols and non-chaebols. The results showed that the partitioned sample model of chaebols versus non-chaebols was found to have more detailed effects on the location decision between the two regions than the combined full sample model. In addition, the results showed that there are clear, effectual differences for subsidiary scale and prior host country experience between chaebols and non-chaebols.

Intensifying Export Performance Through Planned Capacity Building: A Study of the Indian Apparel Sector

The process of firms making sequential foreign direct investments have been an area of interest and research for long in the field of International Business. International trade literature is wrought with indebtedness towards FDI as a policy for economic development, especially while tracing the growth path of tiger economies in South East Asia. However, little has been revealed on the subject of OFDI [outward foreign direct investment] in the context of Indian or South East Asian companies. OFDI is better understood as Indian firms investing abroad through various methods like: marketing and sales subsidiaries, production facilities, global brand management, takeovers, acquisitions and wholly owned subsidiaries This becomes not only a method of entering a foreign market but also the process of increasing foreign commitments in host countries. This draws attention to the process of internationalization followed by these countries so as to capture overseas markets and improve the volume of international trade. Much of the early literature on internationalization behaviour concludes that the process involves a series of incremental ‘stages’ whereby firms gradually become involved in exporting and other forms of international business. As they do so, they commit greater resources to foreign markets and target countries that are increasingly ‘psychically’ distant (Johanson and Vahlne, 1977). This by far is the best study on methodology of internationalization prior to the path breaking research of Sea Jin Chang in 1992 when the process of sequential entry by Japanese firms into US had been analysed and documented for developing country references. This became the source and inspiration of this study. It was deemed that a background as rich and endowed as India’s history of foreign trade, should naturally lead to rapid internationalisation in the modern era. The theoretical framework for the study has been drawn from Duning’s OLI Paradigm which relates various forms of International production to the three core advantages owned by the company – ownership, location and internalization. Therefore the OFDI becomes a function of capacity built along these lines. The four significant areas of capacity building at a micro level emerges as: skilled workforce; information technology; marketing network and cumulative learning. After identifying these areas, the major difficulty faced by the researcher was in terms of lack of availability of a research instrument to collect empirical data to study these areas of capacity building and level of internationalisation. The next important task therefore became to develop a reliable and validated questionnaire which can be used in data collection for multivariate data analysis. This led to development of a summated rating scale through factor analysis and reliability testing in a pilot study conducted amongst exporters of Delhi /NCR. It was a tedious and cumbersome process working on so many dependent and independent variables together. The principal component analysis significantly reduced the complexity of this task by grouping interdependent variables into independent factors which were further used in intensive data collection and inferential studies. The research instrument is one of the important contributions from this study and detailed heavily in the paper. To further cement the relationship between the variables a functional concept is desired in the form of discriminant analysis. As is known discriminant analysis is used primarily to predict membership in two or more mutually exclusive groups. For instance, group of exporters who built capacity during internationalization and the group which did not. These are two discrete groups that can be identified using sufficient information from level of investments made in significant areas like – Information Technology; marketing network; cumulative overseas experience and skilled workforce as the independent variable used in the study. From these variables it is endeavoured to create a formula that differentiates or discriminates between the two groups. This newly found formula – if it discriminates successfully could be used to analyse the liklehood of future prospects in capacity building. The last section in Results and Discussion states the important factors which influence mature internationalization and therefore rightful nodes for planned capacity building. It was seen that Organisation, systems, commercial and operational capacity building are best identified as investment areas for mature internationalization. Any company having varied levels of investments in select areas of capacity building can eventually predict its grouping in high or low degree of internationalization-the ultimate objective of business modeling.. It is the researcher’s earnest hope and desire to satisfy the superior intellect of the reader and at the same time maintain a realistic estimate of the variables on ground while unfolding the given framework.

Revisiting the OLI Paradigm: The Institutions, the State, and China's OFDI

We propose a modified theoretical framework based on John Dunning’s classical OLI paradigm in the international business literature to analyze Chinese firms’ fast-growing and aggressive outward foreign direct investment (OFDI). In particular, from an institutional perspective, we suggest a “state-stewardship” view to incorporate state institutions into the OLI paradigm. This paper supplements our earlier work (Ren, Liang, and Zheng, 2011) on identifying the formal institutional determinants of Chinese firms’ OFDI motivations and strategies, by further looking at the impact of direct and indirect policies, and the OFDI state-controlled financial intermediaries. Under our modified OLI framework we also examine the potential concerns on China’s state-backed OFDI and its implication on long-term sustainability.

A comparative ownership advantage framework for cross-border M&As: The rise of Chinese and Indian MNEs

MNEs from emerging economies (EE MNEs) have recently undertaken aggressive cross-border mergers and acquisitions (M&As). This phenomenon challenges the current understanding in the international business literature. Integrating the comparative advantage theory with Dunning's OLI paradigm, this article develops a comparative ownership advantage framework characterized by five attributes: (1) national-industrial factor endowments, (2) dynamic learning, (3) value creation, (4) reconfiguration of value chain, and (5) institutional facilitation and constraints. We test five propositions with a dataset of 1526 cross-border M&As by Chinese and Indian MNEs from 2000 to 2008. Preliminary results support the new comparative ownership advantage framework.

