Chapter Title 277

13 A critical reflection and

some conclusions on OLI
Lorraine Eden*

Introduction
When I was in kindergarten, my teacher taught me that the way to learn
about a new object was to ask five basic questions: Who or what, when,
where, why and how? I have always believed that the OLI (or eclectic)
paradigm was about a subset of those questions. The who or what is, of
course, the multinational enterprise (MNE). While John Dunnings writings
often start with a definition of the MNE, the focus of the eclectic paradigm
from its beginnings up to the present day has been O (why?), L (where?)
and I (how?).
For me, the OLI paradigm is best understood by reading three out of
the dozens of books that John Dunning has authored over the past 25
years: International Production and the Multinational Enterprise (1981b),
Explaining International Production (1988a) and Multinational Enterprises and
the Global Economy (1993a). Each book pulls together and synthesises
Dunnings writings from the previous period.1
In the concluding chapter to this book on the eclectic paradigm, what I
would like to do is provide an overview of the development of the OLI
paradigm as seen through my lens, and link the book chapters to its
development. My thesis is that OLI should best be seen as a way of looking
at the phenomenon of multinational enterprises and their activities. OLI
addresses three of the five kindergarten questions the why, where and
how of MNE activities. Each of these questions can be addressed at a dif-
ferent level: macro (big picture, country), meso (mid picture, industry) or
micro (firm, top management team). As examples of the why-where-how
questions I list some of the research questions that have or currently do
engage international business scholars in Table 13.1.
I argue that the OLI paradigm has been most successful at the macro and
meso levels, and less so at the micro level, but I do not see that as a

*
Acknowledgements: I would like to thank John Cantwell, Rajneesh Narula, Peter
Gray and Dan Li for their helpful comments. Any errors or omissions are my
own responsibility.
278 Lorraine Eden

Macro (big picture, country level) questions:

o O: Why do MNEs exist? Why are MNEs a successful organisational form?
o L: Why are some countries a home, and others principally a host, to MNEs?
How has the pattern of international investment across countries changed
over time? How does regional integration affect the pattern of FDI and
international production?
o I: How do market imperfections affect the pattern of international
production? How are transactions costs related to the firms optimal mode
of entry into foreign countries?

Meso (industry level) questions:

o O: Why are some industries dominated by MNEs and others are not?
o L: What are the changing patterns of international production in the
semiconductor (or other) industry? Why do certain industries cluster
geographically together?
o I: Why are certain modes of entry more predominant in one industry than
another?

Micro (firm, top management team) questions:

o O: Why do firms differ? How do these differences affect their performance?
Why do some firms choose to become MNEs (engage in international
production) and others do not? How do O advantages relate to differences
in firm performance? How does the management of knowledge flows within
the MNE network affect its performance? Why is one firm better able to
manage its O assets than another?
o L: How does an MNEs locational choices affect its performance?
o I: How are modes of entry choices related to firm performance?

Figure 13.1 macro, meso and micro research questions in international business.

weakness. Paradigms do not have to explain everything, nor does the big
tent of OLI have to shelter all theories under its umbrella.
This chapter is organised as follows. First, I address the issue of what is
OLI a paradigm, theory or model? I argue that OLI has moved from a
theory to a paradigm, the pre-eminent one in the international business
(IB) field. Second, I look at the development of OLI from its beginnings in
the 1970s to its latest evolution, highlighting major changes and new direc-
tions. As the IB field grew and developed, and as todays global economy
emerged, the OLI paradigm faced new challenges. It evolved in response
to these challenges similar to the way that a tent needs to grow to accom-
modate more children underneath it. I argue that OLI has gone through
four stages: Mark I (moving from a theory to a paradigm) and three chal-
lenges: Mark II (deepening the paradigm), Mark III (OLI and alliance
capitalism) and Mark IV (OLI and strategic management). Insights from
the chapters in this book are incorporated into each of these different
stages. Lastly, I conclude with some thoughts about new extensions and
challenges to the OLI paradigm.
 Reflection and conclusions on OLI 279

What is OLI?
OLI has been called, variously, a framework, paradigm, theory and
model.2 Which is it? Let us start with a framework, which can be defined as
a basic, conceptual structure of ideas. Frameworks establish structures for
thinking about ideas. Nested within the concept of a framework is a para-
digm. Paradigms, according to Websters Dictionary, are philosophical and
theoretical frameworks within which theories, laws and generalisations, and
the experiments performed to test them, are formulated. A paradigm is an
archetype for modelling and solving problems. Inherent in a paradigm are
basic assumptions about the nature of problems and how they are to be
approached. In sum, paradigms are the way that we think about problems,
a set of background assumptions against which theories are developed.
Nested within a paradigm are theories. A theory is an organised system of
accepted knowledge that applies in a variety of circumstances to explain a
specific set of phenomena; in other words, a theory is a general statement
of cause and effect relationships between phenomena. Theories are explan-
ations of observations or laws.3 Theories normally consist of assumptions,
causal laws (A causes B) and/or hypotheses (we expect A to cause B), and
explanations for the causal laws or hypotheses (A causes B because A
causes X, which causes Z, which causes B).4
Lastly, theories are modelled by using mathematical relationships to
formalise the relationships between assumptions, causal laws or hypotheses,
and explanations. A model is a description or analogy used to help visualise
something (e.g., an atom) that cannot be directly observed. It includes a
system of postulates, data and inferences presented as a mathematical des-
cription of an entity or state of affairs. Models describe observed behaviour
but simplify by ignoring certain details.5
It is clear that Dunning originally saw OLI as a theory, in particular, as
an eclectic theory, drawing together different strands of economic theories of
international production. His early writings consistently refer to the
eclectic theory of international production. It is not until the late 1980s
that Dunning adopted the term eclectic paradigm and began to argue that
other theories (e.g., internalisation) were partial explanations that focused
on particular issues with respect to international production.6 OLI was the
theoretical framework under which theories could be developed about
particular aspects of international production. Dunning (Chapter 2: page
) makes this point quite clearly:

The purpose of the eclectic paradigm is not to offer a full explanation

of all kinds of international production but rather to point to a meth-
odology and to a generic set of variables which contain the ingredients
necessary for any satisfactory explanation of particular types of foreign
value-added activity.
(Dunning Chapter 2: )
280 Lorraine Eden

Tolentino (Chapter 7, page ), in her review of the evolution of OLI,

also argues that OLI was originally a theory that evolved over time into a
paradigm. She sees OLI now as:

[A] general framework of analysis that explains the level and pattern of
foreign value-added activities of firms, and/or of countries, and allows
for the co-existence of complementary and alternative theories in the
discipline of international economics in a logically consistent manner
without being inextricably wedded to any one particular approach.
(Tolentino Chapter 7: )

Dunning (2000b) makes the strongest case for arguing that OLI is not
only a paradigm, but also the reigning paradigm or envelope for all
economic theories of the MNE. He reviews an enormous literature of IB
theories, grouping them under the O, L and I sub-paradigms. The article
concludes that OLI is the reigning paradigm of MNE activities because: (1)
the value of OLI is greater than the sum of the theories that can be con-
tained under the envelope (i.e., the whole is greater than the sum of the
parts); (2) OLI continues to offer value-adding generic hypotheses about
MNE activity despite the growing complexities in O advantages; (3) the
paradigm continues to address significant problems; and (4) there are no
other IB paradigms that are serious contenders to OLI. Thus, OLI has
grown from a theory to a big tent.
How did OLI metamorphasise from a theory into the reigning paradigm
of international production? Were the changes internally or externally
driven? How influential were external critics relative to changes in insti-
tutional realities and the emergence of the global economy? In the next
section of this paper, I examine changes in OLI, pinpointing key turning
points in the development of the paradigm.

OLI: from a theory to the reigning paradigm

Mark I: developing the OLI paradigm
The fundamental puzzle that started the three decade-old history of the
OLI paradigm were questions such as: Why do firms invest overseas? What
determines the amount and composition of international production? From
the beginning, the eclectic paradigm has been preoccupied with explaining
the origin, level, pattern and growth of firms offshore activities.
The early development of the OLI paradigm came from Dunnings
searches across different literatures for answers to these questions. Dunning
(1973), for example, is an enormous literature review, focusing on lessons
about MNEs and international production drawn from surveys and theories
of capital flows, international trade, location, industrial organisation and
market structure. He defines the MNE as an enterprise which operates and
 Reflection and conclusions on OLI 281

controls income-creating activities in more than one country (Dunning 1973:

290). The paper proposes two new lines of research. The first was that
scholars should shift their question from why international production? to
explaining the growth rate, geographic and industrial patterns of multi-
national enterprises. Second, researchers should focus on the distinctiveness
of MNEs and their forms of market penetration, by country and industry.
In his 1976 Nobel Symposium lecture in Stockholm, subsequently
published as Dunning (1977), the first version (Mark I) of the OLI para-
digm had begun to take shape. Dunning (1977 1979) outlined the compo-
nents of the OLI paradigm as three conditions that determined whether or
not a firm would engage in FDI.8
The first condition O answered the why go abroad or how is it
possible to go abroad question. O advantages (primarily from possession of
intangible assets) were characteristics of MNEs that gave them a net com-
petitive advantage over other firms supplying particular foreign markets. O
advantages were broken into three types:

1 Type 1: advantages that do not arise from multinationality but are

advantages that any firm may have over another producing in the same
location; i.e., advantages stemming from size, monopoly power and
better resource capability and usage. These enable the firm to achieve
more technical or cost efficiency or more market power than another
firm.
2 Type 2: advantages from being part of a multi-plant enterprise, such
as economies of scale in non-production overheads (e.g., centralised
accounting) and access to internal resources at lower cost than on the
external market (e.g. internal borrowing).
3 Type 3: advantages that come specifically from multinationality, such
as wider opportunities and the ability to exploit differences in factor
endowments and markets across countries; such advantages increase
along with the number of foreign countries in which the MNE has
operations and the diversity of their economic environments.

Dunning recognised that type 1 advantages were potentially available to all

firms, but type 2 and 3 advantages came from being part of a multinational
group rather than a de novo enterprise (Dunning 1981b: 27).9
The second condition I answered the how or by which route
question. I advantages meant that it was more beneficial to the firm to use
its O advantages internally rather than lease or sell them in the external
market. Dunning (1977 1979) saw the incentives of firms to internalise
activities as twofold: to either avoid the disadvantages (or capitalise on the
advantages) of imperfections in external mechanisms (market or govern-
ment) for allocating resources or capitalise on the advantages. Market
imperfections were either structural or cognitive. Structural imperfections
arose when there were barriers to competition, transaction costs were high,
282 Lorraine Eden

or the economies of interdependent activities could not be fully captured

by the market. Cognitive imperfections arose whenever information about
products was not easily available or was too costly to acquire. Government
intervention in resource allocation (e.g., R&D subsidies and patents, dif-
ferences in corporate income tax rates across countries) also provided
reasons for internalising cross-border activities.
The third condition L answered the where or why do firms produce
in one country rather than in another question. L advantages meant that it
was more profitable for the firm to use its O advantages together with
factor inputs outside the home country. Dunning (1979) simply listed L
advantages (e.g., spatial distribution of inputs and markets, transport and
communication costs, government intervention, psychic distance) without
grouping them.

