Dunning’s Eclectic Paradigm Essay

Dunnings Eclectic Paradigm Professor backside Dunning proposed the eclecticist paradigm as a framework for determining the cessation and pattern of the value-chain operations that companies own abroad. Dunning draws from various theoretical perspectives, including the comparative service and the factor proportions, monopolistic advantage, and internalization advantage theories. Lets engross a real soused to illustrate the eclectic paradigm. The Aluminum fraternity of America (Alcoa) has over 130,000 employees in roughly 43 countries. The fellowships integrated operations embroil bauxite mining and atomic number 13 refining. Its products include uncomplicated aluminum (which it refines from bauxite), automotive components, and sheet aluminum for beverage cans and Reynolds Wrap. The eclectic paradigm specifies three conditions that determine whether or not a company will internationalize via FDI ownership-specific advantages, location-specific advantages, and internalization advantages.To successfully enter and conduct job in a foreign market, the MNE must possess ownership-specific advantages (unique to the tighten) relative to separatewise dissolutes already doing business in the market. These consist of the friendship, skills, capabilities, processes, relationships, or physical assets held by the unassailable that allow it to compete effectively in the global marketplace. They come up to the firms competitive advantages. To ensure international success, the advantages must be substantial enough to offset the costs that the firm incurs in establishing and in operation(p) foreign operations. They alike must be specific to the MNE that possesses them and not pronto transferable to other firms.Examples of ownership-specific advantages include proprietary technology, managerial skills, trademarks or tell on names, economies of scale, and access to substantial financial resources. The more valuable the firms ownership-specific advantages, the mo re likely it is to inter- nationalize via FDI. One of Alcoas most primary(prenominal) ownership- specific advantages is the proprietary technology that it has acquired from R&D activities. Over time, Alcoa has also acquired special managerial and marketing skills in the production and marketing of clarified 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 profits from economies of scale and the efficiency to finance expensive projects. These advantages have allowed Alcoa tomaximize the performance of its international operations. Location-specific advantages bear on to the comparative advantages that exist in individual foreign countries.Each province possesses a unique set of advantages from which companies can derive specific benefits. Examples include natural resources, skilled labor, low-cost labor, and inexpensive capital. Sophisticated managers recognize and look to to benefit from the host country advantages. Aloca- tion-specific advantage must be vex for FDI to succeed. It must be profitable to the firm to locate abroad, that is, to utilize its ownership-specific advantages in conjunction with at least some location-specific advantages in the target country. Otherwise, the firm would use exporting to enter foreign markets.17 In terms of location-specific advantages, Alcoa set(p) refineries in brazil-nut tree 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 critical ingredient in electricity-intensive aluminum refining.Alcoa also benefits in Brazil from low-cost, relatively well-educated laborers, who work in the firms refineries. incorporation advantages are the advantages that the firm derives from internalizing foreign-based manufacturing, distribution, or other stages in its value chain. When profit able, the firm will transfer its ownership-specific advantages across national borders within its own organization, quite a than dissipating them to independent, foreign entities. The FDI decision depends on which is the best optioninternalization versus utilizing away partnerswhether they are licensees, distributors, or suppliers. Internalization advantages include the ability to control 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 about(predicate) 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 five reasons. First, Alcoa management wants to minimize dissemination of knowledge about its aluminum refining operations knowledge the firm acquired at great expense. Second, compared to using outside suppliers, internalization provides the best net pay to Alcoa , allowing it to minimize the costs of operations. Third, Alcoa needs to control sales of its aluminum products to repeal depressing world aluminumprices by supplying too practically aluminum into world markets. Fourth, Alcoa wants to be able to apply a derivative instrument pricing strategy, charging different prices to different customers. The firm could not differentiate its prices really 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 step of its products.