Eclectic Paradigm

This is an economic model used by companies to analyze how attractive a foreign direct investment is based on the OLI Framework. 

During the explanation, businesses have to consider several available approaches. Eventually, the preferred approach would be the one that offers the highest value and at the same time allows the business to maintain its production standard.

Now the paradigm is based on the theory of internationalization propounded in 1979 by British Economist j. H. Dunning assumes that if a company can get the service or product internally at a lower price, then it will avoid participating in the open market. 

This means the said company will instead opt for producing the goods or services internally instead of investing in a foreign company. 

Companies come to this conclusion by applying the OLI framework. 

OLI framework Explained

The OLI framework is made of three factors that companies use in deciding if an FDI is worth it or not. OLI stands for Ownership, Location, and Internalization.

Ownership - this refers to the proprietary rights that a company has which gives it a unique advantage over other companies both locally or globally. This could be a good reputation, a strong brand identity, a strong customer base, patented technology, a trademark, or copyrights. 

All these serve as a reasonable counterbalance to the common difficulties faced by investors looking to invest in foreign companies. In essence the stronger the ownership advantage is, the more attractive a company is to foreign investors. 

Location - the location of a company is also a factor investors take into consideration when making FDIs. The location advantage of a company refers to the advantages that a company has by virtue of its geographical location. 

This includes proximity to a port, availability, and cost of raw materials, availability of labor, tax laws, etc. If these advantages exist and can be fully utilized to create a competitive advantage, then it makes for an attractive investment. 

Internationalization - the third factor that is considered is internationalization. What this means is that companies have access to a cheaper alternative, either producing goods in-house or outsourcing to a third party.

Apart from serving as a cheaper alternative, outsourcing can also help foreign companies deal with competition in the local market. This can be by possessing good knowledge of the local market or having a better skill set. 

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