Mark II: deepening the OLI paradigm

Throughout the 1980s and 1990s, the eclectic theory was deepened in
several ways, but at least four dominate, in my view: responses to criticisms
by internalisation theorists, the investment development cycle, applications
to different industries, and incorporating geography. The first was
Dunnings response to counter-arguments that internalisation theory, not
OLI, was the reigning explanation for international production. The second
was Dunnings attempt to make OLI more dynamic in terms of explaining
changing patterns of FDI over time as a function of economic
development. The third broadened the focus of OLI from manufacturing
to services. The fourth changed the focus of the L component from the
country level upwards (regional integration) and downwards (clustering).

OLI and internalisation theory

The eclectic theory did not meet with universal acceptance. The strongest
criticisms came from the proponents of internalisation theory (see, for
example, Buckley 1981, 1983; Rugman 1980). They argued that market
failures in international intermediate product markets were both necessary
and sufficient to explain the existence of MNEs. Since Dunnings O advan-
tages were neither necessary nor sufficient, internalisation theory should be
seen as the theory of the multinational enterprise.
As a response, Dunning made the first of several accommodations to his
critics. Dunning (1983) reorganised the O advantages into two groups:
Type 1 advantages were relabelled as Oa (asset) advantages and types 2 and
3 were grouped and relabelled as Ot (transactional) advantages. While Oa
advantages were unchanged, Ot advantages

. . . mirror the capacity of MNE hierarchies, vis--vis external markets,

to capture the transactional benefits (or lessen the transactional costs)
 Reflection and conclusions on OLI 283

arising from the common governance of a network of these assets,

located in different countries.
(Dunning 1998a: 42)

This was a direct attempt to incorporate transaction costs into O advan-

tages. O advantages are summarised with the nice statement:

. . . O advantages of MNEs stem from their exclusive possession and

use of certain kinds of income-generating assets; their ability to co-
ordinate separate value-added activities across national boundaries;
and their capacity to reduce environmental and foreign exchange risks.
(Dunning 1988a: 25)

The criticisms continued, however (see, for example, Buckley and Casson
1985; Casson 1987). Dunning (1988a) explicitly addresses the criticisms of
the internalisation school. In a section entitled Criticisms of the Eclectic
Paradigm, he asks are competitive or ownership advantages necessary to
explain international production? (1988a: 42). His response is to dif-
ferentiate between the capability and the willingness of MNEs to internalise
markets. O advantages provide the capability to internalise markets whereas
I advantages provide the willingness. He also criticises internalisation theory
for assuming market imperfections are always exogenous to the firm. In
Dunnings paradigm, market imperfections can also be endogenous
because MNEs can erect barriers to entry and exploit their monopoly
power in cross-border markets.

Making the macro level dynamic

From the beginning, Dunning was interested in explaining changes in the
pattern of international production, addressing the research agenda he
posed in his 1973 article. The answer was the investment development path
(Dunning 1981a, reprinted in 1981b, Chapter 5). Dunning argued that the
net FDI position of a country depended on its firms OLI advantages.
Countries in Stage 1, at the lowest level of economic development, have
very little inward or outward FDI because their firms O advantages are
weak or non-existent and the countrys L advantages are either weak or un-
exploited due to weak institutions and infrastructure. As per capita income
rises, shifting the country into Stage 2, FDI is attracted into the country. By
Stage 3, domestic firms have strengthened sufficiently to move abroad
themselves; eventually by Stage 4, the country becomes a net outward
investor. In later work, Narula (1993) added Stage 5,10 where inflows and
outflows moved into balance. The overall pattern, therefore, is one of
shifting from a host country to balanced FDI inflows and outflows.
Dunning continued writing on this topic (see, for example, Dunning
1988, Chapter 5; Dunning and Narula 1996: 1-41), but the topic has not
284 Lorraine Eden

received the attention that his work on other subjects (e.g., alliance capi-
talism) has received. Perhaps this is because inward and outward flows of
FDI have become much more equal for OECD member countries (where
the bulk of FDI occurs) so that international business scholars accept the
investment development path as straightforward. More likely, it is because
micro not macro research questions are currently in fashion in the
international business literature.
However, IB scholars who study developing countries and emerging
market economies continue to explore the macroeconomic implications of
the eclectic paradigm. The chapter by Ozawa and Castello (Chapter 4)
provides a good example of how OLI can provide a theoretical foundation
for MNC-cum-government driven endogenous growth. The authors see
MNEs and governments as co-drivers of economic growth, turning L dis-
advantages (growth constraints; savings, foreign exchange and human
resource gaps; macro-organisational weaknesses) into new opportunities for
O appropriation by MNEs. Thus, virtuous circles of economic development
can emerge through the interactions of government policies and MNE
activities.