Factors Determining Offshore Location Choice for R&D Projects: A Comparative Study of Developed and Emerging Regions

abstractThis paper examines empirically the determinants of offshore location choice between country clusters. Based on a dataset of 1722 R&D projects by MNEs located in developed and emerging countries, we examine the impact of home and host country, industry, and firm level variables on choice of location. We draw on the extended OLI paradigm to develop our hypotheses. Using the EU15 as a base group, a multinomial logit model is estimated between the regions of USA&Canada, Eastern Europe&Russia, emerging countries of Asia, and India&China. At the regional level, findings show that the R&D wage difference and knowledge infrastructure difference between home and host countries, the science and engineering talent pool size, and political risk level of host countries are important determining factors. At the firm level, experience of overseas R&D projects and prior experience of research in the host country are found to be important location determinants. A distinguishing feature of the paper is that we examine regions in relation to a base region, and then further examine the impact of a marginal change in independent variables on the likelihood of the choice of a region for new offshore R&D projects.

Strategic and Organizational Evolutions of High-Tech SME on Global Market

The “OLI paradigm” of Dunning (1977) claims that firm internationalization is addressed toward the exploitation of home-based specific advantages. However, evidence shows that SMEs are increasingly internationalizing their activities in order to enrich their resource pool. In this regard, a reinterpretation of the OLI paradigm came out with a new perspective suggesting that “foreign direct investment” (FDI) is increasingly oriented toward asset augmentation. Correspondingly, the purpose of this theoretical paper is to suggest a set of principles that could inform on how global small and medium-sized enterprises grow in the international marketplace when investing abroad.

Internationalization strategies of EU and Asia–Pacific low fare airlines

We employ Dunning’s eclectic paradigm (OLI) to shed light onto low fare airlines’ internationalization strategies. In addition to 31 European low fare airlines, we also analyze the internationalization strategies of 41 low cost carriers in the Asia–Pacific region. The results indicate that homogenous groups of such airlines emerge with regard to their internationalization strategies and that capital and ownership structure as well as relative timing is especially closely related to low fare airline’s entry modal choice. We discuss inferences for the use of the OLI paradigm in further studies of airline internationalization.

Multinational corporations, foreign investment, and royalties and license fees: effects on host-country total factor productivity

In this paper we examine the relationship between inward FDI and total factor productivity (TFP) in a framework motivated by the OLI paradigm. A panel data approach is used to study the effects of FDI and payments of royalties and license fees (R&L) on aggregate TFP in a sample of 16 OECD countries, between 1985 and 2002. Our empirical tests show that FDI and R&L have a positive impact on host-country TFP, and also suggest that the amount of positive effects of FDI and R&L is dependent on the level of development of the receiving country. Additionally, our data show that, when other factors remain constant, inward FDI and R&L payments are substitutes in positively influencing TFP of the host country.

Extending Dunning's Eclectic Paradigm toward a Synthetic Model of FDI Performance: An Empirical Evidence in China

By reviewing the existing literature on FDI theories and FDI performance determinants, we find the necessity and possibility to develop a synthetic model to measure FDI performance. This model is not a simple combination of existing theories, but a reorganization of those theories arranged into a new theoretical framework. A logical connection between the MNC subsidiary`s ability to realize OLI advantages and the performance of FDI is found and important extensions to the OLI paradigm are made. The synthetic model is a split OLI paradigm by subcategorizing each of OLI into two elements, thereby the total of six elements. An empirical study of 13 FDI cases in China is conducted to test the model and the empirical evidences support the arguments of this new synthetic model.

Institutions and the OLI paradigm of the multinational enterprise

The prevailing ownership-based theories of the firm are increasingly being challenged by new forms of organising, as exemplified by the Asian network multinational enterprise (MNE). We believe that an institutional approach, that tries to bridge both the macro and micro levels of analysis, and that encompasses both formal and informal institutions, offers a promising way to advance our understanding of the different forms of the contemporary MNE. This paper introduces a theoretical framework that draws substantially on the work of Douglass North, and examines how an institutional dimension can be incorporated into the three components of the OLI paradigm.

The location determinants of FDI in the GCC countries

This paper studies the location determinants of FDI flows to the GCC countries, along Dunning's [Dunning, J., 1981. International Production and the Multinational Enterprise. Allen & Unwin, London] OLI paradigm. The paper uses panel data for the period 1980–2002. Panel data model estimates show that oil potential, measured by oil reserves, and oil utilization, measured by oil production, have a surprisingly negative influence on FDI flows, contrary to expectations about positive association between GCC oil resources and FDI flows. However, the relative degree of oil utilization, measured by oil production relative to oil reserves, has a positive influence on inflows. Similar to oil potential and oil utilization, oil price has a negative influence. Estimates also show that while institutional quality, trade openness and infrastructure development encourage FDI flows, human capital significantly discourages them.

