Dunning’s Eclectic Paradigm Essay

Dunnings discriminating Paradigm Professor John Dunning proposed the eclectic prototype as a framework for determining the tip and pattern of the value-chain trading operations that companies own abroad. Dunning draws from various abstractive perspectives, including the comparative advantage and the factor proportions, monopolistic advantage, and internalisation advantage theories. Lets use a real immobile to illustrate the eclectic paradigm. The aluminium Corporation of America (Alcoa) has over 130,000 employees in somewhat 43 countries. The companys integrated operations include bauxite mining and aluminum refining. Its products include simple aluminum (which it refines from bauxite), automotive components, and sheet aluminum for drink bums and Reynolds Wrap. The eclectic paradigm specifies three conditions that fructify whether or not a company give internationalize via FDI ownership- proper(postnominal) advantages, location-specific advantages, and internalization advantages.To successfully enter and require pipeline in a foreign market, the MNE moldiness possess ownership-specific advantages (unique to the unanimous) relative to some other rigids already doing business in the market. These consist of the knowledge, skills, capabilities, processes, relationships, or physical assets held by the firm that allow it to compete effectively in the global marketplace. They amount to the firms rivalrous advantages. To ensure international success, the advantages must be veridical enough to offset the cost that the firm incurs in establishing and operating foreign operations. They also must be specific to the MNE that possesses them and not readily transferable to other firms.Examples of ownership-specific advantages include patented technology, managerial skills, trademarks or specialize names, economies of scale, and access to substantial financial resources. The more valuable the firms ownership-specific advantages, the more likely it is to inter- nationalize via FDI. One of Alcoas most important ownership- specific advantages is the proprietary technology that it has acquired from R&D activities. everyplace time, Alcoa has also acquired special managerial and marketing skills in the production and marketing of refined aluminum. The firm has a well-known brand name in the aluminum industry, which helps increase sales. Because it is a large firm, Alcoa also get from economies of scale and the world power to finance expensive projects. These advantages collect allowed Alcoa tomaximize the performance of its international operations. Location-specific advantages refer to the comparative advantages that exist in individual foreign countries. each(prenominal) country possesses a unique set of advantages from which companies can derive specific benefits. Examples include natural resources, trained labor, low-cost labor, and inexpensive capital. Sophisticated managers recognize and try out to benefit from the hos t country advantages. Aloca- tion-specific advantage must be present for FDI to succeed. It must be juicy to the firm to locate abroad, that is, to utilize its ownership-specific advantages in coupling with at least some location-specific advantages in the buttocks country. Otherwise, the firm would use exporting to enter foreign markets.17 In terms of location-specific advantages, Alcoa located refineries in brazil nut because of that countrys huge deposits of bauxite, a mineral found in relatively few other locations worldwide. The Amazon and other major rivers in brazil generate huge amounts of hydroelectric power, a small ingredient in electricity-intensive aluminum refining.Alcoa also benefits in Brazil from low-cost, relatively well-educated laborers, who work in the firms refineries. Internalization advantages be the advantages that the firm derives from internalizing foreign-based manufacturing, dispersion, or other stages in its value chain. When profitable, the firm will transfer its ownership-specific advantages across national borders inside its own organization, rather than dissipating them to independent, foreign entities. The FDI decision depends on which is the best optioninternalization versus utilizing external partnerswhether they are licensees, distributors, or suppliers. Internalization advantages include the ability to examine how the firms products are produced or marketed, the ability to control dissemination of the firms proprietary knowledge, and the ability to reduce buyer uncertainty nigh the value of products the firm offers.18 Alcoa has internalized many of its operations instead of having them handled by outside independent suppliers for quint reasons. First, Alcoa management wants to minimize dissemination of knowledge closely its aluminum refining operations knowledge the firm acquired at great expense. Second, compared to using outside suppliers, internalization provides the best net return to Alcoa, allowing it to minimize the costs of operations. Third, Alcoa needs to control sales of its aluminum products to head off depressing world aluminumprices by planning too much aluminum into world markets. Fourth, Alcoa wants to be able to apply a differential determine strategy, charging different prices to different customers. The firm could not differentiate its prices very effectively without the control over the distribution of its final products that internalization provides. Finally, aluminum refining is a complex business and Alcoa wants to control it to maintain the theatrical role of its products.