From manufacturing to services and beyond

From the early days of OLI, Dunning argued that the paradigm applied
not only to manufacturing but also to services and natural resource indus-
tries. Perhaps the first application of OLI at the meso level was to the
international hotel industry (Dunning and McQueen 1981; Dunning
1988a). An important piece is Chapter 10 in Dunning (1993b) on the
globalisation of service industries, which I often ask the students in my
graduate MNEs seminar to read.
In this book, Piscitello (Chapter 12) provides a good example of apply-
ing OLI to the financial services sector. She use proxies for the O, L and I
advantages of Italian banks to empirically test the locational patterns of
their foreign branches and offices over the 1990s. O advantages are pro-
xied by bank size and international experience, I advantages by the need to
follow the customer (Italian manufacturing FDI in the host country), and L
advantages by host country market size and risk, and industry charac-
teristics. The author finds that O and I advantages and the presence
(absence) of an international financial centre are the primary factors deter-
mining banking location.
Perhaps the most interesting industry study is Dunning and Wymbs
(Chapter 11) and their application of OLI to electronic commerce. The
authors argue that the Internet is a facilitating technology that acts as a
catalyst for business networks, disrupting traditional borders and
boundaries for firms, industries and governments. However, they believe
that the basic tenets of OLI continue to hold even in a world of e-
commerce.
 Reflection and conclusions on OLI 285

Clusters and regional integration

A fourth broadening of the OLI paradigm was directed at the locational or
country-specific advantage. Dunnings original formulation of the location
advantage was a simple list of country-specific items that could induce
international production (Dunning 1979).11 Later, these items were
grouped (Dunning 1988c, 1993a) into the ESP paradigm: Environment
(resources, stage of economic development, cultural/historic background),
System (institutional framework) and Policies (macro, macro, general and
FDI policies).12 His own efforts to the contrary, Dunning has continued to
argue that insufficient attention has been paid to location by international
business scholars. Dunning (1998) is a plea for IB scholars to engage in
more research on the L component of the eclectic paradigm.
Throughout this period, Dunnings primary OLI focus was the country
level. However, Dunning, from very early on, was interested in location at
other levels of analysis. Dunnings work on location at the sub-national
level goes back at least to 1981. Dunning (1981b, Chapter 9) asked whether
FDI strengthened agglomeration tendencies within the United Kingdom,
and explored the effects of locational subsidies on regional economic
development patterns.
At the supra-national level, a continuing preoccupation has been
regional integration. The first piece, to my knowledge, was Dunning
(1988a: Chapter 11).13 In this chapter, he explored the linkages between
the integration of corporations (goal: improve profits and long-run com-
petitiveness) and the integration of countries (goal: increase efficiency,
resource usage and competitiveness). He argued that cross-border inte-
gration by MNEs facilitated, and created a demand for, cross-border
integration of countries, and vice versa.14
In later work, Dunning (1993a: Chapter 17; 1993b: Chapter 15)
explicitly examined the linkages between MNEs and regional integration,
focusing on the European Union, the CanadaUS Free Trade Agreement
and the NAFTA. Dunning (1994), which compared and contrasted the roles
MNEs have played in NAFTA and the European Community, was particu-
larly well argued. However, perhaps his best-known work on regional
integration was Dunning (1997), the huge, two-part literature review and
analysis of FDI and European integration, pre- and post-EC 1992, in the
Journal of Common Market Studies. Most recently, Dunning (2000a)
incorporated both interests sub-national and supra-national location in
an edited volume that focused on clustering and agglomeration.15

Mark III: OLI and alliance capitalism

As early as 1982, researchers had begun to notice two new trends in
international production. The first was a shift by firms, from using one of
the two polar modes of entry (markets or hierarchies) to intermediate
286 Lorraine Eden

modes such as equity joint ventures, subcontracting, and R&D alliances.

The second, which was tied to the first trend, was the emergence of non-
traditional MNEs from developing countries, in particular, East Asia. Non-
traditional MNEs were much more likely to use joint ventures than wholly
owned subsidiaries as an entry mode (Giddy and Young 1982). Dunning
(1984) dealt explicitly with non-equity forms of international involvement
and their implications for OLI.
Perhaps the best piece marking the change was Chapter 13 in Dunning
(1988a) on The New Style Multinationals Circa the Late 1980s and Early
1990s, which began with the prophetic statement:

There are gathering signs that the internationalisation of value-adding

activities by enterprises has reached a new watershed in its evolution
. . . the MNE is now increasingly assuming the role of an orchestrator
of production and transactions within a cluster, or network, of cross-
border internal and external relationships, which may or may not
involve equity investment, but which are intended to serve its global
interests.
(Dunning 1988a: 327)

The creation of these new-style MNEs cried out for an explanation, one
that John Dunning clearly wanted to fit within the OLI paradigm. A first
response was to broaden the definition of international production to in-
clude any value-adding activity owned or controlled, and organised by a
firm (or group of firms) outside its (or their) national boundaries (ibid.: 1).
This enabled international production to include modes of entry such as
joint ventures and strategic alliances.
Chapter 13 provided a nice discussion of three major drivers of the new-
style MNEs (the introduction of information technologies; the increased
importance of non-market forces especially government policies for inter-
national production; and the rise of international alliances). Porters value
chain was used to illustrate the range of value-adding activities that can
occur within the MNE network.16 A discussion of networks followed. After
reviewing alliances and networks, Dunning argued that the conceptual and
analytical structure of the paradigm remains largely unimpaired, but
worried that its operational usefulness decreases as the complexity of the
variables making up the OLI configuration increases (ibid.: 342). He
concluded with the observation that MNEs should now be seen as
organizers and co-ordinators of clusters of cross-border producing and
transacting activities; to which a latitudinal dimension, which embraces a
series of co-operative inter-firm relationships is added (ibid.: 345).
In 1993, Dunnings major opus, Multinationals and the Global Economy, was
published (Dunning 1993a). Inter-firm relations were examined in detail in
Chapter 9 with a full discussion of the variety of entry modes. Technology-
based alliances were also analysed in Dunning (1993b: Chapter 8).
 Reflection and conclusions on OLI 287

