Eclectic Theory

Assignment 1, Eclectic Theory

Stephen Jablonski

Met AD 655: International Business, Economics and Cultures

Dr. Andrew Banasiewicz

7/27/15

Dunning’s Eclectic theory includes the factors of Ownership, Location and Internalization, (OLI). It is an effective research and analysis tool to analyze and answer specific questions about behavior of specific segments of FDI practice. Ownership may include advantaged access to physical or intellectual resources, technology or the ability to leverage economies of scale or access to capital. Location refers to a firm having a location specific advantage that may be based on economic, political or cultural factors. Internalization refers to a firm’s ability to reduce uncertainty when coordinating activities in multiple countries. Use of this resilient and effective framework by business leaders can assist them in assessing the viability of FDI opportunities. Five research articles incorporating the Eclectic theory were analyzed to assess its’ applicability. The Eclectic theory ties these studies together, but all strive to provide answers to different research questions in different contextual circumstances. Nevertheless, all provide proof the Eclectic theory is an effective method that can be applied to many circumstances to generate valuable insight and assist business leaders in decision making processes related to FDI investments.

The study “Foreign Ownership strategies of UK and US international franchisors: An exploratory application of Dunning’s envelope paradigm” (Dunning, Pak, Beldona, 2007) examines foreign market entry preferences for international US and UK investors by choice of franchising or equity modes of entry. It further analyzes these choices in context of OLI and the benefits obtained by either method of entry.

US entities studied preferred the franchising method of foreign entry as they “are likely to accumulate new knowledge that institutionalizes the contract procedure of forming franchise relations”. The paper describes the franchising method as the investor identifying “willing, qualified master franchising or area developers” (Dunning, Pak, Beldona, 2007) to initiate FDI entry to a foreign market. Under this model, the master franchisor has location specific knowledge such as how to navigate permitting and regulatory issues. The master franchisor also provides capital to develop the specific franchise. The investor gains the capability to initiate quick penetration of a foreign market. This method is also frequently used when the franchisor receives unsolicited inquiries from experienced franchisees in unfamiliar, but promising markets. The franchise method of entry enables quick penetration of a foreign market and expansion of market share, but also minimizes resources commitment.