Strategies Pursued By Swiss Firms in Investing in R&D at Foreign Locations: An Empirical Analysis Based on Firm-Level Data

The aim of this paper is twofold: Firstly, we try to identify and characterise different of strategies firms pursue in performing foreign R&D. Secondly, it is analysed whether the of R&D strategies we identified in the first part differ in terms of their impact on firm productivity. In order to identify foreign R&D strategies we perform, in a first step, a non-hierarchical cluster analysis of data on the firms' motives for investing abroad in R&D. In a second step, we characterise these clusters by use of a large number of variables that, according to the well-known OLI paradigm, determine a firm's FDI in distribution, manufacturing and R&D. In this way, we can check whether the clusters identified by applying a (purely) statistical classification procedure effectively may be interpreted as types of foreign R&D strategies. We end up with four of strategies, which significantly differ in terms of characteristics that are important according to the OLI approach. In the second part we estimate a production function where the standard factor inputs are complemented by domestic R&D and strategy-specific foreign R&D. It turns out that only one of the four strategies exerts a positive influence on firm productivity. However, it cannot be excluded that some of the other strategies have, in the longer run, a positive productivity effect as well. The paper also finds that foreign and domestic R&D, on balance, are complements.

Determinants of Swiss Firms' R&D Activities at Foreign Locations: An Empirical Analysis Based on Firm-Level Data

Using the OLI paradigm as theoretical framework, we explain econometrically why a firm invests in foreign R&D (model A), and, if it does, which factors determine the level of foreign R&D expenditures (model B). It turns out that the pattern of explanation is quite similar for both types of decisions. In both cases, O- and I-advantages are the main drivers of foreign R&D, whereas L-disadvantages of the Swiss location do not play any role. A descriptive analysis of a series of motives of Swiss firms for performing R&D abroad shows that market-seeking is the most important motive. Knowledge-seeking and (human) resource-seeking are of intermediate importance as motives of foreign R&D, whereas efficiency-seeking objectives are hardly relevant. These results are fully in line with those of the econometric modelling. The findings of both approaches imply that foreign and domestic R&D are complements rather than substitutes. “Asset exploiting” is more prevalent as a strategy of foreign R&D than “asset augmenting”.

A internacionalização das empresas portuguesas: a experiência brasileira

O artigo tem por objetivo investigar a internacionalização dos investimentos portugueses no Brasil de meados dos anos 1990 até o começo da década de 2000. Foram registradas cerca de 400 empresas lusitanas no país em 2003. Previamente, colocam-se várias questões empíricas e teóricas, e destaca-se a relevância do caso à luz dos grandes modelos de referência em matéria de internacionalização de empresas, em particular a escola nórdica (ou modelo de Uppsala) e o paradigma OLI de John Dunning. Enfatiza-se em seguida a contribuição dos determinantes culturais, globalmente considerados, desde o início do processo de investimento luso-brasileiro. Nesse contexto, o papel da língua comum é enfatizado. De passagem, analisam-se diversos tópicos, inclusive o da influência por vezes paradoxal da proximidade cultural sobre o investimento internacional. Por outro lado, os resultados a que foi possível chegar ajudam a preencher as lacunas deixadas pelas insuficiências teóricas ligadas à negligência do movimento internacional de fatores.

Characteristics of Japanese FDI in the East and the West: Understanding the strategic motives of Japanese investment

Key determinants that distinguish the investment behavior of Japanese manufacturing companies in two general regions (East and West) and two specific countries (China and the United States) were investigated to identify the underlying global strategic motives of Japanese investment. The West was preferred by Japanese firms that belonged to competitive domestic industries and that also had aggressive foreign ownership strategies. When China and the US were compared, additional variables, such as initial entry time and an industry's resource-intensiveness were found to influence the geographic choices of Japanese firms. A marginal effect of Japanese firms’ R&D activities on the selection of location was also observed. Overall, an examination of different investment behaviors has allowed us to identify the global strategic approaches of Japanese firms in the two regions. Internalization theory, a knowledge-based view, and the OLI paradigm complemented each other in explaining the geographic preferences of Japanese firms.

Determinants of International Activities: Are SMEs Different?

In this paper we econometrically investigate the factors determining the choice of a specific internationalisation strategy. We distinguish four strategies, ranging from “serving foreign markets through exports only” up to “exporting and locating abroad several business functions such as distribution, production and R & D”. These strategies are evaluated against the reference category “domestic sales only” (multinomial logit model). The analysis, to a large extent, confirms Dunning’s well-known OLI paradigm. O-advantages turn out to be the main drivers of internationalisation, irrespective of firm size and internationalisation strategy. However, the knowledge-base on which O-advantages of smaller firms rests is more narrow than that of large companies. Whereas the former rely, in relative terms, primarily on capabilities related to incremental innovations, the latter draw to a higher extent on assets enabling them to be competitive in terms of far-reaching innovations. L-advantages (wages, regulatory framework, etc.) primarily are relevant in case of small firms; but even for this size class, O-advantages are dominant.

International business and the eclectic paradigm: developing the OLI framework

For more than two decades, the eclectic OLI paradigm developed by John Dunning has provided a unifying framework for research on multinational enterprises. Numerous scholars, including John Dunning himself, have continuously extended it to analyze new research questions emerging with new forms of international business and with increased globalization.