The definitive piece was Dunning (1995) on Reappraising the Eclectic

Paradigm in the Age of Alliance Capitalism, where he separated old-style
hierarchical capitalism from new-style alliance capitalism and compared
their O, L and I advantages. He argued that hierarchical capitalism was
akin to an exit strategy (replacing the external market with the internal
hierarchy) whereas alliance capitalism was similar to a voice strategy since
firms adopt cooperative solutions within the market. In conclusion,
Dunning argued that firms and governments needed to focus more on
innovation and to recognise that firms go abroad to acquire O advantages
as well as to exploit them. Alliances (voice) should also be seen as an
efficiency-improving mode of entry and a way to enhance competitiveness.

Mark IV: OLI and strategic management

OLI plus S?
The third major challenge to the OLI paradigm appeared in the mid-
1980s; however, this challenge was a theoretical one, not empirical.
International business scholarship had been dominated by economists
throughout the 1970s and 1980s; with the emergence of strategic manage-
ment as a separate discipline, strategy scholars began asking questions
and developing theories that were drawn from disciplines such as
sociology, psychology and labour relations. Initially, strategy research
focused on domestic firms, but scholars such as Michael Porter, Sumatra
Ghoshal, Christopher Bartlett and Michael Hitt began to develop a new
subfield in international/global strategic management, linking strategy
with international business. Could OLI expand to incorporate this new
discipline?
Dunnings first attempt to incorporate strategy into the OLI paradigm
(Dunning 1993b: Chapter 4) compares and contrasts OLI with strategy.
Perhaps the most telling statement is:

From the economists perspective, strategy related variables are most

often treated as part of the unexplained (or unexplainable) variables,
whereas they are the main subject of interest to the business analyst.
(Dunning 1993b: 83)

Recognising that strategy is missing from the eclectic paradigm, Dunnings

solution was to add it on at the end as a dynamic add-on, creating OLIS. He
recognised that OLI could induce strategy, but that strategy could also affect
OLI. He argued that firms with different OLI configurations would adopt
different S. As a result, he concluded that S should be added to OLI as a
fourth component. An appendix at the end of the chapter detailed the
components of O, L, I and S (where S includes 10 topics such as technology,
sourcing, HRM, marketing).
288 Lorraine Eden

Personally, I have never liked this attempt to weld strategy on at the end
of OLI. It does not work. Going back to my kindergarten questions at the
beginning of this essay, strategic management, as a discipline, addresses all
the Who, what, where, when, why and how? research questions. Strategy
questions, however, are micro questions at the level of the individual firm,
or even go inside the firm to focus on the entrepreneur, top management
team or board of directors. Strategy therefore cuts across all the kinder-
garten questions, but at the micro level. The OLI paradigm, on the other
hand, has been focused on the why, where and how research questions,
primarily at the macro and meso levels. If we think of the kindergarten
questions as a matrix with who/what, where, why, how and when as columns
and macro, meso and micro as rows, OLI fits primarily into the why-where-
how columns and macro-meso rows; whereas strategy, as a discipline,
crosses all the columns but primarily at the micro row level. Therefore, for
me, adding S as the last column in OLI does not and cannot fully inte-
grate strategy into the eclectic paradigm.
Along a similar vein, Guisingers revision of the OLI paradigm to OLMA
(Guisinger, Chapter 6) attempts to shift OLI down to the micro level of the
firm by replacing I with M (mode of entry) and adding A (adaptation of
businesses processes to the environment) to the end, where A is basically S
(strategy formulation and implementation). As such, OLMA suffers from
the same problems as OLIS.
A more promising route to accommodating strategic management
within OLI would follow the same approach that Dunning adopted with
Porters diamond of competitive advantage, where he incorporated
international dimensions (defined as multinational business activity) into
each of the diamond factors (Dunning 1992). Dunning (1988a: Chapter
12) began this process of linking OLI to strategy by reviewing eight
different disciplinary approaches to international production ranging
from strategic management to law and economic history. In each case, he
showed how insights about international production from a discipline could
be included under the O, L and I umbrella. He concluded that the eclectic
paradigm was robust and offer[ed] a powerful tool of analysis for
understanding MNE activities (1988: 325).
In this volume, Devinney, Midgley and Venaik (Chapter 8) also provide
an example of how strategy and the OLI paradigm can be integrated. The
authors argue that the eclectic paradigm pays insufficient attention to what
goes on inside the firm; that is, to the role played by managers and the
dynamic evolution of the MNE. Recognising that O, L and I affect S and
that S also affects O, L and I, they develop a theory where OLI is both exo-
genous and endogenous. The initial environment (O, L and I) determines
the set of all possible strategic orientations for the firm. The MNEs
existing structure acts as a constraint, determining the technologically
feasible set of strategic orientations open to the MNE. Managers beliefs
about the feasible set then determine the strategies they choose. As the
 Reflection and conclusions on OLI 289

