Internationalization Process

A Theoretical Perspective Recent decades have witnessed the internationalization of operations of many companies around the world, and especially U.S. corporations. Although the extent, form and pattern of their transnational activities vary according to the characteristics of the firms, the products they produce, and the markets in which they operate, they all reflect t h e dynamics of a changing and increasingly competitive international environment. Of the theories that have sought to explain the transnational activities of enterprises, the eclectic paradigm (Dunning, 1988) enjoys a dominant position. This concept provides a broad framework for the alternate channels of international economic involvement of enterprises and focuses on the parameters that influence individual MNE foreign investment decisions (Buckley and Casson, 1976; Dunning, 1977). Specifically, the eclectic paradigm identifies three important determinants in the transnational activities of firms– ownership, location and internalization (OLI). The first condition of the OLI configuration states that a firm must possess certain owner-specific competitive advantage in its home market that can be transferred abroad if the firm’s foreign direct investment (FDI) is to be successful. This advantage must be firm specific, not easily copied, transferable, and powerful enough to compensate the firm for the potential disadvantages and risks of operating abroad. Certain ownership-specific competitive advantages enjoyed in the home market, such as financial strength and economies of scale, are not necessarily firm specific because they can be also attained by other firms. Similarly, certain types of technology d o not ensure a firm – specific advantage because they can be purchased, licensed or copied. Production and marketing of differentiated products, too, can lose their competitive edge to modified versions of such products promoted by lower pricing and aggressive marketing. The second strand in the OLI model stands for location-specific advantages. That Is, the foreign market must possess certain characteristics that will allow the firm to exploit its competitive advantages in that market. Choice of location may be a function of market imperfections or of genuine comparative advantages of particular places. Other important considerations that may influence the locational decision may include a low- cost but productive labor force, unique sources of raw materials, formation of a custom unions or regional trading bloc, defensive investments to counter a firm’s competitors, or centers of advanced technology. The third component of the OLI paradigm is internalization and refers to the importance for a firm to safeguard its competitive position by maintaining control of its entire value chain in its industry. This can be accomplished through foreign direct investment rather than licensing or outsourcing. Transferring proprietary information across national boundaries within its own organization would enable a firm to maintain control of its firm-specific competitive advantage. Establishment ofwhollyownedsubsidiaries abroadreduces the financial agency costs that arise from asymmetric information, lack of trust and the need to monitor foreign partners, vendors, and financial intermediaries. Further, if the parent firm funds the operations of its foreign subsidiaries, self-financing eliminates the need to observe specific debt provisions that would result from local financing. If a multinational firm has access to lower global cost and greater availability of capital why subject its operations to local financial norms or share these important advantages with local joint venture partners, distributors, licensees, and banks that would probably have a higher cost of capital.