Q1.
Using John Dunning’s Eclectic Paradigm, critically
assess when firms would engage in foreign direct
investment, exporting or licensing. Use examples in
your answer.
An eclectic paradigm, also known as the ownership, location,
internalisation (OLI) model or OLI framework, is a three-tiered evaluation
framework that businesses can use to decide if it is advantageous to seek
foreign direct investment (FDI). This paradigm posits that institutions
would avoid open market transactions if the cost of performing the
identical operations internally, or in-house, is lower. It is based on
internalisation theory and was developed by researcher John H. Dunning
in 1979. Moreover, it is not a theory, but a framework.
Ownership advantages stem from high miss monopolistic advantages
on ascension. This means that a firm should have a strong superior
ownership advantage, which could be advanced system, superior
management skills, or superior industry knowledge. This allows him to
achieve the disadvantage position that they intrinsically face when they
go internationally. These may include branding, copyright, trademark, or
patent rights, as well as the usage and management of internal abilities.
In most cases, the benefits of ownership are seen as intangible.
Location advantages: potential company host nations being examined
for FDIs must provide several competitive advantages, one of which is
location. The location advantage is primarily concerned with the host
country's or nations' geographic advantages. Access to the ocean, as
opposed to a landlocked country, is an example of a geographic
advantage. Other geographical benefits may include low-cost labour and
raw materials, fewer taxes and other tariffs, a well-trained workforce, and
so on. In most cases, the Porter's diamond model may be utilised to
assess location benefits.
Internalization advantages: companies must assess the internalisation
benefit to determine which investment pathway or approach is most
suited to their objectives. They must generally examine if it is more cost
effective to have the value chain activity conducted locally with their own
team or to outsource it to a foreign location. Lower prices, greater abilities
to undertake value chain operations, and/or better understanding of local
markets are some of the benefits of outsourcing from various nations.
YE YE
YE
S S
S
Foreign
Consideri
Internali Direct
ng Ownership Location
sation Investmen
Investme
t (FDI)
N N N
Outsourcing, on the other hand, makes financial sense only if the
contracting business can satisfy the organization's demands and quality
standards at a cheaper cost. Perhaps the foreign firm can also provide a
higher level of local market expertise, or even more skilled staff who can
produce a higher-quality product.
Starbucks' international expansion, particularly its entry into India, can be
analyzed using the OLI (Ownership, Location, Internalization)
framework, highlighting the advantages of its brand, the strategic location
of India, and the use of joint ventures to navigate the market.
Here's a breakdown of how the OLI framework applies to Starbucks:
Ownership (O):
Starbucks possesses strong brand recognition and a unique coffeehouse
experience, which are valuable assets.
Location (L):
India, with its rapidly growing economy and large consumer base,
represents a strategic location for Starbucks' expansion.
Internalization (I):
Starbucks has used a mix of strategies, including joint ventures with local
partners like Tata Beverages, to navigate the Indian market and access
local resources and knowledge.
Elaborating on each element:
Ownership (O):
Brand Recognition: Starbucks is a globally recognized
brand, known for its quality coffee and unique coffeehouse
experience.
Intellectual Property: Starbucks has valuable intellectual
property, including its brand name, logo, store design, and
beverage recipes.
Unique Business Model: Starbucks' business model,
focusing on a premium coffee experience and a comfortable
atmosphere, is a key differentiator.
Location (L):
Market Size and Growth: India's large and growing
population, coupled with its increasing disposable income,
presents a significant market opportunity for Starbucks.
Economic Growth: India's rapidly growing economy creates
a favorable environment for foreign investment and business
expansion.
Resource Availability: India has a growing middle class with
a taste for premium coffee, which aligns with Starbucks' target
market.
Internalization (I):
Joint Ventures: Starbucks has partnered with Tata
Beverages, a local Indian company, to enter the Indian
market.
Adaptation: Starbucks has adapted its business model to suit
local conditions, including offering a wider range of beverages
and food items.
Learning and Networking: The joint venture allows
Starbucks to learn about the local market and build
relationships with local partners and suppliers.
In essence, the OLI framework helps explain why Starbucks chose to
invest in India, highlighting the advantages of its brand, the strategic
location of India, and the use of joint ventures to navigate the market.