MNEs managers implement their chosen strategy, this in turn affects the
firms OLI advantages. Because certain strategies dominate others in terms
of profitability and market contestability, MNEs make adjustments over
time to move to the optimal position. Thus, strategic considerations and
managers beliefs are incorporated into the OLI paradigm. In my view, the
intertwining of strategy and OLI in this chapter has potential, but needs to
be fleshed out through application to particular strategic decisions.
The chapter by Oxelheim, Randy and Stonehill (Chapter 10) suggests
how this can be done in terms of financial strategies. They argue that a
firms financial strength affects its ability to engage in FDI. Finance-specific
strategies can be either proactive (efficiency-based) or reactive (arbitraging
market imperfections). Proactive financial strategies generate OLI advan-
tages that can be exploited through international production. What is
missing from this chapter is managerial beliefs, which link the feasible set
of strategies to the chosen strategy (see Devinney, Midgley and Venaik,
Chapter 8). The juxtaposition of these two chapters, to me, suggests the
way that OLI might better incorporate strategic decision-making. (The
Oxelheim, Randy and Stonehill chapter is important for a second reason:
the OLI paradigm underplays the financial aspects of international prod-
uction. The effects of exchange rate changes, over/under-valued currencies
and international financial management are seldom examined through the
OLI lens; this chapter is a rare and welcome exception.)
Another comment linking OLI and strategy should be made here. The
bottom line for strategic management scholars is firm performance; that
is, how strategy affects financial and market returns to the firm. The links
between OLI and firm performance are particularly slim in the inter-
national business literature. This is not surprising: OLI outlines advantages
and disadvantages of international production; the link to firm per-
formance is not straightforward unless one makes the simplifying
assumption that the greater the OLI advantages, the better the per-
formance. Benito and Tomassen (Chapter 9) begin the process of
unpacking the relationship between OLI and firm performance by ap-
plying the resource-based view to the OLI paradigm. This enables them to
create an inventory list of performance implications for each component.
The next step would be to operationalise this list and engage in empirical
tests.
There have been few empirical attempts to explicitly link the eclectic
paradigm to firm performance. Robins, Tallman and Fladmoe-Lindquist
(2002) applied OLI to the performance of joint ventures in Mexico. Inter-
estingly, they argued for and found evidence of some resources provided by
the US parent to the Mexican joint venture actually reducing the ventures
performance. This suggests that not all OLI factors must have positive
impacts. Eden, Thomas and Olibe (forthcoming) also examined the
influence of O and L advantages on the performance of US MNEs. They
decomposed L into two components measuring firm depth (foreign market
290 Lorraine Eden

penetration, foreign production presence) and one measuring depth

(country scope). The authors concluded that both financial and market
performance of US MNEs over 19904 were positively related to O and L
variables, but that breadth was more important than depth. Clearly, more
research linking OLI and firm performance would be a useful addition to
the literature.

Motivations for international production

Dunning (1988b) in his restatement of the OLI paradigm, recognised that
the link between OLI and strategy could be made through firm-level
motivations for international production. The O factors answer the why
question in terms of general Oa and Ot motivations. However, once one
begins to think of MNE activities in terms of the value chain, individual
plants, products and factors, the actual motivation or strategy behind
establishing any particular value-adding activity abroad becomes
important. Thus, focusing on motivations at the individual activity or
investment level can be the link between OLI and strategy.
Dunning (1988b: 13) provided perhaps the first cut at these moti-
vations, outlining what he called the three main forms of international
production: market seeking (import substituting), resource seeking
(supply-oriented) and efficiency seeking (rationalised investment). A fourth
category strategic asset-seeking FDI was soon added, reflecting the
increased use of knowledge-based strategic alliances within OECD coun-
tries (Dunning 1991). By 1993, Dunning (1993a: Chapter 3) had identified
four basic types of international production: natural resource seekers,
market seekers, efficiency seekers and strategic asset or capability seekers.17
Throughout the 1990s, strategic management scholars wrestled with the
research question: why do firms differ and how do these differences affect
their performance? Perhaps the dominant explanation was the resource-
based view, which argued that the long-run competitiveness of a firm
depended on its resources and capabilities (Barney 1991). Initially, the
resource-based view focused on domestic firms, but IB scholars soon began
to make the link between resources and capabilities in the strategy
literature and ownership advantages in OLI.
Dunning (1999) addressed the resource-based view in the context of
globalisation of economic activity during the 1990s. He argued that the
world was shifting from hierarchical to alliance capitalism, where, at the
end of the twentieth century, knowledge, regional and global activities and
intra- and inter-institutional alliances were of increasing importance. He
recognised that the resource-based view and evolutionary theories of the
firm were close relatives to the O in the OLI paradigm, but the strategic
management theories took as their focus the creation and upgrading of
these advantages, whereas the eclectic paradigm focused on their exploi-
tation.
 Reflection and conclusions on OLI 291

Recognising that the eclectic paradigm needed to encompass the growing

importance of knowledge-based FDI, Dunning (1993a) again revised the
paradigm. While the motivations for FDI (the why) were still seen as
exploitation of the firms O advantages, the purpose of the actual investment
was now defined as seeking or acquiring either products (market seeking FDI)
or factors (resource, efficiency and strategic asset-seeking FDI).18
Two chapters in this volume focus explicitly on OLI and the resource
based view. Madhok and Phene (Chapter 5) argue that the OLI paradigm
was useful when firms were beginning to internationalise, but is less useful
now that many firms have multiple foreign affiliates. Now, the key source of
competitive advantage is creating and managing a knowledge portfolio.
They see OLI as focused on explaining the home-country firm as an
institution as compared to firms from other countries, rather than on a
specific firm. The key issue, from their perspective, is knowledge manage-
ment, both in terms of asset exploitation and asset seeking.
Maitland and Nicholas (Chapter 3) argue the resource-based view
ignores location-specific differences in firm resources and capabilities
because they are not unique to a particular firm. Their solution is to incor-
porate institutional theory into OLI. Reviewing the new institutional
economics (NIE), the authors argue that NIE could replace OLI as an ex-
planation of country and industry patterns of international production.
That is, rather than incorporate institutional theory under the OLI big
tent, the authors make the audacious proposal that NIE replace OLI!
Reconciling the tension between exploitation and acquisition within the
motivations for international production, first identified in Dunning
(1993a) has been a key preoccupation of his recent work. For example,
Dunning (2002) broadened the OLI envelope to encompass the resource-
based view by including relational assets within the O variable. He split
firm-specific advantages into tangible and intangible assets; intangible
assets into intellectual and relational assets; and relational assets into
private and social assets. Relational assets were defined as facilitating assets
that had to be used jointly with the relational assets of another actor. After
reviewing the implications for the OLI paradigm, Dunning concluded that
O needed to be modified to include the creation, coordination and suste-
nance of relational assets; L, the presence/absence of networks of related
activities; and I, a greater focus on cooperative non-equity economic
linkages, particularly networks. Lastly, in this volume, Dunning (Chapter 2)
now argues that incorporation of asset-augmenting FDI into the eclectic
paradigm requires reconfiguring the traditional OLI variables, but leaves
the overall paradigm intact.

Conclusions
My review of the OLI paradigm and its evolution over the past 30-plus
years supports Dunnings contention that OLI can be and is an envelope
292 Lorraine Eden

or big tent for all theories that address the why, where and how of MNE
activity (Dunning 2000b). The paradigm has shifted its focus from ex-
plaining international production as the exploitation of OLI advantages
through wholly owned foreign subsidiaries in manufacturing to a rich,
complex analysis of globalised businesses at the beginning of the twenty-
first century.
The chapters in this book point to ways in which the OLI paradigm is
being interpreted and altered by international business scholars. Many of
these contributions focus on strategic management and the need for OLI
to better incorporate the resource-based view and managerial perspectives.
In terms of my matrix (see Figure 13.1) of macro, meso and micro levels of
analysis, the thrust of these extensions is at the micro level. One advantage
of moving down the level of analysis is the increased ability to perform
econometric analysis; that is, we can examine how OLI affect firm strategies
and performance using firm-level data rather than FDI statistics. However,
a fully fledged integration of strategy into OLI even of the resource-based
view into OLI has yet to appear. The chapters in this volume point the way,
but more work is needed here.
Second, I agree with the authors in this book that OLI should better
integrate insights from institutional theory. The new institutional econo-
mics is a vibrant and thriving discipline, crossing management, economics,
sociology and law. Institutional theory has brought new insights into inter-
national business literature, for example, liability of foreignness, relational
capital, public corruption, and property rights. One can speculate how
liability of foreignness and public corruption, for example, could quite
easily be incorporated into the OLI big tent. However, I do not agree that
NIE should, or even could, replace OLI as the reigning paradigm of
international business.
Third, the focus on international finance, bringing finance back in to OLI,
is a welcome sign. As international business researchers increasingly adopt
the tools of finance (e.g., real options theory, foreign exchange exposure,
currency unions) the OLI model needs also to redirect its attention to risk
and uncertainty in connection with the financing of international production.
To restate my initial thesis at the beginning of this chapter, the focus of
OLI was and remains the why, where and how of international production.
The chapters in this book focus primarily on deepening the OLI in terms of
these three questions by incorporating the micro level of analysis (the firm
and its managers).
Let me suggest, as a counterpoint, that the eclectic paradigm might also
usefully be broadened by an explicit focus on the when question; that is, the
issue of timing of international production.19 International business and
strategy scholars are increasingly preoccupied by timing issues; for ex-
ample, de novo versus sequential FDI, FDI as platform investments, incor-
porating real options theory into IB research, the big step hypothesis, the
recent issue of Academy of Management Review on timing.
 Reflection and conclusions on OLI 293

Perhaps it is also time to go back to the what and who questions. As

the boundaries of the MNE grow ever more fuzzier, what is and is not an
MNE? Cantwell and Narula (Chapter 1) also raise the fuzzy border
question. With the growth in non-equity cooperative alliances and net-
works, where does the hierarchy stop and the market begin? As ownership
becomes less important, does control remain the critical dividing line?
Earlier debates on this topic have been spirited. For example, Wilkins and
Schrter (1998) examined free-standing companies, firms set up in one
country for the purpose of doing business outside that country. The hotly
contested debate among Wilkins, Hennart, Casson and Corley about free-
standing companies is a wonderful way to introduce graduate students to
the question of what is and what is not a multinational enterprise.20
Perhaps it is time for a discussion about whether alliances and networks are
MNEs and where inter-firm trade stops and intra-firm trade begins.
A second angle on the what and who question is the growth of
multinationals from emerging markets and developing countries. Whether in
the form of family conglomerates (chaebol, grupo), EastWest or NorthSouth
strategic alliances or born global firms, MNEs from the East and South have
been under-explored in the international business literature. Partly this is
because 80 per cent of FDI comes from and goes to OECD countries; but the
lack of high-quality statistics also hampers scholarly research. There are
lessons from earlier work that could prove useful here. Kojima argued in the
1970s that MNEs from Japan were different from Western MNEs. This
argument was refuted both by OLI and by later events that showed Japanese
MNEs, as they matured, began to behave like Western firms (Kojima 1978;
Dunning 1980). Giddy and Young (1992) also argued that developing
country MNEs were non-traditional. My suspicion is that new-style MNEs
from emerging market economies will come to look increasingly like Western
MNEs (e.g., shifting their corporate strategies from unrelated to related
diversification), but this remains to be seen.
In conclusion, this chapter has attempted to do two things: provide an
overview of the development of the OLI paradigm over the past 30-plus
years and consider the chapters in this volume in light of that paradigm. In
terms of my first goal, I have touched on only a small segment of
Dunnings enormous volume of research in international business, and
have perhaps missed several important contributions.21 However, I hope
that this chapter testifies to the resilience and robustness of OLI in the face
of the theoretical and real-world storms that have occurred since Dunning
first proposed the eclectic theory in 1976. In terms of my second goal, it is
clear from the chapters in this book that the OLI paradigm has a life of its
own outside of Dunnings work. William Arthur Ward once wrote: The
pessimist complains about the wind; the optimist expects it to change; the
realist adjusts the sails. The OLI paradigm is a testimony to the ability of
John Dunning and scholars such as the authors in this book to adjust the
sails. OLI is alive and well!
294 Lorraine Eden

Notes
1 My latest purchase, the two-volume set of Dunnings selected essays, Theories and
Paradigms of International Business Activity (2002b), is also a must have since the
first volume gathers together many of Dunnings OLI writings in one place from
1973 to the present. There is one problem with the Selected Essays; they have
been updated from the originals in places, making it harder to trace Dunnings
own theory development from one paper to the next. For example, Chapter 4,
Explaining the international direct investment position of countries, published
originally in 1981, contains references to 1993 publications. A second problem
is that some of my favorite OLI readings (e.g., Dunning 1979; 1988a: Chapters
11 and 13) are missing.
2 For example, in this volume, OLI is referred to as a framework (Maitland and
Nicholas) and as a theory evolving into a paradigm (Tolentino). Dunning in his
earliest OLI writings (1977, reprinted in 1981, page 33) shares this uncertainty
about where OLI fits; the eclectic model can be perceived as a general theory of
international production in so far as it provides an analytical framework for
explaining all forms of such production.
3 Laws are generalisations about observed regular relationships between two
phenomena, from which we can generalise about what we expect to happen
(e.g., the law of one price or Greshams Law).
4 According to Van Evera (1997), a good theory has large explanatory power,
importance, parsimony and a wide explanatory range. A good theory is appli-
cable to the real world, clearly framed and satisfying. A good theory should be,
in principle, falsifiable. It should have prescriptive richness and explain impor-
tant phenomena.
5 As a result, models allow complex systems to be understood and behaviours
predicted, but may give incorrect predictions for situations outside the models
assumptions.
6 The first major statement of OLI as a paradigm is Dunning (1988b), which
draws his previous writings on OLI together, shifting from eclectic theory to
paradigm.
7 Dunning (1981b) pulls together his first eight years of publications on the MNE,
organised into three topics: OLI, impacts of MNEs on home and host countries,
and lessons for governments.
8 To recap the three conditions: (1) It possessed net ownership advantages over
firms from other countries in serving a particular national market (O advan-
tage). (2) It was more beneficial for the firm to use these net ownership
advantages itself rather than sell or lease them (I advantage). (3) These net
ownership advantages were more profitably exploited when used with factor
inputs outside the home country (L advantage).
9 This distinction was important later for incorporating, first, internalisation theory,
then strategic management and finally, sequential FDI into the OLI envelope.
10 Published as Narula (1996).
11 These included the spatial distribution of inputs and markets; prices, quality
and productivity of inputs; transport and communication costs; government
intervention and policies; infrastructure; psychic distance; and scale economies.
12 Personally, I also teach L as broken into E + S + P but use a different grouping
that I find more intuitively appealing: E(economic), S (socio-cultural) and P
(political-legal). This is closer in spirit to Guisingers breakdown of the
international environment (this volume).
13 This is a short chapter, but it has always been one of my favourites.
14 We now refer to these processes as investment-led and policy-led regional
integration.
 Reflection and conclusions on OLI 295

15 Piscitello (this volume) is also notable as an empirical piece using OLI to predict
location.
16 And right side up too upstream activities are at the top and downstream at the
bottom, rather than moving from left to right horizontally! Thus, horizontally
integrated activities can be shown horizontally (e.g., the component supply
stage in Figure 13.1 on page 340) and vertically integrated activities in a vertical
direction. See also Chapter 9 in Dunning (1993a) for a full discussion of value
chains in MNE entry and expansion strategies.
17 Other motives (escape, support and passive investments) are also discussed
although they appear to have been dropped from subsequent Dunning papers,
leaving only the first four. In the OLI paradigm, the key verbs used to describe
motivations are exploit and acquire; however, there are other verbs such as
arbitrage (market imperfections) and avoid (risk) that now are seldom heard.
18 Originally cast as exploiting O advantages, the eclectic paradigm now includes
seeking O assets. Note the shift from advantages to assets, which may come from
the resource-based view. Dynamic capabilities should be next.
19 Although I do believe that paradigms do not have to explain everything, nor
does the OLI big tent have to shelter all theories under its umbrella.
20 See also Contractor and Loranges new book where Dunning (2002a) appears.
21 For example, I deliberately omitted the World Investment Reports, where Dunning
has served for many years as the lead intellectual scholar, and his work on MNE-
state relations and the benefits and costs of FDI, which are tangential to the OLI
paradigm.

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